Deferred Consideration is an option that Affirmative offers which gives a developer the option of not having to pay for land/an existing building upfront, so potentially a development can be started without a deposit. It all comes down to the seller’s willingness!
The buyer/developer can approach the seller and ask if they would defer their payment: (Obviously not everyone will be willing to do this) This could be either deferring all the payment until the site is finished or deferring some funds at the start with further payments to be made throughout the development. Affirmative can be flexible with this and structure it to suit both parties.
Once the seller agrees, Affirmative will sit first charge on the site and the current owner (seller) will sit second charge to offer them protection. We then use the value of the site as security to lend the funds to the developer. Once the development is complete, it is sold or refinanced to pay back our loan and to pay for the land.
A recent example we had:
Loan application received for £1.5m
£900k was to purchase the site which had planning for 18 houses (To be built in 3 lots of 6)
£600k was to build the first 6 houses (£100k build cost each with expected sale price of £250k each) The profit would be used to build the remaining houses
We asked the developer who was he buying the land from. It was a someone he had bought 4 other sites from so he had got to know him fairly well. We suggested Deferred Consideration and he thought the seller might accept.
Verbally they agreed that instead of taking £900k up front, he would accept £930k in 18 month’s time. (Our solicitors will sort all the legals for this)
We now have a £900k asset to use as security to lend the developer the funds.
Great deal for everyone. The land owner gets an extra £30k (He has to wait 18 months but he has owned the field for years so he was happy to wait) The developer is only borrowing £600k instead of £1.5m so is paying much less interest. The developer then has the funds from the sale of the properties to pay for the land.