Financing garden community projects

Finance strategy

Consideration of finance needs to address the full lifecycle of the garden community project, from factoring in the acquisition of necessary land at the outset and the upfront costs entailed in building houses and other infrastructure, to the costs in delivering the project, how stewardship of the scheme in the long term will be funded and how any income generated is to be shared.

Funding sources could include:

• local authority funding, including through using land as equity;
• government funding. Examples could include funding secured from the housing infrastructure fund (14-page / 6.5MB PDF) or the home building fund operated by Homes England, funding from local enterprise partnerships (LEPs), or grants issued by the Department for Transport towards electric vehicle charging infrastructure;
• developers and investors, including directly and via section 106 contributions and/or, if applicable, Community Infrastructure Levy (CIL) payments;
• income streams from special energy or multi-utility service companies (ESCOs/MUSCOs) or from stewardship models;
• income streams from data trusts set up to enable the sharing of data for a common and defined purpose. In the context of a garden village, the purpose may be to provide valuable insights to optimise resident, customer and visitor experiences within the site in addition to generating a valuable funding stream by making the data available for third parties to use, subject to appropriate regulatory and ethical safeguards.

Tying public sector intervention to private sector investment

Public funds will often be needed to get garden community projects off the ground. Public bodies need to check that they have the necessary powers to provide funding for garden community projects or, particularly where they have invested, have the powers to participate in whichever corporate structure is chosen to deliver the development.

In addition, developers and other private sector investors will need to be incentivised to help finance aspects of the project too. Innovative financing structures have been developed by public sector bodies to bring the private sector into the scheme at the earliest point. However, the overall funding strategy should be tested to ensure the requirements of the private sector are properly understood and catered for.

Financing land acquisition

The landowner and promoting local authority, if different, will need to consider how it will seek to work with individual landowners and developers to co-ordinate their proposals and whether it is necessary for the local authority to acquire land interests and override any title encumbrance restrictions affecting delivery of the scheme. Ultimately, if the land cannot be acquired through negotiation, the local authority may seek to acquire the land through the exercise of compulsory purchase powers and/or use appropriation powers to override title defects.

Financing delivery

There are various models for delivering garden communities. It is likely more than one delivery model will be in place to account for different aspects of the scheme. Each requires funding.

Where a development corporation or public sector vehicle is involved, this could act as strategic master developer to deliver the strategic infrastructure and sites. Increasingly, local authorities are creating joint ventures with private sector partners and using their land interest as equity to enable themselves to enjoy a share in the returns from those developments. Where the land interests sit with private sector landowners and/or developers the delivery will draw on the usual debt and equity financing options.

Financing of management and stewardship

The financing of long-term management and stewardship is an important facet of the financing strategy and needs to be considered at the point the business case for the garden community is being developed.

Income streams from garden community schemes can help with funding their management. Income might be generated from establishing and operating data trusts, for example, or through ESCO or MUSCOs in delivering sustainable energy and utilities solutions. However, thought must be given as to how commercial models for generating income will be created, and they will require initial capital investment.

Finance models

One of the finance models that can underpin the delivery of new garden communities is a land trading model, which enables developers to sell land for more than the value it was acquired for.

Public bodies selling land to enable garden community developments need to satisfy their legal duties in respect of that land disposal, not least so-called ‘best consideration’ requirements. These duties, which can arise under section 123 of the Local Government Act 1972 and section 233 of Town and Country Planning Act 1990, for example, are essentially designed to ensure public assets are not sold off at below value. However, section 233 does provide flexibility by enabling public bodies to consider wider factors beyond pure monetary value in carrying out a ‘best consideration’ assessment.

The planning obligations developers are subject to under section 106 agreements need to recognise that developers may only see returns from the project in the long run. Requirements around affordable housing, mixed tenure and delivery of infrastructure need to be appropriately phased to ensure developers do not encounter cashflow issues.

A community infrastructure levy (CIL) could also provide financing for some components of a garden community development. CIL is a charge that local authorities can impose on developers to contribute to the cost of infrastructure. It can be somewhat inflexible, however, although “mix and match” approaches to CIL and Section 106 can be considered where appropriate.

Subsidies

The use of public funds to deliver a garden community must comply with rules on subsidies. The provision of state aid to projects will commonly attract scrutiny and sometimes prompt legal challenge if there is a perception that the aid granted is unfair.

Considerations in relation to subsidy may arise in relation to the terms of public sector funding contributions to a garden community village and the terms and value for the disposal of land interests by public sector participants.

Where issues of financial viability arise, the parties will need to create subsidy compliant solutions for contributing finance, including the mechanism and timings in the development lifecycle, to allow for the successful delivery of the garden community.

Pinsent Masons has asked 70 market participants about garden communities, and you can find out what they said in our results (40-page / 5MB PDF). And you can find out more about a step by step approach to garden communities in this guide (40-page / 6MB PDF).