GUIDE TO FINANCING REFURBISHMENT PROJECTS
in association with
Glenhawk.com
Glenhawk’s Guide to Financing Refurbishment Projects
Welcome to the Bridging & Commercial Magazine guide to Financing Refurbishment Projects, in association with Glenhawk
Contents 4-9 Feature 10-13 Q&A 14 Case Studies
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GLENHAWK’S
GUIDE TO FINANCING
REFURBISHMENT PROJECTS
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Glenhawk’s Guide to Financing Refurbishment Projects
A refurbishment loan is short-term finance available to property investors, landlords and developers to support work on any existing property structure, for every type and stage of a project. The finance allows for alterations to be completed for minor development, up to heavy duty works and structural changes, including full change of use. It is most effectively used to upgrade a residential, mixed use or commercial asset before renting it out, or selling the property to make a profit. Our bridging finance has been designed to help secure an asset and complete the development to maximise the return. A refurbishment loan can provide a significant amount of finance within a short time frame and can bridge the gap when there is a shortfall in funding, or if the developer does not want to put all their capital into the deal. The demand for refurbishment finance is currently increasing. The main factors contributing to this are: he conversion of commercial properties into T residential use. The high street is changing and investors are capitalising on this opportunity Increased multi-functional living space in people’s homes. COVID has has led to people wanting more from their homes, including office and outdoor space, and a move towards more defined areas Modernised workplaces. As employers encourage teams back to being office based, workspaces are expected to be safe environments that are also set up to support the virtual world and provide the best amenities to attract young talent
he new permitted development rights for T converting commercial into residential. The removal of planning opens up the opportunity to renovate vacated buildings and refurbish them in a timelier manner I ncreased demand for holiday lets. With more of the nation holidaying in the UK, there is opportunity in changing properties into viable rental accommodation to support the surge in demand Refurbishment bridging supports these opportunities as it provides funds for both the initial purchase and the drawdowns for the refurbishment requirements.
Refurbishment loans
Accounted for 11% of bridging in 2020
Increased to 13% of bridging lending in 2021
It is expected development loans will account for the highest market value by 2026, at a value of £4.6bn
Source: Mintel report - Bridging Loans 2021
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Glenhawk’s Guide to Financing Refurbishment Projects
Key tips to approaching a refurbishment project: 1. B uy the right asset. Is the property suitable for your goals and will it make you enough profit when it comes to selling? 2. Pre-empt planning permissions. Buying a property and then having planning rejected will be an expensive mistake. 3. Put the right team in place. Good designers, architects and builders will save you a lot of time and money in the long run. 4. Invest time in a detailed schedule of works. Break down costs and timeframes - and always include a contingency for problems.
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Considerations in getting a bridging loan Bridging can be seen as a complex option in financing a refurbishment project, however, with our wealth of experience and understanding of these types of undertakings, we are on hand to support introducers in dissecting the requirements and can produce terms very quickly. We will always price the deal on our commercial understanding of the project, and will never change the rate through the course of the application, as it will be based on our grasp of the transaction from the outset.
Glenhawk’s Guide to Financing Refurbishment Projects
The main questions we look for when producing terms for a refurbishment loan are: What is the security address? We will be looking at the build and class type of the property, its location and surrounds to assess if it is suitable security to raise finance against. What is the client’s experience and net wealth position? We will assess these to determine other assets available should the customer be unable to repay the debt. What is the security address? We will be looking at the build and class type of the property, its location and surrounds to assess if it is suitable security to raise finance against.
H ow long will the refurbishment loan be required for? The term length is essential for the client to complete the project and execute their chosen exit in enough time, to ensure they do not to default on the loan. W hat is the planned exit? This is crucial to ensure the loan does not default; we would consider factors such as sales times in the security’s location, or refinance by a lender who would be able to take this loan out.
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Glenhawk’s Guide to Financing Refurbishment Projects
How we structure a bridging loan Refurbishment finance through Glenhawk is structured in two stages. The initial advance is based on the current valuation of the asset—we can lend up to 75% of the open market value of the property (not 180- or 90-day value), or even 90% of the discounted purchase price. The balance of the loan will be drawn down by the developer in multiple tranches, in line with their schedule of works. The total loan amount is based on the projected value of the asset post works completed, known as the GDV (gross development value). At Glenhawk, for the right project, we can lend up to 65% LTGDV. We will allow you to borrow 100% of the cost of works drawn down in arrears. Staged draw-down for refurbishment finance means that you only pay interest on the amount of funding you’ve accessed, as you need it. Another cost consideration is the quantity surveyor or asset manager who will assess progress at each stage before releasing the next tranche of funds. We will also consider the LTC (loan to cost), which means the amount a bridging lender will provide as a loan against the total cost of the project. With Glenhawk, this could be as high as 90% LTC. One of the main factors to consider in 2021 is the building materials shortage in the UK. This is affecting construction, designers, and homeowners looking to complete their projects. The result is rising costs for materials, leading to projects running over budget and pushing the timelines. The amount the investor, developer or landlord can borrow from Glenhawk will be determined by the type and class of the asset at the end of the project (eg commercial 70%, residential 75%). Depending on the works being carried out, it will be determined whether the refurbishment is light (cosmetic, such as a new kitchen, bathroom, redecoration, modernising, rewiring etc) or heavy (where there are structural changes to the property and planning permission is required)— Glenhawk can help with both. This is will generally based on the cost of the works versus 1 8
Planning permission or permitted development? Prior to lending, Glenhawk will want a full understanding of whether the intended works require planning permission or can be undertaken under permitted development rights. In short, full planning permission required getting approval to build a scheme, whereas permitted development is simply making known your intention to do so. Planning permission can take up to 10 weeks to be decided, and Glenhawk would want confirmation before we could lend on the refurbishment project.
