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The Joys and Perils of developing your land! The farmer who turned down £275m from developers…
In light of the recent, popular new story of West Sussex farmer, Robert Worsley who has turned down an eye watering £275m for his 220ha farm (read here: http://bit.ly/1QItbBb), read Nick Woolley’s article that was published in the Farmers Weekly a few weeks ago on what you need to be aware of, if you find yourself sitting on a piece of prime development land…
Imagine a developer who knocks on your door, offers to take forward your land for development and then starts pulling out huge and tempting figures, like rabbits from a hat. BEWARE – like all magicians he may be using more than a little ‘sleight of hand’!
With increasing national pressure for more housing, I am dealing with development land on a daily basis. As UK Fund Asset Manager to two rural pension fund portfolios, with over thirty projects, these, as well as other sizable clients, keep us very busy.
The Key points to consider are:
- Developers are often pushy; they are usually trying to bully you into agreeing and signing probably unreasonable terms to play their game on THEIR rules!
- You need a crack team to ensure that you get the best possible deal, often with an option agreement. This requires an agent, solicitor and tax advisor, who all deal with development land on a daily basis. Many will claim to do this, but few actually do so.
- This team will ensure that your agent’s agreed Heads of Terms, set out what is fair and necessary to be covered; the solicitor then ensures that this is not biased towards the developer in the fine detail; finally, all must be planned to minimise your tax bill.
- Your agent will advise you on your correct share of the ultimate open market value of the land with planning consent (the ‘headline figure’) – usually between 85 and 95%. The remaining 5 to 15% will cover the costs of the developer’s efforts to obtain consent, depending on the size and also the complexity/cost of achieving consent on your site.
- The deductions that the developer will try to agree are usually referred to as the ‘Abnormal Costs’ that a clean and ‘fully serviced’ block of land (with water, electricity, sewers etc.) could be expected to have, with no extra requirement for expensive extra costs (foundations to cater with poor ground conditions etc.).
- Clawback and overage on any future planning consents or sales-on, must be included. These create extra value for the developer that should be shared with the landowner.
Typical Tricks of developers:
- Often developers try to option various sites in an area and promote the one that looks most promising as the Council’s plan emerges. With all competing sites locked, developers can potentially have a clearer run with their chosen site. Ensure your option contract prevents this.
- The developer wants to buy at the lowest price. Ensure that if following a planning consent, the market drops (as it did in 2007), you are not forced to sell at a low or even give-away price. Insert a ‘Minimum Price’ clause that stops the developer from buying below that figure.
- Ensure that the method that is to be used for valuing your land is the ‘Open Market Value’ of land and not just a ‘Residual Value’, calculated on the basis of taking the estimated final selling price of the houses, less all the costs of planning, construction, abnormals and costs imposed by the Local Planning Authority (usually Sections 106, 278 or CIL costs). Developers love to use the ‘Residual’ method. It involves huge sums with huge opportunity for reduction of land value.
- When planning consent is achieved, be prepared for price negotiations! The developer will try to minimise the price and it is up to your agent, possibly with a civil engineer, to argue the case for either reducing costs, particularly the ‘Abnormal’ ones, if they apply to your site, or even arguing a more cost-effective construction form. I have done this on a number of occasions, sometimes saving large sums.
- Price will also be dependent on the net size of the site to be developed. The developer will invariably try to exclude as much land as possible on the grounds that it is for ‘community facilities or infrastructure’. This may need to be argued!
Selling land to a developer can be highly lucrative and is increasingly attractive to many farmers. However, I have been called in by too many farmers, who have felt unfairly treated either by the planning process or a developer – or both.
It is a complicated business and not to be tackled half-heartedly. Lack of understanding of the complex issues involved will be punished heavily – so do invest in experienced and well-informed advice. The consequences if you don’t, can be very disappointing or even disastrous; whereas, properly prepared and planned, it can be that wonderful opportunity in a working lifetime!
G N Woolley FRICS FAAV FRSA
Wednesday, May 13th, 2015