Secure Tenancy Affordable Rental (STAR) Scheme – How does it work and will it be a success?
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Background
The STAR scheme has been brought forward by the Government to assist the delivery of new rental stock that will be earmarked for those in the private rental sector who are struggling to afford market rents.
It does this by addressing viability issues faced by developers (rising construction costs, softening of yields and increased finance cost) through an equity investment on the condition that the residential units will be designated as Cost Rental Units within the framework of the Affordable Housing Act 2021 (the “AHA”).
What are the Requirements?
In order to qualify for the equity investment, developers must commit to the following:
- To dedicate the proposed units as Cost Rental Units available for Eligible Tenants under the regime set out in Part 3 of the AHA for a minimum period of 50 years.
- In doing so the rent levels are set at the outset of this 50 year period at levels that are at least 25% below market rents – and also cannot exceed the rents set under Part 3 of the AHA (see below). The rents are then index-liked over the 50 year period.
- The developer must meet certain other qualifying criteria (e.g. a proven track record in delivery of residential units and management of residential accommodation) and enter a Cost Rental Investment & Equity Participation Agreement with the Housing Agency.
Eligible Tenants:
The main criteria for prospective tenants of Cost Rental Units is that they meet annual net income limits prescribed by the relevant regulations. At present these are determined by Affordable Housing Act 2021 (Cost Rental Eligibility) Regulations 2023, which limit the annual net income for all prospective members of a household to:
Area | Maximum Net Income for all members of the household |
Dublin | 66,000 |
Rest of country | 59,000 |
What is the Level of Investment Available?
The Principle
Conscious of the provisions of EU Law, the level of investment by the State shall not exceed:
a) the costs incurred by developers less b) the revenues obtained by developers.
However – developers are permitted to generate a reasonable profit. There is little detail as to what comprises a “reasonable profit” apart from EU Law prescribing this 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”.
The Limits
Within this principle the Star Scheme has set upper thresholds for the investment, with an additional uplift available subject to certain sustainability criteria being met.
Area | Maximum STAR Investment per unit in € | Maximum STAR Sustainability Investment per unit in € | Maximum Total STAR Investment Available per unit in € |
Dublin | 175,000 | 25,000 | 200,000 |
Rest of country | 150,000 | 25,000 | 175,000 |
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.