Conversion

Comparisons between conversion and its neighbouring development finance options turn on cost of capital, speed, and how the facility is repaid. Conversion risk is concentrated in what the survey did not reveal, which is why contingency, not margin, is the critical number.

Structurally, the facility is secured on a first charge over the existing building, supported by a debenture and guarantees, written over terms of nine to twenty-four months, aligned to the build programme plus a sales period, with advances to 65% of gross development value, with a day-one advance against the current value of the building. Lenders assess the exit before the entry: the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt. That ordering explains why two applicants with identical income can receive materially different terms — the credit question is whether the repayment route survives a slower market, not whether the borrower looks creditworthy today.

Activity in this segment comes from peer-to-peer and syndicated platforms, specialist development lenders, debt funds and institutional capital and challenger banks with construction desks. Each prices the same development finance case against its own funding cost and risk appetite, which is why the same conversion case can attract offers several percentage points apart. The Financial Conduct Authority supervision shapes conduct standards and, where the borrowing is regulated, the advice and disclosure obligations that sit around the transaction.

The principal risks in conversion are existing services proving inadequate for the new use, unforeseen structural defects discovered once the building is opened up, sound and fire separation requirements adding significant cost and listed status or conservation constraints limiting the design. Conversion risk is concentrated in what the survey did not reveal, which is why contingency, not margin, is the critical number. All of them are manageable when they are priced at the outset rather than discovered mid-transaction.

The most common failure mode is an exit that slips. The facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt If that route depends on a sale or a refinance, a slower market extends the term, and extension terms are rarely as favourable as the original facility. Building contingency into the timetable is materially cheaper than negotiating it under pressure.

Independent valuation advice, early legal instruction, and a written repayment plan reviewed against a downside case address most of the exposure. Where borrowing is regulated, The Financial Conduct Authority conduct rules require suitability to be assessed and disclosed; where it is not, that discipline remains good practice rather than an obligation.

Eligibility for conversion is assessed on the asset first and the applicant second. Lenders test the appraisal with a heavier contingency than new build, reflecting the likelihood of unforeseen structural work, then satisfy themselves that the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt remains achievable under stressed assumptions. Trading history, sector, and the quality of the security all move the answer, and a marginal case is far more often declined on evidence gaps than on the underlying numbers.

A complete submission normally contains a structural survey of the existing building, an asbestos and condition report where the building is older, a cost plan with an enhanced contingency and evidence of the developer's experience with similar conversions. Where any of these are missing, underwriters price the uncertainty rather than ignore it, so incomplete packs tend to return higher rates or lower advances rather than an outright refusal. Preparing the pack before approaching lenders is the single most effective way to protect the terms available.

Where the pack is thinner, underwriters ask for planning consent or prior approval for the change of use before they will commit, because those items evidence the part of the case the security cannot. Conversion risk is concentrated in what the survey did not reveal, which is why contingency, not margin, is the critical number. The trade-off is cost: flexibility on criteria is almost always paid for in margin, fees, or a lower advance against value.

An application moves through four stages: an initial assessment of security and requirement, a terms sheet or decision in principle, valuation and legal due diligence, then formal offer and drawdown. Terms are typically issued within a week of a complete appraisal, with drawdown following legal and monitoring-surveyor sign-off in four to eight weeks. The valuation and legal stage accounts for most of the elapsed time and is where avoidable delays occur.

Preparation shortens the timetable more than lender selection does. Having a cost plan with an enhanced contingency, evidence of the developer's experience with similar conversions and planning consent or prior approval for the change of use ready at enquiry allows a lender to issue terms on evidence rather than assumption, and reduces the number of conditions attached to the offer. Instructing solicitors experienced in development finance at the same time prevents the legal work starting from a standing position after the offer arrives.

Conditions precedent are normal and usually procedural: confirmation of insurance, satisfactory searches over a first charge over the existing building, supported by a debenture and guarantees, and evidence of the deposit or contribution. Treating them as a checklist to clear in parallel, rather than in sequence, is the practical difference between a transaction that completes on time and one that requires an extension.

Pricing is built rather than quoted. The headline rate reflects a margin plus arrangement and exit fees, with interest charged only on funds drawn rather than on the full facility, and the effective cost only becomes visible once arrangement fees, valuation and legal costs, and any exit or early-repayment charge are added to the same calculation. Comparing two offers on rate alone routinely selects the more expensive facility.

Three variables move the price materially: where the request sits against advances to 65% of gross development value, with a day-one advance against the current value of the building, how the appraisal with a heavier contingency than new build, reflecting the likelihood of unforeseen structural work is evidenced, and the time the lender is exposed before the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt. Reducing the advance is usually the most efficient lever, because it lowers loss-given-default for the lender and therefore the margin charged. Figures discussed at enquiry stage are indicative and subject to valuation and full underwriting.

Borrowers should also price the cost of delay. Terms are typically issued within a week of a complete appraisal, with drawdown following legal and monitoring-surveyor sign-off in four to eight weeks. Conversion risk is concentrated in what the survey did not reveal, which is why contingency, not margin, is the critical number. Where a transaction has a fixed deadline, a slightly higher margin from a lender that can meet the date is frequently cheaper than a lower margin that misses it and forfeits a deposit or a negotiated purchase price.

Conversion is most commonly used where a redundant office building is converted to apartments, a barn or agricultural building is converted to residential under class Q and a large house is divided into self-contained flats. What these situations share is a mismatch between the timing of a cost and the timing of the funds that will meet it; the facility exists to bridge that mismatch at a known price rather than to fund an indefinite shortfall.

A second group of cases is structural rather than urgent: an upper floor above retail is converted to residential accommodation. Here the borrower is choosing how to hold an asset over time, and the analysis is closer to a capital-structure decision than a funding emergency. Term, covenant flexibility, and early-repayment terms matter more than speed.

The route is a poor fit where the repayment plan depends on an event outside the borrower's control, or where the requirement is better met by a developer exit facility to reduce cost once the scheme is watertight. In those cases the honest answer is that conversion would refinance a problem instead of resolving it, and the deciding test is whether the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt still holds if the timetable slips by a quarter.

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