Bridging the gap on permitted development projects

By Gerard Morgan Jackson, Business Development Manager, United Trust Bank

The changes to the planning requirements for the conversion of office buildings to residential use have made it significantly easier for property developers to take advantage of opportunities to turn redundant commercial space into profitable residential projects. At UTB we have recently assisted a number of property developers with bridge finance to enable them to quickly purchase property with permitted development opportunities. UTB has the advantage that it can pass them over to our development finance colleagues so that a full development finance package can repay the bridge and provide the funds to complete the project.

The relaxation of the planning requirements came about with the introduction of permitted development rights in May 2013. These rights avoid the need for an express planning permission for the change of use but associated external development may still need planning permission. There are also some important qualifications which need to be borne in mind when considering potential projects. For example:

•    The rights only apply to buildings used as an office immediately before 30 May 2013 or, if vacant, where its last use was as an office. Therefor new vacant offices are excluded.
•    Only offices in the category B1(a) can be converted, not office units within A2 financial or professional services nor B1(b) or (c) offices i.e research and development or light industrial use and listed buildings and scheduled ancient monuments are excluded.

The Local Planning Authority (LPA) will still need to give its permission in relation to flooding risk, highways and contamination matters and it has 56 days from receipt of the planning application to confirm whether further details are required, failing which development may proceed. Property developers should also be aware that some LPA’s have sought exemption from the permitted development rights regime so they should confirm the current status of the LPA before committing to any purchase.

United Trust Bank has had several approaches from property developers who have identified potential projects and require funding to acquire the site and progress the project by employing professionals such as architects, quantity surveyors and structural engineers before refinancing into a development finance facility.

When considering a new proposal such as this, a lender will want evidence that the borrower has not only identified a suitable site, but researched the local market for demand and potential sales values and has the necessary skills and experience to deliver a high quality project on time and on budget. Brokers can help clients’ proposals progress quickly by ensuring that there’s plenty of supporting evidence at the proposal stage and by facilitating requests for additional information during the due diligence. For the developer, a few hours scouring local estate agents for evidence of comparable sales activity will be time well spent as will research into transport links and local employment. The lender will need to be convinced that there will be a good demand for the finished product before they part with any money.

Lenders also like to ascertain, that, as ever, the exit strategy and means of repayment is viable.  In this context, as well as an analysis of the proposed development, a strong track record of previously successful developments of a similar nature will be important. Evidence of previous success denotes a greater probability of the borrower’s ability to seek and obtain development finance as means of repayment, be it through the Development Finance team at UTB or elsewhere.

To give one example of how a combination of financing options can be combined to create one very quick and flexible funding solution, take this recent case; A corporate borrower wished to acquire a vacant 1970’s office block arranged over four stories in a Surrey town which fell within the permitted development criteria. The borrower’s plan was to apply for consent to convert the upper floors to 27 self-contained flats whilst initially retaining the ground floor offices. Our valuer thought that it was highly likely that consent would be granted.
The Bank agreed to provide a bridging loan of just over half of the current value of £2.8m and permitted the borrower to raise an additional mezzanine facility to rank behind the Bank’s senior debt. This enabled the borrower to reduce its capital injection to around 10% of the purchase price and so retain more of its own capital for use elsewhere.

Some people expect quick bridging turnarounds to be achievable solely in more straight forward residential property transactions. However, this case completed in just three working days between offer letter and drawdown, despite it being secured against a commercial property where planning was a potential issue. The exit for the bridging loan will be via development refinance once permitted development consent is obtained.

Permitted development rights are providing developers with additional opportunities to find projects in areas where brownfield or greenfield sites are scarce and at the same time breathe new life into urban areas where there’s no longer a need for large amounts of office space but a demand for new dwellings. Specialist lenders have the flexibility, skills and most importantly, the desire to fund suitable schemes with experienced developers and bridging can provide the means for them to seize opportunities quickly.