Affordable Homes Guarantee Scheme 2020

Question 1

Scheme rules

Accepted Answer

1. Eligibility

1.1. AHGS20 loans will support proposals that will deliver new-build affordable homes, including those in existing affordable housing grant programmes (subject to not having started on site at the point of application). Additionally, AHGS20 loans can support works for the decarbonisation of existing homes and improvements to meet, or exceed, housing decency requirements. In all cases, borrowers must undertake to spend an amount equal to at least 50% of each loan on the development of Approved Pipeline Schemes (net of grant) (the “APS Allocated Amount”), with an amount equal to any remaining balance being spent on Existing Asset Investments (the “EAI Allocated Amount”).

1.2. Prospective borrowers may also, where applicable, apply for assistance for other affordable homes products (such as the Affordable Homes Programme 2021-2026) and for other programmes that support decarbonisation or housing decency works. Eligibility for the loans will be assessed on the merits of each application irrespective of whether any parallel grant application has been, or is, successful. Where grant or other subsidy is provided to support delivery of any element of the proposal, then the loans will only be available for up to the net debt required to finance that element, subject to subsidy control requirements.

1.3. Affordable homes products that will be eligible for both loan security and selected Approved Pipeline Schemes are for Affordable Rent, affordable home ownership or Social Rent in line with the eligibility requirements under the Affordable Homes Programme 2021-2026, or any successor scheme, and must be used as such (subject to future staircasing) for the period of the loan.

1.4. Minimum size of proposal: total debt requirement to be not less than £5 million.

1.5. Loans will be available either in full or where appropriate in a limited number of drawdowns within a prescribed availability period. Borrowers must undertake to have commenced construction of each Approved Pipeline Scheme in respect of which an advance has been made within 36 months of the relevant drawdown date. In relation to Existing Asset Investments (if applicable), the relevant spending must be incurred within 72 months of the start of the borrower’s financial year commencing immediately before the point of application.

1.6. Homes delivered or improved must be in England only.

1.7. Borrowers will need to be Private Registered Providers as defined in Section 80(3) of the Housing and Regeneration Act 2008.

2. Security and recourse

2.1. The lender will, as a minimum, have the benefit of a first ranking legal mortgage over existing homes for Affordable Rent, affordable home ownership or Social Rent.

2.2. The property security value must be a minimum of 105% on an EUV-SH (Existing Use Value Social Housing) basis and a minimum of 115% on an MV-STT (Market Value Subject to Tenancy) basis calculated on the APS Allocated Amount. This must be evidenced by a professional valuation addressed for the benefit of the lender and DLUHC. Where loans also include an EAI Allocated Amount, property security may be provided on the same basis on the entire outstanding balance. Alternatively, borrowers may elect not to provide property security to cover the EAI Allocated Amount and pay an additional, non-refundable 0.10% per annum asset cover fee on that part of the loan balance (or, if lower, the part of the outstanding loan balance not covered by the property security value).

2.3. There will be annual desktop valuations and five-yearly full valuations, or more frequently subject to market conditions.

2.4. Security release will be permitted when asset cover exceeds 115% on an EUV-SH basis or 125% on an MV-STT basis as evidenced by a full professional valuation. For these purposes asset cover will be measured against the entire outstanding balance of the loan.

2.5. The lender will have full recourse to the borrower for any shortfall resulting from recovery following an enforcement on security.

3. Fees and costs

3.1. Approved borrowers will be required to meet the arrangement costs for facilitating the loan; this may be paid from loan proceeds.

3.2. Approved borrowers will be required to pay an ongoing management fee to cover the administration costs of managing and monitoring the facility. All borrowers will be required to pay the same ongoing percentage management fee.

3.3. Approved Borrowers may be required to pay additional fees in certain circumstances.

4. Covenants

4.1. A minimum borrower corporate interest cover ratio of 1.0x (or such other level required by the lender) at all times will be maintained.

4.2. Other covenants may be required depending on the characteristics of individual borrowings.

4.3. Monitoring reports will have to be provided by approved borrowers.

5. Application

5.1. Borrowers will be required to complete a standard application which will detail the information required to support the application. This will be available from the lender at ahgs@ara-venn.com.

5.2. All applications will be subject to full due diligence and approval prior to any funding under the scheme being provided. Any such funding will be at the complete discretion of DLUHC. No offer or commitment to provide a funding under AHGS20 is implied by the publication of these scheme rules. DLUHC reserves the right to amend the scheme rules at any time.

Question 2

Frequently asked questions

Accepted Answer

Eligibility

Question 1. What do you mean by ‘additional new build affordable homes’?

