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Somerset Co-operative Community Land Trust

Financial performance

SCCLT is looking to raise a maximum of £350,000 through this share offer to finance the purchase of a property and land for the development of 3 flats.

Financial History

SCCLT has financially underperformed over the last two years. At the point the Society acquired its first property, it had already accrued costs of establishing the society of around £45,000; and the conversion of a listed building presented some challenges.

The income from rents covers servicing of debt (a mix of mortgage, low interest short term loans, and interest only finance) and other vital expenses, but this leaves a tight profit margin. By replacing the expensive share underwriting loan with share capital or a re-mortgage; gaining economies of scale from a larger number of flats; saving money with new builds (as opposed to conversion of a listed building); and acquiring further properties that represent good value, the Society is now seeking to recover the investment its members have made establishing the CLT.

In 2016 there was a major adjustment to the share register to correct errors in the previous year’s accounts, but even allowing for this there was a loss. In 2017 SSCLT made another loss, made up of several one-off costs that are not expect to recur:

  • £3187.50 (invoices at-risk, conditional on new housing being built at East Reach)
  • £3125 (additional interest charge to be eliminated with planned remortgage)
  • £1925 (one off charge for an unsuccessful planning application)
  • £3000 (legal and management costs resulting from a dispute with 9 East Reach)
  • £500 (rents set too low, and cost of water charges not recovered)
  • £326 (arrears of delinquent tenant written off)
Financial performance 2015 - 2017

The current liabilities include £7,882 that are loans due for repayment within the course of the year, the greater part of which have now either been paid or been rescheduled through a recent remortgage with Community Land & Finance. Similarly, a £10,000 loan from CAF Venturesome is due within the present year, but on the very last day - 31st December 2018.

The combined value of purchases and development exceeds the most recent valuation, which is just £300,000. Accrued losses also contribute to low shareholder funds. This would be remedied by securing planning permission for a development of flats in the vacant portion of the plot. SSCLT have spent the last year working with planners, surveyors, architects and other experts on a plan to do this.

11A East Reach combines with a garden to create a practical development plot of 0.3 acres, and is expected to deliver a consequential improvement in the value of existing assets.

The share capital issued by the society to date has been credited with interest at the rate of 2%. Withdrawals were last open in 2015/6, and some early investors did withdraw shares and interest then. However, withdrawals have been suspended since summer 2016 in preparation for the 2018 share offer.

While the new share capital will be on the same terms as the old, if the Society does not achieve enough funds to purchase both the sites that are available, they have an offer from a large investor to donate interest and shares back to them, at least until some planning gain from existing sites is achieved. This compensates for any shortfall in profit from the lost opportunity to carry out a development.

 

Forecasts

SSCLT has prepared some monthly cost analyses to establish how to achieve positive cash flow and profitability by 2020. It expects to be able to allow payment of interest on some larger investments from 2019 (smaller sums being credited as additonal shares), but only in 2021 will they allow withdrawals of share capital invested in the 2018 offer. From 2023, it will be able to steadily reduce the overall balance of share capital.

This shows that there is a route to achieve full profitability from 2020, even without further development beyond the planning permission already in place for the South Street site.

While SSCLT has accumulated losses on the balance sheet, this is based on the conservative assumption that the properties do not appreciate in value, and the new buildings have no value beyond the cash inputs to construct them (which are some way below present market values). So the losses on paper may in practice be offset by valuations of the new properties that are in excess of the cost to develop them. This is however speculative and so forecasts do not rely upon them.

It is equally clear that the scenario in which the flats are developed behind 10/11A is far preferable. In this scenario, with rent rises that are at or below inflation, there is a windfall profit from the planning permission of £50,000; and development costs similar to South Street allow a corresponding improvement in profitability with the additional scale that comes from a development of 6-8 flats rather than three.

Above is a summary forecast for the profitability and cash flow of the society, using a model developed for the society by Third Sector Accountancy. The versions here correspond with the the minimum raise scenario.  Please see the share offer document for illustrations of optimum and maximum scenarios.

Annual return

SCCLT expects to begin to pay 4.5% interest on shares from 2019

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