2. Contents
Foreward
Sector Focus
The changing face of residential development
finance by James Thomlinson
Guest Article
Don’t get left in the dark; Problems arising from
rights of light by Ian Rowson, Partner Head of Real
Estate Freeths LLP London
Tax Update
A brief guide to annual tax on enveloped dwellings
(ATED) by Brian Dunk
Bridging Trends
‘Bridge to Market’ by Andrew Hosford
Case Studies
A featured case study and a selection of recently
completed others.
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2
3
4
5
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Voltaire Financial | The Discovery Report - Bulletin 2015
3. Foreward
Welcome to the inaugural half-yearly bulletin from
Voltaire Financial. Over the coming instalments our
aim is to supply a snapshot of interesting real estate
finance topics, updates from specialist members of
the team as well as a summary of recent transactions.
Occupying as we do a part of the marketplace that sees us to work on a varied selection
of transactions ranging from residential developments and hotel acquisitions to
mixed-use portfolio refinances, the business advises on an equally broad mixture
funding types and structures such as senior commercial investment facilities, senior
stretch residential development loans and joint venture equity participations. In this
first issue we will touch on some of our recent successes (in one case in some detail)
and share some thoughts on the residential development funding environment. We’re
also delighted to invite a valued relationship of ours in Ian Rowson of Freeths to
provide some insight into one of his areas of legal expertise. As always please do get in
touch to catch up or for a more detailed conversation with ourselves or a member of
the team.
We hope you find at least some of it of interest. Wishing you all an enjoyable festive
period and a successful 2016.
1
Dorothee Queyroux
Partner
E: dorothee@voltairefinancial.com
T: +44 (0) 20 7182 1743
James Thomlinson
Partner
E: james@voltairefinancial.com
T: +44 (0) 207 182 1742
4. Sector Focus
James Thomlinson, Partner
Voltaire Financial LLP
The changing face of residential development
finance
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Voltaire Financial | The Discovery Report - Bulletin 2015
It makes sense to start
with a few qualifying
statements about the
portion of the residential
development market
within which we operate.
Our typical residential
development client
ranges from small or
fledgling developers
to medium-sized
housebuilders.
Typical loan sizes are between £5-50m
but with the ability to assist with smaller
and larger. Our expertise is therefore
largely focused on direct lending of one
form or another (senior, mezzanine, joint
venture equity) rather than bonds or
IPOs.
Lender appetite: apparent vs actual
We’ve all heard the rumours of certain
High Street lenders supplying terms
in the full knowledge that they won’t
be acceptable to or workable for the
borrower in order to satisfy some internal
quota (‘the terms were issued, the
borrower chose not to take them..’). In
reality I think instances of this are rare
and increasingly so. Indeed the market
currently has a positive and progressive
feel to it.
However we have seen some evidence of
this type of behaviour being applicable to
certain debt funds albeit in more subtle
ways. Given most debt funds are driven
by IRR hurdles it is not just their pricing
that one must scrutinise but also for
example the timings of their redemptions.
It is not uncommon for such lenders to
shorten loan periods or generate agreed
project cash flows (underwritten by
covenants) that involve optimistic off-
plan sales assumptions in order to quote
meretricious headline terms.
Typical sources of finance: past,
present and future
Fewer than 150,000 new homes were
built in the UK last year and in the
few years preceding that even fewer
still. With mounting pressure on
the population the Department for
Communities believe that over 200,000
homes per annum are required. But
does this supply/demand inequality
necessarily lead to strong appetite across
the board from lenders? Volumes of
development finance have undoubtedly
been increasing year on year but it is
interesting to explore the type of funding
source issuing these loans.
The germination of the post-downturn
residential development lending
environment was a slow and poorly
attended one with only a few staunch
regulars that saw the process through.
These participants numbered a modest
selection of private banks, specialist
development lenders and newly-founded
mezzanine providers. The pricing ranged
from the reasonable to the downright
larcenous and with everything in
between.
