Triodospaper

This paper was submitted to the U.K. Network Cohousing Website by Triodos Bank on 28 February 2000 For further information please contact Sue Cooper at Triodos Bank on 0117980 9718

A half day seminar at Triodos Bank, 9 July 1999

Introduction

As one of Europe's leading ethical banks, Triodos Bank takes an active interest in the social and environmental benefits that co-housing initiatives can deliver. We have worked with two co-housing schemes - Frankleigh House and The Community Project.

The aim of the seminar was to give groups who were considering a co-housing development an understanding of Triodos Bank's approach and experiences, and to discuss some of the issues that arise when considering bank finance for such projects.

The first half of the session outlined a financial model for the development of co-housing schemes while the second half looked in detail at our approach to particular issues.

The Financial Model

Amount of loan

The amount of loan finance required will vary from scheme to scheme depending on the total costs and the funds available from members. There are likely to be two main types of project, and the amount Triodos will lend for each type will vary:

  1. A project where the group wishes to purchase land and then build on the site: in this situation, Triodos will consider lending 50% of the value of the land and 2/3 of the building costs under the construction contract. This is subject to the total sum borrowed not exceeding 60-70% of the anticipated value of the property on completion
  2. A project where the group wishes to purchase an existing building, and convert it to provide self contained units of accommodation and communal areas: in this situation Triodos will consider lending between 50% and 70% of the cost of the building. This proportion depends on our view of how saleable the property would be on the open market. 

In addition we would consider lending a percentage of the amount needed to convert the property to self contained units. This amount would be based on the estimated additional value of the property once the converted building is completed.

In both of the examples above, Triodos Bank will lend up to a maximum amount based on a professional valuation of the property at the time of purchase, and an estimated added value which any work undertaken to improve the property may provide.

Term

Loans are generally considered for a period of up to 20 years.

Security

Triodos Bank lends only a fully secured basis and security needs to be available to cover the full amount of any loan.

For this type of project Triodos Bank's main security will be the land and buildings. We will also ask for guarantees from the members of the co-housing scheme. This area is discussed in more detail below.

Drawdown

Drawdown of the loan will take place only after all the funds to be invested by members have been spent on the project.

For each type of project, the loan for the purchase of the land or building is drawn on completion of the purchase.

For the subsequent development parts of a project, the loan is drawn in stages. Each payment is made following our receipt of agreed documentation which is likely to include contractor's invoices for works completed and architect's certificates stating that the works have been carried out to an agreed standard and that the financial budget and works timetable are on target.

Repayment

Payment of interest on the loan begins one month after the loan is drawn, and payments are then made on a monthly basis as the project progresses.

Repayment of the capital element of the loan is made from the sale of the completed units to members of the co-housing group.

Additional Costs

The Bank will charge an arrangement fee for any loans agreed. This is generally 1% of the loan agreed.

In addition the project will have to meet any legal costs incurred in completing Triodos Bank's security, and the cost of a professional valuation of the site or building.

Points to Consider

Appropriate legal structure

Triodos Bank does not provide advice to projects, so a solicitor should be consulted about the choice of a particular legal structure. As there may be tax implications for different structures, an accountant's advice may also prove useful.

It is important to Triodos that a structure appropriate to the group's plans is in place. This is likely to be a corporate structure of some kind e.g. a company limited by guarantee or an Industrial and Provident Society. It is not essential that a group has formally incorporated at the point they approach us for a loan but there should be clear plans to do so.

If we agree to lend, a group must be incorporated before an offer to lend is made, as the loan will be to the corporate entity rather than to members either individually or as a group.

Commitment of the members

A number of groups have struggled with the question of what constitutes commitment on the part of the members and how to show and maintain this. Triodos Bank needs to see that there is a member for each of the living units being planned and that the members will be committed from the start to the completion of the project. In practice this means that we seek guarantees from each group member for a proportion of the money borrowed.

These guarantees constitute a very real personal financial liability for each member of the group. A guarantee is a promise to pay a certain sum to Triodos Bank in the event that the co-housing project defaults on repayment of the loan. In looking at the value of a particular guarantee we usually calculate it as the difference between the finished price of the unit that the member intends to purchase and the funds they have already paid into the project.

The guarantees give us confidence that the members are committed to the project and will not leave it half way through the development without thinking carefully about the financial consequences.

The site

We cannot consider a loan request from a co-housing scheme unless it is in relation to the purchase and development of a particular site.

Groups do experience difficulties in finding and acquiring sites particularly as they may be in competition with commercial developers.

We may in some circumstances consider providing a loan towards the cost of purchasing a site before plans for the development are complete. However, we need to see clear, detailed plans and time scales for the full funding and completion of the project and be absolutely satisfied as to the value of the security offered. In cases where the site is purchased without planning consent, the members must appreciate the very real financial risk they are taking if that consent is not forthcoming.

Building plans

Triodos will need to see that an architect has drawn up the plans for the building works required and that these have been fully costed by a quantity surveyor. A valuation of both the existing property and the finished units will be required from a professional valuer (a qualified Chartered Surveyor - RICS or FRICS).

Financial projections

We need to see detailed financial projections showing all income and costs for the project. This includes a capital budget, including land purchase, legal costs and fees, architect's and surveyor's fees, project management costs, the expected cost of the construction contract and an allowance for interest charges during the development. The capital budget should also show where the money will come from to cover the total cost of the works e.g. members contributions and bank borrowing.

A development cashflow should also be produced showing on a monthly basis all the payments and receipts associated with the development. This should include details of all the cashflows associated with the project including expected monthly payments under the construction contract, the input of members' funds, the release of loan tranches and the expected receipts from the sale of the completed co-housing units.

It is important that the financial projections are clearly presented. The group should consider carefully whether or not they have the skills to do this themselves or will need to bring in specialist help to produce the figures. Whether or not a specialist is used, it is essential that every member fully understands the financial information produced.

Professional advisers

The choice of professional advisers is entirely at the discretion of the project - we will be interested to know who they are, what experience they have had and the basis on which they have been contracted to work for the project.

The building professionals involved in working with a co-housing scheme will probably include an architect, a quantity surveyor and a project manager (in some cases this may be the architect or quantity surveyor).

It is essential that the group choose a project manager who has the skills required to carry forward the project. The project manager will be the contact between the group and the building contractor and typically will also be required to report to us about the progress of the building works and other construction related matters.

Building contract

There must be a formal contract for the building works that are to be carried out. This needs to be in a form acceptable to us, and include a fixed price contract so that the cost of the works is clear from the outset. We may take an assignment over this contract (and the architects' plans) as part of our security.

Completion

Completion will be verified by a certificate of practical completion, and this may be either for all units at once, or in tranches as the work is finished.

Sale of the units, repayment and release of security

The usual structure for a co-housing project is that the company holds the freehold and each member buys the lease on their living unit. That member's individual mortgage will be secured against that lease. Triodos Bank will retain the security over the freehold, making each sale subject to our consent. The security of the freehold and the members' guarantees will remain in place until the loan is fully repaid.

Terms of leases - controlling future sales

The terms of the leases issued by the company to its members will need to be agreed with Triodos. The group may wish to encourage (or restrict) certain behaviours within the lease and also impose covenants to control how a member can sell their unit. The choice of covenants - such as a group veto over new purchasers - could significantly affect the value of the property and its ability to support a mortgage, and should be discussed with us before being agreed.

If the project intends that some units will be let rather than sold, the type of tenure offered will affect the property valuation and therefore the level of any residual loan that the group may wish to borrow beyond completion. Consequently these plans should be discussed with Triodos at the outset where appropriate.