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Income generation: are housing delivery vehicles the solution?

Local authorities are increasingly looking for innovative methods to generate additional sources of income. One method being adopted is the setting up of housing delivery vehicles (HDVs), which either purchase or develop housing for letting on assured tenancies.

A spate of HDVs have been set up across the country over the last few years, as local authorities see them as a useful tool to generate additional income and much needed housing both for rent and sale.

But, there are a number of issues that must be worked through before a HDV can be formed. We set out the five key issues that local authorities will need to consider when setting up a HDV. 

Do you have the necessary powers?

A local authority must first consider whether it has the requisite vires to set up a HDV which will acquire/develop residential property.

Local authorities have the power to establish stand-alone vehicles pursuant to: 

  • the general power of competence. Local authorities have the power under s.1 Localism Act 2011 to do anything that an individual has the power to do subject to certain limitations. 
  • its investment functions. The local authority has the power to invest for any purpose relevant to its functions under any enactment; or for the purposes of the prudent management of its financial affairs (s.12 Local Government Act 2003). 

In relying on its investment powers, the local authority must ensure that the investment would be:

  • consistent with its treasury management strategy; and
  • in accordance with the relevant provisions of the Local Authorities (Capital Finance and Accounting) (England ) Regulations 2003.

Which corporate form should be adopted?

When deciding which corporate form the HDV will adopt you should consider whether the vehicle should be a company limited by shares, company limited by guarantee or a registered society. Consideration will also need to be given to the extent of control by the local authority over the company, including the role of members.

Charitable/registered provider status

Charitable status and/or registered provider status for the HDV should be explored. Achieving such status has clear tax advantages and opens up access to government funding, but this has to be balanced against the increased administrative burden and in particular the limitations on a charity in terms of trading/commercial activity.

Procurement considerations

Local authorities may wish to transfer existing development land to the new vehicle. Any such land transfer may trigger procurement obligations. There are exemptions to the procurement rules applying to land transactions and thought should be given to whether any of these would apply.

A further consideration is whether the new HDV will itself qualify as a contracting authority due to the nature of its relationship with the local authority. It may be possible to apply the Teckal exemption to the delivery of certain services by the local authority to the HDV if this is required (eg in relation to housing management).

State aid risks

The main risks of state aid in respect of a wholly owned company would be the payment of any financial support/working capital provided to the company. It may be possible to argue that any financial support will be on market terms. 

It is likely that a key issue for a HDV will be its source of working capital and any development costs going forward. Due consideration should be given to whether the local authority should on-lend any funds it raises through prudential borrowing to the HDV to cover these funding requirements. The effect of the prudential borrowing on the  local authority's balance sheet would need to be signed off as complying with the Prudential Code by the local authority's s.151 officer. Any loan arrangements would have to be framed so that they do not amount to state aid. 

Staffing the HDV

Given that the HDV will be a separate legal entity it will be able to employ its own workforce and have its own support functions, including HR and Administration, although in the initial start-up phase this may not be attractive.

The local authority may want to ensure that the HDV is a "thin" entity in the initial start-up phase which does not directly employ its own workforce. In this case, the local authority could agree to employ staff and then either second to and/or agree to provide these employees (as required) on a labour only basis to the HDV. The local authority would then also therefore provide any agreed levels of management assistance to the HDV as part of these arrangements. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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