The once overwhelmingly dominant pre-
downturn position of High Street banks
atop of the residential development tree
is soon to be at an end with this category
of lender now accounting for only just
over 50% of total lending in the sector.
The High Street have not been helped
by the particularly risky classification
of development lending by Basel II. The
corresponding capital requirements on
banks make it relatively costly for them
to provide such loans.
5. Hand in hand with the move away from super-prime property comes a shift in focus
from zone 1 London into zones 2-6 and beyond; within Greater London still represents
most lenders’ geographical sweet spot. However a growing number of lenders are
prepared to look farther afield and in some cases venture deeply into the regions
including the South West and North East.
There is no doubt that sentiment will continue to change during 2016 and in many
ways this will be welcomed by the marketplace. The recent announcement that
permitted development rights will be extended beyond the current deadline of May
2016 will maintain the fuel for what has been a very feasible type of development. We
look forward to seeing what else the new year will bring.
Having started out in the short term
finance sector, a good place to start given
the small average loan sizes, P2P firms
are now hiring experienced and specialist
development originators out of banks
to gear up for a serious challenge to the
more established sources.
What or where - becoming more or
less important?
There is now generally less appetite
amongst lenders for super-prime
opportunities with re-sales in excess
of £2000psf. Somewhat esoteric asset
classes within the wider definition of
‘residential’ are being considered more
favourably than before such as serviced
apartments, assisted living and so-
called ‘pocket units’. Lenders are now
more comfortable with larger/50-100+
multi-unit schemes. The extent to which
these can be speculative is dependent on
lender type. Debt funds have consistently
been lending without any pre-sales but
usually insist on covenants surrounding
the quantum of off-plan sales that must
be delivered. High Street banks still insist
on a proportion of the scheme being pre-
sold prior to first drawdown – typically
as much as 20-30%. Leaving to one
side the substantially differing levels of
gearing available from these two types
of source this creates another dilemma
for developers. No one would deny the
comfort of having de-risked a project
through pre-sales but in a market that has
seen so much capital appreciation during
the last 5 years it is very tempting to keep
alive the opportunity to see super-profit
rather than lock in current sales prices,
cap profit on those units and arguably
constrain future achievable prices
through setting a precedent.
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Voltaire Financial | The Discovery Report - Bulletin 2015
James Thomlinson
Partner
E: james@voltairefinancial.com
T: +44 (0) 207 182 1742
*2015 forecast - 13% increase Source: IPF ‘increase in lending’
2080
2980
4010
4550
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2012 2013 2014 2015
£m
6. Guest Article
Ian Rowson, Partner Head of Real Estate
Freeths LLP London
Don’t get left in the dark; Problems arising from
rights of light
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Voltaire Financial | The Discovery Report - Bulletin 2015
In many respects, rights
of light are something of
a legal oddity. Rights of
light subsist as easements
but whereas most
easements are expressly
granted pursuant to the
terms of legal deeds, that
is comparatively rare in
the context of a property
owner’s right to light.
A right to light normally arises as a result
of some of the historic and archaic legal
rules being prescription at common law,
lost grant and prescription arising under
s3 of the Prescription Act 1832, generally
regarded as one of the worst pieces of
legislation ever enacted.
Under the terms of s3, where a right of
light has been enjoyed for a full period of
20 years without interruption, the right
is deemed to be absolute and indefeasible
unless it appears the right was enjoyed by
virtue of consent or agreement expressly
made or given for that purpose.
It will often be the case in practice
that many town centre and city centre
redevelopments will be adversely affected
by potential rights of light claims.
Legal redress for infringement of
rights of light
The basic principles governing the legal
redress of a property owner whose right
to light is infringed by another party
are set out in the case of Shelfer v City
of London Electric Lighting Company.
The basic principle established in the
Shelfer case is that a party whose rights
are injuriously affected is entitled to an
injunction against a person committing
the wrongful act such as a continuing
nuisance.
The wrongdoer is not entitled to ask
the court to sanction his wrongdoing
by purchasing the claimant’s rights on
payment of damages assessed by the
court. Whilst the court has a discretion
to award damages in lieu of granting an
injunction, it is not obliged to do so.
