accelerated construction - an overview
TRANSCRIPT
Successful places with homes and jobs
A NATIONAL AGENCYWORKING LOCALLY
Accelerated Construction
OverviewDecember 2016
1. What is Accelerated Construction (AC)?
2. The Objectives of AC
3. Contractor Model Overview
4. Worked Example
5. Equity Model Overview
6. Who is AC Targeted At?
7. How Do I Get Involved in AC Opportunities?
Contents
What is Accelerated Construction? The Accelerated Construction (AC) initiative is the Government’s new
approach to land disposal to increase overall delivery in the sector and build on public land at a faster rate than the market currently does
The initiative currently involves 2 alternative approaches – the ‘Equity’ or ‘JV’ Model, and the ‘Contractor Model’, but others may be used
The ‘Contractor Model’ was approved by HM Treasury in November 2016 – and is therefore a live approach available for immediate use by HCA
The business case for the ‘Equity Model’ is still being prepared – and details of this approach will therefore be released at a later date
The model applies only to public sector sites – and can be for projects involving new build and / or renovation works
Increase the pace of build
Diversify the range of companies involved in housebuilding, and support existing players with capacity to grow
Diversify construction techniques – with a particular focus on promoting modular build (or New Methods of Construction)
Objectives of AC
What is the ‘Contractor Model’?
The ‘Contractor Model’ is a shared risk approach to site disposal / development
The model involves the HCA procuring a partner to build out on public sector land significantly faster than the current market would under a normal disposal
The AC contractor is responsible for detailed planning, raising finance, construction and dwelling sales
To help mitigate the increased risk to the contractor, HCA provides a guaranteed ‘exit’ from the project by agreeing to buy all unsold properties at an agreed date (usually 12 months after practical completion) at a pre-agreed discounted price
How the ‘Contractor Model’ Works HCA secures Outline Planning for the scheme, and agrees a S106 with
the Local Authority
HCA invites contractors to bid competitively to become its AC contractor partner
Contractors are asked to bid the following information to HCA:
Agreement to deliver at the required build rate, and to agreed specifications
A fixed development cost (including construction and finance costs) Details of the expected sale value of each property Their ‘Stop Loss’ position Their ‘Back Stop’ position Their ‘Gain Share’ position
DefinitionsStop Loss: Bid as a % of the development cost of the unit. At the agreed Distribution Date (perhaps 12 months after final unit completion), if sales revenue is lower than the ‘Stop Loss’ position the HCA pays the difference into the development account.
Back Stop: Bid as a % of the development cost of the unit, below stop loss. At the agreed Distribution Date, if any completed units remain unsold, the Agency will pay a sum (the ‘Back Stop’) for each of these units into the development account.
Gain Share: If there is a positive balance on the development account (i.e. sales revenues minus allowable costs) this surplus will be shared between HCA and Contractor according to the agreed ‘Gain Share’ arrangements.
The selected AC contractor secures reserved matters planning consent
for the scheme, raises finance, builds and sells the homes
The contractor must aim to build / sell properties at an agreed pace, that must be faster than the typical pace for that market location.
All sale revenues go into a ‘Development Account’ (with HCA and the contractor as co-signatories), and the majority of these revenues will be made available to the contractor to fund ongoing delivery
How the ‘Contractor Model’ Works
How the ‘Contractor Model’ Works At the agreed Distribution Date, as a priority return, the AC contractor
takes its agreed fixed price development costs from the Development Account.
