Case Study: Option Agreement with Planning Uplift
In this interview-styled conversation, I speak to Puneet Gupta, Co-Founder of PTF Property.
TM: With me today is Puneet Gupta of PTF Property and we'll be speaking about a planning uplift deal secured by an option agreement that they did a couple of years ago. We'll run through the details of the deal, how he found the opportunity along with how and why they structured it the way they did.
Puneet, tell me a little bit about yourself, your background and how you got into development?
PG: Hi Tariq, I'm a shareholder in PTF Property. We have two main areas to our business - one is our development side and the other is our buy and hold social housing side. As for my background, I'm a qualified accountant - I trained with KPMG, then worked in banking. I became interested in property after reading, Rich Dad, Poor Dad by Robert Kiyosaki and a few related type books. When I began my property journey, in my 30s, I trained with one of the national training companies - that’s when I realised there is a need for social housing focused Houses in Multiple Occupation (“HMO”), especially in Southeast London. My wife and I started buying properties to convert them into HMO, which we used for social housing, particularly for vulnerable adults. That enabled us to leave our corporate jobs, living off the income we created from property instead. That was great for us - it allowed us to start a family and spend more time with each other and our children.
One of the challenges with investing in this way - buying and holding - is that you have a certain pot of money to start with and once you buy some assets, you run out of money. You can try to recycle as much as possible but that is a slow process and as you know, there are challenges with that approach. We realised that if we're going to continue building wealth, we need to look at other ways - either through development or planning uplift, etc.
I started attending property networking meets regularly, particularly the event hosted by John Cory in the City. It was there that my interest in property development was ignited. There were very interesting property developers presenting at that event. That event is where I met my now business partners - Timur Ashimov and Francis Hur. Francis is an architect and runs a small practice. Timur has an investment banking background and owned some HMO. Timur and I did a small joint venture together in Lewisham and we stayed in contact since then - that was in 2016.
In 2017, the three of us decided to start PTF Developments. When we started, we were focused initially on trying to buy sites on the open market that already had planning permission. Pretty much on every single deal we bid for, we were being outbid - the prices people were willing to pay for sites with planning permission on the open market was just crazy. We couldn't quite understand how they can make the margins on those sites. It was obvious that they were using lower build costs or they had lower finance costs. A lot of our competition were builder-developers who of course have their own in-house build teams, which meant they could build projects at cost. We figured that because they employ staff on their books, they have to keep bringing in sites to keep churning projects in order to pay their staff. We realised that buying sites with planning permission on the market was going to be very difficult for us, as a business model.
Francis, being an architect, was always an advocate of where we can add value through the planning process ourselves. Then once we secured the site and obtained planning permission, we could either build the project ourselves or trade the site on. That shift in business model then led me to undertaking some training with Paul Higgs of Millbank Land Academy. That training was very useful in helping us learn at least some of the process in identifying sites which have development potential, which don't have planning permission at the moment.
TM: THat’s great, thank you. I have been on Paul’s site-finding training myself some years ago and belatedly have been one of the trainers on his training programmes. It’s very good content.
Walk me through this site that you found at 1 Selborne Road in Croydon? First, let's start off with what you alluded to - on the back of that training - walk me through how you found this site in the first instance.
PG: So this particular property is about a 10 minutes walk from where I live. I was focusing on Croydon when doing site finding for a couple of reasons - first was that, since I live in Croydon, I know the area well. Second, Croydon council takes its planning target and its new housing targets quite seriously and because of that they have relatively progressive planning policies. Compared to some of the neighboring councils, Croydon planning officers like to engage with developers through the pre-application process; they are quite positive about meaningful and well designed development.
With this particular site, despite living so close, I actually found it using LandInsight. It appeared to me that there's quite a bit of land to the side of this person's house, enough space to build another house on it. I obtained the owner’s details, wrote him a letter - saying something along the lines of ‘we're local developers, we think your site has some development potential and we’d be really interested in having a conversation or meeting with you to see if we could potentially do a deal here’. That was one of the early letters I've written and maybe it's beginner's luck or maybe it was just fate but the owner actually responded positively.
