Developing for a Community Housing Provider – How does it work?

I am personally close to completing a property development with a Community Housing Provider (CHP), I have arranged development finance on a fair few and it is something we are often asked about so I thought I had better write a blog about developing for a Community Housing Provider.

Crucially, the new National Government has expressed a desire (via their public housing plan) to allocate further funding to the community housing sector to enable it to deliver a greater share of New Zealand’s social housing obligation as opposed to Kainga Ora.

In this blog we will cover what a Community Housing Provider is, what properties they like to lease, where there is demand, how the contract and their funding works, how your development and investment finance works, and the benefits and risks.

What is a Community Housing Provider (CHP)?

A Community Housing Provider (CHP) is an organisation that provides rental housing typically on a subsidised basis, to a specific cohort (group of people) that the provider supports. These people tend to be found on the public housing register that is often reported in the press.

There are many different CHP’s across New Zealand and each will have a slightly different group of people they support. Some focus on mental health, some physical disability and others may be tied to a particular iwi. Effectively it is another form of social housing to support those less fortunate.

A CHP will also normally provide support services to their tenants whether that is counselling, care, assistance with securing paid employment or other similar services. These all are designed to help their community and those less fortunate to improve their lives.

In this instance the community housing sector tends to have more focussed support than Kainga Ora.

Are there different types of housing?

There are 3 primary forms of housing provided by CHP’s. These are Emergency Housing, Transitional Housing and Public Housing.

Emergency Housing is what has often made the press over recent years, particularly concerning motels. This is where individuals or families cannot find somewhere to live today and require a room to avoid sleeping in a car or on the street during the night. It is, therefore, an emergency.

This is the most expensive form of housing and therefore the most controversial. The government is trying to phase this out, however, will always look to provide to those in need. Ideally the typical stay here is a few nights or weeks until someone can be placed with more formal housing.

Transitional Housing is where people are between homes or on the wait list for permanent housing. This may be in the form of a family who has lost their primary income earner and can no longer afford their rent for the time being through to people who have left a state house and haven’t yet been placed in a new home or even those placed from Emergency Housing. It is, as the name suggests, designed as a transition from one home to another.

The typical stay for a tenant here is 6 – 14 weeks.

Public or permanent housing is, as the name suggests, permanent homes for people. This is another form of housing similar to Kainga Ora for people who cannot afford typical accommodation and have a long term need for affordable housing.

The typical stay for a tenant here is 15+ years.

What kind of properties do they want?

Community Housing Providers will have a need for a variety of different unit types in different locations. There is a higher demand for 1 and 2 bedroom units at the moment, however, there is also a requirement for larger typologies to accommodate larger or intergenerational families.

Depending on what cohort they are looking to house the community housing provider may have different requirements. For instance, if it is for the elderly or physically disabled the CHP will likely require units be accessible with good car parking.

The most common constraint will come down to whether the property is being used for transitional or permanent housing. If the CHP is seeking permanent housing or you want to build units suitable for that there are some specific criteria around unit sizes and design. For instance, a one bedroom unit cannot be any smaller than 50sqm.

Transitional housing, due to its short term nature, is more flexible on design and sizes.

CHP’s will look at unit titled apartments, stand alone homes and terraced housing. All are suitable in specific instances. Typically they will want fewer than 20 units in a single development as it can be difficult to manage communities with greater. Most will also look at single homes in some instances.

It is important to note that CHP’s will often want all the units in a single development as opposed to looking to manage their tenants amongst the general public as this can become difficult.

If you are considering a CHP it is best to engage with them early in the design process to ensure that you are developing a suitable product.

Where do the CHP’s need housing?

The short answer here is everywhere. There is a demand for housing across all major centres in New Zealand, however, also a high demand in some more regional locations. We have seen projects in Whangarei, Levin, Hokitika, Greymouth, Rotorua, Tauranga as well as Auckland, Christchurch, Wellington and Dunedin.

It is, however, important to look at the local amenity when you are considering a site for CHP housing. Again, because of the nature of the tenant, there is normally a focus on what is nearby such as bus stops, schools, parks, grocery shops and even other social housing.

How does it work with a CHP?

Community Housing Providers will enter into a lease agreement with the landlord of the property(ies) for a period relative to the type of accommodation being provided. In the instance that it is transitional housing we typically see an initial lease term of 5 – 6 years with one or two rights of renewal.

Permanent housing will normally attract a 10 – 15 year initial lease term with a further 5 year renewal.

The reason for the differing lease terms is to do with the nature of the housing and the fact one is for permanent living and the other transitional. The funding mechanisms for the CHPs are different between the two allowing for different commitments.

