Introduction
In a previous article, we discussed the current
State initiatives that aim to deliver social and affordable housing
in Ireland. In this update, we put one of these initiatives under
the spotlight: the Secure Tenancy Affordable Rental Scheme (the
"STAR Scheme"), the purpose of which is to offer
long-term stability and affordability for lower income renters that
fall outside the income eligibility criteria for social
housing.
Main Characteristics
The STAR Scheme is operated by the Housing Agency (the
"HA") and is open to all potential housing developers. It
aims to make available up to 4,000 cost rental homes in the private
rental sector to assist eligible households experiencing rent
affordability pressures. It does this through an equity investment
to developers for the acquisition and development of residential
schemes on condition that the residential units are then designated
as cost rental homes. Up to €750 million of State funds have
been made available for investment in the STAR Scheme.
The STAR Scheme has been open to proposers to submit expressions of
interest ("EOI") to the HA since August 2023. Successful
EOIs will be awarded until all the available funding has been fully
allocated, or until the HA and Department of Housing, Local
Government and Heritage announce the closure of the STAR Scheme,
currently scheduled for December 2027.
Cost Rental
Residential units under the STAR Scheme will be available for
renting at an initial rent at least 25% below market value in high
demand areas and must be designated as cost rental homes for at
least 50 years. The 25% figure is set by the Department of Housing,
Local Government and Heritage, and is not a legislative
requirement.
The requirement for rents to be at least 25% below market rent
applies only to the initial rent. Any subsequent rent increases
must comply with the terms of the Affordable Housing Act 2021 (the
"AHA Act") and any regulations made thereunder. The rents
for residential units designated as cost rental homes under the
STAR Scheme may only be reviewed once a year and any increases must
be tacked to the rate of inflation .
In accordance with Section 29(1) and (4) of the AHA Act, the
minimum cost rental period for a residential unit so designated
cannot be less than the cost calculation period. The minimum cost
calculation period under the AHA Act is 40 years, with no upper
limit, so the current 50-year cost calculation period specified
under the STAR Scheme is a policy decision.
Units
A minimum of ten (10) residential units must be proposed in an EOI,
and they must either: (i) have not commenced construction; (ii) be
under construction; or (iii) be recently completed and not yet
rented. Where construction is not underway, it must commence by a
date agreed with the HA. Proposals involving adaptive re-use of
non-residential buildings for use as residential units will also be
considered if the buildings have not previously been used for
residential purposes. EOIs must include 2-bed units together with
another type of unit such as 1-bed or 3-bed units.
The level of funding available will depend on the costs and
revenues outlined in each proposal, with maximum funding of
€170,000 per unit available for Dublin and €150,000 for
the rest of the country. An additional uplift of €25,000 is
available subject to certain sustainability criteria - set out at
paragraphs 7.12-13 of the STAR Scheme explanatory document - being met.
The proposer is entitled to make a "reasonable profit".
Surprisingly, there is no formula for assessing what a reasonable
profit is so this is likely to be interpreted by reference to EU
Law's prescribing reasonable profit as "the rate of return
on capital that would be required by a typical undertaking
considering whether or not to provide the service... for the whole
period of entrustment [50 years], taking account of the level of
risk".
All residential units in receipt of investment from the STAR Scheme
must be built and fully completed within 2 years of the
commencement date or 31 December 2027, whichever is earlier.
Tenants
Prospective Cost Rental tenants must meet net income limits to be
eligible. These are set periodically. As of 1 August 2023, an
income level of €66,000 net applies for properties in Dublin
and €59,000 net for the rest of the country.
Three-Stage Process
The approval process for the scheme comprises three stages:
1. Submission of the EOI;
2. Due Diligence Assessment by the HA; and
3. Entry into the Equity Participation Agreement
("EPA").
Stage 1: EOI
The EOI Application Form is a four-page Word document with a
Declaration of Eligibility appended.
Proposers must provide their details, including contact details and
VAT number, and confirm their agreement in principle to the
designation of the proposed residential units as cost rental homes
for a period of 50 years. A high-level summary of the
proposer's track record in delivering and managing rental
accommodation is also required.
Proposers must provide details of the proposal, the proposed
delivery timeline and the proposed average delivery cost per
dwelling. A description of the proposed dwellings is given by
selecting from tick-box options and a proposed cost rent must be
supplied. Proposers must also specify the proposed average STAR
Scheme investment per unit and for the proposal in full.
Proposers are required to complete a declaration confirming that
the minimum proposer requirements are met. Where a consortium/joint
venture is proposed, all parties must complete the
declaration.
So, all in all, the first stage of the approval process would
appear to be quite administrative in nature and easy to
navigate.
