Financial Planning

Steve Bendle, Community Finance Solutions

CLT aimsCLT aims ViabilityViability

o Income > expenditure: costs less than part-equity Income > expenditure: costs less than part-equity sales + long term loans + grants sales + long term loans + grants

AffordabilityAffordabilityo part-equity at 3.5+1 times household incomespart-equity at 3.5+1 times household incomeso rent at 67%-80% Local Reference Rentsrent at 67%-80% Local Reference Rents

Affordability in perpetuityAffordability in perpetuityo rented homesrented homeso lease under Declaration of Trustlease under Declaration of Trusto Shared Ownership with restricted stair-casing if Shared Ownership with restricted stair-casing if

changes to Leasehold Reform Act in Housing & changes to Leasehold Reform Act in Housing & Regeneration BillRegeneration Bill

SustainabilitySustainabilityo as organisationas organisationo more than housingmore than housingo low impact housinglow impact housing

Different CLT needsDifferent CLT needs

Urban schemesUrban schemeso may be very largemay be very largeo full value security may be available: full value security may be available:

homes can be sold fully so long as receipts homes can be sold fully so long as receipts recycledrecycled

Rural new build schemesRural new build schemeso s.106 may restrict values.106 may restrict valueo may be mix of housing, workspace, may be mix of housing, workspace,

communitycommunity Rural “quota” schemesRural “quota” schemes

o need to buy before sales proceedneed to buy before sales proceed

Matching cost and incomesMatching cost and incomes2-bed2-bed 3-bed3-bed 4-bed4-bed TotalsTotals

77 22 11 1212

m2m2 7575 9090 110110   

Mortgages people can afford Mortgages people can afford (£)(£)

55,00055,00065,00065,00070,00070,00090,00090,000

120,000120,00060,00060,00070,00070,000 90,00090,000   620,000620,000

What CLT can afford to borrow What CLT can afford to borrow (£)(£)- on part-equity- on part-equity 101,000101,000

What CLT can afford to borrow What CLT can afford to borrow (£)(£)- for rented homes- for rented homes 58,000 x 258,000 x 2 116,000116,000

Cost target for affordability (£)Cost target for affordability (£) 539,000539,000 75,00075,000 110,000110,000 837,000837,000

Actual all-in costsActual all-in costs 84,00084,000 95,00095,000 99,00099,000 1,077,0001,077,000

Grant neededGrant needed 240,000240,000

Cost of 2-bed 75m2 house

Land (£5,000)

Build (£80,000)

Infrastructure (£7,000)

Fees etc (£7,000)

VAT (£1,000)

Finance fee (£250)

CLT income (£1,500)

Contingency (£2,000)

Interest (£2,000)

Fees

£250

£4,000£1,250

£250

£1,000

£500

Legals

Fees

Employer's agent

Planning

Guarantees

Other

Cost: £106,000Cost: £106,000 Target cost for affordability: Target cost for affordability:

£86,000£86,000 £20,000 required£20,000 required

Charitable grant, HC grant, some Charitable grant, HC grant, some high % sales, cross-subsidy, high % sales, cross-subsidy, developer conditiondeveloper condition

ViabilityViability

Finance requirementsFinance requirements Pre-development financePre-development finance

o Essential to secure planning and buy siteEssential to secure planning and buy siteo Little or no securityLittle or no securityo May require £10k-£30kMay require £10k-£30k

Development financeDevelopment financeo To buy the land/housing and build the schemeTo buy the land/housing and build the schemeo Development seen (unreasonably) as inherently Development seen (unreasonably) as inherently

riskyrisky Choice of mortgages for part-equity Choice of mortgages for part-equity

purchaserspurchasers Long term loan financed from rentsLong term loan financed from rents

o Possibly plus rent element on part-equityPossibly plus rent element on part-equity Grants to bridge viability gapGrants to bridge viability gap Sales/high % sales to meet specific needs and Sales/high % sales to meet specific needs and

generate incomegenerate income Dowry/reserve for viabilityDowry/reserve for viability

Appropriate financial Appropriate financial instruments instruments

High Risk

Low Risk

Secured loans

Unsecured loans

(“mezzanine”)

EquityGrants, 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, Risk decreases over time, but £s increasebut £s increase

Fin

anci

al

risk

Construction

Pre-planning

Feasibility

Occupancy

Time

ConstructionPre-planning OccupancyFeasibility

How best to fund your How best to fund your schemeschemeHigh

Risk

Low Risk

Grants, donations, equity

Gifts in kind

Mezzanine debt

Seniordebt

Work at risk

Some finance optionsSome finance options BanksBanks

Prefer large schemes but not to be ruled outPrefer large schemes but not to be ruled out Building societiesBuilding societies

Some large, some small, some localSome large, some small, some local Few will fund developmentFew will fund development

Housing associationsHousing associations Excellent solution if willingExcellent solution if willing

Local authoritiesLocal authorities Repeatable/sustainable?Repeatable/sustainable?