Typically, the court will take account of
the following factors in deciding whether
to grant an injunction or whether to
award damages:
• whether any injury to the claimant’s
legal rights are small;
• whether it could be adequately
compensated by a small money
payment;
• whether it would be an oppressive to
grant an injunction;
• whether the claimant had shown
they only wanted money;
• whether there were circumstances
that justified the refusal of an
injunction.
“Until the law is reformed,
rights of light are still a topic
that need to be treated with
extreme care in the context of
large-scale development and
regeneration schemes in built
up areas”
Ian Rowson
7. The Lawrence Case did not concern rights
of light, but private nuisance, and the
facts were complex.
However, in the light of the decision
in the Lawrence case it is considered
a strict application of the Shelfer rule
in the Heaney Case may no longer
be good law. In the Lawrence Case,
Lord Sumpter offered his view that
the decision in Shelfer was out of date
and that it was regrettable it had been
followed so recently and so slavishly,
as in the Heaney Case. He commented
it was devised at a time when England
was less crowded, with fewer people and
conservation was only beginning to be a
public issue and generally there was no
system of statutory development control.
He went on to comment that in many
instances, damages would probably be
an adequate remedy, particularly in
circumstances where a use which caused
a nuisance was authorised by planning
permission, as in the Lawrence Case.
However, he made the point that, as
Shelfer was not being fully considered in
the Lawrence Case, he could only call for
the law on this subject to be reconsidered
at some future date.
Possible Solutions
The problem is that the current state of
the law still leaves many uncertainties
and causes difficulties for developers
and their funders in bringing about
large-scale redevelopment projects,
particularly in town centres and built up
areas. One mechanism that can be used
in the context of schemes which involve
joint ventures with local authorities is the
utilisation of an authority’s powers under
s237 of the Town & Country Planning Act
1990.
In very simple terms, s237 provides
that where a local authority acquires or
appropriates land for planning purposes
a building constructed in accordance with
planning permission will be authorised
notwithstanding interference with the
right of a neighbour. Effectively the
mechanism removes the threat of a party
whose rights have been infringed from
applying for an injunction.
Any party whose rights are injuriously
affected would be entitled to
compensation but the compensation
would be based on Compensation Act
principles rather than a ransom and
critically the threat of the injunction is
removed.
The developer, Land Securities and
Canary Wharf, identified at an early stage
that the number of potential rights of
light claimed would effectively prohibit
the redevelopment. They persuaded
the City of London Corporation to take
a transfer of the freehold of the land
from themselves and the City of London
Corporation appropriated the land for
planning purposes pursuant to s237.
The City of London Corporation then
granted a 999 year lease back to the
developers, which enabled a £200 million
development, creating both jobs and
economic prosperity for the City, to go
ahead in circumstances where otherwise
the project would have been stalled.
An authority has to properly consider a
number of issues including the potential
benefit of a particular scheme and its
economic benefits and the power cannot
just be used as a whitewash to enable
development to take place without proper
consideration of its merits. However,
Heaney and the Current Law
The problems associated with rights
of light claims perhaps came to great
prominence for developers and those
involved in the development industry in
the case of HKRUK (ii) (HCAC) Limited v
Heaney (“the Heaney Case”).
In simple terms, the developer owned a
large office block in Leeds to which they
were proposing to add two additional
floors, 6 and 7. Marcus Heaney owned
the iconic Yorkshire Penny Bank building
in the centre of Leeds.
It was acknowledged that the
development would adversely impact
on rights of light to the Yorkshire
Penny Bank building. There were
discussions between the parties whilst
the development proceeded and after
practical completion had occurred the
developer sought a declaration to the
effect that Marcus Heaney did not have
rights or alternatively his rights sounded
only in damages.
To the consternation of virtually the
whole of the industry, a mandatory
injunction was granted and, whilst a
settlement was ultimately reached,
it is known that the decision cost the
developer a very great deal of money.
