Achieving a planning gain can be very profitable, whether you’re a developer who’s purchased a site unconditionally or taken an option, or a promoter working with a landowner.
In the UK, there’s nowhere near enough land with planning permission to satisfy demand for new homes and housebuilders will pay a premium for it.
But planning permission is difficult to get. There are stringent legal restrictions on where new homes can be built and local councils often reject applications for purely political reasons.
The difficulty of getting planning makes it expensive to draft and submit a successful application. Your application and accompanying reports/submissions have to be policy-compliant and technically appropriate to get the approval of local authority planning officers. They also have to be attractive and compelling enough to persuade a planning committee (local councillors). All this can be costly.
And the whole process, from application to approval (or appeal), can be long: 12-18 months is pretty standard for a moderate scheme. Promoting larger schemes can take five years plus. Sinking capital into the planning process for that length of time can mean missing out on other opportunities.
Financing planning gains (rather than funding them out of your own pocket) is often a better option. Yes, you lose some of your profit to finance costs, but you can make more profit elsewhere with the capital that would otherwise be tied up in a planning application.
So: how do you get planning gain finance?
It depends on the type and scale of the project you’re attempting to take through planning.
If you’re buying land or property unconditionally in anticipation of a planning gain, you can partially fund the purchase through senior debt from banks or other lenders. Typically, you’ll be able to borrow 50-60% of the land’s current value. This means you’ll need to find equity to fund the rest of the purchase and your planning costs.
If you’ve acquired land on an option, achieving planning permission will probably cost you somewhere in the region of £75,000-£150,000 in professional and planning fees. If you’re promoting a large scheme through planning, your fees will likely end up totalling £500,000 plus.
In either case, you’ll need to find an equity investor to finance these fees – banks won’t fund them, as they don’t offer any form of security. Investors tend to have a greater risk appetite than banks – they’re often prepared to invest capital without securing it, if the potential profit is large enough. Often, investors are property professionals and capable of making a balanced judgement about risk and returns.
Equity investors will usually finance planning gains on a profit-share basis. If your planning application is approved and your site increases in value, you will be obligated to split your profit with your investor, when the gain is realised. Profit shares tend to be negotiated on a deal-by-deal basis, subject to the specifics of each project, your track record as a developer/promoter, and your investor’s risk/reward assessment.
The best way of getting an investor to finance your planning gains is to find a good broker. Unlike banks, equity investors do not tend to have application forms available on their websites. Instead, they form relationships with brokers, who bring them prequalified, profitable deals to invest in.
At Mackenzie Byrne, for example, we have a network of investors – including family offices, high net-worth individuals, and property funds – that we work with on a regular basis.
If you need planning gain finance, email us at firstname.lastname@example.org and tell us about your proposals.