Community Land Trust Fund

Delivering Affordable Sustainable Housing
Context setting:

Policy context

Health warning

At the time of writing this section, government policy is in a state of considerable flux, as a result of policy changes introduced:

  • As part of the Conservative Party manifesto at the last general election
  • Changes announced in the July 2015 budget and October 2015 Autumn Statement
  • Proposed changes to NPPF, which are currently the subject of consultations by DCLG.
  • The implications of the Housing and Planning Bill and the Welfare Reform and Work Bill, both of which are currently being debated in Parliament.

This guidance note will be updated as and when those policy changes take effect.

Affordable housing

The affordability of and access to good quality housing is a major issue for many communities, in both rural and urban locations.  Most CLTs aim to address this by ensuring that all or a significant proportion of any housing developments on sites under their control are “affordable”.  This has also become a significant issue in the policies of local planning authorities.

The key document in defining affordable housing is the National Planning Policy Framework, which was published by the Department of Communities and Local Government in March 2012.

This superseded Planning Policy Statement 3 (PPS3) which was published in November 2006 and updated in June 2010.

Section 6 deals with housing.  Annex 2 (Glossary) provides definitions.  However, at the time of writing the government is undertaking a consultation exercise about proposals to change the definition of Affordable Housing, to include Starter Homes built by private developers and sold at a 20% discount to market value.

Affordable housing is currently defined as:  “Social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market.  Affordable housing should:

  • Meet the needs of eligible households including availability at a cost low enough for them to afford, determined with regard to local incomes and local house prices.
  • Include provision for the home to remain at an affordable price for future eligible households or, if these restrictions are lifted, for the subsidy to be recycled for alternative affordable housing provision.”

Social rented housing is defined as: “Rented housing owned and managed by local authorities and Registered Social Landlords [now known as Registered Providers], for which guideline target rents are determined through the National Rent Regime…  It may also include rented housing owned or managed by other persons and provided under equivalent rental arrangements to the above…”

Affordable rented housing is defined as: “Rented housing let by Registered Providers of social housing.  Affordable rented housing is not subject to the National Rent Regime, but is subject to other rent controls that require a rent of not more than 80% of the local market rent.”

Despite the government’s definition of social rented housing making reference to the National Rent Regime, the government discontinued the policy of achieving convergence of local authority and housing association rents in 2014.  That does not affect new development, but does affect rent increases on any existing, social rented stock that may be transferred to CLTs from Registered Providers.

Intermediate affordable housing is defined as: “Housing at prices and rents above those of social rent, but below market price or rents, and which meet the criteria set out above.  These can include shared equity products (e.g. HomeBuy), other low cost homes for sale and intermediate rent but does not include affordable rented housing.”

Subsidy

 

By definition, housing which is being provided at below market price – whether sale or rent – requires subsidy.  This can be in the form of:

  • Cash, ie grants
  • In kind, ie land provided at nil value or on beneficial terms
  • Equity investment

Affordable housing development by CLTs in the housing boom before 2007 was based on a business model of developing housing for sale alongside affordable housing.  Profits from the housing for sale were then used to “cross subsidise” the affordable housing.

That model, although carrying significant risks, worked reasonably well in the buoyant housing market conditions prior to 2007, and is becoming appropriate again in those parts of the country where the housing market has recovered fully. However, it created the environment in which CLTs were characterised as ‘more expensive’ because they could not do what RPs could do.

RPs are now allowed to convert properties within their existing stock from social rent to affordable rent on re-let and are then required to use the increased income to “cross subsidise” new provision.  Therefore CLTs are still at a disadvantage unless a RP is willing to transfer stock or some of that increased income from its existing stock.

Constitution and funding

 

CLTs can be established in a number of constitutional forms, such as:

  • Charity
  • Company limited by guarantee
  • Industrial and Provident Society
  • Community-interest Company.

Each different constitutional form has implications inter alia in relation to governance, directors’ obligations, and access to funding.   As far as this guidance is concerned, they have implications in relation to:

  • Access to grant/gap funding through the Homes and Communities Agency.
  • Rent policy and increases/decreases.
  • The requirements of the Homes and Communities Agency, who took over responsibility for registration and regulation from 1 April 2012.
  • The CLT’s ability to develop housing for sale at open market value.
  • Liability for Stamp Duty Land Tax and Corporation Tax
  • VAT.

Localism Act

 

This legislation had major implications for CLTs, under the banner of “new freedoms for local authorities, new rights and powers for communities”.

