Secure finance

​

Financing land acquisition and property development is a key challenge, and often the reason that collaborative housing projects fail. Groups of households are competing with developers for land and subject to the same tough lending criteria, but lack the experience and balance sheets of large developers. Financiers will typically see this as adding risk.

 

How it typically works

​

There are various models, however this is the most typical scenario: Households take out a development loan to cover land acquisition and development. Financial institutions in Australia only want to deal with a single entity, so the group of households form a company that holds the land in trust during the development process and gives power of attorney to the development manager. Once built, each unit is given a separate title and households apply for individual mortgages to pay out the development loan.

​

Equity contributions

​

Financial institutions only fund a proportion of development costs. Collaborative housing residents must typically contribute between 30-40% of total development costs at the land acquisition stage. This may suit asset rich older households but can be a barrier for many other groups, whose best option may be to seek help from equity investors or consider a model like Nightingale Housing where individual households do not get involved in development financing and instead pre-purchase apartments with a 10% deposit.

​

Loan security

​

Financial institutions will require collateral for a development loan. This can be a significant hurdle for groups without a substantial asset base and so a guarantor may be required. For projects with an affordable or social housing component security may be provided by government or an asset-rich institution – some community housing providers would fall into this category. For other projects, it might be private investors.

​

Managing other financial hurdles

​

Financiers require projects to demonstrate they could achieve a profit if they were sold on the open market. The threshold varies but is typically around 20%. While this may align with the project goals – quality housing delivered to households at less than its market value – it can present a hurdle if this threshold can’t be reached or if financiers are inflexible about the way they view profit. Some projects have dealt with this by splitting a project into market and affordable collaborative components so that the average return meets financing requirements. Financiers will also require the housing to demonstrate broad market acceptance as part of the lending criteria, which could potentially be a factor in restricting design innovation.

​

Impact investment
 

Projects with a measurable social impact may want to explore impact investment as part of the financing strategy. Impact investing is a growing field of investment that targets organisations and projects that deliver positive social and environmental impact alongside financial return. Impact investment can really help in cases where conventional finance is hard to obtain, or to reduce the equity contribution required of households. It is also offered at a lower rate than conventional finance of the same tier. Impact investors can also bring in other finance partners to a project (syndicate lending).

​

Will my project fit the criteria for impact investment?

​

Impact investors will want to see a professional proposal prepared by a development manager that contains detailed information on project feasibility, costs and cashflows. Applicants will need to have realistic expectations around the equity they’ll need to contribute to the project - for impact lenders, the rule of thumb is at least 20%.

​

To attract impact investors, the project will generally need to be pushing the envelope on social and/or environmental criteria and it will need to show broad public benefit. Some impact investors have subjective criteria for impact, others are more defined. Find out more about impact investing here.

​

Savings via the building group (baugruppe) model

​

In a true baugruppe model, households do not pay sales tax and GST on the final cost of their homes, only on land purchase. This is because the only ‘sale’ occurs at land purchase. The corresponding ATO tax ruling is here. Baugruppe WGV will work this way. Nightingale Housing is developing a new model that is closer to a traditional baugruppe and promises to deliver greater value – homes at around 25-30% less than market value. Instead of making a 10% deposit to pre-purchase a unit, households commit the same amount as equity and form a company to purchase the land and hold it in trust. The finance capital is similar to the previous model, but a legal structure has been worked out that means there is no ‘sale’, so there is no GST or stamp duty on the improved entire value.

​

​

Shared equity models

​

Shared equity financial models allow households to have a stake in their home without fully owning it. They help households with lower or variable incomes to enter the housing market. Some collaborative housing projects are exploring this as part of their goal for a diverse community that can welcome households on lower incomes. Typically, an equity partner co-invests, using a financial model that will allow the homeowner to eventually buy out the equity partner’s share. The equity partner could be a private investor, not for profit organisation or a government housing authority. See here to read about shared equity schemes in Australia. Note that collaborative housing may not fit the criteria for all schemes.

​

What about rental housing?

​

Collaborative rental housing could be an attractive proposition for impact investors, who might fund and manage it in return for a guaranteed rental income stream. Creators of the Nightingale Sydney project are considering a model whereby long-term rental housing is owned and operated by an institutional investor, such as a superannuation fund.