Maintenance & management arrangements
Rented homes
If you are managing rented homes you will need to retain from the rent
sufficient income to manage, insure and maintain the homes; and to allow for
void periods. You will also need funds to manage the CLT itself which is
discussed further in the revenue budget section. The remaining rental income can
be used to repay a long term loan.
Maintenance is usually considered as comprising three elements:
- routine maintenance: broken door handles, blocked drains, leaking roofs
etc. and, a more significant item, an annual boiler service (if there is a
boiler!). The tenant will normally be responsible for internal decorations and
for any damage they cause.
- cyclical maintenance: keeping the exterior painted or stained, probably every
5 years and carrying out other preventative work such as clearing drains or
gutters.
- planned maintenance: most obviously boiler replacement after 12-20 years,
replacing kitchen fittings after 15-20 years and replacing bathroom fittings
after 20 or more years. In theory planned maintenance could include full
lifecycle costing - the renewal of every element of the home according to its
expected life (e.g. a new roof after 100 years), but in practice, when the long
term debt is paid off, there is the option of re-financing any major repairs
that arise from the increased income then available or even from taking out a
new loan.
Housing associations set aside £25-£29pw at 2009 prices to cover these
running costs and the cost of insurance: e.g. £9pw routine; £4pw cyclical; £7pw
planned; £4pw buildings insurance; £3pw (about 3% of rental) for voids. Service
charges for common parts and shared areas of grass or planting will be
additional and service charge income must cover them: 15% could be added to
service costs for the CLT’s own administrative costs of getting the work done.
It is an option not to set aside planned maintenance until year 5. A larger
sum can then be committed to loan repayments and more can therefore be borrowed.
If a deferred or index-linked loan is used, the planned element will need to be
set aside sooner because part of the rising rent is then committed to loan
repayments and hence is not available to create the planned reserve. The level
of planned reserve needed to pay for the expected replacements should be
calculated and a long term loan repayment and reserves profile produced to show
that the necessary planned reserve will be built up by the time it is required.
Management costs will depend whether you pay a housing association or other
agent to provide the service, which might cost £8pw, or if you have a part-time
employee whose cost is met from the management element of the rent and income
from any other sources you may have. If an element of the work is carried out by
volunteers, there is obviously less cost and the rent income is then available
for other purposes.
Tenancy agreements
You will let your homes on assured tenancies or assured shorthold tenancies.
The Homes and Communities Agency has agreed to the use of assured shortholds
as this also means they do not insist on the right to acquire where grant is
provided. Assured shortholds which can be ended after 6 months also provide a
mechanism for having a rent that would rise to the market level if the tenant’s
financial circumstances improve or if it is intended that the tenure must switch
to part equity.
If the aim is to provide residents with a sense of security, ownership and
permanence, assured tenancies are obviously better if the right to acquire can
be avoided. Right to acquire should not apply on a rural exception site.
Model agreements to be made
available shortly.
Some CLTs have sought to develop a rented tenure that gives the tenant the
benefit of low maintenance spending where the home is well looked after. Tenancy
Plus provides for a rebate to be paid at the end of the tenancy if the total
cost of maintenance and required cyclical and planned funds are less than the
sum that has been deducted from the rent. Rent-to-equity aims to be a step
further with the tenant given full maintenance responsibility by means of a 20
year renewable agreement so they are in the same position as a part-owner. A
reduced sum is still held back from the rent to meet maintenance costs of say
£12pw and when the tenant leaves they receive these accumulated weekly sums as a
lump sum plus accrued interest - but less the cost of any maintenance which has
not been carried out.
Two further steps can be taken. First, accounting for capital repaid from the
long term loan using the rental payments (or a proportion of it) and adding this
to the lump sum paid to the tenant at the end of the tenancy. The CLT can also
refinance the home when the tenant leaves to increase the loan back to the
maximum possible over a further period of, say, 25 years starting from the new
rent level. A percentage of the difference between the outstanding loan and the
new 25 year loan can be added to the lump sum. To avoid the need for re-finance,
tenants could be given this latter element of the lump sum only if they switch
to part-equity with the lump sum as a deposit which avoids the problem of
re-finance for the CLT.
Shared ownership leases and maintaining affordability
The marketing and sales section explains how shared ownership leases can be
drafted:
- using the equity mortgage model that involves freehold or long lease sale
subject to an equity mortgage from the CLT on the unsold proportion.
- under a part-equity lease which avoids leasehold enfranchisement rights and
requires the CLT’s consent to be obtained if the part-owner wishes to buy a
further share
The former maintains affordability by enabling the CLT to reinvest the sum
received from the repayment of the equity mortgage in the provision of another
part-equity opportunity so that the total equity held by the CLT is maintained.
The latter enables greater control and prevents homes moving onto the open
market: however if the CLT does consent – as would be reasonable – to allow a
part-owner to move from say 40% to 60% ownership, there will be a sum available
which should be re-invested. Ideally this would be so that its value keeps pace
with house prices by offering another purchaser the option to buy at a lower
percentage of equity: if it is held in an interest-bearing account, there is a
risk that a short-term house price rise might make the sum insufficient to
restore the original affordability when the part-owner sells.
Managing non-housing elements
You should consider with each non-housing element whether it is allotments;
workshops let on renewable commercial tenancies with 3 year rent reviews;
workspace or hot desk space let by the hour or day; or a community space let by
the hour or 3-4 hour morning,
afternoon or evening session:
- the rent or fee to be charged
- the likelihood of vacancies or, from the opposite viewpoint, how often they
might be let
- responsibilities for maintenance
- how service costs such as heating, water and cleaning will be shared and met
- the cost of managing the space: dealing with re-lets, arrears and disputes
about the terms of the lease
A budget should be drawn up for these costs, which obviously has to be met
before forecast rent is committed to loan repayments on the capital cost of
provision.