Loans against social housing – how to sustain your developments
One of the topics we explored in our recent social housing webinar was how to sustain and prepare developed sites for social housing as security against which to lend money.
The usual position when developing a site for housing is that it is purchased and developed with mortgage financing. Social housing is unusual in that it is purchased through grants or, more recently, capital swaps, and then billed or mortgaged after housing is built. Simply put, the money then loaned against the units is used to fund more social housing and the process repeats itself.
As explained in the talk, given the delay between site acquisition and the loan, there is a crystal ball element in determining what a lender will need, which can cause problems for housing associations.
In addition to persuading the lender that the site represents good security (that is, he has all the rights, consents, etc. that he needs and that nothing prevents his consented use), there is has a particular problem facing housing associations and that is securing the maximum value or drawdown in relation to a property. To do this, the lender must be able to sell the rental units on the market free of any restrictions on the use of the housing as social housing to achieve the MV-T or the market value subject to rental. For the majority of the country, this equates to the open market value and significantly more than the EU-SHV value or the value of existing use social housing, which is the value placed on social housing that is to be used as social housing in perpetuity.
The planning process and, in particular, the s106 agreements are the main way in which the use of social housing is restricted. These can set occupancy restrictions, housing appointments, and local connection criteria, all (some would rightly say) limiting its use to social housing. We have explored in detail how to exempt lenders from these requirements using a mortgagee protection clause (also known as a mortgagee exclusion clause). This is not an absolute exemption for lenders, but rather allows them to sell unrestricted social housing if they have first offered the housing to the local council (or their agent of the housing association ). We looked at the industry standard clause drafted by the Joint Finance Working Group to establish some key points that any clause should include to be lender compliant, namely:
- the mortgagee should not need to take possession of a home to realize his security, i.e. he (and the sector) wishes to have the capacity to sell with the tenants in place
- the clause should include all persons and all modes of administration, i.e. all types of receiver and administrator
- the clause must include any person who derives title from it, i.e. the buyers of the mortgagee
- the mortgagee should only have to make reasonable efforts to sell the units to the board or their nominee
- the sale price should be set at a level so that the mortgagee does not suffer a loss
- the board or candidate should only have three months to complete a sale from the date of the notice
- if the sale is not concluded within this period, the mortgagee should be given the opportunity to sell for free
If these provisions are included then, while we cannot predict with absolute certainty that any future lender would be happy with the S106 deal, we believe this is the best approach to avoid any renegotiation and modification of the deal that takes time.
This article expands on topics covered in our recent webinar on social housing. This can be viewed in full on Birketts YouTube page.