The HA will give preference to an EOI which meets the following
criteria:
(a) high density proposals in urban locations;
(b) proposals with a higher volume of units;
(c) high density residential developments with a diverse range/mix
of dwelling types;
(d) proposals located within 1.25km of urban transport systems
(such as DART or Luas) or within 1.25km of reasonably frequent
urban bus services (at least every 20 minutes peak hour frequency);
and
(e) proposals which can deliver additional cost rental homes in the
shortest timeframe.
Stage 2: Due Diligence Assessment
The HA will typically notify proposers within 2 to 4 weeks as to
whether their EOI is considered suitable to proceed to Stage 2,
which involves a full due diligence and financial assessment. This
stage requires additional information to be provided for assessment
by the HA and its advisors, including:
(a) delivery costs or construction costs if appropriate;
(b) management, operational and maintenance costs;
(c) the proposer's funding package;
(d) the appropriateness of financial assumptions regarding void and
vacancy risk, cost inflation and rental income inflation and any
other variables;
(e) the level of investment to be provided and the cost rents that
will be made available with the benefit of the investment on
completion of the dwellings;
(f) sources of funding of the proposed units including a letter of
confirmation from any proposed funders;
(g) the proposer's tax compliance; and
(h) the location, amount and ownership of any units currently under
management by the proposer, and how long they have been under
management.
It's no surprise that, as one progresses through the approval
process, the level of detail and specifications becomes more
onerous and demanding.
Stage 3: EPA
Subject to the successful completion of Stages 1 and 2, a form of
EPA in the HA's prescribed format will then be entered into
between the HA and the proposer, governing the equity investment
from the STAR Scheme (the "Investment").
Under the terms of the EPA, ownership of the properties remains
with the developer and the Investment is secured by way of a fixed
charge. Where a commercial lender is involved in purchasing,
developing, or refinancing the purchase of the property, the HA
will permit a first ranking charge for that lender and take a
second ranking charge subject to intercreditor arrangements.
There is no interest or return payable to the HA during the 50-year
cost rental designation period. However, the EPA will include a
right for the HA to receive a property realisation equity share
("PRES") from the relevant property. The PRES is
calculated as a percentage of the then market value of the relevant
property by reference to the aggregate of the equity share
contributed to the purchase by the developer plus the Investment.
The PRES is payable either:
(a) at the end of the cost rental designation period;
(b) if the property (or any part thereof) ceases to be used for a
cost rental home for any reason during the lifetime of the EPA;
or
(c) on breach of the AHA Act or any regulations made
thereunder.
Expiry
On the expiry of the EPA after the 50-year cost rental designation
period, there are three options available in respect of the
Investment:
1. extension for an agreed period, with the dwellings to retain
their designation as cost rental homes;
2. payment to the HA of the PRES and exit from the cost rental
designation; or
3. the HA may exercise an option to purchase the residential units
for market value, making an allowance for the Investment.
Conclusion
The STAR Scheme offers an opportunity for private developers to
contribute to the social and affordable housing sector in Ireland
by endeavouring to make it more viable for them to bring cost
rental homes into the market. It does this by seeking to address
economic and viability issues faced by developers (rising
construction costs, softening of yields and increased interest
rates). To date, however, there have not been many proposals
submitted by potential developers, possibly due to the complexity
and duration of the approval process. In our view amendments may be
required to attract potential investors and unlock senior
funding.
It remains to be seen whether the STAR Scheme will be attractive to
private developers who will need to balance the availability of the
potential Investment against other factors. The terms of the EPA,
the key governing document for the Investment, provide for
increased regulation and oversight by the State in the
developer's ownership of the designated property. The EPA
contains various provisions regulating the use of the property, the
potential sale of the participating property and the realisation of
the PRES. Once a property is designated for cost rental purposes
for the period of 50 years prescribed by the EPA, it cannot then be
used for other purposes during that period without Ministerial
consent.
The provisions of the EPA will certainly have an impact on the
valuation of the property by any proposed purchaser through a
combination of:
(a) the limitation on market rents through the cost rental
designation;
(b) the requirement of the EPA that the PRES be realised at the
maturity of the STAR Scheme; and
(c) the impact of the option for the HA to acquire the property in
the event of a proposed sale by the operator or on maturity of the
scheme.
So, a cost beneficial analysis clearly needs to be undertaken by a
developer in signing up to the Scheme. Is there a risk that the
limitations imposed by the STAR Scheme outweigh the benefits?
It is our view that aspects of the template EPA stand to be further
developed and clarified for more certainty to be brought to this
key governing document for the STAR Scheme.
We will continue to monitor the development of the STAR Scheme and
are interested in seeing whether it will attract more
proposers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.