Diffusion Pack for a Sustainable Fund to provide Community Loans to Householders
This document provides a pack of information for Social Enterprises involved in taking action on climate change to determine whether a setting up a sustainable community fund which can provide loans to householders (and potentially community organisations such as schools) is appropriate for meeting their aims. Template application forms and legal agreements are provided that can be modified and used by communities in setting up a fund. The focus in this diffusion pack is on loans to fund energy performance improvements, the principles could potentially be applied to other areas such as community waste where there are potential future revenue streams that can be generated as a result of an initial capital investment. Where any of the information from this pack is used to form legal agreements it is strongly recommended that the social enterprise takes its own legal advice on the applicability of the information to their specific circumstances.
Importantly, it has been assumed that the loan fund will be set up to make use of working capital already generated by the social enterprise through for example: winning grant funding, corporate sponsorship, revenue generated from community owned renewables, community share issues etc. The significant benefit is that the loan fund allows the community to unlock finance from throughout its members. Work can commence to improve the energy performance of buildings immediately and then members pay off the capital sum borrowed to the community for further work in the community in a sustained programme of work. We have seen that removing that barrier where people have to find all the up front capital immediately provides a step change in the level and rate of action on climate change. This approach can be fantastic for building the feeling in the community that everyone is working together and that countering climate change can then be something that brings the community together to build a positive future vision.
Community Benefits & Culture
The prime benefit of a rolling loan fund is that hard-earned capital funds for a community can be used to fund an on-going programme of activity such as household retrofits rather than the one-off burst of activity provided by many grant-funded programmes. Here we have used the example of the HNLC Low Carbon Fund which has the focus of enabling the community to put in place a sustained programme of improving the energy performance of the building stock (both individual homes and community buildings). The initial £400K of grant funding has been used to establish a 10-20 year programme “Annex 2 – HNLC Low Carbon Fund.pdf”
Hook Norton is a community in rural Oxfordshire with approximately 2,500 residents. The Low Carbon Hook Norton group was first set up in February 2008 by a few interested individuals. Having grown to a membership of some 160 people we formed a formally constituted organisation Hook Norton Low Carbon Limited in October 2009. We now have a chair, treasurer, secretary, and a project management committee. Nearly all positions to date are voluntary, although we are contracting some of the administrative activities to a member of the community on the basis of an hourly rate. There is no membership fee for the wider engagement group Low Carbon Hook Norton and membership is open to all residents. To be a member of the constituted community benefit organisation Hook Norton Low Carbon Limited costs £1 and is run on the basis of one member one vote when it comes to decision making. In December 2009 HNLC successfully applied for DECC (Department of Energy and Climate Change) LCCC (Low Carbon Communities Challenge) funding to set up a rolling retrofit fund – see www.hn-lc.org.uk.
The culture HNLC aims to instil in the community is to move away from a dependency on continual applications for grants to one where the initial injection of capital can be used to set up a viable and sustainable community social enterprise. So for example, within 3 months of the launch of the Loan Fund, households in the community had committed to invest £200,000 and started work to upgrade the energy performance of their homes and to pay this back to the community over period between 3 months to 10 years so that the funds can be recycled to other members of the community.
Loans will either be need to be made at a level which keeps pace with inflation or, if as in this case the loans are made at 0% or 3% interest, in order to maintain the real value of the capital loan fund the community will need to generate the relatively small income stream required to keep the loan pot topped up. In this example affiliation schemes with a green electricity provider and ethical telecoms generate the capital replenishment element.
The social enterprise needs to be a legally constituted body such as an Industrial & Provident Society (see model rules Hook Norton Low Carbon Limited Rules.pdf; only sections 1,2 & 4 need to be changed for a new IPS) or Community Interest Company (see **example from The Big Lemon**.pdf). Make sure you get professional support to help you choose a legal structure appropriate for the current, and future, needs of your project. The loan fund principles can potentially operate for smaller communities than the 2,500 in Hook Norton and could readily scale up to a scale of a Transition Town. If the community is fortunate enough to have individuals to provide informal advice and point to local contractors then transaction costs can be kept to a minimum. However, where those skills are missing we point readers to the Household Energy Services diffusion pack. Apart from that all it needs is time and a committed group of indiviuals who enjoy working together for their community.
