How the Money Works Part 2: Rock House

(See also Part 1: Hastings Pier: How the Money Works)

Until we as citizens understand ‘how the money works’ when it comes to developing land and buildings we will always be disadvantaged – land and buildings are where power is held. Without them the community sector will be forever undercapitalised.

I am not an expert in property finance, not trained or qualified. But I have first-hand development experience, professional curiosity, and an insatiable desire to work out new ways to make things happen. As traditional regeneration approaches – which I would argue never really worked for communities in any case – fell by austerity’s wayside we have been piloting new forms of community investment.

So I want to tell stories, not just about the impact of our projects on individual lives, on cultural and community activity, and on the local economy, but also about how they are financed so we can begin to demystify and democratise the development process. I do have an ulterior motive – ignorance leads to suspicion and I have sometimes suffer in my home town from rumours and bad-mouthing. I hope this goes some way to address that.

The story of Rock House is long and convoluted. Here I’m going to tell it purely from the perspective of the money that came in to make it happen.

Back in 2013, Meanwhile Space CIC (of which I was a founder but non-executive director paid £500 a

month for my input) had been awarded a grant of £230k from HCA as part of the voluntary sector strand of the Empty Homes Initiative. Initially this was for a project in Margate but after a couple of buildings fell through they looked at Dover. When that too fell through I convinced them to come looking in Hastings. First we considered taking on the defunct Hastings Trust buildings in Robertson Street but that was moving very slowly.

Meanwhile Space and White Rock Trust (which had emerged from the Hastings Pier & White Rock Trust) were both fascinated by the Alley behind Claremont and had together arranged for a meanwhile lease of the basement of the building that was to become Rock House, mainly in order to liven up the Alley and to keep an eye on the derelict 1924 Observer Building (OB) – at that point on its 13th owner since it became empty in 1985. This meant we were in position when Dyer & Hobbis called to say the owner of the freehold wanted to sell the building – did we want to buy? The asking price was £400k. I asked my friend Chris Brown from igloo regeneration to come and have a look. We walked around the building and he said ‘offer them half’.

At the very same time the situation with the Observer Building (OB) was hotting up. Investec had lent large amounts to a man later convicted of mortgage fraud and they ended up owning the building which was listed in their books with a high (£4M+) valuation. After an aborted sale to a pleasant but deluded man from Essex called Tanjir Sugar, I had been working with Esther Brown (supported by a pre-feasibility grant from Social Investment Business) to encourage the council to consider a compulsory purchase. Jeremy Birch was getting interested. That pushed Investec to put it up for auction and it is a convention that local authorities dial down on CPO if there’s a chance of a new owner. Suddenly we were needing to compete to bring the building to safety. Mark Curry became chair of the White Rock Trust property group; Keith Sadler was lead negotiator. We spent a week on the phone back and forth with the auction house. I went begging to HBC, had a very memorable meeting with Jeremy Birch and Simon Hubbard which ended, amazingly, with them backing us with the promise of up to £350k so we could go and bid at auction. I rushed home… only to see on the auctioneer’s website: ‘SOLD PRIOR’.

The weeks merge into each other in hindsight but these processes – trying to buy the OB, actually buying Rothermere House (as it was known then) – were running in parallel, and could easily have had different results.

I called Ollie Dyer and (with butterflies in my stomach) offered £230k (I couldn’t bring myself to go to £200k – it just felt too cheeky – shows how naïve I was!). Ollie said yes but you’ll need to complete in 4 weeks.  So how could we do that? In a sector dependent on grants and loans, where funders require you to point at a building and say we want to do that one and then take 3-6 months minimum to say yes? I remember standing over the road from the OB with Cllr Keith Glazier (Leader of ESCC) and Nick Hurd MP (Minister for Civic Society) and saying in a dynamic market that just doesn’t work. They nodded, and went back to their duties. We were left to work it out.

There was one option. It was a bit crazy. When I describe it now I say: “I wanted to test whether people like me, people with equity in houses that they didn’t earn, could take some of that equity and invest it for good”. Ronan and I had been thinking for a while about buying a Hastings property and trying to be ‘good landlords’. Then I had started working with the Old Bakers in their base at Silchester Mews. We concluded what they needed was a ‘good landlord’. I spoke to Ronan about how maybe we could be that landlord and we opened negotiations with the owners Hastings Trust. But again, they were too slow (the charity is still not quite deceased even now). At the same time conversations were underway about the need to cap rents to protect the affordability that underpins the wonderful Hastings quirkiness (see Part 3 How the Money Works: Heart of Hastings, forthcoming).

So we were ready to invest. We’d spoken with mortgage lenders. We were renewing our mortgage in any case. But even for us the timescale was punishingly tight. Stroke of luck – my mother was moving house and holding cash in the bank while she rented in between. I borrowed the money from her first of all and then within a couple of months repaid her once our mortgage came through. The money on my personal mortgage is loaned to Jericho Road Solutions which pays £350 a month back to cover that element of the mortgage payment. So Jericho Road invested £85,000 into Rock House at the most crucial moment of all. And we haven’t stopped investing since.

We formed a company – White Rock Neighbourhood Ventures – 50/50 between Meanwhile Space CIC (MWS) and Jericho Road Solutions (JRS). Immediately I was keen to grant 10% of the shares to White Rock Trust, the 440-member community organisation I had spent the past 8 years developing. So JRS went down to 40%.

We bought the building in July 2014 and took vacant possession of a 9-storey office block  (1350sqm) in October 2014.

Two useful stories about money.