The lease agreement will provide for a weekly rent per unit, agreed on and loosely based on a rental appraisal. The CHP will then pay this rent to the landlord likely on a monthly basis and will assume full occupancy at all times.

The lease will provide for the CHP to manage the property and sub tenants (their cohort). This is normally run similar to any rental agreement and if a particular subtenant is misbehaving they are removed from the housing.

The CHP will also provide support services to the tenants (as mentioned above). Depending on the risk profile of the sub tenant this may mean that someone is at the property on a daily, weekly or monthly basis to provide that support.

The CHP will also have a property maintenance division that is responsible for ensuring the property is maintained throughout their tenancy. This will include repairs where necessary (i.e. if a sub tenant damages the property).

How is this all paid for?

The CHP will charge the subtenants (the people actually living in the home) a weekly rent which is often partly covered by the income related rent subsidies, however, often this will not cover the rental that the CHP needs to pay the landlord. To cover this and provide for the other services required the CHP will enter into a Service Level Agreement (SLA) with the Ministry of Housing and Urban Development (MHUD).

This agreement normally comprises up to a 25 year term and will provide for the rental obligation for the CHP. They can invoice MHUD for their rental obligation less any rent received.

Crucially, MHUD will provide what is called an ‘operational subsidy’ over and above the rental figure. This typically is somewhere between 30 – 50% of the rental cost (i.e. if the rent were $500.00 per week the operational subsidy would be between $150 - $250 per week). It can, however, stretch all the way up to 80% in special circumstances.

This operational subsidy is, as it sounds, designed to subsidise the operational items for the CHP being the wrap-around services, maintenance, general running costs and property management.

Because of this underlying agreement it can be considered effectively a government backed lease providing a high level of certainty to the landlord.

What are the key terms of the lease with the CHP?

There are many things to look out for in any prospective lease agreement, however, some of the key items to consider are as follows;

1. How are rental increases measured? There will normally be an annual rental increase baked into the lease agreement, however, this may have a cap attached to it. Most commonly we see something like 2 – 3% or CPI, whichever is lesser. Understanding what this is and pushing for as great a mechanism as possible will help maximise your return.
   Normally each lease will have a mark to market every 5 years with a soft ratchet which means the rent can’t fall at year 5.
2. Is there a make good clause? Given the nature of the tenant it can be important to ensure you secure a make good clause within your lease. What this means is that in the event the lease is terminated or ends the tenant has an obligation to return the property to the landlord in a specified condition. This is normally accounting for ‘fair wear and tear’.
3. What are the landlords responsibilities? Most leases will require the landlord to repaint the property at a specified point (7 – 10 years) as well as any structural maintenance (i.e. roof etc) or even possibly maintaining the lawns. important to understand what you are on the hook for.
4. What rights of cancellation does the tenant have? This is a really important one to understand. Normally the CHP will hold the right to cancel if the landlord breaches its obligations which may relate to a maintenance item. They also, usually, have the right to cancel if the government chooses to cease its funding for the housing. In this instance you can often negotiate a termination fee which can equate to 6 – 12 months rent. This gives you some comfort to cover any debt costs and find the time to re-tenant the property.

When should I speak to one about leasing my property?

You can and should engage with a CHP early in the process. You can begin a conversation with the provider once you have identified a site and typology you are keen to deliver. This would be a high level conversation to gauge their interest without any formal commitment.

From there, a CHP will require more information before they can put their proposal forward to MHUD for support. This will include;

• RC Plans (note, these can be detailed plans prior to submission)
• Rental Appraisal
• Detail on the developer.
• Programme (when will the project be delivered and key milestones).

There may be other information required, however, the above covers most of it. The CHP will then put their proposal to MHUD which will include financial forecasting and commentary around the need for the housing. MHUD will hopefully then approve the business case which will allow the CHP to enter into an Agreement to Lease (ATL).

The ATL is an agreement from the CHP that it will enter into a lease when the properties have been delivered. This effectively removes the risk for the developer allowing them to proceed with site acquisition, consent and delivery in the knowledge the CHP will lease the product on completion.

The ATL will include some key dates and terms for the developer to achieve such as consents, project start date, delivery date and sunset dates. In this case it operates similarly to a pre-sale agreement (it is effectively a pre-lease agreement).

Because you can secure this agreement early it is beneficial to engage with the CHP very early in the process.

Despite this, there is nothing wrong with engaging with a provider while your project is underway or complete (or even if you just have an existing home to lease). CHP’s are often in need of more housing and will have short term demands to meet meaning product available now can be particularly attractive.

