Property Development Joint Venture

Admin • August 5, 2020

Joint Venture Case Study: Dunsmore Business Centre, Spring Street Rugby

Background: An existing borrower (JVP) to BIG Finance Limited agreed to purchase a closed down business centre for £650,000. They had obtained consent through Permitted Development Rights to convert to 22 studio and 1 bed apartments. JVP had experience with residential conversion albeit on a smaller scale but had a good design & professional team in place. At the point that the deal was submitted to BIG notice had been served on JVP to complete the purchase within 10 days.

Cost Summary Purchase Price - £650,000

Purchase Costs - £28,000

Refurbishment - £750,000

Sales & Marketing - £40,000

Interest @ 8% pa - £100,000

Total Exc. Interest - £1,568,000

Deal: JVP had circa £200,000 to put into the transaction so needed a facility of £1.35 million. This represented 88% of the total expected costs. Aitchison Rafferty provided a Valuation Report that supported the purchase price and costs and a gross development value of £2.2 million indicating a profit after interest of £632,000.

The report excluded the value of the Freehold interest which at the time was estimated at £150,000 giving a total expected profit of £782,000 BIG agreed a deal and facility to provide the full facility required in return for interest of 8% per annum and a Priority Profit Share of £285,000 over 18 months (£10,000 per month decrease offered for repayment before 18 months).

This represented 36% of the appraisal profit and an Internal Rate of Return (IRR) to BIG of 30%. The deal was put in place within 10 days. JV Structure The property was purchased in an SPV company with 100% of the shares owned by BIG. JVP and BIG simultaneously entered into a Development Agreement and Facility to outline responsibilities and protect JVP’s interests. JVP has the right to acquire the shares in the SPV for £1 on repayment of the debt, interest and profit share.

Management JVP is responsible for the refurbishment project and sales. Aitchison Rafferty are appointed Monitoring Surveyor on behalf of SPV to provide independent assessment on the cost, quality of the works and the build programme.

During the works JVP has amended some of the units adding floor space, accommodation and therefore value. The units are now all 1 and 2 bed with no studios. There have been issues with the design of the roof that caused a 4 months delay.

The project costs have increased by circa £400,000 and the facility needed has risen to £1.45 million and 24 months but the GDV has also increased by £700,000 according to Aitchison Rafferty. JVP has taken 10 formal reservations and has a contract in place to sell the freehold for £250,000, £100,000 more than budget. BIG have worked with JVP closely throughout the venture and have formally agreed to extend the facility as needed and increased the JV period to 27 months in return for a further £17,500 per month after month 18.

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