Property Finance Success Story: Funding a hotel conversionPublished on 8th September 2020 2020-09-08T11:04:13+00:00 - Last update on 25th October 2020 2020-10-25T21:49:29+00:00
Converting an existing property can mean high profits when it is done in the right way and supported by a knowledge of the market - but to achieve those profits, a high scale of funding will often be necessary.
TL:DR - At Rangewell, we recently helped fund a Manchester-based redevelopment with lending of £2million by negotiating Bridging Funding at less than 1% per month and to arrange attractive terms by providing a carefully structured deal.
Change of use is a major growth area for property development. Changing patterns of business and lifestyle, coupled with a wealth of older property, can mean many opportunities for creating new homes which will meet with enthusiastic buyers. However, in the current climate, financial uncertainties have made it more difficult to secure many types of funding - and the large-scale funding required for property development is no exception.
Lenders have to be cautious when large sums are involved - even when the security provided by existing property is on the table. Even those who are prepared to fund developments may have a ceiling on the amount they can lend on a single project. Others may be reluctant to offer funding for certain kinds of development.
And those that will lend may require a high rate of interest.
Without in-depth knowledge of the lending industry, it can be extremely difficult to find the lenders who can provide the most competitive rates for specialised funding such as Development Finance. At Rangewell we not only have the necessary knowledge, but we can also put it - and our network of contacts throughout the property lending market - to work for you.
We recently helped a Manchester-based property owner with a challenging redevelopment project find the funding he needed to put his plans to work - which required a total of £2,000,000.
In the current climate, such a high-value loan may be difficult to arrange - and the developer realised that he would need help to secure the funding he needed at a rate which would allow him to retain sufficient profits.
“I owned a large townhouse in an up and coming part of Manchester. I had bought it as a hotel, and with 12 rooms it was viable as a business, but to be perfectly honest, it had seen better days. I’m not a developer as such - but I had bought it with the intention of doing something with it rather than going into the hotel trade, so I started looking at the potential. The location was up and coming, as many parts of Manchester now are.”
He had talked to an architect and had plans drawn up for the conversion of the hotel into six flats. These would be very highly specced, recognising the appeal of the area to young professionals - and the greater possibilities for profit with a high-end development.
He was able to secure planning permission for change of use. This was a formality. The property had been built as a single home, and its use as a hotel was not in keeping with other properties in the street, many of which had already been converted.
But the challenge of finding the right finance remained.
The property was worth in the region of £3 million according to the latest valuation. It had an outstanding commercial mortgage for £1.2 million, and the conversion work would cost around £800,000.
The need would be to pay off the existing mortgage and to provide the funds for the conversion work.
“The time was right at the beginning of the year, with property values heading up. But then came Covid and most lenders were simply no longer lending."
About Property Development Loans
All lending is arranged on an individual, project-by-project basis and there are three broad categories these projects fall into, including:
- Small-scale loans to cover light refurbishment
- Lending to cover renovation and major conversion projects
- Funding for ground-up development, starting with an empty plot of land
However, we saw that for our client there would be little chance of securing Development Funding, which is usually reserved for experienced builders and developers. However, we believed we could find a solution by finding a lender who could offer funding with a Bridging Loan.
With a Bridging Loan, the security is provided by the property - not the credit record of the borrower, or by any record of past developments. They are versatile but have a high cost and are, therefore, intended to be repaid quickly - either by the sale of the property or by another finance product designed for the long-term, such as a Commercial Mortgage.
They can be used to secure a property which is not suitable for a mortgage or to raise funds for development work for a property that is already owned. As the client had considerable equity in his property, we were confident that we could use a Bridging Loan to provide the funds he needed.
We knew that many property development funders had ceased lending until a post-Covid future became more clear - but we did know of one specialist bridging company that might be interested and still prepared to lend.
We approached them with full details of the project. They looked at the client's hotel and at his plans. Bridging lenders are able to make rapid decisions and funding was agreed within hours, with the funds released in a matter of days.
Costs for the Bridging Loans can be high. Rates of 1.0% per month are not uncommon, and there would be arrangement and exit fees which will increase the costs.
However, these fees and the growing interest could be rolled up into the loan, and all settled with a single repayment when the flats were sold off.
Lending for property development can include a roll-up of interest and associated costs into the loan, which would be paid off once the development is sold.
The deal we arranged
We were able to negotiate funding at 0.89% per month and to arrange attractive terms by providing a carefully structured deal.
This would provide a total of £2million to pay off the existing mortgage, and pay for the work required. The work was projected to take 12 months, but we arranged an 18-month loan to ensure that there was a margin if unexpected work would be required, or if the flats took longer to sell than anticipated.
All interest and fees would be rolled up into a single repayment.
“The funding was exactly what I needed, and we were able to start work immediately - despite the lockdown. The boost to the value of the property thanks to an unexpectedly buoyant market is making things look brighter than ever.”
Why we were able to help
We work with all the lenders in the UK market, and not only do we know which are most suitable for a particular type of deal or a particular sector, we know those that can offer the most cost-effective solution for an individual need.
We were able to secure the funding required by our client at just 6%
£2,000,000 at 0.89% over 18 months - with no penalty for early repayment
Getting the right deal for your property development plans
Finding the right lender for your development project can be crucial to its success and profitability. That’s why it is important to speak to the Rangewell team without delay. Our team is made up of industry specialists. Whatever your line of work, we have someone who understands the challenges you face - and the ways to answer them.
Our term includes experts in Property Finance, and our service is personal. It lets you talk to a property funding expert who understands the challenges you face with your project to find a solution that is planned around your business needs.
It often means finding solutions that our clients did not know were possible - it always means having a property expert working to save you money.
First, we discuss your plans. Then we can call on our network of property lenders, which includes virtually every name in the UK market, to get the funds you need.
If you have a property project that needs funding, just call us and one of our experts will be able to discuss your options and work out the most cost-effective ways to provide the funding you want - whatever challenges your business is facing. Plus, in most cases, our services are absolutely free.
Property development costs less with our help
- Individual arrangements tailored to your circumstances
- Adverse Credit – no problem
- Repayments geared to your revenue stream - including interest roll-up
- Understanding the funding challenges for your sector
- Personal service
Talk to Rangewell – the business finance experts
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