‘Additional new build affordable homes’ are homes in Approved Pipeline Schemes that have not started on site at the point of application. New build homes eligible for funding under the Affordable Homes Programme 2021-2026, equivalent Greater London Authority (GLA) programme, or any other government-funded programme will be eligible subject to not having started on site at the point of application.

‘Start on site’ has the same meaning as in the Capital Funding Guide and relevant GLA guidance (including for non-grant funded schemes (including S106) (disregarding references to payments or claims of grant)).

‘Point of application’ means a satisfactorily completed application as assessed by the lender. Applications to Homes England or, in London, the GLA, for any grant or other subsidy may be made in parallel with an application under this scheme, and should be submitted in line with the requirements of the specific scheme in question.

Affordable homes on Section 106 funded sites funded both with and without grant are also eligible for consideration, as are affordable homes that receive no grant or any other government funding and are not Section 106 homes.

Question 2. What do you mean by ‘decarbonisation and housing decency works’?

AHGS20 will be available to finance works for the decarbonisation and quality improvement of existing affordable housing of Private Registered Providers, alongside new development. This element of AHGS20 financing should be used for decarbonisation works – for example by improving the EPC and/or SAP rating of homes – and/or ensuring existing homes meet the Decent Homes Standard (or future equivalent measures of energy and environmental performance or housing decency) including building and fire safety requirements.

As part of the application process borrowers will be required to submit business plans setting out how they are proposing to meet net zero targets and to improve the quality of their existing homes so as to meet or exceed legal and regulatory decency standards, and how the loan will support these activities. They will also be required to report on progress towards achieving business plan targets, and on the expenditure incurred in doing so. This expenditure, over the [72] months period from the start of the borrower’s financial year commencing immediately before the point of application, must not be any less than the amount allocated under the loan for these purposes.

The eligibility requirements for this tenure and other tenures under this funding programme are set out in the Capital Funding Guide provided as part of the Affordable Homes Programme 2021-2026.

Question 4. What is the definition of ‘Approved Pipeline Scheme’?

An ‘Approved Pipeline Scheme’ means a scheme in the borrower’s development pipeline (as evidenced by the borrower’s most recent board-approved business plan) that will, on completion, deliver new build affordable homes that satisfy the scheme’s eligibility requirements and has been approved by the lender. Further information is available from the lender.

Question 5. Is Supported Housing eligible as an Approved Pipeline Scheme?

Yes.

Question 6. Is the conversion of an existing commercial building eligible as an Approved Pipeline Scheme?

Yes, affordable housing units delivered as part of a conversion project from commercial use will be eligible as an Approved Pipeline Scheme subject to meeting all eligibility criteria.

Question 7. Is the acquisition of new build stock repurposed from private tenures eligible as an Approved Pipeline Scheme?

Yes, affordable housing units delivered as part of such an acquisition will be eligible as an Approved Pipeline Scheme (for example, “off the shelf” acquisitions) subject to meeting all eligibility criteria.

Question 8. Is the demolition and replacement of existing affordable housing with new build affordable housing eligible as an Approved Pipeline Scheme?

Yes, new affordable housing units delivered as part of a regeneration project will be eligible as an Approved Pipeline Scheme however the amount of any costs associated with demolition and/or remediation of the site previously used for affordable housing will not count towards ‘development costs’ for these purposes (see below).

Question 9. What costs count towards ‘development costs’ for the purposes of delivering Approved Pipeline Schemes?

Development costs mean all capital costs and expenses properly and reasonably incurred by the borrower in developing Approved Pipeline Schemes (including, but not limited to land, housing-related infrastructure costs, construction costs, professional fees, sales and marketing costs, legal costs, any non-recoverable VAT and interest and administration charges incurred in connection with any senior finance). Where existing affordable housing is being demolished, the demolition and remediation costs for the site (or the relevant part of it) shall be excluded from ‘development costs’.

Question 10. Will proposals that incorporate an element of Modern Methods of Construction (MMC) be eligible for funding under the scheme?

The government is supportive of MMC: proposals incorporating MMC would be eligible for funding as long as all other requirements are met.

Question 11. Are deferred drawdowns permitted under the scheme?

Yes. Depending on the circumstances of each loan, a small number of loan drawings may be supported, subject to a minimum size per utilisation. Options may be discussed with the lender.

Question 12. Will borrowers be required to provide the full amount of property security at the point of drawdown, or will they be permitted to draw loan proceeds into a sinking fund and replace them with eligible housing assets over time?

Yes, this will be permitted subject to compliance with the lender’s sinking fund requirements and replacement with full property security in respect of the relevant part of the loan (see Scheme Rule 2.2) within 24 months of the relevant advance.

Question 13. What is the maximum loan size the scheme will entertain?

