B&C spoke to Noel Meredith, Director at United Trust Bank, to find out more about a property development deal involving a professional client’s unusual funding model…

UTB was first approached by the developers in question in September 2011. They had already created a successful business which invested both their own funds and money from other private investors into property developments. Any investors would get a return on their money once the properties were sold and the funding paid off, with any funding shortfall being usually borrowed. It was an unusual funding model and, although some mainstream lenders may not have considered a proposal of this nature, UTB was experienced and flexible enough to consider it. It was important to the firm, however, that the developers were investing some of their own capital.

A site with great potential was identified on a private estate, called Dormans Park, near East Grinstead, which at the time was home to one residential building in around two acres of land. The clients had planning permission to demolish the house and construct two new six-bedroom luxury homes with triple garages and about an acre of garden each. The target price for each finished property would be in the region of £2 million. The site was available for £1.15 million and the developers needed £495,000 from us to complete the purchase.

Jonathan Nail, part of UTB’s Development Finance team, was appointed to research the developers and some of their previous projects. The clients had also taken the wise decision of finding a contractor who was highly experienced in delivering the kind of high-specification properties which the developers had envisaged. Using various property websites, online resources and local contacts, Jonathan then established whether the developers’ aims - in terms of both property type and projected selling price - stacked up against other comparable properties in the area.

Once satisfied that the developers and the contractor have a proven track record and that the project appears viable, outline terms were discussed with the developers and a site visit was arranged. Happy that the site was as described and the developers were experienced and professional, Jonathan then put a proposal to UTB’s credit committee.

At UTB, a credit committee meeting is held every weekday. The committee comprises representatives from across the bank including directors, heads of the departments and business development managers. The BDMs are encouraged to play an active role in the discussion, challenging other proposals and helping to make a robust lending decision. This close association means that BDMs are very attuned to UTB’s criteria and, consequently, will only take a proposal to the credit committee if they are confident of a positive outcome.

With this approval, the bank issued a formal offer to provide funding of £495,000 for the site, £1.35 million of build costs and £112,000 of professional fees with interest added on. It’s not unusual for professional fees such as those paid to architects, engineers and estate agents, to amount to almost 8 per cent of a development’s total cost. Once the borrower accepted the offer, the due diligence process began: an independent valuer and quantity surveyor were instructed to the confirm end value opinions and build costs, while lawyers were instructed to prove the legal title of the site.

Once due diligence had been completed, the borrower was able to draw down the funds needed to complete the purchase of the land and the contractor was quickly on site.

From then on, UTB’s surveyor carried out monthly site visits to check that work was completed to the required high standard; if the surveyor was happy, UTB would then release funds to the contractor to cover construction work completed to date. Over the next 11 months, Jonathan made several visits himself to the site to meet with developers, check progress and keep in touch with marketing plans once the houses were nearing completion.

In this instance, the finished properties were placed on the market for more than the original estimates and were quickly sold. In the end, the sale of the first house provided enough capital for the developers to be able to repay UTB’s funding sooner than anticipated, saving them interest.

The finished development

Speaking about the entire transaction, Noel said: “The funding of this development worked well for both the borrowers and United Trust Bank. The developers and the contractor demonstrated a high level of experience and professionalism enabling the build to be finished on schedule, on budget and delivering an even higher return on investment than initially predicted.

“The developers are now exploring other opportunities and we look forward to working with them again in the future.”