Development finance deal

Positive arranges £2.2m facility for second development phase

Our property developer client recently agreed a sale on the final unit of phase one of a mixed-use development scheme in Cheshire.

He needed a highly leveraged loan for phase one given his resources were tied up in another scheme, and had to exercise his option to buy the site before it expired. A joint venture deal was agreed – for a profit share.

Given that phase one has now been completed and sold, the developer wanted to press on with phase two, but hoped to attract a debt funder at a smaller loan-to-cost and without a profit share. Phase two included a mixture of eight houses, three flats and a ground-floor retail unit which – given the location – attracted a pre-let quickly.

Phase two GDV was £3.65m and a sum of £2.2m was required to cover the build costs and a small amount of residual debt from phase one. A facility was agreed to cover the full sum at a rate of 9% per annum, plus a 2% arrangement fee. While the lender usually applied an exit fee, it was agreed that it would be waived if the lender also funded phase three, after phase two was concluded.

The lender was extremely quick to react as the build cost and quality was clearly supported and demonstrated in phase one. The same contractor and professional team were retained, giving total continuity which put the lender at ease. The success of phase one also confirmed that the proposed GDV of phase two was achievable. Terms were issued quickly and completion occurred within five weeks.

This is an example of an experienced property developer using a highly leveraged funding option to get a scheme underway and then being able to drop down to a more conventional debt-funded facility to progress through the next phases. Without this, the developer faced a loss from being unable to exercise his option on what will almost certainly be a very profitable project.

Positive Commercial Finance can be reached on 0161 763 0321.

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