An innovative approach to a £30m planning gain proposal

United Trust Bank’s Structured Finance Team were approached by a broker representing an experienced property developer with an extensive portfolio of residential and commercial assets.

The developer owned several commercial properties in West London with potential to be redeveloped into a scheme of six luxury town houses in a gated community, with an estimated GDV of £30m. The commercial properties, now vacant, were previously used as a car showroom, garages, warehousing and offices and although the developer had carried out considerable due diligence and pre-planning work, including extensive communication with the local authority, he did not yet have the all-important permission for the proposed redevelopment to proceed. As it stood, the site was worth a fraction of what it would be should planning be obtained.

Having committed a considerable amount of his own capital to the acquisition and pre-planning costs, which included paying planning consultants, architects fees, valuations and other associated costs, the developer wished to be partially reimbursed for these expenses and in addition raise capital for a future acquisition. However, he did not wish to be restricted to using the funds to purchase a particular property, preferring instead to have liquid funds available for when the right opportunity arose.

Due to the lack of planning for the commercial properties the SF team leveraged the clients other assets. The proposed additional security properties comprised two BTL houses converted into flats. The developer had mortgages on both properties with the same lender but the lender would not consent to a second charge being secured on them. As the mortgages were on advantageous terms the developer was reluctant to refinance the facility so UTB utilised an equitable charge on the properties to release the tied up equity.

Several meetings were held between the developer and members of the Structured Finance team, including Gerard Morgan Jackson visiting the development site in West London. After careful consideration the Bank agreed to make a £2.5m facility available in two tranches – the first for reimbursement of planning expenses and the second once a suitable project property became available. The exit would be the subsequent arrangement of development finance potential funded by UTB once planning permission had been achieved on the West London property. If planning was refused the property would be sold to settle the loan.

Commenting on the case, Head of Structured Finance, Gerard Morgan Jackson, said:

“We’re increasingly dealing with customers who have extremely competitive mortgages on their BTL properties with lenders which will not allow second charges to release equity. This is happening even in cases where the equity is considerably more than the security required. Their intransigence is almost certainly designed to encourage the borrowers to refinance and repay their entire loans because they would rather have their funds back than continue to lend them at very low or even negative margins.

“Having recognised this trend, we have structured facilities where we take an equitable charge over a mortgaged security property or properties, a solution which is not reliant on the first charge lender’s permission. This is another example of the Bank’s willingness to put together innovative and flexible funding for customers with complex portfolios but straightforward requirements.”

Facility: £2.5m

Term: 24 Months