The size of loans offered must be discussed with the lender. However, borrowers should be aware that in approving any loan DLUHC must consider its overall exposure to the relevant borrower and the counterparty limits set by DLUHC in relation to specific Registered Providers.

Question 14. What will be the loan term be?

Up to a maximum term of 30 years.

Security and recourse

Question 15. What tenures will be allowable as security?

Social Rent, Affordable Rent and affordable home ownership will be allowable as security.

Question 16. What level of shared ownership will be allowable as security?

Shared ownership will be allowable, subject to ensuring a robust mechanism is in place to monitor staircasing volumes and receipts. It will be for the lender to discuss with individual applicants the level of shared ownership that is appropriate as security for each borrowing.

Question 17. Is Supported Housing eligible as security?

Supported housing (where classified as such for the purposes of the Regulator) is not eligible as security.

Question 18. How will it be judged that construction has commenced in respect of Approved Pipeline Schemes?

Schemes will need to meet the definition of start on site used by Homes England and the GLA and set out in the Capital Funding Guide and relevant GLA guidance. This definition will be used for schemes which only require funding under the AHGS20 and for schemes which also require grant funding.

Question 19. Will substitution of security assets be permitted?

Yes, subject to the arrangements set out in the loan agreement.

Question 20. What arrangements will there be for a liquidity reserve?

Each borrower will be required to place up to 12 months interest cover, and a minimum of 6 months interest cover, in a liquidity reserve fund held by the lender prior to or on drawdown of that individual loan. Should there be a payment shortfall by that borrower these funds will be utilised by the lender to make up the shortfall; any unused funds will be returned to the borrower once the loan is fully repaid.

Question 21. What will be the arrangements if I wish to repay a loan early?

Any full or partial optional repayment on a loan will be subject to ‘Spens’, the typical make-whole payment for early repayment on long dated fixed rate debt. The lender can provide the details of this calculation.

Question 22. Do I have to ringfence the proceeds of a loan drawdown?

No, proceeds from a loan drawdown can be used for general corporate purposes but as set out in Scheme Rule 1.1 a borrower must undertake to spend an amount equal to at least 50% of each loan on the development of Approved Pipeline Schemes (net of grant), with an amount equal to any remaining balance being spent on Existing Asset Investments. The allocation between these delivery undertakings shall be agreed with the lender as part of the application process.

Question 23. What happens if I want to apply for a loan, and wish to charge an affordable rent without applying for additional grant? How do I comply with the Regulator’s tenancy standards on rent?

To charge an affordable rent, and comply with the Regulator’s requirements, the Registered Provider will need to have a delivery contract for new supply with Homes England and/or the GLA. If a provider already has a contract to deliver homes with Homes England or the GLA any additional homes delivered as a result of funding under AHGS20 will be added as additional nil grant homes to the existing contract and monitored separately for the purposes of National Statistics reporting.

If the provider (i) does not have a contract, or (ii) only has an existing short form agreement, then in the case of (i) a new short form agreement will be needed and in the case of (ii) the homes which will be funded under AHGS20 will be added as additional to the existing short form agreement and monitored separately.

Fees and costs

Question 24. How will the cost of borrowing be determined?

The cost of borrowing will be a combination of Gilts, a market-determined liquidity premium, the lender’s arrangement fee and management services fee. If the loan includes an EAI Allocated Amount and the borrower elects not to provide property security to cover this amount in accordance with Scheme Rule 2.2, the additional non-refundable 0.10% per annum asset cover fee will be applied on that part of the loan balance (or, if lower, the part of the outstanding loan balance not covered by the property security value). In exceptional circumstances the guarantor may charge the lender other fees which will be passed on to borrowers.

Question 25. Are there any additional fees that may be payable by borrowers?

There are a number of fees that may be charged in certain specific circumstances. For example, borrowers may be charged a special servicing fee should a loan become distressed, and the lender may recover out-of-pocket expenses from borrowers (including but not limited to legal fees).

Covenants

Question 26. How will covenant arrangements be determined for individual borrowings?

Covenants will be discussed and agreed with the lender on a case-by-case basis.

Question 27. What monitoring reports will be required?

These will include data to enable additionality to be tracked for the purposes of reporting to the Office for National Statistics and for reporting to DLUHC. For loans with an allocation towards Existing Asset Investments, borrowers will be required to report on their expenditure on such works and their progress towards meeting government targets in these areas. The loan agreement will set out reporting requirements in full.

Application

Question 28. How long is the application window?

The scheme will be open for applications until midnight on 30 April 2026.

Having considered the scheme parameters set out above, should you think the scheme may be suitable for your organisation’s borrowing requirements, please do not hesitate to contact the lender at ahgs@ara-venn.com. The team would be happy to hear from you.

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