Special skills pull special deal out of the fire

“I don’t know who you are. I don’t know what you want. If you’re looking for money, I can tell you what I do have is a very particular set of skills. Skills I have acquired over a very long career. Skills that make me a dream for people like you…”

Okay… forgive us for the rather cheesy paraphrase of Liam Neeson’s Taken speech. But when you’ve done something special, that few others could have done, you can be forgiven for wanting to crow about it.

Positioned as we are at the conservative end of the P2P piazza, it’s highly unusual for such a deal to pass the CapitalStackers smell test. But when a refinance out of receivership satisfies the very sensitive nostrils of our directors, it’s clearly an opportunity of note for those with the right appetite.

To be fair, it wouldn’t have been in with a sniff of raising finance at most banks these days. Not because it might be seen as especially risky in terms of property finance, but because it required a very refined nose for the kind of risk it represented, and a lot more time than they have nowadays to scrutinise it. But for those with the knowledge to understand the risk, and the appetite to turn it into gold, it represented a very fine opportunity indeed.

And yes, this was a deal that took skills acquired over very long careers in High Street and specialist property banks, looking developers in the eye and knowing when it was worth committing the bank’s money and when to show them the door.

Now directors of CapitalStackers, those property lending specialists, have a Little Black Book of contacts that many in the industry can only dream of. And were thus uniquely placed to capitalise on a very interesting situation.

The situation was thus…

The developer had already completed 32 apartments of Towergate House in Milton Keynes and had made good progress with the 14 penthouse apartments when his financier ran out of funds to complete the project and went into administration.

All building work was placed “on hold” until ongoing funding could be found. The developer imagined that there were snowballs in hell with better chances than he had of getting his equity back.

Then the funder (while in Administration) appointed an LPA Receiver. Many months later, when the developer was given a ‘time is of the essence’ opportunity to refinance, CapitalStackers was asked to look at the project. We did. And – even to our cynical eye – things didn’t look as bad as they first might appear.

With the building work almost complete, the construction risk was minimal. The developer had a good track record. There was evidence of historic sales to owner occupiers – so marketability was strong, and all the indicators pointed to keen demand for both sales and rentals from the retained selling agent. There was also the possibility of a sale of all completed units to a single buyer. The site was within walking distance of the main shopping centre, rail and bus services – and there was dedicated parking for the penthouses and public parking immediately adjacent. With a financial model assuming a very pessimistic exit term of 14 months, and including no sales during this cash flow period, the snowball looked to be quenching the flames around it.

Only £407K was required to complete the fitout of the units, resulting in a £5.4m funding requirement (excluding interest) against a sales value of £7.9m. And the build period was just 3-4 months.

But with only two weeks before the deal melted away completely, the CapitalStackers directors had to act quickly. Raising this level of finance is a challenge at the best of times, but with just two weeks to source the senior debt, instruct the valuer, monitoring surveyor and lawyers and satisfy due diligence, the snowball was certainly starting to sweat.

The deal

Together Finance agreed to provide a senior loan of £3.475m (at 44% LTV) with a fixed interest rate of 12% p.a., which left CapitalStackers to raise the junior funding of £2.255m – so we first approached the CapitalStackers Underwriters Club. This is an uncommon group of High Net Worth Individuals and Sophisticated Investors with a high appetite for risk and a huge hunger for returns. The deal was split into four risk/return layers – with anticipated payback in Spring 2023 but paying a minimum of 6 months’ interest.

When approached, a single individual became a “Master Underwriter” offering to underwrite the whole of the top layer of £400,000, at an LTV of 81.8%, but for a phenomenal return of 30.67%. With time being short, he also agreed to be a ‘safety net’ and cover any loans in the lower layers not raised in the auction (which he also did, to the tune of over £500,000).

We then put the remaining three layers out to ‘ordinary’ CapitalStackers investors in an auction window of just 8 hours: Layer 3 would raise 615,000 and would pay an annualised 21.99% at an LTV of 74.8%; Layer 2 would raise 620,000, paying 17.84% p.a. at an LTV of 64.9%; and Layer 1 would raise a further 620,000 and would pay 14.97% p.a. at an LTV of 55.2%. Hardly a white knuckle ride in the lower layers when one stands to make such a hefty profit by the time the leaves come back on the trees. And it’s worth noting that these ratios are struck taking into account full interest roll up for the whole of the 15 month loan term. In reality, they will likely turn out much lower.

So, inside 14 days, we’d got the developer’s ‘dead’ project back on track. He could now refinance the project out of receivership, complete the remaining works and achieve a ‘good’ exit by selling the remaining 27 apartments. Naturally, the pricing was significantly higher than a ‘standard’ deal – but we had, of course, pulled his equity out of the fire, and given him a clear new pathway to make a decent profit. And in doing so, we’d created an opportunity for ordinary investors (with as little as £2,500) to make exceptional double digit returns on their capital in just a few months.

It’s also worth noting that this project would never have actually needed rescuing had CapitalStackers been involved from the start, since the platform famously has a policy of never allowing building to start (or indeed funds to be released) until all finance is in place to complete the development. So a CapitalStackers development has never run out of funds before completion.

The development

The development comprises a former 3-storey office block converted to apartments under Permitted Development rules – 19 of which have already been sold with 13 still to be sold – and two further storeys of new-build two-bed penthouses subject to a separate planning consent, for which there is already a high demand. The flats are priced between £200K and £260K and the penthouses from £330K to £360K. And in further good news, the selling agent has confirmed a gross development value for the remaining 27 properties of £8.245m – comfortably above the conservative £7.9m formal valuation adopted in our financial model.

The trouble with doing the impossible is everyone then adds it to their normal expectations of you

We’ve chosen not to display headline deal details on CapitalStackers’ public website because it’s so unusual and we don’t want to mismanage potential investors’ expectations.

It was a special deal born out of an extraordinary situation. The developer would have lost his stake had we not performed – but he had a deal worth saving. We realised he’d presented us with an opportunity that few other platforms, if any, would have even looked at – let alone known how to capitalise on it. And the two weeks remaining before it finally fell off the perch were just – just – enough time for us to get the senior lender, valuer, monitoring surveyor, lawyers underwriter and remaining investors together. But only because we already had those relationships in place.

However, it stands as a flagship example of how a P2P platform can think outside the box and move quickly – if they know the key people who can move as quickly. And it demonstrates why the CapitalStackers model of P2P working in partnership with banks and reliable senior lenders is the most surefooted way of financing a building project.