The Trust will be a non-profit charity. Its purpose will be to deliver its objectives throughout the term of its lease (250 years proposed). This means that unlike many private developers, it can take a longer term approach to financing. It does not have to deliver a profit to any shareholders.
The development and the Trust have to be self-financing and not reliant on future funding from Lambeth Council. Brixton Green and Lambeth Council are working with Bates Wells and Braithwaite and the Confederation of Cooperative Housing to develop the business plan for the Trust.
How is the development being funded?
The current proposal is for Lambeth Council to borrow the money to fund the development. Local councils can usually borrow at a lower rate than is available commercially. However, it may be possible for the project to borrow the funds from commercially if necessary.
How will the ground rent be set?
The ground rent is the annual rent the Trust will pay Lambeth Council for the 250-year lease. The ground rent will be set at the level a market provider would pay for the lease for all the homes, public realm and non-residential uses excluding the theatre.
As the lease* will require the provider to deliver the project’s objectives (affordable homes, community facilities etc.) it will be less than a market provider would pay if all the homes could be let at full market rent levels.
The ground rent Lambeth receives from the project must be enough to cover the repayments for the development costs to ensure the project is be self-funding.
*The lease along with the framework agreement and planning obligations will obliged the provider to deliver the objectives including at homes that are affordable to local people.
Will the Trust have enough financial resilience to endure periods of financial difficulties?
Once the Trust generates a surplus over the ground rent it will start to set aside reserves. The reserves should be equal to 9-12 months operating costs in the early years. As the trust becomes more established, these reserves can reduce to 6 months operating costs.
In addition, insurances will need to be put in place to address catastrophic events.
Stamp Duty Land Tax
This is the tax that is paid when land is transferred from one person or organisation to another. As the Trust will be a charity it will be exempt from this tax.
Corporation tax & business rates
Charitable bodies are exempt from corporation tax on profits and business rates. The Trust would have charitable status. The Trust can set up a sub-company if it needs to carry out any activities that may generate a profit. These sub-companies would be liable to corporation tax.
The first business plan for the Trust will be developed with Lambeth officers. Operations will need to be structured to ensure non-recoverable VAT is kept to a minimum while still achieving the objectives and bringing in established organizations where required. The key points are:
- VAT is not charged on residential rent, which is the main income for the Trust.
- The Trust would not pay VAT on its in-house services.
- VAT would be charged on services purchased from VAT registered organizations (VAT chargeable turnover above the threshold – £83,000 2016/2017)
Why a 250 year lease?
In sixty years or so some of the buildings will need to be renewed. To do this, the Trust will borrow against the value of the remaining lease at that time. A 250-year lease would have enough remaining years for the Trust to be able to borrow the funds required.