Bridging finance can be used to purchase and develop land for commercial reasons or for one’s own private use, like building a house. Individuals or companies often use bridging finance when they have a business idea and have identified a piece of land to develop. They wish to secure this plot (most of the time a bargain plot) to develop it, sell it and make a profit.
For those individuals whose goal it is to build their dream home, or those looking to expand their portfolios, they may need the finance to not only purchase the plot of land but also to cover the planning and building costs. After the development has been completed, when it has become a more valuable prospect, they can take out a regular mortgage and reap the profits.
But how many lenders will fund such a loan and does the criterion vary according to whether land acquisition cases have or have not received planning permission?
Bridging and Commercial spoke to industry experts to try to ascertain more facts about this specialised area of bridging.
Most of the lenders we spoke to informed us that they don’t fund finance for land as it is quite risky. Therefore, getting the finances to buy a piece of land can often be difficult.
When developing a site, a lender may fund the proposed project only when they’ve appraised the property, which will be used as security, and believe it to be a viable opportunity. Lenders must also feel comfortable that the developer has the means to move the project through to completion.
If the date for returning the funding can vary according to the development’s progress then an open bridging loan – which involves paying back the loan when the project is finished although not knowing when that will be – might be most suitable. If the date for refunding the loan is known – as there is a solid schedule for the development to be completed and perhaps a buyer lined up – then a closed bridging loan can be offered.
If purchasing land for a self-build project, one could secure the land purchase with a bridging loan, obtain planning permissions and then seek development finance by way of a self-build mortgage or alternative development finance which can be used to repay the bridging loan and fund the building project. Another option would be to purchase the land using a bridging loan and use existing funds for the build project.
On completion, the Open Market Value (OMV) will ideally be greater than the cost of the land purchase and build costs, leaving the option to take out a traditional mortgage to pay off the bridging loan, and if possible to repay the invested build costs.
We asked the experts, what the difference is between securing finance for land on cases which have or have not got planning permission.
If the land does not have planning permission the bridging loan lender is very likely to reduce the borrowing LTV, although if extra security can be provided more can be made available.
Richard Deacon, Sales and Marketing Director at Masthaven, explained how specialised this area of funding is.
“There are no bridgers I know who lend solely on land, the majority (ourselves included) would want secondary security to lend against this type of asset,” he said.
“The problem is that no one wants to be left holding the baby if the deal goes wrong and all they are left with is a chunk of mud. There are so few senior lenders who look at land, and even when they do they have many onerous conditions attached to the facility – this is one for the real specialists.”
Terry Markham, Managing Director at the Funding Operation, said, "We must all remember that all lenders get offered land as security on a daily basis. There are those lenders who will dismiss it out of hand and this may be due to them not having the experience of dealing with this type of commodity or it may just be they prefer to only lend on bricks and mortar.
“However, some lenders do have an appetite for land, but the vast majority of them will only lend on land with full planning as this enhances the re-saleability of the security in case of default.
Montello is able to lend against vacant land but will only do so against land which has planning permission in place,
Christian Faes, Managing Director at Montello, indicated. “We are not typically a development lender, but if the transaction makes sense on an 'as is' valuation basis, then we are not adverse to lending against land provided that the deal makes sense,” he added.
Terry Markham supported this view, “As with any enquiry, it must be put to a lender who readily lends on this type of asset and it must be presented to them in its best possible light for it to stand a chance of being agreed in principle.
“Therefore, certain factors will definitely need to be answered – such as what is the planning for? If the applicant intends to develop it, what experience do they have in doing so? However, most importantly for the lender is how they intend to exit the loan.”
Ian Rennie, Tem Leader for Underwriting at Tiuta plc told us: “Tiuta would only consider lending on land with planning. We do not lend on land without planning.”
Terry Markham added: “When it comes to borrowing on land without planning, such as agricultural land, there are currently very few lenders who will take a view on this. Those who will generally limit the maximum loan amount to 50% LTV of the 90 day forced sale value." Terry Markham”
Duncan Kreeger, the Chairman of West One Loans believes: “The main issue is that the market for potential buyers is much smaller than conventional residential property. The other problem is that development finance is extremely difficult to obtain. This makes it hard for potential buyers to complete a purchase.”
