Housing Delivery Structures Mark Swallow

Local Authority Housing Residential housing is an obvious investment opportunity for local authorities Meet social and policy objectives Stimulate local economic growth Direct financial return Indirect financial benefits e.g. new homes bonus But there have traditionally been limitations and constraints HRA ring fence: surpluses cannot be used to fund other services HRA limit on indebtedness: limits/prevents debt-funded capital expenditure Right to Buy: discounts can make debt-funded housing unviable Partnership working usually means ceding some control over outcomes Housing Delivery Structures

Delivery Options – which one? Direct Development HRA/GF? Debt Cap? Ability/Skills to deliver? Local Authority Company Reliance on Localism Act Impact of previous housing legislation Potential for legal challenge? Tax, Audit, Governance and other issues Partnership with RP Loan, Grant or Joint Venture? What is the best structure/term? How much control is retained? Institutional Investor Long-term – between 30 to 40 years Accounting implications – on or off balance sheet? Can cost of finance compete with traditional sources Special Purpose Vehicle Legally robust structure Risk and rewards of ownership Maximise financial benefit Selecting the right method is vital for the success of the housing delivery programme, there is no “one size fits all” approach and what has worked with one Council may not work with you. Understanding the mechanics of each method of delivery, its impact on the Council over the short, medium and long term is vital. Investment in this analysis will ensure the right investment decision is made. Housing Delivery Structures

Developer/Vendor Organisation Housing Management Organisation Wholly Owned Company Source of Funds PWLB/Cash/Loan Loan Local Authority Local SPV Co. Interest Construction or Purchase Agreement Housing Management Agreement Developer/Vendor Organisation Housing Management Organisation Services Housing Delivery Structures

Wholly Owned Company – Risks!!!! Power? General Power of Competence or 1985 Housing Act? Key limitation of the General Power set out section 2(1) of the Localism Act 2011. “If exercise of a pre-commencement power of a local authority is subject to restrictions, those restrictions apply also to exercise of the general power so far as it is overlapped by the pre- commencement power”. If the use of a wholly-owned subsidiary of a local authority is a mere device and is expressed as means to avoid the requirements of Part II HA 1985, then this would be vulnerable to challenge (Credit Suisse v Allerdale BC [1997] - Credit Suisse v Waltham Forest LBC [1997]). Challenge will result in housing being accounted for within the HRA and tenants being granted the Right-to-Buy. Government policy unclear of the use of W.O.C. structures. Have all the costs been taken into account – MRP – State Aid Etc? Alternative options exist which can protect against potential challenge. Housing Delivery Structures

Special Purpose Vehicle Source of Funds PWLB/Cash/Loan Ultimate Parent Non-Recourse SPV Parent Co. Share Security Company Management Loan Local Authority Local SPV Co. Interest & Covenant Construction or Purchase Agreement Housing Management Agreement Developer/Vendor Organisation Housing Management Organisation Services Housing Delivery Structures

Key Features of the Loan Agreement Loan Facility Maximum sum, repayment terms, etc State aid compliant interest rate Net income paid as loan interest excess income covenanted to local authority Obligations on the SPV To use the loan proceeds only to buy/build/manage homes in the local area To provide housing that meets local housing need To make regular, detailed reports to the LA Local Authority rights in the event of default Exercise an option over the shares of the SPV parent Take ownership of the SPV’s assets via the debenture Step-in to the project agreements Housing Delivery Structures

Summary of Legal Opinion Proper use of LA powers Contract with the SPV using the power to invest and the general power of competence Not vulnerable to a successful challenge SPV is not a device to circumvent Housing Act obligations More robust than a wholly-owned subsidiary structure Loan to SPV can satisfy the CLG Investment Guidance Due to asset security, state aid compliant interest rate and profit share mechanism Public Contracts Regulations need not apply Competition is absent for technical reasons, subject to VEAT notice SPV will not be a body governed by public law SPV will not be a LA controlled company LA should not appoint a director to the Board Housing Delivery Structures

Funding Options – Sources, Risks and Impact Internal borrowing PWLB loans Institutional finance LA guarantee Risks Interest rate Re-financing Inflation (link to rents) Accounting/Regulatory Balance Sheet Impact On/off balance sheet? GF/HRA? CFR impact & debt cap MRP implications Housing Delivery Structures

Have You Considered Everything? Housing Delivery Structures

Summary Housing is a key policy objective for local government. Investment returns appear attractive and social objectives are also met. W.O.C. structure appears to be the favoured option. Risks associated with the accounting and Right-to-Buy. Alternative options exist – Have you considered them all? Housing Delivery Structures