How does my finance work?

For the development, as you are building a property with a lease you have a confirmed revenue on completion. This is great as it gives the lender and yourself an avenue for repayment of the debt that is secured. Because of this, the lender will often look through to the position on completion and look for that to be aligned with your ability to service debts with the lease income.

In a low interest rate environment that can be beneficial as the rental income will allow you to service more debt. As rates come up, however, the ability to service will fall and therefore your borrowing capacity may fall with it.

You may still look at selling these units down with the lease in place, however, as mentioned below in the advantages and disadvantages section the lease can be off putting to some buyers so you will need to consider this course of action if you are intent on selling. If you did manage sales, however, then this can form part of your repayment strategy with the lender allowing for further leverage.

Pricing on this type of investment is an interesting one to work through. If it is a single lease over a block of units it is likely to be looked at as a commercial proposition and thus attract those terms at a bank. You can, however, with some providers look to split the lease out to one per unit with a single ‘tenant liaison’ (think property manager) that the CHP deals with as opposed to multiple landlords. If you manage to do this you may be able to split bank the investment portion and secure residential terms on each property.

Another consideration when looking at finance is the current green and social funding that is available in the market. Most banks currently have some funding earmarked for assets that provide for some ESG benefits. In practice this can mean you can secure a favourable interest rate for this type of product priced better than a traditional commercial loan.

How do I treat GST?

We always recommend that you secure independent tax advice on each transaction, however, from our experience we can confirm that if you are leasing to a CHP and looking to hold the units there is no GST to be claimed or paid. It is important to understand this and your strategy early as it will have a great effect on your budget if you are developing and need to be considered when applying for finance.

Where can I find out about which CHP to consider?

There are lots of Community Housing providers in New Zealand and as we mentioned each will have a slightly different demographic and locality they are targeted towards. That can make it hard to establish which CHP you want to talk to.

There is some resource online to help you in this journey. The Community Housing Regulatory Authority website has a register with all CHP’s listed on there. It gives some good high level detail regarding their activities and locations as well as details around who the senior management might be to contact.

There is also the Charities Register online where you can search up the CHP’s. This will give you a link to their financial accounts which we recommend reviewing as part of your due diligence.

You can also speak with us at Lateral Partners and we may be able to introduce you to one of the providers we have worked with.

What are the benefits to leasing to a CHP?

There are many benefits to leasing your property to a CHP. Some of these are surmised below;

1. You have no vacancy risk. Because the CHP is signing up to a longer term lease and responsible for actually putting someone in the home they pay the full rent each month regardless of the actual tenancy. This is particularly beneficial.
2. You have no property management costs. Because the CHP manages the property themselves you do not need to pay a property manager to do so. This can save you up to 8% of the annual rental.
3. You can secure a long-term commitment. The CHP’s will sign up to longer term leases giving you greater certainty in your investment than a year by year or month by month lease to a standard tenant.
4. It is effectively government backed. Because the funding for the CHP stems from the government and relates to your property it can be considered that the lease is government backed meaning that the likelihood of a default or non-payment is near zero.
5. You can secure a 6 – 12 month penalty for cancelling. This is effectively equivalent to securing a 6+ month rental bond from a tenant. It gives the landlord some great comfort that if they were to lose the contract they would be adequately recompensed to go to market and secure tenants.
6. Lower spec’d homes. Because of the profile of the housing the CHP’s often don’t require high specs like stone benchtops and high value appliances. They also prefer simple design and layouts. All of this can mean a cheaper build cost.

What are the risks?

Despite those benefits, there are some risks. These are as below;

1. The tenant profile tends to be harder wearing than your private tenant which presents a risk to the landlord around damage. This is well mitigated by the make good within the lease and most CHP’s will have insurance and a strong balance sheet to support this.
2. It may impair the saleability of your unit(s). Given you have a committed lease from the housing provider, if you were to sell down the properties you would be required to sell them with the lease in place. This may limit the scope of who will buy the property(ies). You may also end with a single lease over all units (although this can be navigated) which can lead to the requirement to sell in one line. Again, this is a more limited market and therefore can affect the price you receive or the time on the market.
3. Finance Costs. As mentioned above, this type of project can be considered commercial in nature meaning a higher interest rate and shorter loan term.

Overall, we think social housing can be a great asset to a portfolio and an option worth considering if you are looking to invest in some rental stock. Despite this, it is always worth doing your due diligence to make sure it is the right fit for you.

If you are looking to do a project or raise some finance on property with a Community Housing Provider as a tenant reach out.