It was previously thought that mandatory
injunction would not be granted where
a party had delayed in enforcing its legal
rights and the development had been
completed.
The Heaney Case was more recently
considered by the Supreme Court in the
case of Lawrence v Coventry (T/A RDC
Promotions) (“the Lawrence Case”).
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Voltaire Financial | The Discovery Report - Bulletin 2015
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Voltaire Financial | The Discovery Report - Bulletin 2015
Ian Rowson
Partner, Freeths
E: ian.rowson@freeths.co.uk
T: +44 (0) 845 050 3627
About Freeths LLP
Freeths are an expanding national law firm with a network of offices in the UK
including major regional centres such as Manchester, Leeds, Birmingham and Oxford.
The firm is a full service firm and has a major practice in Real Estate and Real Estate
Finance. Under the guidance of its London Managing Partner, Philippa Dempster, the
firm has recently opened its new flagship London Office at One Vine Street.
the utilisation of such positive planning
powers can be a useful tool to help bring
about large-scale development schemes
as is illustrated by the Walkie Talkie
development.
Conclusion
Until the law is reformed, rights of light
are still a topic that need to be treated
with extreme care in the context of large-
scale development and regeneration
schemes in built up areas. Whilst the
Law Commission has put forward certain
proposals to significantly reform the law
and one of the Judges in the Supreme
Court called for reform in the Lawrence
Case, a great deal of uncertainty still
exists. In practice, because of the Heaney
Case, rights of light are very difficult to
obtain title insurance cover for.
For the time being on large schemes
involving public sector bodies, the safest
and most practical option appears to be
to persuade the local authority to utilise
its powers under s237 of the Town &
Country Planning Act.
9. Tax Update
Brian Dunk, Tax Consultant
Voltaire Financial LLP
A brief guide to annual tax on enveloped
dwellings (ATED)
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Voltaire Financial | The Discovery Report - Bulletin 2015
Finance Act 2013
introduced a new annual
tax on ownership of high
value residential property
held by non-natural
persons.
The tax, known as the annual tax on
enveloped dwellings (ATED), applies
to residential dwellings owned by
companies, partnerships (including
limited liability partnerships) where
there is a corporate partner and also
collective investment vehicles.
Initially the threshold was set at
£2m per dwelling, but Finance Act
2014 introduced measures lowering
this to £1m from 1st April 2015 and
prospectively to £500k from 1st April
2016.
Although the definition of “dwelling”
is widely drawn there are a number of
exemptions and reliefs that can apply so
that the ATED is not generally payable where a property is in commercial use, for
example, let to a third party on commercial terms and not occupied by anyone
connected with the owner or held in a property trading business.
Notwithstanding that a dwelling potentially within the ATED charge may qualify
for one of these reliefs, there is still a requirement to submit a formal ATED return
and make a claim for the relief. Strict time limits apply for the submission of ATED
Returns and penalties apply in the case of late Returns.
These penalties are not tax related and so will be payable where a relief is claimed so
that ATED is not due. For example, in the case of a dwelling which was held in April
2013 and for which returns (for 2013/13 and 2014/15) were submitted late in April
2015 the total penalty would be £2,900.
Brian Dunk
Tax Consultant
E: brian@voltairefinancial.com
T: +44 (0) 207 182 1740
10. Some key benefits of carrying out this refinance - often labelled ‘bridge to market’ - can
include:
• Reduce the total cost of finance for the remaining period that it is needed
• Complete the scheme without rushing
• Allow the client to sell the properties for the right price rather than being
forced to sell quickly to repay the development lender
• Release equity for a variety of uses
More often than not the developer will have (pre) sold a number of apartments in the
scheme by the time the refinance is carried out.
Example figures
Bridging Trends
Andrew Hosford, Head of Voltaire Bridging
Voltaire Financial LLP
‘Bridge to Market’
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Voltaire Financial | The Discovery Report - Bulletin 2015
There are a number of
reasons that property
developers need or want
to increase the length
of their development
facility.
