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Carving the deal

1st September 2021

We have managed to source a very interesting and lucrative deal in an area of London which is still being regenerated.  This is very helpful as then you are not sailing against the wind; the currents are lifting the deal up.  If the planning takes more time, at least prices will only be increasing.  So, the pressure is reduced.

This property consists of several freehold buildings, about half of which are commercial, the other being residential.  The great thing is the residential properties are currently producing income at a yield of a respectable 4% of the overall price of £3.5M.  This means you will not starve whilst planning is being sought, income will be flowing in.

As the full price of the property equates to the same as the residential, this means you’re essentially getting the commercial for free.  There is the obvious commercial to resi conversion under the new legislation which has just come in, and there is also further development potential.

The price per square foot in the location is circa £500.  Therefore, once this has been achieved you are expected to have a GDV of about £5.5M on a square foot of 11,000.  The conversion costs should not be more then about £350K, allowing £50K per flat.  In short, for an injection of £350K you’re obtaining an uplift of £2M – not bad.

The game is not over at this point.  There is development potential both above the property and to the rear of the property.

The aim is to do the planning in bite size chunks.  When the first phase is completed, we will look to refinance and place the residential element in a separate company, with a stable BTL rate.

The freehold will be hived off and placed in another SPV where we will only be concentrating on the development potential.  From a previous project, this procedure can add 6 figures on to the profit margin.  It also serves to de-risk the project, should anything thing unexpected come out of the woodwork in regards to planning.

Structure and foresight is incredibly important on a project this size.

It pays to have several rounds of discussion with the professionals to ensure this deal is carved out in the right manner, and it has been viewed from a 360 degree angle.  One often forgets it’s not the gross margin one gains from a profitable deal, but the net amount, the difference between the two can be whittled down through some clever planning and structuring.

On this deal there is the possibility to purchase the company.  Purchasing shares as opposed to the underlying asset has the obvious advantage of stamp duty saving, though it requires more warranties in regards to the purchase of shares.   You will also have a company which will be pregnant with a capital gain.

It may be worthwhile to cut the residential from the commercial immediately upon completion, rather than later on down the line.  We will need to see how this can be executed without destabilising the deal.

This is an interesting deal, which is expected to yield a good margin in a short period of time.  We will of course be keeping you abreast of how it develops over time.

Suresh Vagjiani

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