Over the past few months I’ve been approached by a number of people with the same question. “[insert your local authority] are desperate for social housing. We’ve got the site / money / expertise to deliver it, but the authority can’t do it because it would be on their balance sheet. I’ve got a great idea that would get it off their balance sheet”. And they then proceed to outline an arrangement that, however they dress it up with special purpose vehicles, Trusts, call and put options, etc, is a long term lease (because the funders don’t want to take a risk) whereby the authority has an option to buy the property at the end of the lease (because that’s what the authority wants).
The lease is at a cheap rate (because the funders are taking virtually no risk), so it’s good value for money for the authority. I then feel like the guy that shot Bambi’s mother when I tell them “Sorry, it’s on-balance sheet”. Without wanting to send people to sleep with local authority and national government accounting rules, just think “off-balance sheet = good, on-balance sheet = bad.”
There are two problems here. Despite what many of you will be thinking, funders (be they banks, pension funds or any others) don’t like taking risks. And that means they want a lease that is as long as possible. And the longer the lease, the more likely it is to be on-balance sheet (bad, remember?). The second problem is that the local authority wants some certainty that at the end of the lease the property will be theirs. And unfortunately the accounting standard that they have to follow says that that requirement will put it on their balance sheet.
So we’ve got a situation that there is money, there are plenty of developers willing to get housing built, there are local authorities desperate for social housing sitting on shedloads of spare land, and because of a relative technicality they can’t be brought together. A bit like the accountancy tail wagging the social housing need dog. Sometimes being an accountant doesn’t feel rewarding. But, in my defence, I didn’t make up the rules. So, what we need is EITHER the local authority accepting the project onto its balance sheet, OR a shorter lease with no option for the property to go back to the local authority at the end.
Of course, what some local authorities say is that if these projects have to go on balance sheet they have to compete with other urgent projects for capital funding. Which sort of begs the question of why they shouldn’t compete with those projects. If the need is that desperate, why not? I suspect the answer lies in the many years that social housing projects could be treated as off-balance sheet – there is an expectation out there that someone is going to work it out. But if the answer were simple (bearing in mind what local authorities and funders seem to be demanding), trust me, someone would be doing it all over the country by now.
So let’s revisit those demands.
Local authorities, if the need is that desperate, why have the hang up about what happens to the property in the future? Are you certain that you’ll want to own those properties?
And funders, why do you need a 40 year lease? If you’ve got a 20 year lease with a local authority for housing, do you really think there’s a massive risk that the housing won’t be needed after that?
Somebody please break the mould.
Frustrated of Leeds.
Paul Smith is an Associate Director in the BDO Public Sector Infrastructure team