Community Land Trusts Conference and Exhibition 2012

Plenary three: Discover innovative approaches

to funding

Speakers: Matthew Dodd

Rural and Communities Manager Homes and Communities Agency

Mike Jones

Director Savills Financial Consultants

Gerhard Oberholzer

Director GB Social Housing

Chair: Bob Paterson

Director Community Land and Finance / Resonance

The HCA and

Community-led Housing

Reminder of the AHP

The FAQ that accompanied the AHPFramework stated that:

“there will be small community led organisations such as community

land trusts or small rural groups and others, who may not be in a

position to bring forward proposals at the outset of the

programme…[and that] ….. If a community led group wishes to

apply in its own right, but does not have enough detail available or a

scheme proposal in time for the contract negotiations in Spring

2011, they can contact the Agency when they are ready and we

anticipate that there will be resources available to fund such

schemes that meet the required value for money and other

considerations.”

Existing Consortia

Organisations can join existing consortia at any time

A ‘community’ or ‘group’ can be offered the opportunity to approach

Investment Partner leads in order to work with the lead through

their existing framework agreement.

The HCA operating area team can assist the ‘group’ in finding a

suitable lead partner.

Working in this way the local group would not need to become and

Investment Partner and could avoid some additional requirements.

Only funds affordable rent, HCA shared ownership or shared equity

Grant recipient and landlord is an RP before completion

Schemes meet local needs and priorities (set out by local authorities)

Schemes have a realistic prospect of delivery (by 2015)

HCA design standards (incl Code Level 3) are met or exceeded

The scheme offer good VFM in relation to other comparable schemes

AHP principles still apply

A reminder…

It’s a broad and varied sector

We consider community-led housing to mean:

– Formal and informal community groups

– Communities doing things for themselves

– Variety of models: coops and mutuals, CLTs, co-housing, self-build,

development trusts, CICs, CRtB…..

We don’t want to exclude/favour any particular model

It’s about local flexibility

To access tailored community-led support, groups must meet basic key criteria to ensure the funding is directed to the right groups and areas.

This is NOT a tick box process, but will be part of local conversations

Community Benefit

– Clear definition of the community (geographic or other)

– Expected benefits and how they meet local need

– How the community has been involved in decisions

– Will these will be provided and protected in perpetuity

Structure / Governance – Membership of or access to the group to be open to the whole community

– Group decisions taken with community input and feedback

– Even if a partner is involved the group must be able to influence key decisions in a real and transparent way (e.g. membership, voting, governance, legal controls)

– Is there a long term role (ownership or management) for the community, and if not why not?

Community-based ‘criteria’ Initial Criteria

– protecting the benefits

Are benefits going to be provided and protected for the long term

or in perpetuity? (e.g. through a CLT or cooperative management

body).

– How will the ‘group’ or project ensure that financial surpluses and

profits are used to deliver future benefit for the ‘community’?

– If not, how has this been made clear and has the community

agreed to this?

– partnership

How does the ‘community’, ‘group’ or organisation control and

influence key decisions, such as the design of what will be

delivered, the way decisions will be made, and how management

and maintenance arrangements will be carried out?

If the ‘community’, ‘group’ or organisation is using a delivery partner,

how will the relationship with the delivery partner be managed and

what roles and responsibilities are being assigned each party?

If the ‘group’ or organisation is to become the freehold owner or

landlord of the asset, what are the timescales and deadlines for

phasing and handover of responsibilities?

Talk to the local HCA team first to get their views, input and indicative approval – they are the key gateway

Groups can ‘qualify’ with HCA in parallel to setting out their ‘offer’ for grant

Info and assessment process proportionate to scale and risk:

– Basic Company Details, Statement of good standing

– Financial information (appraisal, cash flows, costs, VFM, funding)

– Technical expertise/experience (or those of partners/contractors involved)

Templates and guidance available

NOTE: IP QUALIFICATION IS NOT REQUIRED IF CONSORTIA/PARTNERSHIP ROUTE TAKEN

Community-based schemes Investment Partner Qualification / Bidding

Where a CLT is applying itself for additional AHP funding, and where it

doesn’t have re-let capacity, we will take that into account in our VFM assessment

Other factors affecting VFM include need, complexity, location etc.

However, we expect schemes to deliver reasonable and broadly similar VFM to other comparable schemes.

Every scheme will have to be considered on its own merits so it’s hard to be precise about what VFM would be

We are not operating a system whereby offers will receive outright rejection or acceptance in the first instance. There will be a process of negotiation through which we be able to better understand the offer.

- value for money

For those taking the Consortia route, contracts already on www.

