Financial and legal situation

In the beginning….

The Open House Project started with no great experience in financial or legal expertise. We researched possible ways to make the scheme work through free consultations with financial advisors, bank managers, accountants and friends with related financial experience. We have been able to get our ideas and costings seen by a variety of people, one of whom works for a property development company in London. Mostly we have had positive responses and plenty of new lines of enquiry have emerged.

We could have paid for professional advice from the outset but the instinctive need to avoid spending and the challenge of seeing if we could do it ourselves provided the motivation.

We identified buildings at the Barnes Hall Farm site as a real possibility for our relatively small scheme (the site already had existing planning permission, however not ideal for co-housing) and worked out what we could afford to offer. We estimated how much it might cost in total to develop seven units and a community room.

Forming the company, buying the site

Meeting with solicitors with co-housing experience, we talked through our plans and strategy and listened to their advice as to what we needed to do in legal terms. The Open House Project Ltd was eventually formed providing us with the platform to purchase the site as a company. To secure buildings at Barnes Hall Farm the solicitors suggested we negotiate a call option – a device which was new to us. This would give us a six month period during which we could get planning permission and carry out surveys to check the property had no hidden pitfalls. They also advised us to employ a negotiator. We would not then be as involved and could be more objective in our decisions. He would also calculate the value of the site relative to our project and in doing so the value of the completed project in property terms. We were very pleased when our negotiators valuation was greater than ours.

Our call option was agreed in November and recently we have been organising accurate estimates for utilities, making final surveys and commissioning a quantity survey.

The next steps

The Open House Project company will develop the whole site including all infrastructure, communal facilities and the seven dwellings. The dwellings will be sold leasehold to members of the Open House Project. The finance for the acquisition of the site is being raised from the existing members. We have divided the costs by seven so that each household will contribute equally. With four families in our group so far, the company will need to raise a further three sevenths of the costs from new members. Currently a personal loan to cover the three sevenths remaining is being arranged from one of the members. The loan will be repaid as new members join. New members will be admitted to the project by a payment of an equal seventh share of the site acquisition and on signing a pre purchase agreement to buy a dwelling unit on its completion. The purchase price of each dwelling unit will include a share of the communal facilities and reflect the size of the dwelling. We have yet to formulate exactly how the total cost of the development and the individual units can be fairly calculated.

There is no doubt that knowing the rules of the road is the key to making good decisions but many legal and financial  professionals are unfamiliar with the co housing model. We have learned a lot but mostly that our strategy, to try to avoid borrowing money by traditional routes, will allow us to have full control over our development.

Extra costs have accrued due mostly to complications in the property transfer but we are still within our budget for the acquisition of a property.

Time now to revise our estimates and plan the build. We are hoping to complete the deal within the call option period and are currently waiting for a response to our planning application. The lease conditions have to be agreed. These will include buying, selling and a final distribution of development costs.

With three dwellings remaining we hope to recruit new members to consolidate our financial position and add strength to our group. We have many more decisions to make but with a strong group and a solid decision making process we have made a good start.

October 2013

Having crossed the bridges of purchasing the site and getting our plans approved we are getting to grips with finalising a financial strategy which will see us through the completion of the project. The conditions to our planning approval have a large bearing on how we progress. The good news is that we have permission to complete the build in four phases which will allow us to raise the capital for each phase. The bad news is that an extra cost has emerged through the need to investigate the archaeology that potentially is in the site.

We have enough capital to complete the first phase of building and our financial strategy thereafter is based on using the payments for completed units to subsidise the following phase and so on. This strategy seemed logical but discussing it with our accountants and their mortgage specialist we find that a phased co-housing development like ours does not fit in with either Commercial property development or self-build financial models when it comes to arranging mortgages. We will need to find a mortgage lender who will be prepared to accommodate the phased development. The search is on…..

January 2018

Four years have slipped by very quickly. Milestones passed have been the granting of VAT status, exemption from the S106 obligation payment, installation of new mains electric supply, installation of sewerage and drainage for most of the site, the development of the growing area with Poly tunnel, raised beds and orchard plus the completion of the Byre the first of seven units.