Community financeCommunity finance New, not well understoodNew, not well understood

Ethical banksEthical banks Charity BankCharity Bank

IntermediariesIntermediaries VenturesomeVenturesome

Proposed facilitation fundProposed facilitation fund £2m-£5m investment by major charities and £2m-£5m investment by major charities and

othersothers Aim of maintaining fund indefinitleyAim of maintaining fund indefinitley Pre-developmentPre-development

Up to £30,000Up to £30,000 3 tranches3 tranches Written off if fails; repaid + 20% if proceedsWritten off if fails; repaid + 20% if proceeds

Development financeDevelopment finance Up to 30%Up to 30% Where no MIP in particular but could be any reasonWhere no MIP in particular but could be any reason

Technical aidTechnical aid 1.5 days pre-development1.5 days pre-development 5 days development5 days development Includes “investment readiness”Includes “investment readiness”

Attracting InvestmentAttracting Investment Need to showNeed to show

awareness of the financial risksawareness of the financial risks ability to manage them appropriatelyability to manage them appropriately appropriate financeappropriate finance

SecuritySecurity Available value @ 1.5x loanAvailable value @ 1.5x loan Income streamIncome stream Experience either as 3 years accounts; Experience either as 3 years accounts;

or on Boardor on Board

Investment readinessInvestment readiness Project managementProject management

Key people – committed, appropriate mix of skills and Key people – committed, appropriate mix of skills and experienceexperience

Technical management – involvement of professional Technical management – involvement of professional expertise in key areasexpertise in key areas

Financial information and management Financial information and management o well evidenced budgets and clear cashflow forecasts well evidenced budgets and clear cashflow forecasts

including significant contingenciesincluding significant contingencieso risks identified and addressedrisks identified and addressedo ownership of the plan ownership of the plan

Appropriate financingAppropriate financing factor in risk and appropriate financial / social returnsfactor in risk and appropriate financial / social returns

Some sticking pointsSome sticking points Section 106 Agreements and “mortgagee Section 106 Agreements and “mortgagee

in possession” clausein possession” clause Rental schemes and need for low start Rental schemes and need for low start

financefinance Timing of raising financeTiming of raising finance Pre-development financePre-development finance Initial start-up capitalInitial start-up capital Reserves and income once in Reserves and income once in

managementmanagement

Holsworthy DevonHolsworthy Devon

Initial grant supportInitial grant supporto £40k Second Homes Tax£40k Second Homes Taxo grant from charitiesgrant from charitieso used to meet architectural and legal feesused to meet architectural and legal fees

First scheme: 5 flats over supermarket to be First scheme: 5 flats over supermarket to be purchased on completionpurchased on completiono Had to be able to guarantee purchase to developer Had to be able to guarantee purchase to developer

even if residents not all in placeeven if residents not all in placeo Charity Bank/Venturesome loan @ 6.5%/7%, fully Charity Bank/Venturesome loan @ 6.5%/7%, fully

repaid in 4 monthsrepaid in 4 months Second schemes: 3 part-equity “do-it-Second schemes: 3 part-equity “do-it-

yourself” shared ownership using commuted yourself” shared ownership using commuted sumsum

Buckland Newton DorsetBuckland Newton Dorset Initial technical aidInitial technical aid

o £7.5k grant £7.5k grant cost of setting up CLT (£1k) and initial designcost of setting up CLT (£1k) and initial designo further £25k loan for detailed design and planning approvalfurther £25k loan for detailed design and planning approval

WDDC development fundingWDDC development fundingo planners refused mortgagee in possession clauseplanners refused mortgagee in possession clauseo 70% could have been borrowed from Charity Bank or Ecology BS 70% could have been borrowed from Charity Bank or Ecology BS

but WDDC decided direct lending easierbut WDDC decided direct lending easier TenureTenure

o 8 part-equity with small (1% of unsold element) rent8 part-equity with small (1% of unsold element) rento 2 rent-to-equity 2 rent-to-equity

MortgagesMortgageso 3 lenders in place aware of conditions3 lenders in place aware of conditions none have yet agreed link to wages not valuesnone have yet agreed link to wages not values Credit crunch maymean 90% maximum loanCredit crunch maymean 90% maximum loan

Long term, low start financeLong term, low start financeo Charity Bank @ 6.5%Charity Bank @ 6.5%o interest only paid initiallyinterest only paid initiallyo Ecology BS had offered interest onlyEcology BS had offered interest only

Chipping LancsChipping Lancs

Brabins Trust existing almshouse charity Brabins Trust existing almshouse charity setting up new CLT with Brabins and other setting up new CLT with Brabins and other representationrepresentation

Initial technical aidInitial technical aido Support from Great Places Housing Group Support from Great Places Housing Group

for pre-development costsfor pre-development costs Further financeFurther finance

o GPHG offer of development finance GPHG offer of development finance andand long term financelong term finance

o Development supportDevelopment support ViabilityViability

o Also needs HC supportAlso needs HC support

Key pointsKey points Viability: cost equal to affordability targetViability: cost equal to affordability target Think through the risks at each stage of Think through the risks at each stage of

your schemeyour scheme address themaddress them finance each stage appropriatelyfinance each stage appropriately

Use professional / technical expertise to Use professional / technical expertise to help manage risk as early as possiblehelp manage risk as early as possible

Keep it simple (if you can!)Keep it simple (if you can!) reduces risksreduces risks easier to attract investorseasier to attract investors

Sources of supportSources of support Supportive RSLsSupportive RSLs

o development expertisedevelopment expertiseo finance expertise and access to low cost borrowing (£60b finance expertise and access to low cost borrowing (£60b

assets)assets)o some retain strong neighbourhood and community focussome retain strong neighbourhood and community focuso HC encouragement as ‘community anchor’ organisationsHC encouragement as ‘community anchor’ organisations

Development TrustsDevelopment Trustso development and finance skills; but only rarely affordable development and finance skills; but only rarely affordable

housinghousing CFSCFS

o toolkittoolkito website website www.communitylandtrust.org.ukwww.communitylandtrust.org.uko www.clt-conference.co.ukwww.clt-conference.co.uko network: network: http://http://www.talk.communitylandtrust.org.ukwww.talk.communitylandtrust.org.uk

Regeneration agencies, LSPs, others?Regeneration agencies, LSPs, others?