Bolstering a developer's business plan

One of the biggest financial hurdles developers face is the high level of investment that is needed to progress planning applications. Especially when they know there’s a significant chance some applications will not, at least at first, succeed. An effective solution that can take away the risk associated with a stalled, delayed or failed planning application has been needed by developers for some time.

In an industry first, our Planning Costs tool lets developers transfer the financial risk related to a failed planning application to us.

For developers applying for third-party funding, our Planning Costs tool gives prospective investors the confidence they need to release more capital. And it gives self-funding businesses the opportunity to release more of their contingency fund that would otherwise be set aside to cover planning losses. In both instances, it’s got the potential to unlock more development opportunities for the business and produce a healthier return on investment.

To get a clear sense of how our Planning Cost tool works in practice, we’ve looked at two typical examples for each funding scenario.

Let’s say you’ve found a prime real estate opportunity. Once planning permission is granted, you imagine the development has a future value of £5m. All you need now is the £500k to finance the planning costs.

With no insurance in place, you can apply to a private investor for a loan. But it’ll come at a price. Typically, investors expect to take 25% (maybe more) of the future equity to cover their loan’s exposure. Meaning your potential profit is reduced by £1.25m. Giving a total profit to you of £3.75m.

But by having the Planning Costs tool in place, a potential funder will loan £500k for planning costs at approximately 18% AAPR. If we assume planning’s been granted in a year, that’s £90,000 in interest to pay. You’ve of course now got the benefit of insurance at £75k and you haven’t had to give up any of your future equity. In this scenario the total cost of planning is now £665k, which increases your potential profit from the scheme by £585k, to £4.335m.

Most significantly it means your funder can proceed with investing in your development, while you are able to retain you full equity stake.

And now you’ve negotiated an insurance policy, which you can add to as you move through each stage of the property lifecycle.

Developers can generally assume that if they bring forward ten planning applications, as three are likely to fail. If each costs £500k, it means setting aside £1.5m as a contingency fund to cover the costs of having 3 planning applications denied.

But instead, you could cover each of your planning applications with our Planning Costs tool for roughly 15% of your overall planning costs. So, for 10 applications, that would cost the business £750k or half of the contingency fund that you would otherwise have to hold. That money can instead be released from your contingency fund and you can expand your development portfolio.

By shifting the risk and consequent costs to us, it unlocks the opportunity to build a more ambitious business plan. Shareholders will see a much healthier balance sheet and you can make a stronger investment case.

Although the tool differs slightly in the way it’s used, the overriding benefit still remains. By paying a premium, developers can unlock more capital, allowing them to develop more projects and build a stronger business.

CLS Risk Solutions ambition is to enable funders to confidently deploy more of their capital into developing projects, allowing developers to complete their projects more quickly. It’s an ambition that requires a highly personalised approach. That’s why we always craft our solutions to match your exact circumstances.

If you want to talk more about our Planning Costs tool, or any of our other solutions, get in touch today. We’ll be happy to help.