Funding the conversion of redundant farm buildings

Changes to permitted development rights for agricultural buildings which came into force in April '18 led to an increased number of clients looking for finance to convert agricultural buildings to residential and commercial uses.

Update: June '24

From 21 May '24, the Government amended permitted development rights to give farmers more freedom to convert redundant farm buildings into housing or new commercial uses.  This is a welcome move, but our warnings about the increasing complications for financing such changes in our April ’21 update below still very much stand.

Added: April '21.

There has been no change to Class Q (dwellings) or Class R (flexible commercial use) permitted development rights since April '18. These rights have created opportunities for many farmers. However, an emerging trend is how banks and lenders see such developments.

Increasing the percentage of farm income coming from residential or commercial lets from such building projects is making some farms fall out of lenders’ agricultural policies and into commercial lending policies. This brings added complications in getting finance to fund developments - however, we regularly work with clients on projects like this.

Converting farm buildings brings a number of benefits to farms and estates says Rob Lister, Director at R&BS, “The planning changes have provided opportunities to convert suitable buildings into dwellings for key workers or family members without full planning permission. Creating on-farm accommodation for the younger generation or for retiring family members makes passing the farm onto the next generation an easier step.”

“It can bring an income boost too – we’ve helped many business convert buildings for residential use for letting, storage, offices, leisure enterprises, nurseries, and other commercial enterprises, which gives the farm or estate a chance to utilise their existing building assets, boost their income and that of the local economy, and form a secure business for now and future generations."

But if the project is to be successful and achieve finance, there are important factors to consider including getting the right advice from the right professional sources.

• Planning. Whilst full planning permission is not required, developers do need to seek prior approval from their local Council on a number of issues including highways and noise impacts, flooding and contamination risks, and design. In addition, the regulations are open to interpretation and so it will be important for farmers and landowners to seek professional planning advice before proceeding with a conversion project.
• Tax. Getting advice from your accountant on the tax on the future gain, family succession implications of any conversion and any subsequent income is also crucial. The use of the property once it is converted (i.e. whether the property is sold, rented, used for staff or family housing) could compromise Agricultural Property Relief, Business Property Relief and/or Capital Gains Tax Roll-over relief. Principal Private Residence Relief could come into play if the new residence is being used to downsize from the main farmhouse.
• Finance. Developers will need to plan for all capital costs and approach a lender with a clear, well-structured business plan. How the business will be able to afford the mortgage repayments has to be demonstrated with clear and realistic assumptions. Although rates are currently low, the lenders will stress test your application against higher rates, so make sure you show that you can afford repayments at higher rates of interest.

We’ve written about the best way to finance farm building developments before. There are different lending options depending on the circumstances and long-term plans.

It's getting harder to get development funding due to changing or tightening bank credit policies and lending appetite. If it is a simple and viable commercial case, then developers’ existing banks will usually fund the projects. However, we now see lenders turn down mortgage applications for developments, especially if the cases are too small, too projection led or if they involve residential and/or self-build homes.

In such cases, R&BS can access the whole market of the different types of lenders – whether that’s the developer’s existing bank, competing banks, private banks and/or alternative lenders. And our knowledge of what those different lenders will accept leads to positive outcomes.

R&BS will be happy to undertake a high-level appraisal before the start of any building project to ensure that the plans are financially feasible. This could prevent unnecessary expense and disappointment.