Secure Tenancy Affordable Rental (STAR) Scheme – How does it work and will it be a success?

Structure of the Investment and Further Conditions

The investment will be made in the form of a Cost Rental Investment & Equity Participation Agreement (the “Agreement”) with the developer. The Agreement imports the conditions of the STAR scheme as prescribed by the AHA and provides further terms and conditions. The Investment is secured by a charge on the Property – which ranks behind any funder security (but subject to an inter-creditor agreement).

Exit and Return on the Investment (“PRES”)

There is no interest or return payable to the Housing Agency during the 50 year term (unless there is a breach of the Agreement). The Agreement does however prescribe a return on the Investment in the case of certain “Trigger Events” listed below. This return comprises the return of the original Investment and a percentage of the uplift/loss in value of the Property – the Property Realisation Equity Share (“PRES”).

Trigger Events

• at the end of the 50 year period – unless the Property is again designated and provided for Cost Rental at that time;
• if the Property ceases to be used for Cost Rental – for whatever reason during the agreement (change in law, damage/destruction to fire etc); and
• breach of the AHA or the regulations made thereunder.

Calculation of the PRES

The PRES is calculated as a percentage of the overall property value, by reference to the aggregate of the equity share contributed to the purchase by the developer and the Investment.

Exit

At the end of the 50 year period there are 3 options:

• Extend the Agreement and cost rental designation for a further agreed period;
• Repay the Investment and PRES and exit cost rental designation;
• The Housing Agency may exercise an option to purchase the property from the owner for market value, taking account of the Investment.

Commentary

The Cost Rental model is certainly becoming a feature of the Irish property landscape, and we have been involved in several housing schemes where it is being deployed by AHBs – funded in part by the Governments CREAL finance initiative. The success of initial schemes is demonstrated by the over-subscription for available Cost Rental units brought to market by the LDA and AHBs.

The STAR scheme makes it more viable for private developers to bring Cost Rental units to market. It certainly has the potential to meet some of the shortfall in availability of private investment for PRS schemes that the market is experiencing at the moment.

It remains to be seen whether the scheme will be attractive to developers – who will need to balance the availability of investment against other challenges:

• The headline feature of Cost Rental rent being no more than 75% of the market rent is somewhat misleading. This is only the upper limit. The level of the Cost Rental rent is determined under Part 3 of the AHA and represents a rent which, over the 50 year period, would amortise a sum not greater than the estimated total cost of acquiring, developing, managing and renting out the relevant units. This is done on an open book basis.

• Once a property is designated for Cost Rental purposes for a period of 50 years – it cannot be used for other purposes during that period without Ministerial consent – which is forthcoming if the Minister is satisfied, on exceptional grounds, that it is in the public interest to do so.
• The increased regulation and oversight by the State in a long-term investment.
• It will be interesting to see the effect on the valuation of the Property by any proposed purchaser/fund through a combination of:

(a) the limitation on market rents through the Cost Rental designation;

(b) the deferral of the STAR Investment and the PRES until maturity of the scheme/exit; and

(c) the impact of the Housing Agency option to acquire the Property on maturity of the scheme.