Purchase Of A Development Site Using Bridging Finance at 80% of Purchase Price

By Kevin Duffin on Apr 14, 2020

An existing client approached us with a situation where they needed to move quickly to secure a development site.One of the first problems on this transaction was our client had a short timescale to complete and finish a certain amount of works before bird nesting season starts which would have prevented any work to start on site. In addition, there was a further requirement for the client as they needed to make some prepayments on materials which is always a challenge for a QS to attribute value on.

Our first decision was to look at the asset the client was buying and use the fact that the asset was being purchased undervalue, due to planning running out this year and the vendor needing to complete by a certain date on their next purchase. The next step was to have conversations with lenders around maximising the Open Market Value vs the purchase price.

Once we had the discussion with a lender who understood the proposal and confirmed the terms with the borrower,we instructed solicitors and a surveyor who would understand both the residual valuation and be able to comment on the gross development value for the lender.

This allowed us to move forward with the purchase on the following terms:

Purchase Price - £1,000,000
Valuation - £1,425,000
Loan - £800,000 (80% of the Purchase keeping below 60% of the Property Value)
Exit – Refinance

The next step was to look at the further need for the funding required for prepayment on materials that will take time to manufacture and deliver.

Given our experience in development finance, we know when cash is deployed this way it is difficult to confirm on QS reports but it is a necessary expense. Having reviewed the client’s balance sheet, we knew there was an unencumbered property coming up for sale which would allow us to raise the necessary capital with a natural exit.

The asset was an equestrian site and appetite to lend on was limited. However, after days of negotiation, explaining the property nature we secured a deal for the client. Once the lending was offered, we then came to draw the funds during the first week of lock down which meant lending appetite had changed. However, given Mesa’s knowledge of lending we worked to clarify the requirements of both the lender and the borrower to come to the agreement:

Open Market Value - £950 ,000
90 Day Value - £925,000
Loan - £462,500 (50% of the 90 Day Value)
Exit – Sale

The key on completing this transaction was the relationship between all professional parties and keeping all stakeholders updated.  The out come for our client was they managed to secure a great development purchase in the tight timescales we had been working towards. A great example of how relationships are key between all parties during a complex transaction using two lenders,three solicitors and two separate assets through one of the most challenging times we have ever seen.

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