Finance for a Permitted-Development Project

Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

If you are looking for a great property investment opportunity as a seasoned developer, permitted development is something you should consider. Even if you are a newbie investor in the property development field, a permitted development project is equally promising. 

The rules guiding Permitted Development Rights (PDR) have undergone many changes, but they are well documented. Developers can also explore various funding options for these types of projects. This article discusses all these and more. Read on. 

What are Permitted Development Rights?

Property owners have the right to make changes to the buildings without seeking planning permission from the local authority. These rights are known as Permitted Development Rights (PDR). Even so, developers are still required to get approval for some aspects of the building development from local planners. 

Overview of the New Permitted Development Rules

The following are the New Permitted Development Rules 

  • The UK Government granted property owners a temporary PDR in 2013 that allowed them to convert office buildings to residential accommodation. Three years later, this rule became permanent. 
  • Another PDR was approved in August 2020, to be precise. This PDR allowed for old/two-story buildings to be extended to residential or commercial properties. 
  • In September 2020, another permission was granted, enabling landlords to convert a wider range of retail and commercial premises (Class E) to mixed-use. 
  • In August 2021, a new PDR known as the class MA right was introduced. This PDR approved conversions between class 3 (residential) and Class E use. 

Do I Need Development Experience for Permitted Development?

It is preferable to have development experience and for new-build loans, this experience is mandatory. The risk associated with permitted development is usually lower for lenders. Therefore, you will be likely to get loan approvals even with a low development experience threshold. 

When it comes to development, new construction always poses the highest risks. In the event that the risk is no longer there, lenders enjoy a higher protection. 

There is a range of PDR. However, the majority of them are heavy refurbishments or internal fit-outs. Therefore, if you are building from scratch, the same level of skills will not be required. Even at that, most lenders will only be willing to approve funding for a team with experience. 

If you lack experience, it is expedient to add experienced people to your team. A project manager or even a qualified contractor will suffice. This may, however, mean sharing the profit or giving performance incentives. 

It is natural to feel reluctant about giving performance incentives or even agreeing to a profit share. However, doing so is to your advantage, as it would make the lender more comfortable. 

The idea is to start and gain more experience along the way. Therefore, assembling people with the requisite experience, even if it means sharing some of your profit, can culminate into bigger things in the future.

How to Find a Permitted Development

The main way a new build differs from a permitted development is in the weighting between land and build costs. For most new-build projects, the land costs are usually lower than the build cost or, in some cases, equally weighted. It is rare to have a different scenario. 

However, with permitted developments, land costs are higher than building costs, and the reason is mostly because of 

  • The way these PDR sites are valued
  • The method of calculating the development loans.

Why Is This Important?

Lenders first determine the gross amount for the loans before deducting interest fees and any other costs they may incur, including the cost of building. The rest is allocated to the land. 

Most lenders have a cap on the maximum to be allocated to lands. This is the case even in situations where LTGDV or LTC gives room to lend out more or prohibits more borrowing. This invariably means you will be required to put down a large deposit. 

The day-one land cap restricts lenders to only a 60% LTV on loans against the value of the land. This means that you will need to provide a larger deposit, as the lender will only cover 60% of the land’s value. Most lenders are silent about this and prefer to talk about the high percentage of GDV they offer borrowers. 

Lenders have different criteria and loan amounts they are willing to offer. The gross loan out is usually determined after considering several factors, some of which include: 

  • The total cost of the project
  • The day one exposure
  • The expected end value
  • Equity input
  • Size of the loan
  • Development team’s experience
  • Complexity of the construction.

The margin with which the loan amount offered by different lenders can differ may be quite significant. This difference can vary in the turn of hundreds of thousands.

Also, values provided by lenders may value the site differently from a buyer or seller. A value appointed by a lender will mostly value the sites as vacant possession. 

The vacant possession value is usually lower than the investment value, but with the right development documentation from the council, the valuer can work on the basis of that approval. This means that the lender’s valuation may not reflect the potential value of the property after development. 

Depending on the kind of asset, if you get permission from your local council, that could mean that the valuation will be 75% or 50% of the value. The purchase price would also have been arrived at based on the premise that getting prior approval is only a formality. 

Lenders calculate the loan amount either as a percentage of the valuation or purchase price. Whichever one is lower is used. This means you will be required to put down a bigger deposit. 

The lack of awareness about the policy governing development finance has proven to be a clog in the wheel of many potential property developers. 

One way to avoid this is to option the purchase. This strategy involves getting the landowner to submit an application for the permit and complete the purchase once they get approval. 

The owner may, however, expect to be paid a premium or even start considering doing the development themselves. Optioning the purchase allows you to secure the property at a certain price, contingent on obtaining the necessary permits.

How to Choose a Lender for a Permitted Development 

When choosing a lender for a permitted development, it is ideal to use a specialist if

  • Part of the project is new-build
  • The property is expected to be above 4x units. 

There are more options available for a PDR than for a new build. While many bridging loan lenders are willing to help fund conversions, they are not as eager to help with new builds. 

On the other hand, all development lenders will provide funding for a permitted development. However, the minimum loan amount will be between £1m and £2m. Therefore, it is ideal to use a specialist development lender if the project is a big one. 

Bridging loan lenders is, however, a perfect option for relatively smaller conversion projects. The reason is that bridging loan lenders may not have the prerequisite experience needed to provide support for a very large project. Therefore, if something goes wrong, they may not be able to provide adequate support to the extent you may need. 

A specialist development lender with extensive experience is more likely to offer invaluable support during hiccups. An inexperienced lender, on the other hand, may begin to look for contract breaches and, therefore, fail to provide the needed support. 

How to Get Funding for Permitted Development

Funding for a permitted development is provided by both development and bridging loan lenders. The size and how complex the project is will determine the lender to use. 

If any part of the project involves a new building, extensions or additions or is bigger than 4 units, a development lender is ideal. However, it is best to source funding for smaller projects from bridging loan lenders. 

Bottom Line

The process of getting funding for a permitted development project for an individual can be exhausting. This is why you need an experienced mortgage broker to take the burden off your shoulders. An expert is knowledgeable in all the steps involved, has access to lenders, and can recommend the best products in the market to suit your peculiar circumstances.  

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Luca Bertolino

Mortgage Expert

Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.

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