Secure Tenancy Affordable Rental Investment Scheme - What is it?

Background

The Secure Tenancy Affordable Rental Investment Scheme (STAR) is a “cost rental viability measure”. Its stated aim is “to assist in addressing viability challenges for developments by providing equity investment to stimulate the creation of cost rental accommodation”.[1]

The scheme is being managed by the Housing Agency (HA) on behalf of the Department of Housing and they have been accepting expressions of interest since it came into force on 1 August 2023.

How will it work?

All market operators, namely, developers and approved housing bodies (AHBs), can apply to provide cost rental homes under STAR (the Proposer).

If approved, the State will provide an equity investment in return for designation of the units as cost rental homes for a term of 50 years. These cost rental homes must be let below comparable market rent at a minimum of 25%.

All submissions will be considered until such time as all of the capital funding made available to it has been fully committed or the Department of Housing, Local Government and Heritage publicly announce the closure of STAR.

Key Criteria

The key criteria when submitting an application to STAR are:

• the Proposer must have good and marketable title to the units being proposed to be used as cost rental units (CRUs)
• at least 10 units must be made available for a period of 50 years as CRUs with rent at least 25% below market rents
• the CRUs must be new and never rented previously
• all CRUs must be completed by 31 December 2027 or within 2 years of the commencement date, whichever is the earlier
• the maximum investment available per unit is €200,000 for Dublin and €175,000 for the rest of the State
• the investment will be made when the CRUs are complete and ready to be let, unless otherwise agreed with the HA
• a cost rental designation of the CRUs is registerable in the Registry of Deeds and/or Land Registry, as applicable
• the Proposer is obliged to ensure that the tenants meet the eligibility criteria for cost rental at the time of application. The Proposer retains ultimate discretion as to whether to offer a tenancy of the CRUs to any particular applicant. 

How do I apply?

To apply for STAR, there are 3 stages of assessment being:

Stage 1: Submission of an expression of interest by the Proposer to provide CRUs

Stage 2: Full due diligence by the HA of the proposal

Stage 3: Completion of Cost Rental Investment Equity Participation Agreement

There are certain criteria for each stage and full details can be found here.

What is the Cost Rental Investment Equity Participation Agreement?

The Cost Rental Investment Equity Participation Agreement (Investment Agreement)[2] is the agreement that will document the State’s investment and will be entered into between the Proposer and the HA. While the Proposer will remain the owner of the CRUs, the HA will take a charge over the CRUs. If a commercial lender is providing finance, the HA will permit the lender to take a first ranking charge and the HA will take a second ranking charge, subject to an intercreditor agreement being put in place. The Investment Agreement will include a right for the HA to receive a Property Realisation Equity Share (PRES).

Ok, so what is a PRES?

PRES is the State’s return on its investment in the CRUs. PRES will only become payable where the CRUs cease to be CRUs due to (i) the expiry of the 50 years (ii) an extrinsic event such as a fire or change in law and (iii) the owner fails to comply with the Affordable Housing Act 2021 (the Trigger Event).

PRES is calculated as a percentage of the overall value of the CRUs, taking into account the equity share given by the Proposer and the investment given by the State. The percentage applied to the market value of the CRUs, will be the date on which the Trigger Event occurred. The return to the HA will consist of (i) repayment of the original equity and (ii) percentage of any uplift in value. In the event of a negative return, the HA will suffer a proportional loss on its original equity element. A summary of the formula used to calculate the PRES can be found here.

Can I sell during the 50 year period?

Yes, an owner can dispose of its interest in the CRUs to a third party provided the units continue to operate as CRUs for the purposes of providing cost rental accommodation. However, in the event of a disposal, replacement security will be required to be in place in addition to a new Investment Agreement or accession to the existing agreement by the new owner. The HA must be notified in advance of any such sale.

Refinancing is also permissible provided a new intercreditor agreement is entered into and the PRES is recalculated as appropriate.

What happens at the end of the term of 50 years?

At the end of the 50-year term the owner of the CRUs has 3 options:

1. They can extend the cost rental designation for an additional agreed period of time; or
2. Exit the cost rental designation by making a repayment of PRES to the State; or
3. If at the end of the designation period i.e. 50 years the landlord wishes to sell, the HA or its nominee will have the option to buy the units from the landlord at market value minus an amount equal to the PRES.

Summary

While the introduction of the STAR is a welcomed step in addressing Ireland’s housing crisis it remains to be seen whether there is a commercial appetite for Proposers to avail of it.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

 

[1] https://www.gov.ie/en/press-release/e5790-new-secure-tenancy-affordable-rental-star-investment-scheme-aims-to-invest-in-the-delivery-of-4000-cost-rental-homes-by-2027/

[2] A copy of the Investment Agreement is not publicly available