The following powers have particular relevance to CLTs:

  • The Community Right to Buy and the Community Right to Bid.
  • The abolition of Regional Spatial Strategies and the associated housing targets.
  • Neighbourhood Planning:  Neighbourhood Plans can be prepared by Parish Councils or Neighbourhood Forums.  The regulations require that they must be consistent with the Local Planning Authority’s Local Plan, but specifically encourage identification of additional sites for housing.  Particularly in rural areas, this offers a real opportunity to identify small scale sites which otherwise may have been deemed “exceptions sites”, which can be allocated for housing subject to a policy constraint that a significant proportion of that housing must be affordable.  That offers a real opportunity for CLTs to work with their Parish Councils or Neighbourhood Forums to bring forward sites for development in such a way that they effectively could only be developed by CLTs.
  • The Community Right to Build contained within Neighbourhood Plans:  as part of a Neighbourhood Plan, the Bill gives “groups of local people” the ability to bring forward small developments, with the benefits retained within those communities.  Organisations such as CLTs are seen as appropriate delivery vehicles for that power.
  • A presumption in favour of Sustainable Development.
  • Housing management reforms including the Local Offer, Local Allocations Policies and tenure reform.

The Local Authority Role

 

The local authority is the key player in relation to affordable housing, particularly in relation to its housing strategy and planning activities.  Each local authority, or group of local authorities working together at a sub-regional housing market level, produces a Strategic Housing Market Assessment and a Housing Needs Study.  These are sometimes combined into one document.  These form the evidence base for their local planning process.

They are also required to produce a housing strategy.  Between them, these documents inform the range of housing and planning activities within the local authority area, although they are often at too high a level to pick up local needs and demand in small communities such as those served by rural CLTs.  Parish surveys or those by CLTs and Rural Housing Enablers fulfil a very important role in supplementing the LA-wide data.

Under the previous system local authorities were required to produce a Local Development Framework (LDF) consistent with the Regional Spatial Strategy.  The LDF comprised a Core Strategy and a series of Development Plan Documents or Supplementary Planning Documents.  Most local authorities had a DPD or SPD on affordable housing, which related to guidance in PPS3.

Under the system introduced under the Localism Act and the associated National Planning Policy Framework, RSSs and LDFs are replaced by Local Plans, although obviously only a handful of local authorities have these in place at the time of writing.  There will be a transitional period lasting several years, during which the system is likely to be confused to say the least.

Also see work by Marilyn Taylor for DCLG called ‘Planning Together’ and the ATLAS guide: www.atlasplanning.com.

Over the last few years, the planning system has facilitated the delivery of affordable housing through the use of Section 106 agreements.  These are agreements under Section 106 of the Town and Country Planning Act 1990, as amended by the Localism Act 2011.  In parallel with the Localism Act, regulations were introduced which will allowed local planning authorities to charge a Community Infrastructure Levy.  This aims to capture increases in land values arising from the grant of planning permission, in order to secure funding for infrastructure related to the development of land.  The regulations around CIL leave it to the discretion of the local planning authority as to whether the provision of affordable housing can be handled through CIL rather than s106 agreements.

Section 106 obligations represent a charge on the land for which planning permission is granted, which imposes obligations on both the current and any future owners of that land.  Many of these Planning Obligations affect the monetary value of the land by restricting its use.  More importantly, they also have the impact of modifying the security value of the land and any homes covered by those Planning Obligations.  We deal with those issues later.

Another key aspect of the local authority’s activities relates to land ownership.  Many use conditions attached to the disposal of their land to achieve policy objectives, a policy given fresh impetus by the Quirk Review “Making Assets Work”.

See http://webarchive.nationalarchives.gov.uk/20120919132719/www.communities.gov.uk/publications/communities/makingassetswork

They are required to achieve best consideration (not necessarily the same as the highest price) when disposing of land.  As land can account for 25-35% of the gross development value of housing sites (possibly higher in London and the South East of England), acquisition of land on beneficial terms or at nil value can represent a very significant element in a “cocktail” of funding for affordable housing developments.

Best consideration is an extremely technical area of valuation, covered by legislation in the former section 123 of the Local Government Act 1975, with guidance provided to valuers in the RICS “Valuation Standards”.  The publication “Valuation of land for affordable housing” (1st edition 2010) is very useful.

 

The Homes & Communities Agency

 

Whilst a very small number of local authorities have subsidised the provision of affordable housing by direct grant funding, the main funder is the Homes and Communities Agency (HCA).  The HCA was established through the Housing & Regeneration Act 2008.  It became operational in December 2008, following the merger of the Housing Corporation and English Partnerships.