The balance between straight low interest (or 0% interest loans) and loans with grants (where there is an element of the initial capital investment which the community decides will not need to be repaid because this meets a wider community benefit such as supporting more vulnerable groups in the community) attached depends on the demographics of the community and how the social enterprise wishes to provide the wider community benefit. In the initial stages of the HNLC rolling fund where there was a tight time constraint to deploy the carbon saving measures rapidly much of the focus was on members of the community who have the funds to be able to invest in improving their homes but have previously been deterred by the high up-front capital costs of improving the energy performance of their homes. This can provide the advantage of rapid recycling of loan funds. The plan is to now switch to engagement with more vulnerable and elderly groups through working with both the local social housing provider and the active Baptist church care groups in the community (this area is developing, but in essence HNLC has provided the care groups with free reign to discuss options within their existing safe environment and has said that it will provide the funds to the options they present back).
Risk to Manage
It is very important that all risks to any project are considered from the outset. Communities need to think through the implications of worst case scenarios and seek to find solutions to these problems before they arise. HNLC identified two specific risks and sought advice on how to deal with them.
- Risk of default: it is possible to set up the loan scheme to have security on the loan against the property (like a mortgage). The advice that HNLC was given by Bird & Bird via the Carbon Leapfrog “pro-bono” (free) legal advice available to communities (www.carbonleapfrog.org) was that for the type of loan scheme being set up , where the borrower is well known by the lender, the relative cost of setting up the security for the loan agreement outweighed the security that the loan guarantee provided.
- Accessibility to all members of the community: Ensure that the panel that makes the decisions on who does and does not receive loans (in the case of HNLC, Home Improvement Scheme panel – see operations section) is representative of the community as a whole and that the availability of the loans is well publicised. If the aim is to provide the potential for uptake from all sectors of the community, especially the vulnerable and the elderly where there are concerns on whether the energy savings they will benefit from will be great enough to fund the loan repayments, then the community can consider adding grant aid elements (which do not have to be repaid to the community social enterprise) as well to ensure that the repayments are matched exactly with future energy savings (the Pay As You Save, PAYS , principle)
Development of Intellectual Property & Networking
Since HNLC was fortunate enough to be provided with a DECC (Department of Energy and Climate Change) LCCC (Low Carbon Communities Challenge) grant to develop the details of the rolling retrofit fund the decision was taken that any intellectual property developed during the project should be shared in an open source fashion, therefore freely available to anyone who is interested. Sharing learnings with a network of social enterprises nationwide was seen as a key activity for HNLC. Where a community develops a project which it feels may have a commercial aspect eg develops something which it could ‘sell’ to others and receive money back into its rolling fund, they may wish to seek advice from external experts about how to protect its commercial interests and the “intellectual property rights” of the ideas they develop.
In the HNLC model, the possibility of obtaining low interest loans is publicised throughout the HN and surrounding community. 0% loans are available to residents who want to carry out low carbon refurbishments – main routes: village newsletter which goes to each of 750 households every two months; HNLC engagement meetings held every 2 months at the brewery visitor centre which are open to all; the village and HNLC web sites.
The procedures for approving householder loans
It is important in any household loan scheme that the process of choosing households to receive funds be transparent and open for all members of the community benefit organisation to be involved in the review panels for the process should they chose to do so.
The steps of the HNLC Limited loan approval process are as follows:
- Residents join HNLC Limited and register interest for a loan and/or advice – see “HNLC application initial form.pdf”.
- Management Board reviews membership applications (only exceptional reasons for exclusion would be considered) and then sends out the share certificate and the pre-application form for completion and return – see “HIS application form v2.pdf”. If advice is required the application details are forwarded to two volunteer members of the management board with technical skills in sustainable refurbishment and renewables to action.
- Pre-application forms are reviewed by the Home Improvement Scheme panel (HIS). The HNLC management member of the panel advises at the start of the meeting the budget available for making loans. Decisions are made by the panel on whether to grant ‘in-principle’ approval for the loan on the basis of whether the work being funded by the loan will deliver carbon savings. Where there is an excess of applications over the budget available the panel will select those applications which in the view of the panel will deliver greatest carbon savings and widest community benefit. The panel also considers whether any additional terms need to be clarified either on the work to be completed (eg. in the case of extensions or new build, only measures over and above building regulations would qualify for a loan) or on the terms of the loan (eg. shorter payback period, or if PV installations form part of the loan which receive Feed-in-Tariff (FiT) revenue whether to charge 3% interest on the loan because the householder is already receiving significant financial support through the FiT incentive), or whether there should be a grant element to the loan where a case has been made on the grounds of social/community benefit.