01 Application completed by introducer, with supporting documents
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Case manager in contact with introducer to discuss next stages, including due diligence searches
Glenhawk’s Guide to Financing Refurbishment Projects
WHAT HAPPENS WHEN?
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Application underwritten on back of valuation report being received
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How long does this take? Bridging loans, by definition, are fast! Glenhawk is on hand to produce terms well within 24 hours of receipt of enquiry. Depending on the developer’s experience, paperwork being in order, prior research on the asset’s value (to not affect the loan to value), and the correct legal team being appointed, the bridging loan can be secured in a matter of weeks, sometimes even days. Inaccurate and slow paperwork, inefficient legal teams, and an inaccurate understanding of the asset’s value will have a detrimental impact on timeframes. The speed is in your hands, and Glenhawk will work with you to achieve defined completion dates.
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Valuation booked and paid for by client
Undertaking of legals and facility agreement drafted by underwriter
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Valuation and legal quotes produced
Case completed, funds sent
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Glenhawk’s Guide to Financing Refurbishment Projects
Q&A 10
Glenhawk’s Guide to Financing Refurbishment Projects
Jamie Pritchard Director of Sales
How has Glenhawk responded to the changing needs of property investors over the last 18 months? We have been hugely encouraged by the resilience of the property market and have monitored the changes in legislation and the types of properties investors are buying. By working with our funding partners, we have been able to change criteria, with the aim to provide solutions to clients to add to their portfolios and achieve their business goals. This includes advancements to our regulated refurbishment product, additional criteria on our unregulated refurbishment products in both commercial and residential, and, most importantly, constantly looking to improve our processes for application through investment in the team and technology based on how clients now want to interact with a lender.
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Glenhawk’s Guide to Financing Refurbishment Projects
From a product perspective, what sorts of solutions exist specifically for those looking to take advantage of PD and the changes in class? We allow a refurbishment loan up to 100% of the refurbishment costs with a day one advance of 75% (max LTV) for residential properties and 70% (max LTV) for commercial properties. These products can allow borrowers to access up to 65% LTGDV, and up to 90% LTC. What separates light and heavy refurb, and how does the application and underwriting process differ? The definition of light vs heavy comes down to the planned changes to the asset and the cost, and percentage of the cost versus the open market value (OMV) of the asset day one. For example, light refurbishment would be 25% or less when considering the cost versus OMV. In addition, light would involve no material structural works and and are generally small-scale conversions including change of use. With regards to heavy this would be when costs are more than 25% of the OMV, with structural changes planned. For heavy refurbishment we would appoint a QS for certification of each drawdown.
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Glenhawk’s Guide to Financing Refurbishment Projects
» Understand the value of the asset you are buying and the uplift in value post refurbishment » Have a detailed schedule of works and consider the current costs of materials required, plus the cost and availability of tradesmen, builders and project managers » Don’t economise on legals – use a firm you know understands bridging and can deliver on time » Always have a contingency pot of approx. 15% of the project » Plan your exit, and contingent exits, to repay the loan When it comes to third parties, such as contractors and other professionals needed to get a project completed, what do you as a lender need to know and will a borrower’s choice of third party affect their application and the overall success of their finance journey?
Q&A
What are your top tips for investors seeking refurbishment finance?
From outset of the enquiry, we would look at the investor’s experience of previous refurbishment projects when assessing the commerciality of the project. In underwriting, we would need to understand the CV of the professionals that were being used for the deal to give us comfort that the project will be able to be completed during the loan term, including the planned exit. All of the above needs to be considered to make sure the term and the overall deal is viable and therefore not likely to put the investor under any financial duress.
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CASE STUDIES
Glenhawk’s Guide to Financing Refurbishment Projects
Study 1
Study 2
Regulated Refurb Case Study
Residential Refurb Case Study
The client was looking to buy an uninhabitable property in Chelmsford with a current value of £550k. It needed a new bathroom, wiring and modernisation, plus an extension under PD for a large kitchen/diner.
Clients wanted to purchase a 4-bedroom property in an Article 4 area of Southampton with a view to refurbishing it into a 6-bedroom house. Planning was required to change it from a class C3 to a C4.
Their existing property had a mortgage of £100k and was to be put on the market for £650k. Lending up to 70% required Net loan of £625k to allow for purchase, works and SDLT 12 month term rolled 2% fee Exit – sale of existing and refinance The customers were able to live in and market the property during the build, which was completed in 13 weeks with an end value of £735k.
Study 3
Commercial Refurb Case Study A limited company sought to purchase tired office premises in London to convert into flexible, shared working space, with modern kitchens, meetings rooms and open-plan work stations. Purchase for £3m End value (GDV) £4.6m Works £500k, 4 drawdowns Initial loan £2.1m Total loan £2.6m LTGDV 58% Rate 0.78% 14 month term – rolled interest Exit – refinance onto commercial term
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A bridging loan of £337,500 was used to purchase the property at 70% of its £450k OMV. Once planning had been obtained, Glenhawk turned the loan into a refurb facility and works could commence. £50k refurb required GDV £640k Total loan £387,500 62% LTGDV Rate 0.74% Term 12 months Exit – BTL term refinance
Up to
Max
Interest from
of refurb costs in arrears
65%
LTGDV loan exposure
0.70%
75%
Rolled
£5m
100%
initial max LTV
or retained interest
per month
max loan amount
REFURBISHMENT PRODUCT SNAPSHOT Glenhawk.com Regulated loans via authorised intermediaries only.
0207 100 8787
Glenhawk.com 0207 100 8787 lendingteam@glenhawk.com