  1. The first Quantity Surveyor we got to cost the renovation said it would be £1.98M. We freaked! Can’t do that. So then we brought in Charles Couzens of Ecos Maclean who was committed to reuse and a staged approach. In the end (by March 19) we will have spent about £1M on conversion.
  2. The main reason the owner wanted to sell was because the 25-year lease to Diageo was ending in Sept 2014. By buying in July we not only got the last quarter’s rent (about £15k) but also got to charge Diageo for ‘dilapidations’. This was not something we even knew about but with help from the Third Sector Alliance we ended up getting £115k extra towards the refurbishment.

So we had enough resource to do the 1st and 3rd floors. We made those floors work for the tenants we had lined up – a perfect set of pioneers. On the first floor the Old Bakers expanding nearly two-fold as they moved from St Leonards into the nascent Rock House. On the third floor an exodus from the ‘Creative Media Centre’ – Technology Box, Wave Design Coop and BR Web Consulting. By March 2015 they were in and we were on our way. We still didn’t have any money to do the rest of the building…

This is where pre-existing relationships helped again. Meanwhile Space had long been in discussion with Big Issue Invest. BII were keen to invest and had done all the due diligence. They lent us £250k to develop the six flats on the 4th and 5th floors. We got on with that, while developing further plans for other floors, and nurturing the building as it came alive.

I was continually fundraising. I had been writing bids focused on ‘the rotting buildings at the heart of our community’ since 2013. We had some support from a pre-feasibility grant from Social Investment Business but now I was waiting for some of the funders to catch up. This was particularly true with the emerging Power to Change, which was to play a critically important role in Rock House’s survival and success.

Power to Change was literally being invented in front of my eyes as a funder and support system for community businesses – a field I have occupied for the past quarter-century (since I was a co-founder of the Community Business Network in Deptford in 1993!). A dream come true at last. It took a long time but we were awarded a grant of £300k. We stretched every penny of it to deal with the ‘M&E’ (mechanical & engineering – everything to do with the building as a whole – plumbing, electrics, lighting, heating, fire safety, lift, etc) as well as transforming the Ground Floor into the Ground Control co-working space, the Project Space and the Living Room for the whole building. In the end it wasn’t enough (mainly because we needed a misting system to deal with the complexities of the fire safety regimes) and we went back like Oliver with his bowl and asked for more. Without cruelty or patronising, they looked at the case and agreed a further £58k to meet part of the shortfall – we found the rest through Meanwhile Space.

That leads neatly to describe how we actually survived. Because making these projects work is only partly about making the spreadsheets tell good stories. It’s just as much about having a cushion when it doesn’t quite work out the way you expected. In the jargon, that’s called ‘working capital’ and when it comes to sheer survival, it’s like an airbag or a lifeboat. Without it you are likely to be… in trouble.

Meanwhile Space (MWS) cash-flowed the build phases – in other words they paid all the bills whether or not funding had come in for them. We transferred transactions to the WRNV bank account early on but still made active use of the MWS bank balance to fuel the redevelopment of Rock House for at least two whole years.  By the end of it they were owed £91,000. WRNV didn’t have that money, but that’s the whole point of a committed investor – they stick it out. A year later Meanwhile Space agreed to convert £40,000 of the loan into a grant as match-funding for the Coastal Communities Fund. The remainder is being paid off on a monthly basis.

In the middle of the redevelopment process, weird stuff happened. It’s not worth going into here but it led to Power to Change taking back the shares from White Rock Trust and becoming a one-third owner of WRNV and therefore Rock House. They (PTC) are currently working out how to pass their shares on to a bona fide community organisation.

One further source of significant capital input has been the Coastal Communities Fund. In the summer of 2016, I was putting together a CCF bid for Rock House. Hastings Borough Council told us that so were the Source Park and so was the Pier and that they the council would be best to bring us together and put in an overall bid (as it turned out Source only wanted a small amount and the Pier dropped out). The Council took up the ‘slack’ in the budget but Rock House was granted just over £400k to ‘finish the building’ (6th floor, 2nd floor, Lower Ground and Basement) and support a local-economy led regeneration of the Alley. This work is underway, due for completion in spring 2019.

The WRNV Shareholders’ Agreement envisages a situation in which the founder investors take out as much dividends as is prudent for the first 10 years, and then there is a 3-year window in which the community organisation partner (ie whoever takes over Power to Change shares) can buy out the other partners and own the whole building. The valuation at that point will be based on the covenant in perpetuity to cap rents with inflation. It will therefore represent a decent investment with a reasonable return.

There is another complexity about mixed use, important to understand. Our tax advisors pointed out that the company that develops the whole building should pass the residential to a separate company. Don’t ask me exactly why – we never got a clear answer – but apparently this is the way it is done. So Meanwhile Space and Jericho Road set up Living Rents (Hastings) Ltd to be that ‘ResiCo’ and agreed a 150-year peppercorn lease on the 4th and 5th floors (ie the residential element) in exchange for taking on the responsibility for the £250,000 debt to BII that was associated with the flats. Living Rents has been the landlord for the homes ever since, working out as we go how to run this innovative approach to landlording, and is now providing a similar service for Heart of Hastings CLT at 39 Cambridge Road (for 5% of the total rents).

Now, however, Living Rents being separate from WRNV no longer feels necessary or helpful so we plan for it to be a wholly-owned subsidiary of WRNV in order to bring the whole building together as an asset and a business. This consolidation will also help us in the next stage of the journey: the Observer Building went back on the market in August 2018 and WRNV is working flat out to buy and redevelop it as a community asset…

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