Real-world Development with propertyCEO – Part 1
Small-scale property development projects that use permitted development rights can be done in your spare time, boast six-figure returns, and have a lower cost of entry than buy-to-lets. It all sounds great on paper, but what’s it REALLY like to convert a property?
In this new series that we trailed last month, Ritchie Clapson CEngMStructE, veteran developer, author, commentator, and co-founder of development training company propertyCEO, will guide us through a real-life commercial conversion project from start to finish. Witness the highs and the lows, and learn the critical takeaways in this eye-opening, warts-and-all look at what REALLY happens where property development theory stops and the practice begins…
You can watch a video of Ritchie walking around the project. Click HERE for exclusive video content.
The story so far…
The hunt was on for a commercial to residential conversion project when, out of the blue, Ritchie got a call from a contact whose friend owned an old printing works. They no longer needed the building and had engaged an architect to draw up some plans to redevelop the site. But their costs were spiralling, and Ritchie had spotted a fatal flaw in what was being proposed…
Let me start this first part of our journey by talking about credibility. I’ve worked in development for forty-odd years, so while the downside is my joints creak a bit, on the upside, I don’t have any problem convincing people about my credentials as a developer. If you’re new to development, you won’t have this credibility, so how should you present yourself when talking to vendors, agents, lenders, and professionals? The trick is to create a brand, devise a name and logo for your business, and then get a simple info website built which tells people what you do, where you’re based and who’s on your team of professionals (architect, contractor, project manager, etc.). Making your team visible is critical since your brand’s credibility in building homes comes not from your own experience but from your team that, between them, will have worked on hundreds, if not thousands, of projects. All of the heavy lifting development-wise will be done by people other than you who bring together centuries of experience. What you need as the CEO is an ‘elevator pitch’; the ability to talk confidently and enthusiastically about what your brand is all about and to extol the virtues of your amazing team.
* Top Tip: Outsource as many of your brand-creation jobs as possible. Use fiverr.com to find copywriters, website and logo designers, and template website apps like wix.com or godaddy.com to reduce costs and save time. Aim for a professional look, but don’t overthink it – you’re the only person who cares what your brand looks like.
So, back to our project. Having met with the owner of the printing works, it became clear that their architect’s plans were far from ideal, plus they now wanted another £10k to take things to the planning stage. Alarm bells were ringing; they’d designed large apartments, which involved knocking everything down and starting again. They’d incorporated an expensive car turntable to meet the parking requirements, given the small space. And they’d proposed studio flats when I knew that studios would be tricky to sell in that area. A look at the architect’s website spoke volumes; they were an award-winning, high-end practice that usually designed luxury detached properties.
Being asked to create a design for a run-down printing works in a nondescript part of town was not their area of expertise. There was nothing wrong with their work; it just wouldn’t fly in Gosport, and I shared my views with the vendor.
* Top Tip: Professionals such as solicitors, architects and accountants have specialisms, so hire one that specialises in the type of development that you’re doing. Just because you know an architect doesn’t make them suitable for your business. Also, be sure to give them a proper brief. Similarly, don’t use your current accountant for your development business unless they’re an expert in development accountancy.
I looked at five possible high-level options for the building: 1) demolish and rebuild, 2) part new/part refurb, 3) refurb only, 4) upgrade, or 5) keep as is. Also, could we add an extra floor to get more space? The site was two-storey at the front and single-storey at the rear, yet the neighbouring building on one side was taller, so one could argue there was scope to go up. But there were also challenges: would the existing structure support the extra weight, and would we get planning permission? It would also make for a longer project, increasing both cost and risk.
* Top Tip: When considering creating a larger structure on an existing site, always consider the street scene. Will your proposal fit in with what’s around it, or will it stick out like a sore thumb? That’s one of the main things your local planning authority will consider, so make sure you propose something sympathetic to its surroundings.
I quickly concluded my preferred option was to convert the existing building using permitted development rights (PDRs), creating five one-bed, entry-level flats which would be perfect for that area. We wouldn’t incur significant demolition costs and could reuse much of what was already there. Although less profitable than the architect’s new-build scheme, it would take less time, involve less risk, plus it would still return a healthy six-figure profit.
* Top Tip: The government has radically increased the permitted development rights that allow us to convert commercial buildings into flats and houses, with further changes on the way. I’d always recommend doing a PDR scheme for your first project; there’s less risk, plus they’re generally quicker to complete. Also, there’s not always a requirement to provide parking spaces.
I now needed to do some block planning – working out how my flats would fit into the existing footprint. This involved drawing the footprint to scale on paper and then positioning my flats inside like a jigsaw puzzle, making sure that they each conformed to national space standards. The two-storey front building was simple: one flat on each floor. After a few attempts, I managed to get three flats into the single-storey rear ‘factory’ part of the building, making sure I had good access to each flat without overlooking, plus ample space for bin and bike storage.
My next job was to crunch some high-level numbers. Using a spreadsheet, I used various pricing assumptions to project the costs for developing the site, including construction, fees, and finance, as well as estimating the selling prices for the finished flats. I created three versions to reflect optimistic, pessimistic, and most likely assumptions, which gave me a nice spread. I also got my cost consultant to provide me with a steer on a couple of ad hoc costs, which they were happy to do free of charge.
* Top Tip: Using a good deal analysis spreadsheet is critical because you don’t want to miss anything important. Always start a new analysis from scratch, and never reuse an existing spreadsheet in case you’ve overwritten something. Also, firm up your numbers as the deal progresses; it’s best guesses at the start but by the time you commit, those costs should be nailed on as far as possible.
The good news was the deal stacked well. But what deal should I do with the vendor? The building was worth around £175k on the open market, and I eventually decided to offer him a joint venture partnership. He would put in the property, I would develop it, and we’d split the profits 50/50 after he’d taken the first £175k. This was a win-win; the vendor didn’t need the cash immediately and was happy to receive additional profit for doing nothing but waiting. And for me, it saved all the costs, time and hassle involved in buying the building from him before we could develop it, saving around £50k.
* Top Tip: Think hard about whether you need to do a joint venture – do you know your partner well enough, and do you really need to give away half your profit? Agree on who does what, and always have a signed heads of agreement in place. Agree to use one solicitor as it will save you both time and money.
Having shaken hands on the deal, the next step was to bring some key professionals up to speed on the first phase of the project. A solicitor put together our JV Agreement, and I instructed my accountant to set up a new limited company (a.k.a. a special purpose vehicle or SPV) for the project with the vendor and myself as co-directors. Our commercial lenders would insist that a brand-new limited company be set up for the development through which all transactions will pass, so it made sense to set this up immediately.
* Top Tip: Setting up a new business bank account for your SPV often takes ages, so start early. Get your accountant to recommend a bank that can do things quickly, one that their clients have recently recommended.
I also instructed an asbestos consultant to visit the site ASAP. I already knew that we had some asbestos to deal with, but I wanted someone to do a more intrusive survey to see exactly how much of the stuff we had and of what type. Asbestos is hazardous stuff and, in its nastiest form, requires qualified people in Hazchem suits to remove it, so it’s best to know what you’re dealing with.
It was early days, and there was still much to do. But with the vendor on board and a business plan that showed a decent return, I was optimistic that we could turn the project around quickly and bring home a healthy profit. Little did I know that what would eventually transpire couldn’t have been predicted by anybody…
Next month, Ritchie looks to secure commercial funding and appoints his construction, planning, and design team members, getting their initial input on how best to develop the building to maximise its potential.