Draft 7
Self-Help Housing Funding Models
For Leasing/Acquiring & Renovating Empty Property .
What follows are a variety of “models” which are being used/proposedby community led organisations,for procuring housing for their clients/members,by means of bringing empty properties back into use. Many, but not all, are predicated on receipt of Empty Homes Community Grant. They include:
-lease/ purchase & repairwith grant/loan
-lease,/repair & claw back from property owners
-lease/repair and selling on
-asset transfer & repair
-purchase, repair and selling on
-purchase, repair & refinancing to facilitate further acquisitions
-soft loans from investors
.
The first two models are most widely used and how well other models will work remains to be seen. That said, all depend to a greater or lesser extent on a variety of factors around supply and demand affecting the housing market in different parts of the country. For instance, the property markets in London and the North of England present different challenges and opportunities.
1. Lease/Purchase & Repair With Grant/Loan
Transaction:
Lease/outright purchase and repair of empty property using a grant, combination of grant/loan or even just a loan.
Critical Success Factors (CSFs):
-Price of property/ rent levels: The price of property/rent levels are key factors and this model is most likely to work in areas in where prices are depressed or rents are low. .
-Availability of Grant: where there is grant available to cover the cost of purchase/repair there is clearly greater room for manoeuvre, although the initial cost of the property and cost of repair will always be a key factor. The availability of grants from the DCLG’s Empty Homes Programme via the Community Grants Programme has meant that that there are a significant number of organisations ( mostly in the north) with allocations to purchase empty property
- Availability Of Loans: If some, or all, of the transaction depends on a loan to cover the cost, then the cost of the property and renovation, must be such that it can be serviced from the rental income, once let. An additional factor will also be the cost of the loan itself. It’s impossible to guess what loan conditions will apply, but there are at least sympathetic lenders to hand such as Triodos, Unity & Charity Banks and Big Issue Invest.
-Labour Costs: These will be an important factor andwill vary depending on whether or not the work is carried out by commercial contractors, direct labour/trainees/volunteers or some combination. .
Examples:
-Purchase & Repair With Grant & Commercial Top-Up Loan
Community Campus Stockton, ECYHT Cleveland, Giroscope Hull, Canopy Leeds, Latch Leeds, Changing Lives ( formerly Tyneside Cyrenians) NB all of these have secured EHCGP grant funding and secured top-up loan funding or used reserves
-Lease & Repair With Grant Local Authority Top-Up Loan @0%:
Groundwork Working In Bolton Bury Oldham & Rochdale,use a combination of EHCGP grant funding with 0% loans from local authority. Properties are leased for 5-10 years and the local authority provides a loan which will be repaid out of rental income. Furthermore:
- the LA is underwriting the risk on the loans &
- discussions are planned to take place with a view to using the repaid loans
to create a revolving loan fund .
2. Lease, Repair & Claw Back FromProperty Owners:
- To Secure a Contribution Towards The Cost of Repairs and
-To Create A Revolving Loan Fund If Possble
Transaction:
Property leased from private owner and all, or some, of the cost of repair clawed back from the owner to create a revolving fund or simply to generate a contribution from the owner towards the cost of repairs. This can be done by the owner accepting a reduced rent for several years and thereby repaying the money that has been spent on the property.
Version 1 - Rent Free Period: Making It Possible To Partially Recover The Cost of Works
A proportion of the EHCGP grant is clawed back from the landlord (via a negotiated rent free period) and used to cover the cost of works. This way the landlord makes a contribution to the cost of works
E.g. Broadway London:10 year lease. Aim to claw back c 50% of renovation costs from landlord through reduced rent over 18-24months. This is presented to the landlord as providing him/her with a notional “loan”
Version 2 - Rent Free Period: Making It Possible To Take Out A Commercial Loan Which Is Repaid Over The Rent Free Period
The amount of EHCGP grant spent on the repairs is supplemented by taking out a commercial loan and where just the loan is recovered from the landlord via rent free
Eg Phases London. 10 year lease 5 years rent free. Loan taken out from Big Issue Invest on the back of the rent free period and repaid from rent received.
