Development Finance

This post was written early 2004. At this point I was going through the acquisition stage for a medium sized public house with the intention of converting to flats, the difference being that instead of demolishing the existing building, I planned to restore the original facade of the pub and create luxury internal flats with a victorian theme. The build cost would be higher but a good fit with my experience. This plan was in response to the growing opinion at the time that there were too many 'glass and steel' new builds. My opinion is that anything that deviates from the norm in property achieves a premium.

So here's a quick summary of whats going on with this deal... in list format

There are 8 players;

1. Me, the developer.

2. My solicitor

3. RBS

4. The surveyor

5. The agent

6. The vendor

7. The vendors solicitor

8. The vendors other buyers

There are many players and many motives here but I've grouped them through loyalties. My solicitor is obviously working for me but there is a 0.001% chance that he will run off with funding. True - it has been known to happen. This is amplified if the solicitor is a sole practitioner, which my firm was but i didn't know till i had progressed too far down the deal. You don't really want your solicitor to be a sole practitioner, banks will not send big money to sole practitioners. Find out if your solicitor is a sole practitioner and if he is, bin him and find another one.

Some tell tale signs of dodgy sole practitioners; 

- small offices
- based out in the middle of nowhere
- very disorganised
- very fussy over fees
- very cheap

In a word, don't use a sole practitioner. But if you do, like I did then they will have another firm that they use, unnecessary hassle.

If your starting out, find and build good relationships with a capable solicitor.

RBS

So, RBS is on my side at this stage, my side as in they will let the estate agent know that finance is available who will in turn calm the vendor down, in reality RBS is waiting for the surveyor to be paid for at which point they will have you up against a wall. Be aware. I should also point out that in this case the estate agent was a complete clown. If you come across an incompetent estate agent, walk away from the deal. Regardless of how good the deal looks.

Incompetent agents will end up costing you money, when this deal didn't work out I was down to the tune of about £7K.

Solicitor

At this stage I have also committed to paying the solicitor, believe it or not you can get the solicitor to do some work for you (field a call or two from an idiotic estate agent) and pay them when you are absolutely sure that you want the deal.

Vendors Solicitor

Solicitors are basically pit bulls on leashes, and a good property solicitor will be able to tell the other side to behave - in no uncertain terms how. It pays to have an experienced property solicitor who will be able to do this and who doesn't charge by the letter.

Surveyor

You should also be very wary of dodgy surveyors - at best they get paid for copy and pasting reports at worst they persuade a bank to give you unfavourable terms in the finance package and then pass on the deal to their preferred developer (ie someone who gives them a backhander). Sad but true. End of.

Vendor

Vendor in this case was being unreasonable. But fair play to him he was very worried about the market bottoming out, didn't have a clue what he was doing and thought he could bully his way through the situation. In the end he sold the deal to another developer, which was a sad day for that street, the east end, the building itself and the community. But he got his money, so fair play.

The Estate Agent

A experienced agent translates as money saved. If the agent at any point displays any incompetence be sure to walk away from the deal - hard to do sometimes but best in the long run.

The Prince of Wales

Here is a picture of a pub that I eventually devloped around 2007. the reason why I chose it was becuase it looked different to the rest of the pubs in the area.

Well just so you know what I consider to be an absolutely gorgeous pub heres a picture, the aim is to develop this from an old unwanted bar into high end luxury period themed flats to retain and rent out.

In the east end around the middle of the last decade this particular area was seeing an influx of young arty types who unlike the originals of 1994 who moved into the brick lane area, actually had a lot of money. And just so you know were very interested in renting accomodation for high money. The long term plan was to retain for about 7 years and then flip it.

Building with lots of character

Street view

Liaisng with Bankers, Surveryors and Builders

This post details the first report that I wrote to obtain development finance.

Prior to this I had been buying and selling property through normal mortgages. At this level of property development its important to try and convey passion into the report, ultimately the bankers are looking for someone they believe can do the job and will be far more likely to trust a developer who genuinely cares about the area and has an interest in the architectural landscape.

