James Duncan writes for 24 Housing - The challenges for local authority and housing association joint ventures
Mon 20 May 2013
This article first appeared in 24 Housing in April 2013.
There is increasing interest by local authorities in joining with housing associations and developers in joint ventures to develop new private rental sector housing and social housing throughout a geographic area of influence.
Since changes were made in the Localism Act 2011 it is now easier for local authorities to invest in joint ventures with housing associations, developers, house builders and even private investors. The challenge is to develop a tax efficient model which does not rely on a REIT structure to deliver new housing in a limited liability, off-balance sheet structure while maintaining the tax exempt status of housing associations and local authorities for each development scheme.
Unfortunately, the Localism Act 2011 section 4(2) provides that if a local authority undertakes a commercial activity in exercise of its general power it must only do so through a limited company. This requirement can restrict the types of vehicles that other tax exempt organisations (such as housing associations or foreign investors) may wish to utilise when structuring housing development joint ventures.
This means that local authorities, it would seem, are unable to directly invest in a tax transparent structure, such as the basic one outlined in the diagram. Any economic interest of a local authority would need to be held through a company, incurring corporation tax on any profit that may be made by the relevant scheme.
Whether this is an oversight in the Localism Act itself or is deliberate policy is unclear, but, ostensibly, it does put a local authority in an unequal position relative to other tax exempt organisations which are likely to participate in housing joint ventures. Whether a local authority association (such as an association of more than one local authority or between a county and a district local authority) is able to invest on a tax transparent basis remains to be seen.
The other significant structuring challenge for both housing associations and local authorities is to ensure that any joint venture and development schemes remain off-balance sheet for the purpose of housing associations/developers/builders. Also, where a local authority is involved the relevant joint venture/scheme should not be classified as a local authority controlled or influenced organisation.
A structure, such as that outlined in this diagram, may address these control and influence issues, but it does then raise whether the structure is subject to regulation pursuant to the Financial Services & Markets Act 2000 (FSMA). Ideally the economic participants in such a structure may be exempt from FSMA regulation or can otherwise rely upon another exemption, but in circumstances where no exemption is available the structure would need to be established and managed by an authorised operator under the FSMA. A number of companies have been recently authorised under the FSMA to undertake this role considering the increasing interest in private rented sector joint ventures between housing associations, local authorities and passive institutional investment.
In summary, a housing joint venture structure between local authorities and housing associations needs to be:
- scalable relative to the size of the individual scheme;
- allow investors to ring-fence liability from one scheme to another;
- remain “off-balance sheet”;
- aggregates schemes to be managed by a single entity to achieve economies of scale;
- tax transparent; and
- exempt from regulation.