Cost overruns, planning enhancements
or revised internal layouts and long
periods of bad weather to name just a
few. Though these factors are clearly not
always developer faults and certainly not
all negative issues, development lenders
are often reluctant to extend their loans
regardless.
As the developments are either
completed or approaching practical
completion at this point in the process
the risk for a new incoming short
term lender is reduced. Partly as a
consequence of this reduced risk they
are typically able to offer pricing that is
cheaper than the incumbent development
funding.
“We are seeing an ever
increasing demand for the
bridge to market product. A
combination of cheaper pricing
and extending the marketing
period to sell for maximum
profit are huge benefits that
make this product extremely
attractive to developers”
Andrew Hosford
Development Facility Bridge to Market
GDV £7.0m Market Value £5.0m
Loan Amount £5.0m Debt Clearance £3.0m
LTV 71% Equity Release £500k
Rate per annum 12% Total Loan £3.5m
Exit Fee 2% LTV 70%
Pre Sales £2.0m Rate per annum 9%
Balance GDV £5.0m Exit Fee N/A
Reduced Loan £3.0m Arrangement Fee 2%
New LTV 60% Term 6 months
11. £0.8
£0.9
£1.4
£1.6
£1.8
£2.0 £2.0
£2.2
£2.4
£2.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
As always it will be interest to monitor to what extent if any development finance
providers react.
Meanwhile I expect rates to continue to creep down for requirements such as this
which certainly occupy the less risky end of the growing bridging deal spectrum.
9
Voltaire Financial | The Discovery Report - Bulletin 2015
Case Study 1
Our client required a 12 month Bridge to
Market facility to sell the 10 apartments
he had developed. The construction
programme had been delayed and our
client wanted to wait until the units were
fully completed before commencing
marketing so no sales were secured prior
to refinance.
Initial Development Loan £2.65m
GDV £3.8m
Inital LTV 70%
Interest Rate 12% pa
New bridging rate 9.5% pa
Case Study 2
Our client required a 6 month Bridge to
Market facility to finish internal works
on a residential single unit, increase the
marketing period and extract some equity
to be utilised for business purposes
elsewhere.
Initial Development Loan £4.5m
GDV £8m
Initial LTV 56%
Interest rate 11% pa
New bridging rate 9% pa
Increased loan amount £750k
New loan amount £5.25m
New LTV 65%
The short term funding industry has
always been quick to respond to borrower
demand and the sudden appetite for this
type of facility is no different.
Andrew Hosford
Head of Bridging
E: andrew@voltairefinancial.com
T: +44 (0) 207 182 1744
Source: West One Bridging Index
£ bn
Gross bridging lending figures (£ billions)
12. Case Studies
A featured case study and a selection of recently
completed others.
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Voltaire Financial | The Discovery Report - Bulletin 2015
“There’s a huge need for good
quality social housing not only
in London but all over the
country”
Dorothee Queyroux
Social Housing Portfolio
in London
Loan: £50,000,000
Voltaire was approached by a social
housing specialist in order to source
finance to support the expansion of their
portfolio from 700 to 5,000 residential
units within the next five years.
The hybrid debt and equity financing
facilitated the acquisition and
refurbishment of the properties. The
facility was provided by a lender
with whom Voltaire has an exclusive
relationship.
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Voltaire Financial | The Discovery Report - Bulletin 2015
2 Prime Central London
residential dwellings
Loan: £22,800,000
Refinance of 4 petrol filling
stations across the UK
Loan: £4,150,000
Residential development of
converted flats in SW1
Loan: £34,100,000
Student Accomodation
Refurbishment Equity
Equity: £10,000,000
Residential development of 2
penthouses in SW1
Loan: £3,750,000
Care Home Development in
Dover
Loan: £4,350,000
14. Voltaire Financial LLP
Moss House
15-16 Brook’s Mews
Mayfair, London
W1K 4DS
voltairefinancial.com
Voltaire Financial | The Discovery Report - Bulletin 2015
