Using an SPV for a development plan B
Dak Lam, (pictured), buy-to-let specialist at Brightstar Financial
In the current environment, with the average property taking 19 weeks to sell from listing to completion, and nearly 22 weeks in the South East, according to RICS, developers are well-advised to consider a plan B for their completed scheme.
We are receiving a growing number of enquiries from developers who realise they are unlikely to achieve the price they want in the timeframe permitted by their existing funding and want to explore their options to refinance for the longer-term.
This often involves transferring the assets from the trading company in which they are usually held, into an SPV. There are buy-to-let options available for trading companies, but lenders tend to prefer SPVs as a cleaner vehicle and so a client is likely to have access to more choice and more competitive rates if their properties are held in an SPV.
It’s possible to create an SPV that is owned by the trading company and, as they are interlinked companies, the transfer does not trigger Capital Gains Tax or stamp duty because the ultimate owner remains the same. I often think of an SPV that is used in this way being a lot like a wrapper, like an ISA.
A recent example of a developer taking this approach was a client who was building an £8m development in South West London using a combination of senior debt and mezzanine finance. The balance of the mezzanine finance was £1.25m and the client was approaching the end of the term for the facility, at which point interest would switch to an annual rate of 25%.
We were able to transfer the scheme from a trading company to an SPV and refinance onto a 5-year buy-to-let rate. Reducing costs from current blended rate of 1.035% per month to 0.363% pcm, in simple terms saving slightly more than £400,000 over the next 12 months.
The longer-term loan has also bought the client time during which they can wait for the market uncertainty to wash through before reviewing their options. Then, in the future, they could choose to sell some or all of the properties or continue to hold onto them for ongoing rental income.
If you have clients who face the prospect of high charges when they reach the end of their development facility, it’s worth considering all of the options both long- and short-term. Identifying the best way to structure a plan B could make a big difference to the success of their investment. And, if you have any questions as to the best approach, look to partner with a business that is a specialist in this type of transaction.