TM: There's a couple of things you said that I want to unpack a little. First - you mentioned in your letter to the owner that you were local developers. Some landowners that my clients have dealt with will ask ‘well you say you’re local developers - what's your track record? What have you actually done or built around here?’ Or ‘Have you done other deals like this?’ Were you asked that question by the landowner on your site?
PG: To be honest, maybe we got lucky. This landowner was probably more interested in us as people - what's our integrity like? How are we as people? Do we honour our word? Do we follow through with things? He didn't particularly ask us the questions you mentioned but if he did, our response would have been something along the lines of showing the projects that Francis has delivered through his architecture practice, as well as an architect working for a larger firm. If he had asked ‘well what have you actually built locally around here?’ At that point, we would have had to say, ‘Well we're early in our development career, but we do have expertise in planning and architecture, which is the skill that's mainly going to be required to take this deal forward’.
TM: Once you had that initial response from the landowner, on the back of your direct to landowner letter, did you arrange to meet or speak by phone pretty much immediately? The point I'm getting at is, drawing from my own sales background, there's usually a journey, you need to take a person, from the point where they've made initial contact with you through the seven touchpoints through to the point where they're saying, yes. Talk me through that journey on this site.
PG: The first step was he called me after receiving my letter. He said, ‘thank you very much for your letter, I'd be interested in finding out more’. I took his contact details, telephone number and address then I said, ‘Now that you've responded to us, we'll do a bit more detailed analysis and come back to you.’ We then did our own internal feasibility study. As you know, that doesn't happen overnight - there are a lot of things to consider. Once we were confident there is potential here, we drew up our proposed scheme, spoke to local agents to get an idea of what sale values could be then the number crunching process began - working backwards, i.e. deducting estimated build and finance costs and our margin, we came to a figure which we thought we could potential offer him.
This is all based on just what we could see on LandInsight and Google Maps, etc. It wasn't based on having done a detailed survey as yet - so at this point, we didn't want to make an offer to him straight away without meeting him and doing a physical site survey. When you go to see a site physically, there's always additional considerations that you don't take into account. We arranged to meet the landowner and tried to develop some rapport with him. That rapport worked out well for us later. It helps that he was a very affable and nice gentleman. He was open and honest in his dealings with us and we tried to do the same, being as transparent as we could be. We spoke about the potential challenges on the site but also the potential upsides and the type of scheme we had in mind. One of the major challenges was the protected tree that was on the neighboring land - the roots of which would be impacted by a new development on the land we were interested in. We took detailed measurements and lots of photos. I suppose that was the second touchpoint - the first meeting, the first being his phone call to us - actually, I phoned him again to arrange a mutually convenient time to meet so I guess that was the second touchpoint and the in-person meeting was the third touchpoint.
We went away, refined our feasibility and design; and on the back of that, our financial model. We then arranged to meet the landowner again. During that second in-person meeting, we put forward our offer. It was clear that he wanted a little more than our initial offer so we went away, refined our numbers further and met him again - this time in his office, negotiated somewhat and landed on a figure that became our best and final offer. A couple of days after that meeting, he called us to accept our offer.
TM: I want to know a little more about the landowners position here. Sometimes you have an owner who has put their property on the market to sell. As you said earlier, some with the benefit of planning, others without the benefit of planning. Landowners market their property for sale for different reasons, for e.g. they just want to sell the house with the land because they’re upsizing or downsizing or moving away. If it’s a commercial property, the landowner may just want to sell the business with the freehold building. From memory I don’t recall the landowner here was even thinking about selling - it was just their family home.
PG: That’s right - the situation of this owner was that he was living there happily with his family, no plans to move per se. I think they thought, by working with us, at no cost to them, they could earn a profit by selling land they didn't really use - both their children were grown. In terms of outdoor garden space, they still had their rear garden.
TM: That’s right - so it was a fully ‘off market deal’ and you created the opportunity by identifying a potential development opportunity, writing a direct to owner letter and the landowner is better off because they sold some land they didn’t really need but it helped with their future plans, including retirement.
