There are a wide range of charitable and ethical lenders that have funded CLTs and are keen to lend to the sector.
Typically CLTs get a loan to develop their homes, and then refinance with a long-term mortgage at a lower interest rate which they pay down with rental income. Some lenders will only provide you with development finance if it will be converted into this longer-term loan, given the amount of time they will need to put into assessing your application.
Getting 'investment ready'
Before you approach a lender to discuss development finance, you'll need to have a proposal ready for them to consider. This means you need, at the very least:
- A professionally run Community Land Trust with sufficient skills to give the bank comfort that the Trust is a good credit risk.
- A robust business plan and project financial appraisal.
- Periodic cash flow forecasts and management accounts to ensure that the CLT is operating in line with expectations.
As a general rule, commercial lenders do not lend the whole cost or value of a scheme to the CLT, unless for example the land is provided free of charge or at minimal cost so there is “in kind” subsidy – as is often the case with CLTs. Similarly, mortgage lenders do not lend the full value of a home to a purchaser – they may have done so immediately prior to the credit crunch, but that is unlikely to recur.
Lending on residential property development involves some terms you may not have come across, and that are easily misunderstoof.
Security Value is the value that a lender can expect to recover should the borrower default on a loan and the lender has to repossess the property. This tends to be below the price of a new home, to reflect that if it were repossessed, it would by that time be second hand, and the lender would wish to sell it quickly and would also incur costs in selling it again.
Asset Cover is a test to determine an organisation’s ability to cover its debt obligations with its assets after all liabilities have been met. In effect it determines if, in a worst-case scenario, an organisation has enough assets that can be sold to repay its loans. Funders cover this issue by lending up to a set percentage of overall value of the development. This is called the Loan to Value percentage or ratio. Thus, if the value of the site was £1m and the LTV percentage was 70%, the maximum debt that could be raised would be £700k.
Interest Cover measures if an organisation can meet its interest obligations out of net income. At an Interest Cover of 1, an organisation can exactly cover its interest obligations out of net income. It is usual for a lender to expect an Interest Cover to exceed 1 – the smaller, newer or less financially secure the organisation, the higher the required Interest Cover is likely to be.
It is usual for lenders to stipulate their desired level of Asset Cover and Interest Cover in the loan documentation. These are known as Loan Covenants.
Lenders' requirements and contacts
Different lenders lend on different terms, such as the length of the loan, covenants required, etc. The following table sets these out for major lenders to CLTs. The information is accurate as of September 2017.
|Funder and contact
||Type of funding
||Limits on funding
||Loan to Value
||Indicative Interest Rates & Term
|Development & Long Term Funding
||Maximum £3.25m. Can lend more in partnership with other lenders.
||Project by project basis up to 70% of end valuation. Work in partnership with other junior social lenders who will provide amounts above 70% of end valuation.
Typically 2.5% or more over Bank of England base rate, depending on size and quality/strength of the deal.
Variable rate loan with maximum term of 25 years. Interest only periods available. Possibility to fix the rate for up to five years.
|Active in the sector and looking for lending opportunities.
Co-operative & Community Finance
0117 916 6750
|Development funding on its own and in conjunction with other lenders. Maximum term 20 years.
||Between £10k and £150k
||Each case on its merits, can go up to 95% in some cases and in conjunction with other lenders.
||3-4% above base with minimum of 6-8% depending on security.
||Active in the sector – have worked in conjunction with Triodos and Ecology
Ecology Building Society
Development finance available subject to minimum ecological criteria.
Residential mortgages for restrictive covenant and shared ownership schemes available
|Maximum loan is £2.0m
Up to 80%
Up to 90% of restricted sale price or up to 95% for shared ownership
4.65% SVR less discounts for ecological specifications ranging from 0.50% for EPC B rated to 1.25% for Passivhaus
|Active in sector, particularly regarding the creation of affinity residential mortgage packages for CLTs
0161 883 1720
|Development loan and repayment loan during the rental period
||Up to £2.1m
||80% of the value of the completed properties which can cover up to 100% of development costs
||5-7.5% fixed rate
||Active in the Market. Fund was created initially to help bridge the gap for CLT’s that do not have a track record and cannot attract mainstream finance. Repayment tailored to ensure that the outstanding loan can be refinanced on expiry of the fund. Social Impact of the scheme is important. Social impact report on Resonance website highlights case studies and the measures considered.
|Development & Long Term Funding
||£15m per borrower but will also look to lend on a syndicated or club basis with other lenders if the project exceeds this amount.
||Up to 70% land value plus 60% build cost during development phase; 70% value on long term basis.
||Typically base +2.5% to +4%. We offer 25 year loan funding.
||Active in the sector and keen to lend.
Unity Trust Bank
|Development & Long Term Funding
||Up to 70%
Between 2.5% and 4.0% above base.
Variable rate loan with maximum term of 25 years
|Active in the sector
Provide Pre-development (pre-planning permission) and Development finance (post-planning permission) to finance the cost of construction.
Do not do Long Term funding.
|Pre-development finance average is £30k and is dependent on the number of affordable homes being built (in the past they have lent £100k to individual schemes); Development finance is up to £400k.
||20-40% of the total amount required depending on the funding gap/ amount provided by the senior lender.
Pre-development finance offered at a
10% yearly interest rate (loan and interest only repayable if planning permission is granted with the loan and interest written off should the scheme not go ahead). Development finance charged at 6.5%-7.5% fixed (more expensive than a senior lender because it is the junior tranche).
|Active in the sector – social investor that has been managing a dedicated CLT fund since 2008, providing finance and support. Since 2009 they have supported over 50 schemes with pre-planning finance and development financing.