In reference to planning permission, James Bloom, Chief Executive of Regentsmead, highlighted that: “It is very usual, especially in this difficult finance market, for planning to be required before a funder will commit to providing any finance. Certainly at Regentsmead we always need planning unless there is an existing residential property involved.”
We also asked whether the criteria or process changes for land when there is a different proposed use in the planning permission.
Christian Faes remarked: “At Montello, our funding is quite flexible, so there is no set internal formula where the criteria changes, just because the property is for a different use.
“However, the borrower's circumstances and planning of the property needs to be rational and make sense. If the transaction looks viable on the face of it, we are prepared to spend the time to understand the borrower's situation, and try and find a way to make a deal work.”
On speaking about different criteria set for different proposed uses of the land, Ian Rennie affirmed that: “At Tiuta we look at each case differently and assess it on its own merits. However, generally speaking we would only be looking to lend on land with planning for either 100% residential use or mixed residential and commercial use as long as the commercial element does not include A3 usage such as restaurants, etc.
“The criteria/process will depend on the client’s intentions for the land. If the client is intending to develop the land themselves under the agreed planning permission then we will consider lending development funds for this as well subject to the current value and end value being within our acceptable lending limits. We would also consider the client’s experience relative to the complexity of the development. We also look at the type of development and if it is suited to the location as well as the specification of the build.”
Duncan Kreeger asserted that West One Loans “only look to lend on land if the borrower has a clear plan for how the loan will be repaid. Preferably we want to see a new lender looking to assist with the build. This requires cash from the borrower and extensive experience in the field.”
James Bloom stated that “each type of use will attract interest from a different type of lender and each lender will have varying requirements. At Regentsmead we lend on primarily residential sites or properties and we have criteria relevant to this.”
Duncan Kreeger added: “West One Loans is currently developing products to suit our borrowers’ and brokers’ needs. This includes aligning ourselves with strategic partners in order to assist in the underwriting of such loans. We may be able to offer loans to developers in the near future.
“It is unlikely we will ever look to fund any land without full planning permission. This type of lending is a “developers’ risk” and not something that we look to share in. The upside of gaining planning permission is far greater than the amounts at which we charge. We are not looking to venture into this type of risk.”
Tips for Brokers
Christian Faes, Managing Director at Montello, advises: “If the broker is struggling to place a deal, or looking to source a loan against an unusual asset, then it often helps to have a full view of the borrower's financial situation. There may well be other assets or security that we could look at, that would assist with us getting comfortable with a particular loan.”
Team Leader for Underwriting at Tiuta plc, Ian Rennie, believes: “Simple things such as ensuring that all relevant sections of the application form are fully completed. For development deals on land with planning it is good to obtain any information or examples of the clients’ previous experience of property development.
“It is also useful to gather as much information relating to the development itself when the deal is presented to us including the relevant planning documents, plans/drawings for the development and a schedule of works/costings with timings. It is important to consider the term of the loan for developments as well to ensure the client will realistically have enough time to complete the build and then arrange sales or the necessary refinance to be able to exit our loan without incurring additional default or extension fees.
“For new-build developments it is important to ensure the client is aware they will need to have the relevant build warranties in place as well. This is not an exhaustive list but some ideas for brokers to consider.”
James Bloom advised that what are important are the criteria and needs of the lender. “Find out exactly what type of deals they are looking for and on what basis so you know when you get a deal in exactly which lender you should package this to.
“Find out exactly what your lender requires, at Regentsmead we just need a name and number of a prospective borrower we do not need detailed packaging. Always have your eyes and ears open for a prospective deal and progress it as quickly as possible. Make sure you only give deals to lenders who are really lending – of which there are very few at present,” he said.
It is clear to see that having planning permission in place is vital in order to secure bridging finance on land. Whilst there are a few specialists out there who may accommodate on plots which haven’t received planning permission yet, this is dependent on the case involved. Many lenders we spoke to said that this area of the market was dominated by a few specialists and that they themselves are currently looking to develop and offer this product within their own organisations in the future.
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