HIS panel membership is composed of 11 members representing a cross section of the community. For panel review meetings to be able to reach a decision requires a minimum of one of the main HNLC management board members plus 3 additional members to be present.
- If the Home Improvement Scheme panel takes the view that a pre-application is too large or complex for them to review, or that they are not able to make a decision within the budget available at the time they will refer the pre-application to the HNLC management board.
- The applicant is told the outcome of the panel review and the model loan agreement “HNLC_LoanAgreement_14_09_10.pdf” is sent to them so that they can make sure they are happy to sign the agreement and provide all the required information in schedules 1, 2 & 3.
- On review of the information provided by the loan applicant HNLC sends out the Loan Agreement to the householder by e.mail for final review. The borrower then collates all the information required in schedules 1, 2 & 3 and brings 2 copies to the Brewery premises when they are ready to sign. HNLC reviews the documentation provided by the borrower at the Brewery premises. Two HNLC management committee signatures are required to authorise the loans.
- The appointment of the contractor, project management of the works and payment for completed works are all the responsibility of the householder. This provides both a direct supervision of the work and a clear customer-contractor relationship and also provides a clear limit on the liabilities of the social enterprise. Once the work is complete the householder provides the receipts for the completed work to match the work specified in the loan agreement.
In the case of HNLC two of the members were experts in the fields of energy efficiency and renewables in buildings. These experts have been able to volunteer their time to oversee any technical issues and act as final arbiter. In other schemes this expertise may need to be sought from outside the community group and may be an additional cost. Training may be available for others by adopting the Household Energy Services model)
Legal & Compliance:
Registering for a Consumer Credit Licence
The application for a consumer credit licence is required for a community organisation wishing to make loans (even 0% interest loans to members of the public). This is part of a national framework to ensure that consumers are protected from individuals and organisations offering financial deals that are not in the best interest of the consumer. The good news though is that the application procedure is much more straightforward than one might imagine and can be carried out on line via:
If it is possible to run the loan scheme at low interest rates and the loan agreements can be signed at the registered offices of the constituted community organisation rather than in the consumers’ homes, then the application process is streamlined and the decision process rapid. The fee for the licence is currently £970, but for those organisations meeting the above criteria it is valid for an indefinite period of time.
Sample loan agreements for householders and community buildings are provided under HNLC_LoanAgreement_14_09_10.pdf. These template loan agreements were provided as part of DECC support for LCCC winners by Bates Wells & Braithwaite. In addition, Bird & Bird have provided free legal advice on the appropriateness of the loan agreements on issues such as whether security should be sought on the loans (where the additional complexity and costs were deemed to be inappropriate for the level of financial risk).
Administration, Accounting & Finance
To start with the administration, accounting and finance services for the HNLC householder scheme were provided purely through time provided by members of its management board. This is unlikely to be sustainable over time as the level of administration rises. HNLC have recently contracted in administrative services from a member of the community at an agreed hourly rate and are in the process of appointing an accountant to audit its accounts due at the end of March 2011. Community groups will need to think about at what stage they will need to look at employing book-keeping and administrative support services.
A website is a useful tool for providing information and can, with the right investment, also be used to provide access to downloadable application forms etc. The HNLC web site was developed, and is currently managed, by one of the members of the management board. As groups move from the project delivery phase to spreading the messages of what can be achieved more widely specific IT expertise may be sought. It is important to keep this in mind when examining forward costs.
Social Enterprises are social mission driven organisations which apply market-based strategies to achieve a social purpose. The movement includes both non-profits that use business models to pursue their mission and for-profits whose primary purposes are social
For examples of community financing see www.energysavingtrust.org.uk/cafe/Green-Communities/Funding-Advice and www.communityshares.org.uk.
See Co-operatives UK publication; ‘Simply Legal – structures for social enterprises’ at https://offline.cooperatives-uk.coop/live/dynamic/publicationview.asp?pub_id=92C2810A-0FA6-49B8-9756-A91BF8604E02 – NB also DECC publication to be released as part of LCCC