Making the most of commercial assets
Many housing associations own commercial properties, such as retail units and office space, as part of their property portfolios. The number of commercial properties held and uses of those properties can vary significantly from association to association.
As commercial properties are ancillary to the residential purpose of housing associations, the value of commercial properties is often under-utilised. Active management of such assets can provide an additional income stream to housing associations and depending on the type and number of commercial properties owned may provide an opportunity to raise finance, secured against commercial properties.
When negotiating leases with commercial tenants, it is preferable for the leases to be on similar terms, as this simplifies the management of the leases. Whether this is achievable will depend on the covenant strength of the tenant negotiating the terms of the lease.
In the event that commercial properties are offered to a funder as security for a loan facility, the funder will usually require the terms of the occupational leases to be in a standard form, and for the rental income generated to service the loan repayments.
If the term of the lease is greater than three years, it is usual for the rent to be reviewed at regular intervals throughout the term of the lease. The most commonly used methods to assess and increase market rent is either with reference to open market rent or increasing the rent in line with the Retail Prices Index (RPI). Alternatively, the parties can agree to fixed rent increases throughout the term of the lease.
If rent is to be reviewed with reference to open market rent (this is usually on an upwards only basis), the rent payable by the tenant on rent review can require input from a surveyor or expert in this area, in the event that the reviewed rent cannot be agreed between the housing association and the tenant.
Rent reviewed with reference to RPI can provide certainty to both the housing association and tenant of the basis of the increase. At a time when RPI remains relatively low, this may mean that any increases are of a limited nature but are still likely to result in an increase.
By monitoring the rent review provisions in leases and agreeing and implementing rent review increases at the relevant time, housing associations can benefit from an increased rental income from assets.
Recovery of service charge
Where a commercial unit forms part of a larger building, for example, a retail unit with flats above, it is usual for the housing association to insure the entire building under its block insurance policy. If the property is situated within a wider estate owned and managed by the housing association, the commercial property may also benefit from services provided by the housing association, for the estate, such as maintenance of common areas.
When negotiating leases with tenants and where the housing association is obliged to insure the building, and provide services to the tenant, it is usual for the housing association to recover a fair proportion of the cost from the tenant. This could be in the form of a proportion of the cost of the insurance policy relating to the buildings insurance aspect of the commercial property only, or could be extended to include a fair proportion of the cost of maintenance of common areas which benefit the commercial property, together with the cost of any other services used by the tenants in common with the wider estate. The nature and extent of the service charge recoverable will depend on the nature and location of the commercial property.
For existing commercial leases, housing associations may wish to revisit the terms of the lease and the housing association's records to ensure that a fair proportion of the cost of the insurance premium, and other services provided for the benefit of the tenant is being demanded and received from the tenant.
In order to raise finance secured against commercial properties, it is most straightforward to do so if the commercial properties are registered under separate Land Registry title numbers, and have the benefit of rights necessary for the commercial properties to be separated from other land owned by the housing association and offered as security under housing finance loan facilities.
If commercial properties are part of a larger title the housing association could create a separate title by granting a long lease of the commercial property, to be owned by a separate entity and controlled by the housing association which could be offered as security to a funder.
As with dealing with any property assets owned by the housing association, wider tax, regulatory, governance and commercial implications would need to be taken into account before securing commercial properties, but it may provide a means of raising additional finance.
Whilst commercial property assets are not central to a housing association's purpose, they can provide a valuable additional stream of income, which can further the housing association's aims. By actively managing commercial property assets and the payments due under the terms of the leases, the housing association can maximise the sums received from the properties it owns.