A deal has come into our radar in the NW of England. The property consists of a commercial empty space and the site consists of about a quarter of an acre, with a building of about 1,500 sq. Ft. sitting on it. The site is ripe for planning permission.
However, to just depend upon planning for a site is not a wise move.
We are in touch with a Blue Chip franchise company, who wish to occupy the building on an FRI lease. This would value the building at about £400K. The purchase price we have been offered for the building is £500K. The building will only occupy about 25% of the site therefore the 75% will be ripe for planning permission. The vendor is flexible in regards to how the deal is structured. They are even open to the possibility of a subject to planning deal.
However, agreeing the terms of this when there are two sets of lawyers involved is likely to be a long drawn out process, perhaps even ending at logger heads. Therefore, it is better to keep things as simple as possible; especially for a deal of this size.
There are a couple of things we can do. One is to purchase the property in two lots. One with the building on, and the other simply the land. The completion would be delayed so that we could synchronise the lease signing with the company, so that on completion we would have a paying tenant. This would trigger a lender to loan about 70% of the value of the deal. And likely have a positive cash flow.
The other section could be funded by a bridge again at circa 70%. This would serve to stabilise a large portion of the deal, as the interest would be covered by the rental. And a smaller exposure is left to planning risk.
Once planning is obtained the second site can be refinanced and all the funds pulled out, potentially. Most would be looking at this deal as a pure planning deal, but we know from experience this process can be whimsical and uncertain. By restructuring the deal and having a tenant in there neutralises the risk substantially, and allows one to have breathing space to focus on the goal. There is still some pressure, but only a fifth of what it would have been without the tenant. So, this does not remove the risk entirely but reduces it to only a fraction of what it would have been ordinarily. The split also allows one to sell this part off, once planning is gained, and therefore one has made profit without getting one's hands dirty. Given this site is some distance away this may be a good exit route. If time is not on your side you could sell the second land parcel off the back of a positive pre app report.
The rates for funding the commercial deal would be manageable now, I think this might be unlikely in 6 months to a year’s time. Therefore, if this deal were to go ahead, we would lock into a fixed rate now rather than later.
Interest rates are creeping up, and to be on a variable currently is very risky in my opinion. Therefore we are working with our clients to hedge any floating rates in preparation for what is to come in the economy. This can often be done with minimal hassle.