If the funds available in the account are below the agreed Stop Loss, the
account is topped up to the Stop Loss level by the HCA
After the deduction of agreed development costs, HCA takes the majority of any surplus, up to an agreed amount (usually land value plus HCA costs)
Any remaining surplus (profit) is shared out according to the agreed ‘gainshare’ arrangement
Example Scheme HCA land valued at £180,000 (including costs) Site has planning for 10 dwellings
AC Contractor’s Bid Development Cost per unit: £100,000 Target sale value per unit: £150,000 Stop Loss per unit: £95,000 (95%) Back Stop per unit: £85,000 (85%) Target Distribution Date: 12 months after practical completion Gain Share Distribution: Tier 1: 90% to HCA, up to land value Tier 2: 55% of remaining surplus to HCA
Worked Example
Worked Example – Scenario 1
Surplus after Contractor Development Costs: £500,000 Tier 1 Gain Share: HCA £180,000 (90%) Contractor £20,000 (10%)
Remaining Gain Share (£300k): HCA £165,000 (55%) Contractor £135,000 (45%)
TOTAL HCA = £345,000TOTAL CONTRACTOR = £155,000 (15.5% profit on cost excl. any margins within fixed development cost)
Worked Example – Scenario 2
Stop Loss Cap for 8 units: £760,000 (8 sold dwellings x £95,000)Actual Revenue: £746,000
TOTAL STOP LOSS PAYABLE: £14,000 (£760,000 - £746,000)Revenues credited to Proceeds: £760,000
Back Stop for 2 unsold units: £170,000 (2 unsold dwellings x £85,000)
Back Stop Payment up to Back Stop Cap (£850k): £90,000
AC Contractor’s Position = £0.85m revenue against £1.0m TDC
Benefits of AC to Contractor
Whilst a loss is made under Scenario 2, the contractor’s loss is mitigated by the guaranteed project exit HCA provides through the ‘Back Stop’ and ‘Stop Loss’ mechanisms. A margin may also be included within the original development cost
The protections given by HCA under the ‘Contractor Model’ will enable contractors to reduces risks/losses from market failure situations
Worked Example – Scenario 2
What is the ‘Equity/JV Model’? Details of the ‘Equity/JV Model’ are still being finalised by HCA.
The model is likely to involve HCA investing its land as equity, with the contractor then investing its reasonable fixed development costs as its own equity
Scheme profits would be distributed between HCA and the developer according to the proportion of equity that each party has invested
Unlike the ‘Contractor Model’, HCA would not necessarily give its selected development partner a guaranteed exit from the project in the event of poor sales and may impose different obligations on delivery (eg use of off site manufacture / modular within the scheme)
Who is AC Targeted At? The AC programme seeks to diversify the range of companies involved
in house-building, and support existing players with capacity to grow to do so
HCA has an ambition to make its land opportunities available to a wider audience of development companies
AC is therefore designed to achieve:
New participants who are keen to enter the housebuilding market, where AC models will offer the right incentives, assurances and balance of risk and reward to do so;
Existing builders, including SMEs, who wish to increase their output; An increased proportion of construction that is off-site or using MMC
Builders delivering AC projects may also be eligible to bid for HCA’s development finance via the ‘Home Building Fund’, subject to the usual criteria and bidding process
It is likely that the AC approach will be used on all HCA’s larger sites (i.e. 50+ dwellings)
HCA is required to procure development partners in line with EU procurement law. To streamline this process HCA is seeking to assemble a panel of development companies who have been pre-vetted / pre-procured in accordance with EU regulations.
By bidding onto the panel, members will be eligible to bid for HCA’s larger AC opportunities without the need for repeated procurement related vetting
How Do I Get Involved in AC?
Each region of England will have its own panel (known as a ‘Delivery Partner Panel’ (DPP)). In the Northwest, HCA is seeking to appoint up to 35 panel members to its DPP.
Companies who are interested in participating in AC opportunities are therefore encouraged to bid to become one of HCA’s DPP members
Bid documents for those interested in becoming members of one or more of HCA’s regional DPPs can be found HERE
Bids need be submitted by a close date of 25th January 2017. The panel is intended to go live in April 2017 and will last for a period of 4 years
Details of HCA’s development finance fund (the ‘Home Building Fund’) can be found HERE
How Do I Get Involved in AC?
Contact Details If you would like to discuss AC in more detail, please feel free to contact
Phil Collings on:
[email protected] 0161 200 6180
If you have any queries relating to the DPP bidding process, please direct your enquiries in writing to the following email address:
If you have any queries relating to HCA’s Home Building Fund, please direct your enquiries in writing to the following address: