Financial Planning Steve Bendle, Community Finance Solutions

CLT aims Viability Viability o Income > expenditure: costs less than part-equity sales + long term loans + grants Affordability Affordability o part-equity at times household incomes o rent at 67%-80% Local Reference Rents Affordability in perpetuity Affordability in perpetuity o rented homes o lease under Declaration of Trust o Shared Ownership with restricted stair-casing if changes to Leasehold Reform Act in Housing & Regeneration Bill Sustainability Sustainability o as organisation o more than housing o low impact housing

Different CLT needs Urban schemes Urban schemes o may be very large o full value security may be available: homes can be sold fully so long as receipts recycled Rural new build schemes Rural new build schemes o s.106 may restrict value o may be mix of housing, workspace, community Rural “quota” schemes Rural “quota” schemes o need to buy before sales proceed

Matching cost and incomes 2-bed3-bed4-bedTotals72112 m Mortgages people can afford (£) 55,00065,00070,00090,000120,00060,00070,00090, ,000 What CLT can afford to borrow (£) - on part-equity 101,000 What CLT can afford to borrow (£) - for rented homes 58,000 x 2 116,000 Cost target for affordability (£) 539,00075,000110,000837,000 Actual all-in costs 84,00095,00099,0001,077,000 Grant needed 240,000

Cost: £106,000 Cost: £106,000 Target cost for affordability: £86,000 Target cost for affordability: £86,000 £20,000 required £20,000 required  Charitable grant, HC grant, some high % sales, cross-subsidy, developer condition Viability

Finance requirements Pre-development finance Pre-development finance o Essential to secure planning and buy site o Little or no security o May require £10k-£30k Development finance Development finance o To buy the land/housing and build the scheme o Development seen (unreasonably) as inherently risky Choice of mortgages for part-equity purchasers Choice of mortgages for part-equity purchasers Long term loan financed from rents Long term loan financed from rents o Possibly plus rent element on part-equity Grants to bridge viability gap Grants to bridge viability gap Sales/high % sales to meet specific needs and generate income Sales/high % sales to meet specific needs and generate income Dowry/reserve for viability Dowry/reserve for viability

Appropriate financial instruments High Risk Low Risk Secured loans Unsecured loans (“mezzanine”) Equity Grants, donations, gifts Fixed assets, “hard development capital” Working Capital Sunk costs, “soft development capital” Low chance of repayment High chance of repayment

Risk decreases over time, but £s increase Financial risk Construction Pre-planning Feasibility Occupancy Time

ConstructionPre-planningOccupancyFeasibility How best to fund your scheme High Risk Low Risk Grants, donations, equity Gifts in kind Mezzanine debt Senior debt Work at risk

Some finance options Banks Banks  Prefer large schemes but not to be ruled out Building societies Building societies  Some large, some small, some local  Few will fund development Housing associations Housing associations  Excellent solution if willing Local authorities Local authorities  Repeatable/sustainable? Community finance Community finance  New, not well understood Ethical banks Ethical banks  Charity Bank Intermediaries Intermediaries  Venturesome

Proposed facilitation fund £2m-£5m investment by major charities and others £2m-£5m investment by major charities and others Aim of maintaining fund indefinitley Aim of maintaining fund indefinitley Pre-development Pre-development  Up to £30,000  3 tranches  Written off if fails; repaid + 20% if proceeds Development finance Development finance  Up to 30%  Where no MIP in particular but could be any reason Technical aid Technical aid  1.5 days pre-development  5 days development  Includes “investment readiness”

Attracting Investment Need to show Need to show  awareness of the financial risks  ability to manage them appropriately  appropriate finance Security Security  Available 1.5x loan  Income stream  Experience either as 3 years accounts; or on Board

Investment readiness Project management Project management  Key people – committed, appropriate mix of skills and experience  Technical management – involvement of professional expertise in key areas  Financial information and management o well evidenced budgets and clear cashflow forecasts including significant contingencies o risks identified and addressed o ownership of the plan Appropriate financing Appropriate financing  factor in risk and appropriate financial / social returns

Some sticking points Section 106 Agreements and “mortgagee in possession” clause Section 106 Agreements and “mortgagee in possession” clause Rental schemes and need for low start finance Rental schemes and need for low start finance Timing of raising finance Timing of raising finance Pre-development finance Pre-development finance Initial start-up capital Initial start-up capital Reserves and income once in management Reserves and income once in management

Holsworthy Devon Initial grant support Initial grant support o £40k Second Homes Tax o grant from charities o used to meet architectural and legal fees First scheme: 5 flats over supermarket to be purchased on completion First scheme: 5 flats over supermarket to be purchased on completion o Had to be able to guarantee purchase to developer even if residents not all in place o Charity Bank/Venturesome 6.5%/7%, fully repaid in 4 months Second schemes: 3 part-equity “do-it-yourself” shared ownership using commuted sum Second schemes: 3 part-equity “do-it-yourself” shared ownership using commuted sum

Buckland Newton Dorset Initial technical aid Initial technical aid o £7.5k grant cost of setting up CLT (£1k) and initial design o further £25k loan for detailed design and planning approval WDDC development funding WDDC development funding o planners refused mortgagee in possession clause o 70% could have been borrowed from Charity Bank or Ecology BS but WDDC decided direct lending easier Tenure Tenure o 8 part-equity with small (1% of unsold element) rent o 2 rent-to-equity Mortgages Mortgages o 3 lenders in place aware of conditions none have yet agreed link to wages not values none have yet agreed link to wages not values Credit crunch maymean 90% maximum loan Credit crunch maymean 90% maximum loan Long term, low start finance Long term, low start finance o Charity 6.5% o interest only paid initially o Ecology BS had offered interest only

Chipping Lancs Brabins Trust existing almshouse charity setting up new CLT with Brabins and other representation Brabins Trust existing almshouse charity setting up new CLT with Brabins and other representation Initial technical aid Initial technical aid o Support from Great Places Housing Group for pre-development costs Further finance Further finance o GPHG offer of development finance and long term finance o Development support Viability Viability o Also needs HC support

Key points Viability: cost equal to affordability target Viability: cost equal to affordability target Think through the risks at each stage of your scheme Think through the risks at each stage of your scheme  address them  finance each stage appropriately Use professional / technical expertise to help manage risk as early as possible Use professional / technical expertise to help manage risk as early as possible Keep it simple (if you can!) Keep it simple (if you can!)  reduces risks  easier to attract investors

Sources of support Supportive RSLs Supportive RSLs o development expertise o finance expertise and access to low cost borrowing (£60b assets) o some retain strong neighbourhood and community focus o HC encouragement as ‘community anchor’ organisations Development Trusts Development Trusts o development and finance skills; but only rarely affordable housing CFS CFS o toolkit o website o o network: Regeneration agencies, LSPs, others? Regeneration agencies, LSPs, others?