Risks Involving Property Developments – How To Overcome Them

Property developments across the country often encounter various challenges and issues, including funding issues and planning law restraints. However, there are ways which developers can plan for and overcome these obstacles, so that the building projects can go ahead and ultimately be successful.

Overcoming Property Development Challenges

Funding structures

With many large scale developments which encompass multiple assets, such as social housing or mixed use developments, there will be various investors involved, each with different types of funding. The investors will obviously want to protect their own position during the development project (particularly in default scenarios), so it is vital to structure the deals appropriately so that they are suitable for the investors and other parties involved in the project.

Given that there are various ways to finance a development, the first thing for a property developer to consider is the correct legal vehicle and structure to finance the project. The most common way of doing this is through equity and debt funding.

Other alternative structures are available, such as joint ventures and forward-funding arrangements, which can work just as well, sometimes better with higher financial rewards. Predictably, higher risk options, such as the forward-funding arrangements, carry more risks though and careful thought should be given to the structuring and documentation involved in this type of funding to alleviate any possible complications.

Additionally, with the right financing structure in place, an investor can make substantial savings in relation to Stamp Duty Land Tax (SDLT). This is due to the fact that SDLT is based on the reduced price payable for the land based on the condition of it on the date in which it is sold, instead of its worth when the development is completed.

Planning issues

Large building projects often have to deal with issues and constraints relating to planning law and this can often have an impact in relation to funding.

Planning permission can often take a long time to get and any plans submitted could be challenged and/or be subject to judicial reviews. The site in question may also be subject to the requirements under section 106 of the Town and Country Planning Act 1990, Community Infrastructure Levy (CIL) agreements and Compulsory Purchase Orders (CPO). If the site is subject to these requirements, then a conditional sale and purchase agreement could be used, so that the sale of the development can go ahead, once all necessary forms of planning consent have been obtained. Other purchase options include:

  • Options and pre-emption agreements – these type of arrangements enable the parties involved to purchase the development at a later point in time, once a particular point in the development has been reached.
  • Land promotion arrangement – With this type of agreement, a developer would agree to market the land for development, obtain planning consent and promote the development for sale. This would be done in return for a fee or an agreed amount of the net sale proceeds.

Other issues, particularly in relation to rights of light or way and restrictive covenants, should also be given consideration as they can pose risks on a development.

Property Development ChallengesHow Can Nelsons Help?

Martin Jinks is a Partner in our Commercial Property team.

A property development can be a long and complicated process. We would advise obtaining legal advice as early as possible to overcome any potential hurdles down the line, particularly in relation to funding structures and planning considerations.

Our expert team in Derby, Leicester and Nottingham can advise on the full range of real estate development considerations, including:

  • Promotion agreements
  • Option agreements
  • Conditional contracts
  • Pre-emption agreements
  • Overage agreements
  • Infrastructure agreements
  • Collaboration agreements
  • Ransoms
  • Tax issues
  • Planning

With a wealth of experience in planning, development and environmental matters, our team help our clients through the process of developing land and the various aspects it encompasses. For more information on our services, please call 0800 024 1976 or contact us via our online form.

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