Now is the time to strike on land deals, says North West law firm
Mace & Jones, which has offices in Liverpool, Manchester and Knutsford, is reporting a steady increase in land acquisitions as developers look to increase their portfolios.
Francesco La Rocca, Associate Solicitor in the Real Estate department at the Liverpool office of Mace & Jones, said: “People are coming back to the market and it is getting a bit more active. When the credit crunch hit, most people closed ranks and there wasn’t much movement in land sales.
“This means that now, developers have come to a period where most of the units they have been working on have been sold and they need to look for more land to continue building and keep the cash flow moving.
“Developers are not having the free reign that they may have done in the past, when a straight forward up-front cash transaction was standard. Because of financial restrictions they have had to look at different ways of structuring deals, which is also benefiting the land owners.”
Mr La Rocca said these structures include:
Overage – “One structure that is popular at the moment is ‘overage’. This is where a developer, for example, buys land for one million pounds on the basis of selling 100 homes at a certain price. If they manage to build more units on site or sell the units at a higher price, then the amount the vendor receives will increase too. It reassures the landowner that if the market picks up after their land has been sold they still claw back some profit from the developer.”
Deferred payments – “Deferred payments are quite straight forward in that the developer will pay a certain amount at agreed trigger points. For example if a developer builds 100 homes, they could pay 25 per cent of the purchase price after 25 homes are sold, 50 per of the price after 50 homes are sold and so on. This encourages developers to commit to entering the deal as they do not have to risk paying a significant lump sum up front.”
Joint ventures – “More and more people are happy to look at joint ventures – a company might be set up between a farmer and developer. The farmer has the land, the developer has the cash and the construction expertise and together they will go into business, splitting the profits on any sales.”
Options – “Another way to structure a deal is with the benefit of an Option Agreement. This is where a developer says he will buy a piece of land but only if he gets planning permission to build on it. He will get an exclusive option from the land owner and will pay a small amount for it. If planning permission is later granted then the developer can exercise the option and buy the land at a pre-agreed price. If not the landowner still makes some money and the developer has not risked a large amount of money on land he cannot use.”
Mr La Rocca said: “These structures have always been available in land sales but they were becoming less common as the property market gained pace and deals were predominantly agreed on a straight cash value basis. However, in uncertain times such as these, they are becoming more of a necessity to “get the deal over the line” as they give both parties some certainty at a reduced risk.
These options give people a way of covering their backs financially and maximising what is available to them at the time.”
Mace & Jones’s Real Estate team has considerable experience of working on these structures in times of recession, having dealt with the fall-out from the property crash in the late 1980s and early 1990s.
Mr La Rocca added: “We are certainly seeing a lot more of these structures being used in the current market and Mace & Jones have acted on a large number of such deals recently. Each contract will be different and it is really down to the landowner and developer on what sort of compromise they are willing to reach, but we can help advise both parties on the best options.”
For further information on Real Estate services contact: firstname.lastname@example.org or any member of the Mace & Jones Real Estate team in Knutsford: 01565 634234.