Katharine Lewis 26 February 2015

Go all around the houses

To provide a tailored housing solution which meets the needs of each individual community, as the recent Elphicke-House report encourages local authorities to do, every local authority will have to look very carefully at the funding options available to them.

After all, new housing supply needs financial backing to get off the ground and bespoke solutions may be needed to unlock both the investment and the returns needed to provide a 21st century housing solution.

The Elphicke-House report outlines a number of funding solutions that local authorities may wish to consider – and some local authorities have already successfully adopted various structures.

There are several factors that could help local authorities determine which funding solution best meets their needs:

• Start at the end: consider your goals and your exit strategy, as well as the community needs. Whether your aim is to produce capital gains or a steady income stream, this may shape your funding options and allow you to take a more flexible approach.

• Affordable housing, market housing or a mix: the type of housing you wish to source may have an impact on the funding structure to be adopted. A local authority looking to set up a wholly-owned company (WOC) which delivers market housing for rent or sale may, depending on how that company is funded, needs to think about state aid, transfer pricing and tax among other things.

• Audits: – having ascertained your goals, consider whether you need a vires audit to establish whether you have the power to achieve your goals. As the Elphicke-House report highlights, local authorities need to be mindful of ‘national and local housing policies and the legal and public accounting framework within which they operate’.

• Assets and financial resources: consideration must also be given to the assets and financial resources a local authority has to contribute and how the value of those assets can be maximised. It may be possible to use land contributed by way of equity for a development project to achieve improved financing terms for subsequent projects once it becomes income generating.

Short and long-term goals, as well as risk appetite, may also have an impact on how any contribution of financial resources are made. On-lending Public Works Loan Board (PWLB) funds to enable a private sector partner to refinance expensive construction phase debt may de-risk the project for the local authority and provide it with a source of long-term income, while giving your partner certainty regarding the long-term cost of their debt.

The Elphicke-House report highlights various funding solutions which local authorities may wish to consider, ranging from conventional borrowing structures, through sale and leaseback arrangements to innovative combinations of debt and equity that enable local authorities to deliver more for their communities than just housing.

Examples of the varied approaches local authorities are already taking include:

• On-lending PWLB funds to a WOC can be a cost-effective way to ensure housing projects get off the ground, while ensuring that you retain sufficient control to deliver your vision, have the flexibility to bring in additional investment and development partners and generate profits that can be reinvested in other activities. It is a model which has been adopted by Cherwell DC to fund the development of the 1,900 self-build housing scheme at Graven Hill, but in establishing this pioneering scheme consideration had to be given to property and planning, vires, state aid, tax and transfer pricing issues.

• Establishing a WOC with the specific business purpose of residential development of market-rented property was the solution adopted by the Newham LBC, which also used its powers under the Localism Act 2011 to form a commercial company to develop and rent property. The funding solution for this project uses a combination of different types of debt plus equity and gives the WOC the ability to reduce its debt costs when the development of each project is complete, and to leverage income-generating assets as equity to fund future projects.

• When the States of Jersey decided to turn its housing department into a company, thus enhancing its decision-making and revenue-raising freedoms, the new company’s initial funding requirements were met by a loan from the States of Jersey which was provided from the capital raised by a sovereign bond issue. The debt capital markets provide an alternative source of low-cost, long-term financing for companies, and local authorities may wish to consider whether an own-name bond or a bond or private placement issued in the name of a company (whether wholly or jointly owned by it) ‘wrapped’ by central or local government could be a viable way to finance larger scale projects.

• In the UK’s first entirely privately- funded, local authority-led, affordable housing project, Barking & Dagenham LBC elected to develop 477 new affordable rented homes through its local enterprise partnership, which sought to develop the housing through a wholly-owned subsidiary funded by Long Harbour Ltd.

As well as undertaking a review of Barking & Dagenham’s powers and vires, issues that have to be considered include the establishment of a special purpose vehicle to become the landlord of the dwellings, state aid, procurement, disposal and other consent, housing revenue accounts versus general fund accounting, tax and property, as well as the complex lease structure which leads to a wholly-owned local authority vehicle at the bottom of the chain as landlord.

Katharine Lewis is banking and finance partner at law firm Trowers & Hamlins

This feature first appeared in The MJ magazine. Click here to subscribe to your own weekly copy.

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