Proposed Purchase of 124 Globe Road, London E1

Details of the Property:

A former public house offering over 2,200 square feet of live work space. The property is arranged over four floors and has a garden to the rear and balcony to the first floor. Internal proportions lend themselves well to a versatile future interior. Currently arranged as ground floor former public house encompassing the whole level, lower ground floor used as storage, with first and second floor arranged as two two bedroom self contained units.

Details of the Location:

Globe road is within a short walk of the following tube stations and bus routes: Stepney Green, Bethnal Green and Mile End which makes easy access into the city and central London. It is an up and coming area close to Queen Mary University and Roman Road Market.

Plan of action for 124 Globe Road in Summary:

Point 1
Achieve change of use from A4 use to C3 use (residential)

Point 2
Apply for planning permission to demolish and create 12x 1 and 2 bed flats then sell on the plans to a developer or undertake ourselves.

Point 3
If planning to demolish and rebuild 10 flats is not given then create extra square footage (in this case only requires building regulations and no planning application) by digging out the basement and works to both balcony.

Point 4
Review plan.

Point 5
After increase in square footage develop the ground and lower ground into two high quality luxurious separate units and develop the units on the first and second floors into high quality units.

Point 6
Sell all units on at a premium to Investment Banks, our client at the moment is a derivatives company based in Dublin with offices in London and New York.

Response to the above points;
Point 1
The property has already had a change of use from Public house (Class A4 use) to residential (Class C3 use). This was granted on 23 Nov 2007 and can be viewed online at Tower Hamlets planning portal application number PA/07?01965.

Point 2
In the first instance we intend to apply for planning permission to create 12x 1 and 2 bedroom flats. London Borough of Tower Hamlets Core Strategy and Development Control Plan RT6 states with regards to loss of Public Houses permission will be supported if:

"the loss will not create shortage of public houses within easy walking distance (300m) of residential areas and
following and active marketing exercise there is no reasonable prospect of reuse or refurbishment for an appropriate A Class use, particularly on the ground floor of the site"

There are more than 4 public houses within easy walking distance; and
124 Globe Road has been empty for a good while
so there is a good chance that planning will be given to convert.

The unitary development framework set out by the LBTH Planning has requested a need for more housing in the area, the conversion 124 Globe Road will see an increase from the existing 2x 2 bedroom flats to in excess of 10x 2 bed flats which is in line with the Strategic Planning policy for Tower Hamlets ST2.

If this is not achieved we will apply for planning permission to convert the basement and ground floor into residential. There is a strong likelihood this well be granted as the pub is currently arranged as 2 flats upstairs and has recently been given residential usage throughout (The whole pub has been permitted residential usage on 23 November 2007).

Point 3
Breakdown of projected costs to increase square footage from 2,300 to 2,775 achieved by works to lower ground floor and first floor balcony.

RIBA - £2000
Structured Engineering Fees - £1100
Insured UK Builder (Federation of Master Builders) digging out basement - £30000
Basic decorating, plumbing and electric costs - £15000

Total Cost to increase square footage - £48100

Point 4
Current price of 124 Globe Road is £300 per square foot.

Nearby pub (200m walking distance) sold for £521 per square foot Mile End Road E1.

In this instance the pub was a 2,300 square foot property recently sold at £1.2 by Symmon Smith Estate Agents. We believe it achieved a premium due to its location on Mile End Road.

A conservative estimate of the sale price after an increase in suqare footage of 124 Globe Road would be (2,775 square foot x £500) = £1.36 million.

Point 5
Apply for planning permission to convert the basement and ground floor into residential. There is a strong likelihood this will be granted as the pub is currently arranged as 2 flats upstairs and has recently been given residential usage throughout. (The whole pub has been permitted residential usuage on 23 November 2007).