The HCA inherited a number of different funding streams from its predecessor organisations, which initially were merged into one, consistent set of funding methods.  However, a number of recent initiatives (such as the Help to Buy and Starter Homes initiatives) have led to the reintroduction of a proliferation of different funding systems.  In addition, the role of the HCA has been transferred to the Greater London Authority in respect of funding within London.  As devolution to city regions takes place over the coming years, it can be expected that a number of other local authorities or groups of local authorities will take over the HCA’s functions in their areas.

Central government funding available to the HCA has been reduced dramatically, as a result of which grant rates have reduced very significantly – from around 50-60% to around 20% of the cost of production.  That reduction has been achieved by the replacement of social rent by affordable rent in new production – see the definitions in the introduction to this section.  The practical implication for CLTs is that the proportion of scheme costs which must be met from either private borrowing or cross subsidy is now much higher, which increases the risks and security requirements for borrowing.

Within the HCA’s range of funding options, Community-led groups are able to access funding either by joining an existing consortium with other HCA Investment Partners, or by applying directly for an allocation for community-led schemes.  These options within the 2015/18 Affordable Homes Programme are aimed at community led housing groups such as CLTs.  The objective is to leave a legacy of:

  • A larger, more robust community led housing sector.
  • Sustainable community led housing organisations.
  • Better access to funding and loan finance through improved understanding, which it is hoped will reduce barriers for such organisations.
  • On-going partnerships between community-led organisations, housing associations and local authorities.
  • Support, expertise and peer networks.

The law defining the uses of “financial assistance” provided by HCA is set out in the Housing and Regeneration Act 2008.

Originally, the HCA envisaged that all of the 2015/18 programme would be allocated by a one-off bidding round, but only around 50% of the programme was allocated.  The remainder of the Programme will be allocated through Continuous Market Engagement, which allows Investment Partners to present individual schemes or programmes as and when they reach a sufficient level of certainty to proceed.  However, current proposals by government are likely to lead to the funding of Starter Homes developed by private housebuilders at 20% discount to market value being through the Affordable Homes Programme or its London equivalent.  That will reduce the funding available for “traditional” affordable rented housing developed by CLTs.

Although some CLTs have developed affordable housing without HCA grant, the vast majority have relied on that funding in whole or in part.  Therefore this, and the section on HCA requirements, are important, but will not always be essential.

As well as funding by grant or gap funding and equity investment, the HCA is also a significant land owner which disposes of land on terms which may facilitate the provision of affordable housing.

Although grant is allocated in accordance with policy objectives (both local and national), individual project bids are scrutinised in relation to value for money, usually through a competitive bidding process.

The link between HCA and local authority housing strategies is through the development of “Local Investment Plans”.  This process involves the HCA, other agencies, LSPs and local authorities.  To have a chance of gaining priority for funding, CLTs must find a way into those discussions with their local authority (and parish councils), to ensure that their offer as a housing provider and manager is recognised in the Local Investment Plan.

In the Budget in July 2015 and the Autumn Statement in November 2015, the government changed the rent inflation assumptions that can be applied to housing owned by Registered Providers.  This has now been incorporated into the Welfare Reform and Work Bill, and requires rents to reduce at 1% per annum through financial years 2016/17 to 2019/20.  That restriction does not apply to CLT’s that are not Registered Providers, which can continue to increase rents by CPI plus 1% per annum.

 

Regulation

The Tenant Services Authority was set up under the provisions of the Housing and Regeneration Act 2008 and became operational on the same date as the HCA in December 2008.  However, it was wound up with effect from 31 March 2012, with its functions being transferred to:

  • The Homes and Communities Agency will focus on financial regulation of Registered Providers.
  • The Housing Ombudsman, in conjunction with local authorities, will handle complaints about service, maladministration, etc.

The HCA Regulatory Panel handles the registration of new Registered Providers, as well as regulating them thereafter.  Registration is a complex process, albeit a lighter approach is adopted for CLTs and other smaller, community-based organisations.

The process is in two stages, the first of which establishes the principle of whether the organisation is capable of becoming a Registered Provider.  The Stage 2 application covers matters of:

  • Governance
  • Management and tenancy issues
  • Business planning and reporting systems.

Experience to date of the HCA’s so-called light touch regime has been challenging, particularly in relation to stress testing financial forecasts.  However, the Appraisal Toll is accepted by the HCA as an appropriate basis for project appraisals, business planning, and stress testing.