Let's Share in action...
A development has a Section 106 planning requirement for 20 rented affordable properties.
heylo will sign a forwards purchase contract with the developer to acquire all 20 rented properties at practical completion and sign a Let's Share agreement with the Local Authority or Housing Association to buy shares in the properties once acquired by heylo.
At practical completion heylo will simultaneously:
- Acquire the properties from the Developer for 60% of the open market value of the unpurchased shares
- Sell the shares to the Local Authority (in their general account) or a local Housing Association for 60% of OMV and pass the proceeds to the Developer
- Consent to sub-letting of all 20 properties subject to any Section 106 and nomination obligations
The purchasing Local Authority or Housing Association can specify design and fit requirements at the point of signing the Let's Share contract and these will be incorporated into the agreement with the Developer provided that they would not impede the sale of the properties as shared ownership to consumers.
The Local Authority or Housing Association will be obliged to comply with any related Section 106 requirements, such as rent caps or nominations, but is otherwise free to determine the occupancy of the Let's Share properties, set the term of the sub-lettings, set the rent levels (on a property by property basis), manage the lettings as if the properties were fully owned and undertake maintenance of the properties.
(Should the Local Authority wish to outsource this activity heylo is happy to provide some or all of these services on an "open book" cost basis.)
Single property worked example...
The open market value (OMV) of a Section 106 rented property is £125,000.
Each 25% share purchased by the Local Authority or Housing Association at 60% of OMV is £18,750.
The initial rent on each property under the Let's Share shared ownership lease is 2.75% x 75% x £125,000 = £2,578.13
(Increasing by RPI plus 0.75% annually)
Estimating annual management and maintenance costs per property of £2,400 (this should be much less in early years due to being new build) means that the Local Authority or Housing Association will need to generate annual sub-letting income of £4,978.13 to 'break even'.
This means the Local Authority or Housing Association could obtain this £125,000 property for £18,750 and rent it to a tenant for £95.74 per week.
Development worked example...
The total purchase price of 25% shares in 40 Let's Share properties with 125,000 OMVs is £750,000.
The total initial monthly rent payment due to heylo under the 40 Let's Share leases is £8,594.
The Developer receives the share sale proceeds and heylo pays 60% of the OMV of the residuals = £750,000 plus 60% x 75% x £125,000 x 40 = £3,000,000.
(Equivalent to 60% of the £5,000,000 OMV of the 40 properties.)
Capital Investment and Break Even Weekly Rents
for different Property Open Market Values...
The table below shows the Capital Investment per property and break even weekly rent based on a 25% share purchase.
This includes £2,400 additional annual management and maintenance on-costs to the Local Authority or Housing Association.
(Clearly given these are new build this on-cost will be lower in the early years.)
If the Local Authority or Housing Association wishes to reduce rents further they can elect to make a larger capital investment and buy a larger share.
The table below shows the Capital Investment per property and break even weekly rent based on a 50% share purchase and includes the same £2,400 additional annual management and maintenance on-costs to the Local Authority or Housing Association.