Version 3 -Rent Free Period: Making It Possible To Fully Recover The Cost Works & Create a Revolving Loan Fund
All the EHCGP grant spent on renovation is clawed back via an extended rent free period and then used to create a revolving fund that can be re-invested in other properties
EG Somerset Care & Repair Shepton Mallet
CSFs:
- The Housing Market:
This model depends on owner seeing this as a good financial deal and not being able to secure a better deal ( ie higher rent/no repayment) to provide temporary housing to another provider ( eg the LA & temporary accommodation)
- Availability of Grant:
An element of grant is needed to provide funding for repairs.
- Need For Additional Funding:
Whatever money is borrowed, it has to be at a rate that the rental income can service, subject to other commitments such as M&M.
3. Lease, Repair & Sell On (At The End Of The Lease) To Create a Revolving Fund
Transaction:
Property leased from a private owner for an agreed period of years and repaired at no cost to the owner. At the end of the lease, the property is sold on the open market and the cost of repairs are recouped from the increase in value of the property. This allows the resulting receipt to be re-invested in further properties on the same basis.
CSFs
- Private Owners:
There need to be private owners willing to enter into fixed term leases and to sell on at the end of the lease.
- Availability of Grant:
The only scheme using this model at present (?) ( Fresh Horizons) is predicated on an element of grant for each property, to start the revolving fund off.
- Labour Costs:
Again these will be an important factor andwill vary depending on whether or not the work is carried out by commercial contractors, direct labour/trainees/volunteers or some combination. .
- The Housing Market:
This model depends on the housing market being sufficiently robust to make it possible to sell the property at an enhanced price which will cover the cost of the initial repairs.
Additional Funding Although Fresh Horizons are receiving a grant via the Community Grants Programme, they require top up/match funding to make it work.
It remains to be seen if other organisations could explore this model and whether it could be undertaken simply on the basis of an initial loan
Examples:
Fresh Horizons Huddersfield intend to pursue this model using the grant they have received from the DCLG Community Grants Programme
4. Asset Transfer & Repair
Transaction:
Transfer of a housing asset from an owner, which would almost certainly be a public body, such as a local authority, for a nominal sum of money.
CSFs:
- Securing Consent To The Transfer:
Local authorities need to obtain consent from DCLG and Housing Associations ( registered providers) need to obtain consent from the HCA. There are “general consents” where disposal is to an organisation that is registered via the HCA as a registered provider ( such as under Section 25 of the Housing Act 1985) , but where this is not the case, then specific consent is required
- Discounted Value;
For this to happen the owner must be willing to take the view that the value of the property can be treated as less than market value, or even zero, because of various extenuating factors ( eg cost of bringing properties up to a lettable standard) . The case of the Mansfield asset transfer to Trees demonstrates this. The officer’s recommendation was as follows:
“At 1st April 2010, the subject properties each had a Market Value (MV) of £24,039 and the Existing Use Value Social Housing (EUV-SH) was £8,173. This latter value is substantially lower than the market value due to the fact that it is social housing and councils are required to discount market value by a discount factor set by central Government which for the East Midlands, in this particular case, is 66%.…………
The estimated cost to bring them to a lettable standard is approximately £150,000. At a rental of approximately £63.29 a week, it would take in excess of 7 years to recoup the capital cost of refurbishment through rent. The transfer of the properties would remove the liability the Council has for on-going repairs and maintenance".
However a decision to sell at less than market value would also be subject to individual consent, unless is was covered by a general consent to a registered provider.
-Availability of Grant:
Where an asset is transferred for a nominal value, the importance of grant is greatly reduced, since there will only be repairs to finance.
As far as the Empty Homes Community Grants Programme goes, houses in the ownership of a social landlord are excluded, (although there is some flexibility where properties have not been in receipt of subsidy or previously let - which can apply to Pathfinder areas in the north).
- Labour Costs:
Once again these will be an important factor andwill vary depending on whether or not the work is carried out by commercial contractors, direct labour/trainees/volunteers or some combination. .
- Additional Funding:
How much is needed woulddepend on the extent to which owners can be persuaded to transfers at effectively nil value and the condition of properties.
Examples:
There are currently examples of empty properties in need of repair being transferred for a nominal amount to local community led organisations in Middlesborough,
( Middlesbrough Community Land Trust) Hull (Giroscope) Mansfield ( TREES) ,Rotherham ( Action Housing) Stoke ( Princes Regeneration Trust).
