£2.4m Land and Build Facility for Eight Houses in Frome, Somerset

The situation

The client was a Somerset developer on his third scheme, with two completed projects in Westbury and Warminster behind him. He had agreed to buy a site on the edge of Frome for £1.1 million with detailed consent for eight houses, a mix of three and four beds, and a GDV appraised at £4 million supported by sold evidence from two recent schemes on the same side of town.

Frome is a proper market. What we have seen over the last few years is that the independent-town effect is real, buyers choose Frome for the town itself, the schools and the food scene and the Bath connection, and well-built family houses there hold their pricing in a way that plenty of larger towns nearby do not. The comparable evidence made the GDV easy to support, which is not something we get to say on every Somerset scheme.

The developer had around £1.3 million of cash available. On paper he could have bought the site outright and borrowed only the build costs, and that was his opening plan when he first called us. It would have been a mistake.

Why the obvious structure was the wrong one

Build funding on a facility like this is released in arrears. The developer pays for the works, the QS certifies what has been done, and the lender reimburses against the certificate, usually a month or more behind the spend. Funding in arrears catches out first-time developers every time, and it catches out experienced ones whenever they let too much cash get locked into the land, because the site purchase absorbs the liquidity that was supposed to carry the works between certificates.

Buying the Frome site for cash would have left the client roughly £200,000 of working capital to cashflow a £1.9 million build ahead of reimbursement. One slow certificate, one supplier wanting a deposit on the frame package, and the scheme stalls with the developer solvent on paper and unable to pay the groundworker. Around a third of the land and build cases we arrange are structured specifically to avoid this, and my role on this one was to make the case for borrowing against the land even though the client did not strictly need to.

The high street had no answer here either way. His bank would consider build funding only with the land owned outright and debt-free, released quarterly, which makes the cashflow problem worse rather than better, and their credit process wanted a pre-let or pre-sales on a scheme of eight open-market houses. That was never going to fit.

The structure

The facility completed at £2.4 million, structured in two parts. A day-one land tranche of around 65% of the £1.1 million purchase price completed the site acquisition, with the developer putting roughly £385,000 into the land rather than the full price. The remaining facility funded the build, released in arrears against QS certificates as the works progressed. Overall gearing sat at 60% LTGDV, the facility priced in the high single digits annualised with an arrangement fee in the standard 1% to 2% range, and interest rolled up so the scheme carried no monthly outgoing.

The effect of the day-one tranche was that the developer kept over £900,000 liquid at the start of the works. His cash went into the build as it happened, the certificates reimbursed him on a rolling cycle, and the buffer meant a late certificate was an irritation rather than a crisis. Cheaper is not the same as safer. The all-cash land purchase would have saved interest on the land tranche and put the entire programme one bad month from standing still.

The 18-month term ran as a 12-month build plus a six-month sales runway, with release pricing agreed on day one so each completed sale cleared slightly more than that unit's share of the debt.

How it completed

First enquiry to credit-approved terms took nine working days. The valuation and the monitoring surveyor's initial review of the cost plan and programme ran over the following three weeks, legals took another three, and the facility completed in a little under seven weeks, comfortably inside the land contract timetable. The developer started on site within a fortnight of completion.

One practical point made the drawdowns run smoothly, and it was agreed before completion rather than after. My advice on any facility funded in arrears is to agree the certificate format and the monthly valuation date with the lender's monitoring surveyor up front, and have your QS build his reporting around it, because month one sets the rhythm and a drawdown that stalls on paperwork in the first cycle poisons the lender relationship for the rest of the build. Here the QS and the monitoring surveyor were talking before the first brick, certificates went in on the same date each month, and funds released within a week of each visit for the entire programme.