One conversion in 5 years sounds like very slow progress but we are now close to the completion of the long Barn which is about three times as big as the Byre and certainly three times as complex! We have also created and fitted a plant room which houses the equipment that drives our ground source district heating system and water supply – a cornerstone to the whole project.

On the legal front the formulation of a Lease has been the major issue. It has taken a long time to negotiate and document through our solicitors but is aimed to meet the needs of the community and the individual. Legal documents are difficult to understand so we have tried to put in place the essential mechanisms of ownership, buying and selling and sharing costs.

The sort of policy decisions about the community such as pets and smoking have been left for the members to agree according to the households in occupation. The lease for the Byre has been bought by Greg and Sheila and thus the company has made its first property sale. In doing so we are set up to repeat the legal process for subsequent sales with only the conveyancing fees for the transaction. (VAT registration means that the company has to apply VAT to the sale, however for house purchases the current VAT rate is 0%.)

Financing our development has been a constant quest. We have three more units spoken for with current members but that leaves three potential properties to convert with no immediate buyers. There is a limit to how much can be raised from our current membership so we have looked at alternative funding for the future. We would qualify for the Governments Home Building Fund. They would require us to complete all five remaining units in one go- not our preferred strategy while we are short of buyers. Also the hoops that needed to be jumped through looked very restrictive. Finally the interest rates were unlikely to be much better than could be arranged with a commercial loan. We are still researching but it requires a lot of time and energy which at the time of writing is better spent on building. Thus our strategy is to build one unit at a time and to continue to get loans from members. This has required Leo and Kate, who will move into the Long Barn, to sell their home on the other side of Sheffield and move into a static caravan onsite. They have set a precedent which may help other members to subsidise the construction in the future by doing the same…assuming they survive the winter!

Cash flow is affected greatly by VAT. All our cost estimates exclude VAT but we still have to pay it on materials and services before reclamation every three months. Recently we were subject to a VAT inspection. Companies for these inspections are supposedly chosen at random but maybe the fact that we have claimed back VAT regularly but only paid a small amount from the sale of stone stripped from a barn roof, our enterprise might have looked suspicious. The inspector who visited was very helpful but had not come across the Co-Housing company structure that underpins our whole project. Explaining everything was a good test of our company articles and our accounting system. The good news is that apart from a few minor details everything was in order. Our accounting process was found to be accurate. We have had great support from our accountant in managing our affairs but there is always a massive amount of book work required. Nevertheless it shows that a group of ordinary folk with good advice from accountants can cut the mustard on a project of this scale.

Looking back we did find a source of mortgages – Ecology Building Society. Looking forward 2018 sees us a bit more savvy than when we started and more aware of the build and development pitfalls. We can see these magnificent buildings coming back to life. Renovation reveals the true craftsmanship and beauty of the stonework and we strive to make high quality and sustainable living spaces within.

December 2021

Two units and a communal house have been completed in the last three
years. To fund the work we negotiated a loan from Ecology Building
Society. We found ourselves very much in tune with their environmental
stance and their support for community ventures. Application for the loan
was complex and called for a thorough check on our whole operation,
the company structure and status, financial standing and accounting,
planning and costing of the build, insurance, lease, valuation. We also
needed input from our solicitors who already had a good relationship
with Ecology so progress was steady throughout.

The build was interrupted by covid19 but our build costs were not
affected. However the loan repayment term of two years had to be
extended. We also needed to top up the loan sum to maintain cash flow
at the point where the two new units were completed and ready for
occupation but the lease sales could not be concluded until the
purchasers mortgage applications had been processed. Again our
lenders were very understanding and could meet our needs.

The loan agreement required a legal charge to be placed on our
property assets. With the loan paid off the charge has now been lifted
and we are in full possession of our property.

With three units left to develop we are planning how to move things
forward. We are immensely grateful to the Ecology Building Society for
their support and cannot speak too highly of their personnel. We have
been guided through the whole loan process with understanding and
empathy. The financial transactions have been managed impeccably.