Starting Sustainable Home Development Company - Catch 22!

SarahB16

whattheduck said:

SarahB16 said:

It is normal for a lender to want to have first charge over the land (so yes I understand that Homes England wish to have first charge). 

Lenders wish to see you taking some of the risk and this is usually in the form of you buying the land and offering a first legal charge over it.  You contributing funds of £100k-£150k is not much.  Do you have any equity in your house so you could remortgage and release additional funds?  I really do agree with everything k12479 has says. 

Another option might be to go to a funder who does not require you to build five homes, e.g. I believe Ecology Building Society is supportive of your type of schemes (not sure if they have a lower limit) but I have heard good reports of how extremely supportive Homes England are at supporting people like yourselves to build up the delivery record to then enable them to get mainstream funding.  

If you are confident you have got the experience to deliver a scheme of 5 homes then really try to raise the finance yourself and own the land outright and go to Homes England.    

Any further questions please just tag me.     

Thanks all, for comments so far. 

Yes the plan is to bring the land as our "skin in the game" to H.E. which is more than enough numbers-wise to borrow the build cost. So in this route, we need to somehow gain full ownership of the land with only having maybe 25% of the funds up front.

We are in talks with some land owners, and waiting to see if we can negotiate something like, 25% up front with a further payment after each house sells, such that the penultimate sale will be around the amount they're looking for, and then the last one taking the total OVER, so they will get more than they want, to give them a bigger margin / account for interest etc. 

We have previous attempted a pitch to Angels but it was a very open-ended invite to try to get in discussions with anyone interested, and it didn't yield much interest. It was right at the start of our journey. We're now thinking to go back and try again with an exact site in mind, with actual numbers involved. 

I'm not sure about this last bit yet, but I'm wondering if we could secure the funds we need to buy the land outright in exchange for a 25% stake in the company, and to counteract the point that this is "25% of nothing" currently, it could be structured more as a loan that has equity as a bonus. So if they buy into our vision and agree that once we're up and running, we should be able to grow nicely, then it is potentially "25% of a lot" for free, where the numbers should work as a loan, regardless. 

Interested in thoughts on that - especially from people who have secured investment before from Angels. 

Very quick reply whilst on my lunch break and can expand further later on if you wish me to and happy to answer further questions.

Homes England loan funding can be used to part fund the land depending on what the financial metrics/overall funding structure looks like.  That would be a better option for you rather than giving up a 25% stake in your company, e.g. say the land costs £2m and you can fund £1.2m and Homes England's loan funds £800k of the land cost what percentage is your £1.2m contribution/skin in the game as part of the total funding structure.  If high enough that may be acceptable.  

Deferred land payment to the landowner is another option as you suggest with payments from the house sales.  However Homes England would wish to see those payments to the landowner subordinated behind Homes England, i.e. let's just say £150k is required to be paid to the landowner then rather than £30k to be paid from each house sale (assuming 5 sales) Homes England would wish to be fully repaid before you make any payments to the landowner. 

Personally using both of the above would be better for you rather than giving up a stake in your company.  

SarahB16

whattheduck said:

SarahB16 said:

It is normal for a lender to want to have first charge over the land (so yes I understand that Homes England wish to have first charge). 

Lenders wish to see you taking some of the risk and this is usually in the form of you buying the land and offering a first legal charge over it.  You contributing funds of £100k-£150k is not much.  Do you have any equity in your house so you could remortgage and release additional funds?  I really do agree with everything k12479 has says. 

Another option might be to go to a funder who does not require you to build five homes, e.g. I believe Ecology Building Society is supportive of your type of schemes (not sure if they have a lower limit) but I have heard good reports of how extremely supportive Homes England are at supporting people like yourselves to build up the delivery record to then enable them to get mainstream funding.  

If you are confident you have got the experience to deliver a scheme of 5 homes then really try to raise the finance yourself and own the land outright and go to Homes England.    

Any further questions please just tag me.     

Thanks all, for comments so far. 

Yes the plan is to bring the land as our "skin in the game" to H.E. which is more than enough numbers-wise to borrow the build cost. So in this route, we need to somehow gain full ownership of the land with only having maybe 25% of the funds up front.

We are in talks with some land owners, and waiting to see if we can negotiate something like, 25% up front with a further payment after each house sells, such that the penultimate sale will be around the amount they're looking for, and then the last one taking the total OVER, so they will get more than they want, to give them a bigger margin / account for interest etc. 

We have previous attempted a pitch to Angels but it was a very open-ended invite to try to get in discussions with anyone interested, and it didn't yield much interest. It was right at the start of our journey. We're now thinking to go back and try again with an exact site in mind, with actual numbers involved. 

I'm not sure about this last bit yet, but I'm wondering if we could secure the funds we need to buy the land outright in exchange for a 25% stake in the company, and to counteract the point that this is "25% of nothing" currently, it could be structured more as a loan that has equity as a bonus. So if they buy into our vision and agree that once we're up and running, we should be able to grow nicely, then it is potentially "25% of a lot" for free, where the numbers should work as a loan, regardless. 

Interested in thoughts on that - especially from people who have secured investment before from Angels. 

I very much doubt a landowner would agree to this, i.e. only receiving 25% up front.  Most landowners would want considerably more than that.  Homes England will take a first charge so the landowner will have to take the second charge and they would very much view that as too much of a risk.

A landowner may agree but they would wish to see considerably more than a 25% up front payment for their land.  In my earlier post when I referred to you giving up 25% of your company I doubt a landowner would want that as your company doesn't have any assets so you're not actually giving the landowner anything.  

Run the financial metrics based on what I suggested in my post above to see if your part payment for the land, with Homes England funding part of the land purchase and potentially a small payment to the landowner at the very end to see if that would work.  The problem is the landowner is taking a big risk and may wish to have a higher return for agreeing to this which will therefore reduce the profit you will see for yourself.

Best scenario for you is to see what you can raise yourself for the land with the balance (c.45-50% say) being funded by Homes England but that amount you are putting in yourself towards the cost of the land will need to satisfy Homes England's requirements, i.e. what does your contribution represent in terms of the total scheme costs.  Homes England will wish to see you taking a satisfactory level of risk yourself.