CITM3092 - Investment by CDFI: Non-residential Property Investments

SI2003/96 Schedule 1(8)

There are restrictions on the amount of investment that an accredited Community Development Finance Institution (CDFI) can make in enterprises that acquire, construct, develop or hold interests in property:

• investment of money raised under the CITR scheme in residential property is prohibited outright (see CITM3090), and
• the extent to which investment in non-residential property is regarded as a ‘relevant investment’ is limited (see below).

There are examples of property-related investments and how they would be categorised in CITM3094.

Non-residential Property

CDFIs are permitted to make investments that directly or indirectly fund the acquisition, construction or development of non-residential property. But where the investment funds a property investment by an enterprise whose main activity is concerned with property investment or property development there are limits on the extent to which investment in those enterprises can be regarded as a ‘relevant investment’. The limits are laid down in SI2003/96 Schedule 1(8) and Annex D of the Department for Business, Enterprise & Regulatory Reform (BERR) ‘Material Concerning the Accreditation of Community Development Finance Institutions’ – see ( CITM2130).

These rules restrict the amount of money that a CDFI can invest in enterprises whose main activity involves:

• holding property with a view to its capital appreciation,
• investing property in order to derive an income from its exploitation, or
• property development.

(This would include investment in, or development of, property owned by a development trust or other social enterprises engaged in property investment or development).

In this context ‘property development’ would be expected, broadly, to amount to the development of a property by someone with an interest in the property whose main aim was to realise a gain on the disposal of an interest in the property once it was developed.

Non-residential property investments that are not restricted

a) The enterprise’s base of operations

The restrictions are not aimed at limiting investment intended to help provide an enterprise with a base for its operations. Where an investment funds the acquisition, building or refurbishment of a property for occupation by an enterprise as a base from which to run its business or, in the case of a social enterprise, to deliver its services the fact that there is a property-related aspect to the transaction does not cause the investment to be regarded as caught by Schedule 1(8) nor to be regarded as funding ‘property development’ for the purposes of Annex D.

b) Investment in registered charities (other than development trusts or similar)

Where a CDFI makes an investment in a registered charity (that is not a development trust or other similar social enterprise) the investment will not be in an enterprise whose main activity involves holding, investing or developing property. So it will not be regarded as caught by Schedule 1(8) nor to be regarded as funding ‘property development’ for the purposes of Annex D.

Non-residential property investments: the restriction

The extent to which a CDFI investments may fund the acquisition, construction or development of non-residential property by an enterprise whose main activity involves property investment or property development is restricted. The rules only allow a limited amount of such investment to be regarded as ‘relevant investment’.

This restriction involves identifying the amount of investment in each of three categories and then comparing the amounts in each category on an annual basis. The three categories are:

• Case 1,
• all relevant investment other than Case 1, and
• Case 2

The investments that fall within Cases 1 & 2 are summarised in Table 1.

Table 1

Companies registered as Community Interest Companies (CICs) will be regarded as non- profit- distributing enterprises for the purposes of CITR.

The rules test to what extent investments within Cases 1 & 2 may need to be regarded as investments which are not relevant investments. They do this by undertaking two comparisons on each anniversary of the CDFI’s accreditation, as indicated in Table 2.

Table 2

Example 1

A CDFI was accredited on 1 July 2004. In January 2007 it makes a Case 1 investment of £150,000. None of its other investments relate either directly or indirectly to property.

At 1 July 2007 (the anniversary of the accreditation date) the total amount invested by the CDFI in qualifying enterprises is £500,000. Disregarding SI2003/96 Schedule 1(8) all its investments are relevant investments.

At 1 July 2007 the amount of relevant investment not with Case 1 is £350,000. Since this exceeds the Case 1 investment that £150,000 is a relevant investment.

Example 2

In September 2007 the CDFI in Example 1 above makes a Case 2 investment of £100,000. It retains its £150,000 Case 1 investment.

At 1 July 2008 (the next anniversary of the accreditation date) the total amount invested by the CDFI in qualifying enterprises is £600,000. Disregarding SI2003/96 Schedule 1(8) all its investments are relevant investments.

At 1 July 2008 the amount of Case 2 investments (£100,000) exceeds one half of the amount of Case 1 investments (i.e. half of £150,000) so the £100,000 investment in September 2007 is not a relevant investment.

Note: In Example 2 if the Case 2 had exceeded £100,000 SI2003/96 Schedule 1(2) would also have been in point – loans to profit distributing enterprises that exceed £100,000 are not relevant investments ( CITM3060).