Funding local authority housing companies

Housebuilding iStock 000008203889XSmall 146x219Imogen Fisher sets out some of the key considerations when local authorities fund wholly-owned housing companies.

Lots of local authorities have been setting up wholly owned housing companies (LHC's) to facilitate residential development. How a local authority funds its LHC is dependent on a number of factors. 

As well as looking to the LHC to alleviate cost and availability pressures on housing in their local area, many authorities want to ensure that the LHC can generate returns to the authority which it can use to fund other activities. One way to do this is to make loans available to the LHC, but consideration needs to be given to the amount of any proposed debt provided by the local authority to the LHC. State Aid legislation, coupled with other regulatory and accounting requirements dictate that any loan made to fund market rental or market sale properties must be provided on, substantially, commercial terms. This includes charging a market interest rate on the loan. 

A further consideration will be how any loan is going to be repaid. Loans will typically be repaid at a pre-determined point in the future when the initial local authority debt is refinanced, or out of rental receipts once properties are completed, or from the disposal of completed properties following practical completion, or a mix of the three. 

Article continues below...

When looking at how the loan is to be repaid, consideration will need to be given to the local authority's requirements on repayment and the availability of funds to enable the LHC to repay. Where a local authority is borrowing from the Public Works Loan Board to invest there will be pressure on money coming back to the local authority from the LHC to service such borrowing. It is assumed that interest on development finance will roll up during the development phase, but it needs to be considered whether, following practical completion, anticipated net rental income or sale proceeds are sufficient to meet repayments of principal and interest. Where money is being invested from the local authority's reserves, there may be less pressure, if the local authority considers that the investment is more long term.

Part of the local authority investment in the LHC may be made through subscribing for shares. The return on this equity investment will come to the local authority when the LHC is able to declare dividends. Dividends can only be declared from distributable profits and so a dividend may not be declared until quite some time into the future. There may therefore be a benefit in increasing the level of debt in the LHC and limiting the level of equity, to ensure that the local authority receives cash through the payment of loan interest and repayment of principal rather than tying up capital indefinitely.

The LHC, as well as requiring funding for specific development projects, will also need working capital to fund its day-to-day business. Again the local authority can fund the LHC's working capital through debt or equity. If the local authority intends to fund the LHC's working capital requirements by making loans available, consideration needs to be given to any legal, regulatory and/or accounting restrictions which affect the way in which the local authority funds revenue items.

Funding can be made available to the LHC on a project by project basis and indeed a LHC may be set up to deliver one specific project. Where it is anticipated that the LHC will carry out multiple projects over a period of time, it may streamline things and provide a level of certainty if a framework for funding is agreed at the outset. This framework can also provide enough flexibility so that the LHC can set up subsidiaries to deliver specific projects in the future and to facilitate the refinance of one or more projects at a point in the future when developments are complete and the terms of a property investment loan are more appropriate. 

Imogen Fisher is a Partner at Trowers & Hamlins. She can be contacted on 020 7423 8587 or This email address is being protected from spambots. You need JavaScript enabled to view it..