Breakdown of projected costs for conversion into flats as Ground and Basement:
Planning application - £250 x 2
Building control application fee - £205
Building control inspection fee - £300

Plumbing
Max - £5000
Corgi registered (Copper and Plastic included)
Plumb in bathroom, shower and tray, hand basin and toilet through out including towel rail, and run necessary gas, hot and cold supplies to the new kitchen areas ready to be picked up by kitchen fitter.
Fitting of 2 Worcester Bosch boilers and pumps - £2000

Electrical testing report - £250 (to indicate the quality of existing electrics)

Electrical - Min £2000 Max £7000
NICEIC (minimum to include whole house fire alarm, entry phone system)
Dependent on electrical testing report rewire if required, allowing for 40 double sockets and 50 fire proof spotlights and associated kitchen, bathroom and living area electrics.

Carpenter - £4000
Hanging doors architrave and skirting throughout

Knock wall down between male and female bathrooms, checking if load bearing walls. Take out all the sanitary ware and tiles off the walls.
Plaster board all ceilings where required and skim with plaster to smooth finish.

Insured UK Builder (Federation of Master Builders) digging out basement - £30000
RIBA - £2000 (as above not to be duplicated from point 3)

Three months multi skilled labour 3 men - £12000

5-8 skips - (£170 per skip)

To complete ceilings decorating and tiling (£6000 materials including internal and external high quality paint and fire proof/water proof plasterboard where required).

Material Bathroom tiles - £2000
Tile the shower floor and walls completely for allowing for one border
Matching grout - £200
Standard adhesive - £150
Helo steam generator x2 - £1200
Control unit - £400
Pharo Showers x2 - £2400
Sanding original chevron floor over 3 levels - hire of equipment - £250
Kitchen - Carcass Selco or Wickes - £500
Kitchen doors from Urban Myth - £1000
High quality work top - £1000
Architrave throughout - £1000
Skirting 150 metre - £1000

Cost of building £80000 plus £20000 for contingency = £100000

Point 6
Sell all units in one sale at a premium to Investment Banks.
Properties in area are selling for:

£508 per square foot - Cavell Street, Whitechapel E1. One bedroom live work warehouse.
£627 per square foot - Berhard Baron House, Shoreditch E1. Newly built, two bed room dupled apartment.
£651 per square foot - Strype Street, City E1. One bed room second floor flat.
£513 per square foot - Adler Street. Three bedroom duplex.
£520 per square foot - Assam Street, Aldgate E1.
£564 per square foot - Jamaica Street, Stepney E1. Two bedroom freehold house also ensures a private garden to the rear.
£599 per square foot - Clark Street, Whitechapel E1. Two bedroom duplex flat.
£721 per square foot - Settles Street Mews, Aldgate E1. Two bedroom ground floor flat.

£588 per square foot is the average but we intend to make a high quality luxurious development which taking a conservative view will sell at £650 per square foot, which gives a sales price of £1.8 million.

Over One Year:
£660,000 Cost of Freehold
£34,644 Finance for 1 year
£26,400 Stamp Duty
£2,000 Professional fees
£100,000 Cost of Buliding plus contingency
£30,000 Selling Estate Agent’s fee
-------------
£853,044 TOTAL Expenditure

Expected Profit

£1,800,000
(£853,044)
---------------
£950,706

Our Experience:

In September 2007 we sold a 2,000 square foot property in E1 for £895,000 which was bought for £475,000 in February 2006. The build cost £60,000 mainly on bathroom, floors, kitchens and lighting with a nil increase in square footage. The project was completed on time and within budget. The above sale leads us to believe that there are high money buyers willing to pay good money for high quality luxurious builds in the area, most likely due to the proximity to the City and Canary Wharf. We have extensive knowledge of the requirements of differing types of tenants and home buyers in the area, ranging from traditional European gap year traveller to city executive. This experience has been gained from buying and selling and having a genuine appreciation for the are since 1995.

In Summary:

We have used our local knowledge to identify this public house as an AAA development opportunity.
We are using our knowledge of who will purchase the end product to build to specification.
We intend to use our experience of working with basements and knowledge of how to increase square footage sympathetically.