While we wait for the solicitors to get our deal tied up, we will stay in touch with the landowner to ensure they are kept up to date with progress. You don’t want to go quiet the minute the deal is agreed in principle. You need to make sure you get it over the line.
So why did we go for an Option agreement, not a Promotion agreement?
Option agreements are commonly used on both small and large sites, but they are especially popular for smaller or medium-sized sites where a single developer intends to carry out the planning and development process themselves.
Here’s why they can be well-suited to smaller sites:
- Developer-led process: On smaller sites, it’s more common for a developer to take full responsibility for obtaining planning permission and then building out the scheme themselves—something an option agreement allows them to do.
- Simplicity: Smaller sites usually involve fewer stakeholders and less complexity, making the direct route of an option agreement more straightforward.
- Control: Developers like options on smaller sites because they retain control over the project and can avoid competitive bidding.
- Lower upfront cost for landowners: Since the developer takes on the planning costs, the landowner doesn’t need to fund the process themselves.
In contrast, promotion agreements are more typical on larger, strategic land parcels, where the promoter’s expertise in navigating complex planning issues and marketing the land to multiple potential buyers adds more value.
Option Agreements
An option agreement grants a developer the exclusive right to purchase a piece of land within a defined period—typically between one and five years. Developers always want the longest option period, while landowners want the shortest.
The developer typically covers the costs of pursuing planning permission in this arrangement. If successful, they then have the choice (but not the obligation) to buy the land. The purchase price may be predetermined or calculated after planning approval, often including a discount off the land’s open market value.
In our case, we have an agreed price for the land. We are confident we can achieve this due to the Class Q permitted development rights we can use, which is an easier route to planning.
Promotion Agreements
While similar in some respects, promotion agreements usually involve a land promoter rather than a traditional developer. The promoter focuses on securing planning consent and then marketing the site to potential buyers.
Once planning is secured, the site is sold—usually through a competitive bidding process—and the proceeds are shared between the landowner and the promoter after the promoter has recouped their costs.
Summary:
Promotion agreements take account of the existing use value, and then the promotor takes a share, usually around 20% of the increased value as their fee, once costs have been deducted.
For example, a farmer’s 10 acre field is worth £150,000 as agricultural land, but with planning secured, it is now worth £10m. Planning costs might be £250,000. This leaves £9.6m after the planning costs and the existing use value has been deducted. So, the promoter fee will be £1.92m.
This works well on the larger land parcels.
In our case, it wouldn’t have worked so well, in that the existing use barns on the site are worth around £500,000. So if we were working on a promotion agreement, where we take a 20% cut of the increased land value, less costs, it would work out to be: £1.1m, less planning costs, less existing use value = £550Kx 20% = £110k.
The return drops from about 3x to around 2x.
Plus, the landowner has less certainty, and in our case, the landowner had a specific value they wanted to achieve before they would consider it.
The key to this is to ensure you secure the site at a discount, though, as the time, effort, and costs to secure planning need to be compensated with a discounted rate on the land.
We should have also possibly tried to get the landowner to share the planning costs, with this being discounted off the purchase price if successful.
You can always try to learn what you could do better on the next deal.
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