Yet, there’s another opportunity that often flies under the radar: securing planning permission on a prime plot destined for development.
This could be in the form of a vacant commercial building, a brownfield site ripe for a makeover, or even an existing residential site brimming with untapped development potential.
Here’s where planning gain finance steps in, a unique solution tailored for such scenarios.
It provides the necessary funding to snap up these promising sites before the green light on full planning is given. This financial support can prove invaluable in kick-starting your next big property project.
What is planning gain?
If you’ve been in the property investment or development sector for a while, you’ll likely be familiar with the red tape that comes with securing planning permission, guided by the Town and Country Planning Act 1990.
To embark on significant land development, substantial structural alterations, or to monetise a property, you need to have the right planning consent.
Under the Act, the government and local planning authorities (LPAs) have the power to ensure all new property developments, extensions, changes in use, and similar projects strictly adhere to current planning laws. Simply put, it’s a way to prevent anyone from sidestepping regulations and building as they please.
Typically, land that has no buildings or lacks planning permission carries a rather low value.
As such, it isn’t seen as a viable security for a mortgage. Most lenders tend to steer clear, viewing it as a challenging sale if the borrower fails to maintain repayments.
However, the scenario changes dramatically once planning permission is granted for the land.
Now seen as a potential construction site, the land’s value soars. This is a savvy strategy employed by veteran investors.
With the coveted planning consent in hand, developers have the freedom to either kickstart the construction themselves or sell the now-more-valuable land, thanks to the planning permission, to turn a profit.
An investor can seize this opportunity to generate profit by purchasing a plot of land, securing planning permission for it, and then immediately selling it onwards. Without the need for them to do any construction work.
This strategy is what’s referred to as planning gain.
Bear in mind, the road to obtaining planning approval can be a long one, stretching over months, or even years, during which time you’re footing the bill for the finance on your purchase, or bearing the opportunity cost of that capital. The willingness of local authorities to grant planning permission isn’t uniform across the country; it’s swayed considerably by local politics, local and regional plans, as well as agreed development objectives.
What is planning gain finance?
So, what exactly is planning gain finance?
Also known as pre-planning finance, this unique funding solution aids developers in securing sites that hold promise for further development once additional planning permissions are secured.
These could include: greenfield sites that are potentially part of local authority development zones, dilapidated commercial property or brownfield sites, or even residential developments where the full potential of planning has yet to be harnessed.
In essence, it’s a short-term bridging loan aimed at facilitating the site purchase while you work towards achieving planning gain.
Thanks to the flexible nature of bridging finance, this could even extend to acquiring properties deemed uninhabitable and, as a result, unmortgageable.
Once the sought-after permissions are granted, the bridging lender expects their loan to be repaid in full. This could be through the sale of the plot or by securing development finance to fuel the next phase of the project, based on the increased value of land that’s been granted planning permission.
If the planning permission is refused, then the lender still expects their loan to be repaid in full!
So, who’s eligible to apply?
The spectrum is wide, including:
- Individuals
- Partnerships
- Limited Companies
- Special Purpose Vehicles (SPV)
- Pension funds
- Trusts
And what about the loan to value (LTV) on offer?
Well, this can fluctuate significantly, depending on the lender and the specifics of the project.
You might be able to secure a loan to value LTV of 70% on the purchase, but in exceptionally strong cases, we’ve managed to arrange finance at an LTV of 80%.
The Exit Strategy
Like any short-term secured loan, lenders will scrutinise your proposed method of repayment, or ‘exit strategy’, quite meticulously.
This exit strategy plays a crucial role in your loan application. In the context of planning gain applications, lenders need to understand how you plan to repay the loan, irrespective of whether your planning application sails through or hits a snag.
Typically, the most common exit strategies for bridging loans involve either selling or refinancing.
Your options could include:
- Refinancing to a self-build mortgage
- Switching to a property development loan
- Moving to a commercial loan facility, if suitable
- Selling once the planning consent is granted
So, how can a broker help?
Whether your game plan involves selling a site post planning, or rolling up your sleeves and building the project yourself, our brokers can help tailor a funding package to your needs.
Lenders offering pre-planning finance often prefer to liaise with a bridging loan broker, bypassing direct business.
Respect Mortgages can match you to a commercial mortgage broker, who has the experience and expertise, to get you a great deal.
They can tap into an extensive network of banks, loan companies, and specialist lenders to pinpoint the ideal loan for you.
Pre-planning development finance from £100K
Loan terms up to 24 months
Loan to value ratios up to 80%
Swift decision-making processes
Experienced independent advice
Ready to explore your options?
If you’re just about to start a new mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
An independent mortgage broker can access over 100 lenders on your behalf. They will make the process smoother and more profitable than going it alone.
Keep reading, keep asking questions. The more you know, the better decisions you can make.
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Good to know
Bridging loans serve as a critical mechanism within the framework of Planning Gain Finance. They provide short-term, flexible financing options, designed to bridge the gap between purchasing a site and acquiring the necessary planning permissions. This is particularly useful for developers aiming to secure sites with high development potential.
Bridging loans offer a lifeline during the crucial planning phase, enabling developers to move quickly on promising opportunities without the constraints of traditional mortgage financing. They’re designed to be repaid or refinanced once planning permission has been granted and the land value increases, or the site is sold.
Securing Planning Gain Finance is a systematic process that begins with identifying a promising plot or property. The next step involves approaching a lender or broker with a clear and detailed proposal. This should include an exit strategy and a solid plan demonstrating how planning permission will increase the value of the land.
The lender will assess the proposal, the value of the site, and the likelihood of achieving planning permission. Upon approval, the funds can be released, often within a matter of weeks. The repayment or refinance of the loan takes place once planning permission is granted and the land value rises or the site is sold.
Planning Gain Finance provides developers with several advantages. It allows for swift action on potential development opportunities and helps navigate planning delays. However, it also comes with risks. If planning permission is denied or delayed, developers could face difficulty repaying the loan. It’s essential to have a backup exit strategy in place to mitigate such risks.
With an increasing focus on sustainable development and housing demand, Planning Gain Finance’s future looks promising. As urban areas become more densely populated, the demand for clever use of space increases. Developers who can successfully navigate planning permissions to maximise land usage will likely see substantial returns. However, it’s crucial to stay abreast of changes in local and national planning regulations.
Lenders look at various factors when considering a Planning Gain Finance application. These include the location and potential value of the site, the developer’s experience, the feasibility of gaining planning permission, and the strength of the proposed exit strategy. The developer’s credit history and financial standing also play a role in the decision-making process.
Common mistakes include underestimating the time and cost involved in gaining planning permission, not having a solid exit strategy, and overestimating the potential increase in land value. It’s essential to have a clear, realistic plan and seek advice from experienced professionals to avoid these pitfalls.
While Planning Gain Finance is a popular choice for many developers, it’s not the only option available.
Other methods of financing property development include traditional mortgages, development finance, commercial property loans, and even crowdfunding.
Each option comes with its own set of advantages and drawbacks. For instance, traditional mortgages might offer lower interest rates but require the property to be habitable. Development finance, on the other hand, is suitable for larger projects but may come with higher rates and more stringent requirements. It’s crucial to explore all available options and choose the one that best aligns with your project’s needs and your financial circumstances.
