I have commonly been presented with applications for lending from developers who have negotiated a deferred payment to the vendor.
Securing an agreement to a deferred payment on a land purchase can be very advantageous for the property developer, as this is in effect an interest free loan.
land purchase with planning for £200k.
If you can defer £100k until the properties are built and sold – that’s £100k you don’t need to use from cashflow or borrow and you get to pay for the land from profit.
Taking this one stage further – having agreed the deferred payment you may then also be able to obtain a development loan for the remaining £100k land cost and 100% of the build out costs. A common lending model is 50% land cost plus 100% build out cost, so the lender is effectively taking the deferred payment as your 50% of the land cost.
In summary, the deferred payment to the vendor acts as a substitute for your deposit in any funding proposal, i.e. you do not need to put in any cash.
The terms you must get agreement to for a lender to fund
The terms you agree with the vendor must comply with the lenders requirements otherwise you could find yourself without funding. There are two principal requirements:
- There must be no repayment date for the deferred element.
There must be no specific date for repayment. If you agree to a deferred payment in 12 months for example this causes a problem for the lender. This is because anything could happen within the 12 month period to delay the development. Covid is a great example of unforeseen problems nobody could forecast causing a delay.
In these circumstances the lender would have to make good on the deferred payment themselves or risk losing the land. This is simply unacceptable to the lender so you need to stipulate that the vendor will be paid their deferred amount following the sale of the built properties AND after the lender has been fully repaid.
Whilst the vendor may agree to this term in your initial negotiations you may find that he/she tries to change the position following advice from their solicitor. Its natural to advise a client what is in their best interests and having a 1st charge as security and a pay back date is certainly in the interests of the vendor as otherwise – if something goes wrong they could lose half the land value. That’s the risk they have to take and its part of the deal.
However as the vendor is taking on some risk here and (by agreeing to a deferred arrangement) providing a benefit to the developer the vendor may request additional terms in response – i.e. that if they are not paid by a certain date there is a penalty charge. The vendor may also increase the price of the land in return for agreement to the deferred repayment. It is your responsibility to negotiate a fair deal which is a win for all parties.
- Legal Charge
All development funders will need first legal charge security to lend against.
Therefore you will need to agree with the vendor that the lender can have a first legal charge and that the vendor may if it wishes take a second charge. This basically means the vendor sits behind the lender in control of the property and distribution of any funds.
These are the basic elements of lending in a deferred payment deal. If things start to get complex you can contact us for advice on funding throughout the negotiation stages.
At Specialist Property Finance its our role to help and advise the developer navigate through the funding minefield to avoid declines and help the developer obtain the best funding terms and rates to enable them to prosper.