Flamingo Investment Group: Option Agreement with Planning Uplift
Tariq Mubarak is a Management Consultant. In this article, he discusses a case study of Flamingo Investment Group’s Nikhil Patel regarding a planning uplift agreement.
I had a Zoom catch-up recently with Nikhil Patel of Flamingo Investment Group regarding a planning uplift deal he secured a couple of years ago through an option agreement, which I recently helped him complete. It was a Zoom call because Nikhil was in Florida, on his way to the Bahamas – the life of a property entrepreneur, eh?!
Continuity House in Bracknell is a three-storey office building that was occupied by the owner-seller for his car and van rental business. It included a large surface level car park, where the seller was storing their rental vehicles when they weren’t out for hire. It wasn’t an eyesore per se, but a different use, such as residential would certainly fit in better. Indeed, some of the neighbouring office buildings had been converted into residential use, so there was planning precedent. In July 2019, the seller was intending to consolidate his operation at this office into another office building he owned, so no longer needed Continuity House. The seller did, however, need time to move his staff and equipment to his other office so was keen on a long completion timeline. That’s an important factor, which we explore further below. The seller had put some feelers out through a couple of people but hadn’t fully ‘put it on the market’, i.e. with agents. One of those individuals the seller spoke to got in touch with Nikhil and asked if Flamingo Investment Group might be interested.
I want to pause here a little and focus on this briefly. This was an individual that Nikhil had met at a networking meeting. He wasn’t an agent or a property sourcer but someone in the property industry. As you do at a networking event, Nikhil mentioned what Flamingo does as a group and vice versa. They met for a follow-up coffee chat and kept in touch periodically – as all good networkers do. That networking led to this opportunity being brought to Nikhil – further testament to the power of networking and the law of attraction. If you aren’t already, ensure you attend as many Qandor networking events as you can. Now, back to the case study.
In August 2019, Nikhil went along to meet the seller and view the site. During that meeting, he spoke to the seller and found out his plans, including his preferred timeline. That knowledge and rapport allowed Nikhil to start formulating the outline of his offer even before he left the site.
Quick Segue: I act for many property investors and developers, and one recurring theme I have found amongst those successful in securing and profiting from opportunities is that the investor/developer builds rapport with the seller from the beginning. That rapport is fundamental in convincing a seller to consider a non-vanilla transaction – such as an option agreement; it makes the negotiations somewhat easier and vitally, more likely to assure their cooperation during the planning application process or if an extension to the original timeline is required (usually as a result of delays in the planning process). Needless to say, that rapport needs to be an ongoing process, not just at the beginning when the deal is being done – ongoing rapport eventually builds into goodwill and that goodwill usually results in easier negotiations later – e.g. when the owner’s cooperation is needed on any S. 106 or similar agreements or extending the original time limits.
Bearing in mind the option agreement was finally exchanged in February 2020 and about a week or so later, we went into our first COVID-19 lockdown, with the resulting delays in the planning system, that rapport turned out to be invaluable.
In fact, given the seller’s motivations and timeline, and being a commercial individual – a business owner, he clearly had consulted his commercial property solicitor prior to marketing the property. As such, the seller was keen on an exchange of an unconditional contract with a long completion date or at the very least, a conditional contract with a completion date of X days after planning permission was granted. He did also indicate he was willing to consider an option agreement but was more keen on the unconditional or at least conditional contract route.
The exchange of an unconditional contract with a long completion date would give the seller exactly what he wanted – namely certainty that the property had been sold and a fixed timeline to which he could plan the move of his business operations at this site to the other office they occupied. There were of course a couple of difficulties with this approach from a buyer’s perspective. First, if purchasing with finance, the valuation will be based on the passing rent. Here, the property will be sold with vacant possession on completion so there would be no rental income upon which the valuation could be calculated, thus potentially down valuing the property. Furthermore, vacant possession would result in hefty holding costs until a new occupier was found. Second, the price the seller wanted meant the deal didn’t quite stack as an asset management play, i.e. a pure investment property. This was exacerbated by the fact that the property was being sold with vacant possession on completion.
The deal only really stacked as a development play, which meant buying it with planning permission to develop into residential units. Exchange of a conditional contract with completion being X days after planning permission was granted was not appealing to Nikhil since if the planning process took longer than the long stop date set out in the contract, then not only would the deposit paid on exchange be forfeited, it would also mean there would be immense pressure to arrange finance in a very short period of time to complete the purchase. For those reasons, Nikhil preferred the option agreement route.
Quick Tip: I frequently get involved with Nikhil and my other clients when the offer is being formulated and the heads of terms are being drawn up. My extensive experience in this area enables me to foresee some of the potential friction points during the legal process. I find that when the heads of terms address as many of these up front as possible, some of that friction is reduced or eliminated altogether because it makes it more difficult for the other party and their solicitor to renegotiate those terms. This makes the legal process easier and thus quicker, which is my preference, in recognition that it is the planning phase that adds the most value to the transaction – the legal phase is merely a means to the end goal – securing the transaction to capitalise on a planning uplift play.
As soon as the option agreement was exchanged, Nikhil and his architecture and planning consultancy team went about securing permitted development rights for the conversion into seven residential flats. Nikhil and his team then submitted an application for pre-application advice to the local planning authority for the demolition of the existing building and erection of a five-storey building to provide 27 apartments, comprising one or two bedrooms with associated parking. Following feedback on the pre-application advice, Nikhil and his team submitted an application in December 2020 for pretty much the same as the pre-application advice but reducing the number of units to 21 apartments instead. That application remains pending but is in the final stages of being approved. Such have been the delays in the planning system, exacerbated by the COVID-19 lockdowns.
Quick Tip: Always expect the planning process to take much longer than you expect, then multiply that by 1.5-2.5! That way, you won’t have the rug pulled from under your feet by the option agreement period expiring whilst you’re still waiting on that planning permission coming through. It makes for a challenging negotiation with the owner, but there are ways of approaching the negotiations that make this less challenging.
Reach out to Nikhil or me if you would like to explore these or anything else stated above: