Using BTL to rescue developments from administration
Dak Lam (pictured) is buy-to-let specialist at Brightstar Financial
A successful scheme can deliver developers attractive returns, but property development is a complex process with many potential pitfalls.
Often these pitfalls can be overcome, and experienced developers become adept at spotting them, but there are occasions when there is no alternative but for a developer to go into administration as a result of being unable to redeem the initial finance.
However, administration does not have to mark the end of the road for a scheme and, at Brightstar, we have recent experience of working with a variety of clients who have fallen into administration for different reasons, but where we have been able to secure a long-term Buy to Let exit.
Here are just three examples where we have secure buy-to-let mortgages to lift developers out of administration and buy them time for the market to bounce back.
In the first example, the clients had purchased a plot and obtained the correct planning permissions, which enabled them to draw down on a 12-month funding facility.
However, once this had happened the local council stated that the site was of potential archaeological significance, which meant that a dig was required to check there were no artefacts present.
This dig took six months, using up half of the term of the funding facility and putting the project a long way behind schedule.
At the end of the term, the lender showed little in the way of flexibility regarding repayment of the loan and the client was forced into administration.
The second example is a case where a developer had built two homes, each valued at £1.4m.
As a result of the state of the market, the value of the properties dropped and, combined with increased costs, the loan to value increased from 50% to 75%.
Unable to secure a sale on the property to redeem the facility, the developer entered administration.
A third scenario where we have recently been able to help, was a large scheme of more than 30 flats, which were being developed as a joint venture between two partners.
A dispute between the partners disrupted the development and the lender called in the debt, which pushed the developers into administration.
In all of these scenarios, we were able to rescue the development from administration by refinancing onto a term buy-to-let mortgage, which enabled the clients to earn rental income on the completed properties while they wait for the optimum time to exit.
Entering administration doesn’t have to mark the end of the road for a development, but it does mean working with the right partner that is able to secure an appropriate route out that suits both the client and the lender.