Ensuring affordability 'in perpetuity'

Cross-subsidising market sale with affordable homes on larger sites

• A number of community-led housing projects are now going ahead through cross subsidy arrangements with developers. This tends to work mainly in high value urban areas and on larger developments, but there is scope for examining its applicability to some smaller sites in rural communities with high land values
• Cross subsidy from market sale to community-led affordable rent or shared ownership homes may be needed to make some larger schemes work financially, particularly where communities are committed to providing homes that are genuinely affordable by local people
• Even on smaller schemes, 2 or 3 market sale homes might make the difference between a viable and non-viable project, dependent on sales values and the availability and type of other capital funding for the community-led homes. Local authorities will normally want to ensure that any increase in land value associated with an acceptance of some market housing on what would otherwise only be a site for affordable housing is ploughed back into the community-led scheme
• The St Clements development in Tower Hamlets by London Community Land Trust is a good example of how cross subsidy can be achieved – see the case study snapshot in this section

Including an element of self-build

• Including an element of self build in a community-led housing scheme can help to reduce overall development costs and the costs to future occupiers, improve affordability and add value through skills training. In some cases it may also complicate projects, extend timescales and create problems for some funders
• Self-build elements can be extensive or quite limited, depending on the scheme objectives, the abilities/interests of the self builders and the availability of specialist training and support, both on-site and off-site
• The development in Lewisham by RUSS Community Land Trust is a good example of how self-build can be included in major development projects – see the case study snapshot in this section

Securing land or buildings at below market value

• The cost of land can make or break any housing development scheme and community-led projects are no exception; securing land or buildings for less than open market value is often the key to delivering genuine affordability for local communities
• Rural landowners may sell land for housing development, but its value is essentially determined by the ability to secure planning permission. Rural Exception Sites, which are outside normal development boundaries, work because these sites would not obtain planning permission for market housing, but they can provide a significant uplift in value compared with agricultural values Some landowners are prepared to sell small parcels of land for community-led schemes at significantly below market value in order to support the local community, knowing that other sites were unlikely to come forward. Some rural estates are also attracted to Community Land Trusts because they can guarantee that any homes built will stay affordable and available to local people in perpetuity
• Local authorities are able to dispose of land or buildings for less than best consideration, without the need for Government consent, but only where the disposal is likely to contribute to the promotion or improvement of economic, social or environmental well-being and the undervalue does not exceed £2m
• Some community-led housing schemes have benefited from this general consent; local authorities have transferred empty homes and parcels of land to groups for £1 where the above criteria have been met
• This complex area is covered in more detail in Section 5H of the Toolkit, which also includes a case study snapshot of Granby Community Land Trust in Liverpool

Discounted Market Value

• Community-led schemes that involve homes for sale can use a covenant in the lease or freehold to limit resale prices after the initial sale. This enables a buyer to purchase a home outright, but at a percentage of the market value – often around 30-35%. Schemes like this are often financed, in part, by including a self-build element
• The buyer typically enters into a covenant with the provider that enables them to sell the property in the future, but only at the same percentage of the market value at the time. The mechanism allows the owners to profit from inflation in the value of the properties, but keeps the properties permanently affordable for future generations
• A pre-emption agreement can provide the community-led housing organisation with first refusal to re-acquire or nominate a purchaser when one of the homes is sold, keeping control of the property in the hands of the community. This same mechanism can help protect the organisation from future repossession of the homes by mortgage lenders, for example, by giving it time to nominate a new, local purchaser
• The covenant can also be used to restrict the initial and resale prices to a formula, based on local median household incomes, a mechanism that has been successfully delivered by several CLH schemes to date

Mutual Home Ownership

• A Mutual Home Ownership scheme is a new way of owning a stake in the housing market. It is designed to bring the bottom rung of the property ladder back within reach of households on modest incomes in areas where they are priced out of the housing market
• The homes produced remain permanently affordable for future generations. Members of a Mutual Home Ownership Society are residents who live in the homes it provides. The society operates as a co-operative; it obtains  mortgage finance for all the homes it builds, rather than individuals having to arrange their own finance, and so borrowing is cheaper. Individual members then lease their homes from the Society
• LILAC in Leeds was the first Mutual Home Ownership scheme to be successfully completed in an urban area, in 2013 (see the snapshot in this Toolkit section). Trelay Cohousing Community in Cornwall is an example of the same approach in a rural context.

Developing on Rural Exception Sites 

• Rural Exception Sites are small sites for affordable housing schemes in rural locations where market housing would not normally be acceptable because of planning policy Homes can be developed on these sites only if there is a proven unmet local need for affordable housing. In these cases a Section 106 agreement (see below) is put in place to ensure that the homes will remain affordable ‘in perpetuity’
• This agreement also ensures the homes will be for people in housing need and prioritised for those with a strong local connection to rural community.
• Land values for Rural Exception Sites sites are usually much lower than commercial values on sites where open market homes are provided. This helps to keep overall costs down and deliver affordability for local people
• Small numbers of Starter Homes for sale, with “appropriate local connection tests” can now be accepted on rural exception sites, where this would support affordable homes. This has been controversial because the homes can be sold on the open market within 15 years, which goes against the principle of homes being kept affordable ‘in perpetuity’ on rural exception sites. However, in some cases it can provide sufficient cross-subsidy with affordable homes to make an overall scheme financially viable

Commuted Sums and Section 106 Agreements

• Local Authority Local Plans and policies usually require market housing developments to include an element of affordable homes, either as part of the development itself or off-site
• Where affordable homes cannot be provided on site, developers are usually required to pay the Council money to enable the equivalent affordable housing to be built on another site. This payment is called a commuted sum and it is agreed and secured via a planning obligation under Section 106 of the Town and Country Planning Act 1990, commonly known as a Section 106 Agreement. This is a legal mechanism which make a development proposal acceptable in planning terms that would otherwise not be acceptable
• Section 106 Agreements provide a contract between a local authority and a developer. They can be used to ensure that the affordable homes provided are for local people and will be available on this basis ‘in perpetuity’

Shared ownership in Designated Protection Areas

• Shared ownership schemes allow purchasers to buy an initial share in a home of at least 25% and pay a discounted rent on the remaining sum.  A lease is granted on initial purchase and leaseholders can subsequently buy further equity shares (a process known as ‘staircasing’) until the property is owned outright
• Some community-led housing schemes, mainly in rural areas, include shared ownership homes where ‘staircasing’ is restricted
• Within ‘Designated Protection Areas’ landlords are either required to cap the equity ownership of homes at 80% or require them to be sold back to them once full ownership is reached, through the insertion of a clause in the lease. This provides a way of retaining these homes in shared ownership ‘in perpetuity’