#SQFT 8: Establishing Your Property Company

Experience

Over the years, we have set up many property companies which are effectively known as SPVs (Special Purpose Vehicles). Though complicated sounding, this simply means a company set up to hold an asset (in this case a property), and be dissolved on the sale of it. The reason SPVs are preferable is because lenders prefer a simple structure for ownership reasons. Real-estate debt lenders do not commonly lend against individuals due to complexities involved if they need to step in – which they can do. There can be tax advantages also to using an SPV – though always take an accountants advice.

Setting up an SPV can be daunting and so best done by an accountant at very little cost – typically a few hundred pounds. All developers will need a accountant at the end of a project in order to carry out reconciliation of funds and costs as well as the company’s accounts. The process is fairly simple and probably not even going into here so in this rare instance, throw money at the situation, or more formally – budget for it.

Debt lenders prefer properties to be owned by companies so the can lend against a physical company. As a result they will take what is called a “debenture” against the company which means, in the event of problems and their capital becoming at risk, they can step in and take control of the company and the asset. This is cleaner and easier for them and nothing to be overly concerned about for a developer.

Every developer starting out will more than likely do so without a formal property company but with a personal mortgage – this is what and entrepreneur would call bootstrapping. Our first 3 deals took this route and though tough, were valuable experiences, before engaging and understanding serious real-estate debt. Early deals typically require begging and borrowing and whatever can be done to get a mortgage, secure a property and then take some form of loan to finance your property development. That said, mortgages are becoming hard to obtain so if a decent development opportunity arises it may be preferable to use an SPV and attract either formal debt and or equity loans for a share of it.

Every developer starting out will more than likely do so without a formal property company but with a personal mortgage.

It is not impossible to attract investment to cover the entire amount of a property development (known as 100% funding) – just be aware that you will likely have far less control of the deal should anyting go wrong. Early on, we took a few of these 100% invesments from outside investors. Some turned out well, some not so – but this was all learning that must be done by young developers. As time goes on, we actually prefer not to take 100% investment due to the lack of control it allows us. We prefer now, and where possible to part fund our deals in order to show commitment to our investors. Starting out though – use any means possible to get funds together.

When establishing a property company, it is vital to have a shareholders agreement in place. This is a legal document that sets out the responsibilities of all parties involved, ownership rights and funds dispersal. Most importantly, it sets out what will happen in negative circumstances. It is all too easy when securing a deal to expedite this process on hopes and prayers alone. Experience has taught us that shareholders agreements are important in establishing responsibilities first, and outcomes as a last resort. Going into a new deal, it may be uncomfortable but far better to know if the worst should happen, what actions can and will be taken and what impact that has on you as an  individual and any potential profits. Once you become comfortable with these situations, deals will become a lot simpler, solid and comfortable. Personal experince has taught a lot over time and many mistakes have been made costing us hundreds of thousands of pounds. Having said that, there was no other way these deals could have been executed better and lost costs were put down to very expensive  but invaluable experience which cannot be traded or learned any other way.

When a shareholders agreement is set up, always use a legal professional. These documents are very often a document taken off-the-shelf and altered to reflect relevant names, places and dates. It can be tempting to draft these yourself – but they will not be worth the paper they are written on and two expensive court cases have confirmed this! If you are obtaining legal perspective, ensure you understand every aspect and especially bad positions – what happens if this goes wrong and what are the implications on you personally. Though very morbid sounding, this is hugely important to understand.

Past Scenarios

We once saw a profitable opportunity in a prime street in London for a house that had gone through probate – typically, tired and un-touched for years – truly a rare find. What seems strange now is that at the time the market must have been slightly depressed as it was not swarming with buyers. It was  clear opportunity to extend the rear of the property and the loft and totaly refurbish it to an outstanding 5 bedroom family home. As this was an early development, but with an attractive GDV of just under £2m, we required 100% funding. Though a good contact we acquired this funding from a High Net Worth individual who was a very experienced property developer. It seemed to good to be true and maybe it was.

With the clarity of hindsight, we rushed through the legals, the understanding of the framework, profit share and related outcomes. The deal still went relatively well – we overspent slightly but managed to overcome this hurdle. However, on distribution of funds at the end, our profit share was considerably less than expected. This was purely a fault in not understanding the initial terminology was with regard to profit share. I actually admire the funder greatly now – not for teaching me a good lesson but for being very consistent and fair in his actions. We must always remember that early developments are nothing but experience and a harsh dose of reality sometimes. If you have aspirations of making serious money in this business – expect to make these mistakes.

The property did sell for a record price on that street at the time.

When this type of mis-understanding does occur, there is very little point in fighting it as the other person (typically the money), has a lot more of it than you. People throw around empty threats of suing and taking others to court – it doesn’t work. It purely costs money to argue, however right you are. They will keep going until you a drowned out so take the loss on the chin as a good lesson and move on. You have just made real progress. Welcome to the Layer Cake, Son.

Incidentally, with the aforementioned investor, we actually did a second deal which worked out quite profitable for us. One day, we won’t even know what shit smells like.

3 Top tips for new developer

1. When setting up property companies, use an accountant. The costs is negligible but the professional support is imperative at the start and end of a project as reconciliation is not something you will or should be handling.

2. Always have a professionally draftedshareholders agreement, and more importantly understand it thoroughly. Better to understand the downsides than hope for the upsides. Again, the cost is worth it and typically to the tune of a few thousand pounds. With online solicitors, this can now be done a lot cheaper.

3. Give your company a fucking cool name. It’s a missed opportunity to call it XYZ property Ltd when you could have Rockstar Capital behind your name. This isn’t a trading company so the name is not relevant – hopefully though, it will make you smile.

 

This story is listed in: Investment, London Property market, Property development, Property Market, Uncategorised

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£20,308,750

GDV to date

£970,308

Average acquisition

£1,562,212

Average GDV

£351,115

Average Equity raise per deal

£343,558

Average profit per deal

97.75%

Average ROI on equity

11

Deals completed

8

Currently units in progress