For those ‘going it alone’ HCA Heads of Terms available

Considerably shorter than previous agreement, with ‘plain English’ guidance

– Payment on completion removes need for HCA security during build stage

– Removal of rent-charge

– Emphasis on self-certification (contractor warranties, consents, insurances etc).

– Simplification of conditions precedent to payment

– Contract recovery/recycling mechanism may be built into contracts – presumption in favour of using receipts for new affordable supply (subject to viable proposals) before HCA recovery

Community-based schemes Grant Agreements and Contracts

Community Led Champions

SSW Matthew Dodd

E of England Becky Ashley

NE and Y and H Bill Carr

Midlands Jane Tricker

NW Jacqui Castle

Progress So Far

Groups are already approaching local HCA teams

– Discussions will take time to complete so start now

Nationally around 250 units in the pipeline

Different stages of delivery

Variety of schemes – majority rural but others as well

Area teams now taking projects to local peer review groups

First allocations should be made soon

Localism Act

– New Community Right to Build process + Neighbourhood Planning

– Key announcements on this coming soon

Treasury and Funding Issues Facing Registered Providers

Mike Jones

Director

Savills (L&P)

Savills Financial Consultants

Savills Financial Consultants is a trading name of Savills Capital Advisors which is authorised and regulated by the Financial Services Authority

22 May 2012

Agenda

The wider trends in the lending market

Prospects for debt finance for the wider housing sector

Prospects for the community led sector within this climate

New and innovative approaches to funding

Aims of this session…

Traditional Bank/Building Society Lenders

Only a couple of small long term lenders

Major lenders only lending to existing customers

(restructuring etc)

Several 5/7 year lenders

Re-pricing options

Interest rate margins

Basle 111

The current lending market

Capital Markets

Investor appetite

Public issues/Club deals/Private placements

Selective pricing

Quantitative easing (Asset Purchase Programme)

Retail Bonds

Sale and leaseback

The current lending market (2)

Treasury/Business Planning

Refinancing risk

Mixed maturities

Assumptions for refinance rates, costs etc

Funder business plan approval

More lenders?

Use of Security Trustees

Implications of short term debt

Variable rate debt – banks/building societies

Index linked debt – capital markets (public issues, private

placements, club deals)

Fixed rate debt – capital markets (public issues, private placements,

club deals)

Separate hedging redundant

Unsecured debt

The Loan Portfolio of the future ?

Community Land Trusts

Conference and Exhibition 2012

Plenary 3: Innovative Approaches

to Funding

22 May 2012

Funding Requirements: Needs Must be Met

• Meeting Lender’s Needs:

- Willingness (read price) to take on development risk

- Fixed or inflation linked interest payments

- Can I get the investment through my Credit/Risk department (and keep my job!)

• Meeting Borrower’s Needs:

- Upfront money versus drawdowns

- Affordable interest payments

- Ability to refinance/repay at maturity date or do I need an amortiser

- Protection against currency and interest rate risks (investors paying in Euros?)

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5 Types of Funding Mechanisms

1. Private Placements: Direct investments by cash rich pension/insurance funds and companies

Mostly in bond format but some investors can make or buy loans direct

Not “liquid” so could be expensive and require large loan amounts (£75+million)

2. Club Deals: A UK based funding platform issuing bonds and on-lending the proceeds to a group or club of borrowers

Smaller loan sizes + long term fixed rate loans

Investors don’t like development risk though

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5 Types of Funding Mechanisms

3. Sale and Leaseback Sell assets to an investor and lease them back over 25 to 50 years with a small reversionary purchase price

Annual lease premiums are RPI linked

Investors are large, sophisticated pension and insurance firms

Works for stock finance and financially sustainable development projects

Does not work for shorter life tenures, housing for sale/market rental or student accommodation

Very few deals in existence (Derwent Living + Aviva)

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5 Types of Funding Mechanisms

4. REITS Tax efficient, listed companies buying and developing properties

Pension and insurance investors

US concept, active in commercial property in the UK since 2007 (equity investors requiring higher returns)

Moves taxation of property rental businesses from REI T to REIT investor

New legislation enabling social housing funding due in September 2012 – no 2% initial conversion charge + 3 year delay before listing on stock exchange

REITs require large asset pools so could act as club deals similar to bond club deals

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5 Types of Funding Mechanism

5. Tax Exempt Retail Bonds - An Ideal Solution?

Follow the US municipal bond market example:

- provide tax breaks for local retail investors to invest in CLT assets

- either in funded and/or bond format

- held within pensions or outright as an investment

Enabling local people to invest in local schemes

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