Investment Reform Lenders’ Interests

November 2009

2

Why Fund New Build Development?

Housing associations have a good track record of delivery on new build projects – some contractor failure and cost overruns, but generally sound bet for lenders;

No loan loss – any defaults have been remedied by government intervention;

Underpinned by government; capital grants for new home construction and c.70% income support for repayment of loans via housing benefit;

The housing association sector is considered counter cyclical with very few pressures arising from the economic and property downturn, reliance on capital values in development loan structures (Scotland) has been negligible;

Loans invariably fully secured at outset from completed properties; no ‘real’ development risk taken by lenders on new site(s) being developed (this approach has reduced on-cost, i.e. no monitoring agent acting for the lender and no need for on-going due diligence reporting when compared with lending to private house building sector);

Prior to this year, HAG invested up front before private finance, therefore properties nearing completion ahead of lenders releasing loans (now seeing significant requirement to bridge HAG receipts by lenders);

New build provides better quality housing (meets SHQS), more stable cash flows, and should be in higher demand and evidence lower void performance compared with older stock.

3

Lenders Due Diligence?

Review and assessment of the management team and an understanding of the governance arrangements, i.e. the identities and capabilities of the decision makers of the borrower;

Track record – does the borrower have experience of delivering new build projects?

Principal contractor – as above for borrower, but evidence of delivery on similar projects required. Financial due diligence if development risk accepted by the lender (also undertaken across project/development team);

Project contracts – fixed price; method for dealing with cost overruns; dispute resolution; completion schedule; role of lender’s monitoring surveyor;

Financial due diligence on borrower: assess capacity to borrow - Income & Expenditure Account and Balance Sheet to ensure acceptable levels of interest cover and gearing – and long-term cash flow forecast to evidence repayment (either project specific or more likely at overall business level);

Security and valuation report (also monitoring surveyor reports) – loan-to-value, future demand and quality of build;

Legal due diligence – borrower powers and constitution; review of contracts; perfection of security; loan agreement structured around development contracts; other statutory approvals; etc.

4

Collaborative Procurement

Why work together?

Understand the governance and legal structures – clear and unambiguous (charitable objects?);

Who will be the decision maker(s) and programme manager(s);

A single lead developer or more than one?

Understand the risks, who will take on the risks and expected reward?

Security – provider and beneficiary the same (legal considerations)?

Transfer of ownership - cost, title and funding considerations;

Procurement and efficiency drivers and targets – how will these be measured and monitored (evidence from larger new build programmes and consortia?

Other savings – avoid duplication of staff costs/management time; uniform building methods across larger programmes; lower funding costs for larger loan amount(s)?

5

Bridging The Subsidy Gap

Carry forward and budget pressures;

Capital subsidy vs revenue (housing benefit) subsidy tensions;

Rental growth expectations vs scrutiny of housing benefit budget;

Using other resources - uncharged property pledged as additional security and whole business cash flow to support on-going development programmes;

Balance sheet capacity of recognised developer(s)?

Capacity elsewhere in housing association sector?

Formal consolidation and mergers?

Higher levels of private finance?

Local authorities – resources available to support new build affordable housing?

Other rental models and potential deferred sales (market risk?);

Weslo Housing

Management

Almond HA

Horizon HAWest Lothian

HP

DevelopmentFacility - £10m

Standard Securities

Term LoanFacility - £12m

RBSStandard Securities

Term LoanFacility - £3m

Term LoanFacility - £12m

Term LoanFacility - £6m

Properties Purchase Price

Properties Properties

Purchase Price Purchase Price

West Lothian Strategic Alliance

Leasing Structure

Weslo Housing

Management

Almond HA

Term LoanFacility - £6m

RBSStandard Securities

20 YearLease

Lease Payment

Capital & Interest

Assignment of Lease

Weslo would enter into a 20 year lease with Almond HA

Weslo benefits from a buy back clause, which it can exercise at any time.

The lease terms would allow Weslo to effectively manage the properties, with the lease payment covering Almond HA’s funding liability