TM: I also wanted to touch on something you mentioned - when you did your initial due diligence before even the first full conversation or the first in-person meeting - you came up with a figure even before meeting them. In hindsight, when you get another potential lead like this, would you do it the same way or would you have the first meeting first, then crunch the proposal, the feasibility and come up with the potential offer amount?
PG: We always try to do as much as possible from our desktops, where possible, because site surveys tend to cost more time and money. There are some opportunities, land mainly, which are just really difficult to analyse without first visiting the site. It might be where LandInsight or the camera angles on Google Maps do not extensively cover the site. We don't usually present an offer until we've met the owner at least once and understood their objectives and motivations. That’s not to say we would never do it - we have in the past where the owner is not in London or travels a lot, so getting the chance to meet them is not going to be possible or very limited. In this instance, yes we probably would have done it the same way.
There are instances where a prospective vendor simply says ‘look, I just want to know if it's worth my time, even engaging in this process. I've got a figure in my head. Happy to meet you but I'm letting you know in advance, this is the kind of figure I have in mind - if that’s not going to work for you then don't waste either of our time’. In situations like that, we will have to do as much detailed analysis as we can without meeting the person or doing a site visit but make an offer before even meeting the owner.
TM: Let's move on to the structure of the deal. You secured this via an option agreement. You could have potentially gone with a conditional contract or unconditional contract, i.e. bought outright and then go and get planning. What were some of the factors you considered when you chose the option agreement route, rather than some of these other structures?
PG: I think the option agreement gives the most flexibility to a developer. Firstly, this was always going to have to be a subject to planning deal, being an empty piece of land. If we bought unconditionally - raising finance on empty land, would be problematic. For a start, what's the value of that land without the ability to build on it and without it forming part of the house? The value is potentially zero or not very much. That would mean we would have to fund the purchase wholly from cash funds. That's not an efficient use of our money. Secondly, if we did not obtain planning permission, then basically we’ve shelled out six figures for land which has no or little value - it simply doesn't make sense to do that.
As to the second part of your question, why an option agreement as opposed to a conditional contract - an option agreement gives you a lot more flexibility, you can negotiate terms of the option agreement, such as the deposit amount, how long the agreement is for, and it still gives a developer the freedom to potentially walk away even if planning is secured. Whereas if it's a conditional contract, there's a few more rigidities involved. If you do get planning, you then pretty much have to follow through the transaction in the timeline set out in the original agreement. We would still consider entering into conditional contracts - after all we wouldn’t enter into deals that we didn't want to complete, but the rigidity of the agreement and timeline could be problematic. Just thinking of an example, let's say in a year's time, PTF was no longer in existence - let's say the business partners had a falling out and we no longer want to do these types of deals together - under a conditional contract, we could still be obliged to to complete the purchase of that property. Yes, we could dissolve the company but that could lead to other problems, especially with accounts and tax. With an option agreement, we felt it gives us that flexibility to walk away. A lot of owners don't like option agreements for that reason - they might be okay with it being conditional but they’re also familiar with the concept of an exchange of contract as opposed to an option agreement. Thankfully, in this instance, we were able to secure the site with an option agreement.
TM: The main factor is the timing issue. In a conditional contract, once the condition is satisfied, then you've got a fixed timetable by which you have to complete so that means, getting your finance lined up. If you're going to build it out, then you’ll need to have your construction plan and team ready to go. It's a very rigid timetable, whereas with the option agreement, you can decide to serve the option notice at any time, so long as you are within the option period or any extension period, and trigger completion.
In a recent transaction, we served the option notice and completed the purchase for a client even though planning permission hadn’t yet come through. The option period was for two years but was about to run out and planning permission hadn't come through due to covid related delays. My client was fairly confident that planning permission will come through as they were in the last phase, mainly administrative work. The landowner was willing to extend the option period but wanted £20,000.00 as a further option fee. We served the option notice and completed the purchase just to secure the site at the original price. The point is, sometimes even before planning permission comes through, you might trigger the option and the option agreement gives you that flexibility along with control over timing.
Contact
Reach out to Puneet on www.ptfproperty.co.uk