5. Purchase, Repair & Sell On To Create a Revolving Fund
Transaction:
Purchase and repair of empty property which will be sold on, creating opportunities for apprentices and trainees to learn construction skills and possibly a window for providing housing, subject to how quickly the organisation needs to realise the capital that has been invested. There are two examples here:
- Sale on open market via funding raised by Bristol Together,
- Sale to social landlord as proposed by Neighbourhood Services Company Liverpool – but not operational as yet.
5.1.Bristol Together: A model which is based on a bond issuewhich has been raised with Triodos Bank.
This model has been extended to the Midlands via Midlands Together However, as it stands it’s being used as a vehicle primarily to provide training/work experience and not for rented housing, since properties are sold on the open market when completed, in order to re-coup monies invested.
CSFs:
- The Housing Market:
This model depends on the housing market being sufficiently robust to make it possible to sell the property,once repairs have been carried out at an enhanced price which will cover the cost of the works undertaken and also generate a surplus.
- Successful Development of A Bond
A bond has to be designed and launched and then secure enough subscribers to finance the model . .
- Labour Costs:
Projects are intended to provide training for young people and thus use apprentices/trainees.
- Additional Funding:
The core funding is via the bond, but other funding would doubtless be a bonus
5.2. Neighbourhood Services Company Liverpool: A regeneration model which is based on the purchase of properties in Liverpool and their sale, following repair ( by a workforce or trainees and apprenticeships), to a social landlord, by prior agreement.
This was submitted for funding via the Community Grants Programme under both Rounds 1 & 2 but was not selected for fundingdespite the assessor’s recommendation, since it was thought it was a model which wasn’t suitable for EHCGP funding. (despite another scheme simply involving loans to private landlords having been approved).Regardless of this perverse view, it remains an excellent model worthy of grant support.
CSFs
- Social Landlord Willing To Purchase Completed Properties:
This model depends on a registered provider being willing to purchase completed units – NSC had lined up Cobalt Housing & Liverpool Mutual Homes to buy the properties.
- Availability of Grant:
The Model was predicated on a grant of £400k from the Community Grants Programme, which wouldhaveprovided the basis for the revolving fund (designed to refurbish and sell on 34 homes over the 3years of the programme). This has not been forthcoming.
- Labour Input/Costs:
Projects are intended to provide training for young people and use apprentices/trainees.
-Additional Funding:.
No additional funding required as long as the properties can be sold to an RSL and cover all costs. .
6. Purchase, Repair & Re-Financing To Facilitate Further Acquisitions
This is a model at an early stage and is being pioneered in London by ADCRIS CIC in London. It provides a way of operating within a buoyant property market and utilises the uplift in property values following renovation,as a way of generating further funding. A property is purchased, renovated and then re-mortgaged to generate additional funding for further purchases.
CSFs:
- The Housing Market:
This model is geared towards circumstances where the housing market is very buoyant and where the increase in the value of the property post renovation is sufficient to re-mortgage it and generate sufficient funds to purchase another “follow-on” property.
- Availability of Grant:
Grant is needed at the outset to provide funding for the initial acquisition of property..
- Need For Additional Funding:
It may also be necessary to borrow additional monies to cover the cost of renovation. . .
NB: Ashley Housing in Bristol are also looking into this model.
7. Soft Loans From Investors
Loans Secured Against Specific Property Acquisitions At Nominal interest:
Money borrowed from angel investors, secured against the value of the property, that will be sold off after an agreed period (at an increased value) to repay the loan and to also provide a modest return to the investor..
E.G. Hope Into Action in Peterborough are working with members of local churches who are willing to invest enough money ( c£100k) to enable the organisation to buy and renovate a property. They then receive a modest annual return, equivalent to the rate of interest offered by banks, generated from rental income and at the end of an agreed period the capital sum invested when the property is sold.
All the information in this document is provided in order to illustrate possible ways of financing the use of empty property. Before entering into any financial commitments ortaking out any loans you should take appropriate financial advice.
JNF/ April 2014
Self-Help-Housing.Org/HACT
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