Rural and Islands Housing Fund: Guidance note MHDGN 2021/02

All potential applicants must complete a pre-application questionnaire

before they prepare an application for the RIHF, which includes a requirement to contact the relevant council in their role as strategic housing provider.

If upon completion of the pre-application questionnaire, if the applicant is confident that they  would be eligible to apply to either the main fund or the feasibility fund, they should complete an Expression of Interest form and send this to rhf@gov.scot  We recommend that applicants  complete an Expression of Interest as soon as they  think that they believe they  may be interested in applying for the RIHF . We aim to formally respond to expressions of interest within 15 working days of receipt, highlighting any particular issues or comments and inviting applicants to proceed to application stage, if appropriate. Please note this does not guarantee that a future application to the fund will be successful.

Prospective applicants may be at different stages in terms of the development of their proposal.  Whilst some may be ready to submit an application to the Main Fund others may need to undertake further feasibility work to determine if the project is feasible or viable before they are in a position to apply.  Separate housing feasibility funding is available to allow applications to be made (see paragraph 40).

All applications should be submitted electronically to rhf@gov.scot  A feasibility application form and main fund application form are provided. 

The information requested on both forms will be used to assess funding applications. All supporting information must be submitted together with the funding application.  There is a checklist at the end of the application forms to assist applicants. Only information requested within the checklists on the application forms should be submitted. Failure to provide all required documentation will lead to an application being rejected. 

If an application is not approved for funding, applicants can request feedback from the Scottish Government. A summary of successful applicants will be published by the Scottish Government.

Funding available

Feasibility Funding

The RIHF will provide support towards the cost of feasibility work.  This support is intended to fill gaps in existing provision of feasibility funding and will be prioritised to organisations where alternative sources of feasibility funding are not available.  Information is provided here on potential other sources of funding and support.

Feasibility funding will be available in the form of a grant of up to £15,000 to support feasibility work to enable a housing project to progress an application to the Main Fund. Whilst up to £15,000 is available, we would expect applications to reflect the requirements of individual projects (for example some projects may require a smaller contribution to feasibility work). Supporting documentation, including the need to seek competitive quotes for works, must be provided for all costs of feasibility work.

Feasibility funding is intended for applicants at an early stage of development of their housing projects. It is for site specific projects (with a postcode identified) which have potential to progress to construction and deliver increased affordable housing. Here are some examples of what a feasibility grant could pay for:

• work with someone (for example a consultant, RSL or community support organisation) to develop the project business plan/financially viable proposition.
• undertake community engagement work to understand community views and demand for the proposed housing.
• undertake detailed assessment of housing need and demand in the area (although we recommend that applicants engage with the local authority to identify if there are any gaps in  existing information available on this before progressing with commissioning new work in this area).
• Professional construction and building advice, for example
• Architect’s design drawings
• Quantity Surveyor’s cost estimates
• Structural Engineer’s report
• Chartered Surveyor’s valuation advice or development appraisal
• Specialist advice to consider the environmental impact of a proposal
• Planning applications
• Building warrant applications

The Feasibility Fund cannot be used to fund the following:

• staff salaries
• loan payments
• paying for staff time to complete applications for funding
• projects where building work has already commenced
• projects aimed at specific ‘key worker’ groups
• goods or services that are purchased before any offer of grant is accepted for assistance under the RIHF
• legal advice and representation
• recruitment services

If an application to the Feasibility Fund be successful, applicants should complete the feasibility work within 12 months of the date of receiving confirmation of the grant. Feasibility funding will not be provided in advance of need.  All claims for payment of grant must be supported with detailed invoices that include a breakdown of all costs.

All applicants will be required to send the Scottish Government a completed copy of the outcome of their feasibility work.  All applicants must complete an end of grant report, telling us how the grant was spent and what has been achieved.  If the funding does not enable the applicant to progress an application to the Main Fund, we will expect the end of grant report to indicate the reasons for this.

Main Rural Housing Fund

The Main Fund is for a contribution towards the construction, renovation or conversion capital costs - this can include the total cost of acquiring land or property, construction costs, professional fees and non-recoverable VAT. It cannot be used to solely purchase land.

 We would expect the level of Scottish Government support requested to reflect the needs of the particular project.  For example, houses for social rent would be likely to require higher levels of public subsidy than those for mid-market rent. The Affordable Housing Supply Programme benchmark subsidies provide a useful reference.  Please consider the level of funding requested carefully as this will be considered as part of the Value for Money assessment of the application.

What will happen to the housing after completion?

The houses delivered must be made available for rent or sale as affordable housing after completion (as defined below).  The Scottish Government is keen to capture information on how successful projects have encouraged population growth and stem population decline and expects this information to be reflected in the short case study to be submitted by applicants which will be a grant condition.

For rent

Rent levels must be affordable.  Rents can be set no higher than the relevant Local Housing Allowance level at first let.  This equates to what is generally known as an intermediate or mid-market rent.  Maximum permitted annual rent increases will be CPI plus 1% and the rent must not exceed the median point of the relevant private sector market rent level at any point during the period the home is to remain as affordable housing. The rent level charged may not be increased more than once in a twelve month period. Housing providers should also note that all tenancies for affordable rent will be required to comply with the Private Housing (Tenancies) (Scotland) Bill which came into effect in December 2017. Official private rented sector statistics are available on the Scottish Government website. Data is available at Broad Rental Market Area (BRMA) so housing providers will need to check which BRMA they fall into, and what the median for the area is. Any increase above this level would constitute default.

For sale

The selling price must be no higher than the 4 apartment maximum threshold price that has been set for the Open Market Shared Equity Scheme . The OMSE threshold prices vary by area and size of property and have been set to represent the entry level price for a property on the open market i.e. they equate to the selling price of affordable open-market houses.  The sizes of properties are defined by number of apartments NOT the number of bedrooms.  An apartment is classified as any habitable room, but does not include kitchens, bathrooms, box rooms, utility rooms or hallways. Glass conservatories do not qualify as an apartment.

 If circumstances change and the houses can no longer be provided as affordable housing, grant recipients must repay the full grant to the Scottish Government. 

Please note, if funding is awarded based on rents being set at equivalent of social rent, the grant offer will require the grant recipient to continue to offer rents at social rent equivalents long term.  This is because the benchmark funding for projects providing housing at social rent equivalents are higher than for mid-market rent projects.

Target tenants and buyers

Target tenants and buyers must be those who, due to lower than average income, or higher than average rents or house prices in the area, find it difficult to access housing to meet their needs.  Applications must provide evidence of how this objective will be met together with information where applicable around how the target tenants and buyers will contribute to stemming population decline or population growth in the area.

Application timescales

Applications can currently be submitted at any time and will be assessed on an on-going basis. 

Assessment process

Expressions of Interest

Expressions of interest will be assessed to determine whether the Scottish Government is content to invite an application to the RIHF.  Feedback will be provided on all expressions of interest.  We will consider the following factors in considering expressions of interest:

• Whether the eligibility criteria has been met

• The project has the support of the local authority (strategic/affordable housing team)
• Whether a housing pressure has been identified in the location of the proposed project
• Track record of the applicant in affordable housing delivery.
• Due diligence checks on the organisation applying.
• Evidence of partnership working
• Timescales for the project
• Deliverability of the project
• The level of funding required
• Feedback on expressions of interest will normally be provided within 15 working days (three weeks) of receipt.

Feasibility Fund

Due to the significant demand for the Feasibility Fund the following factors will be considered when assessing applications:

• Whether or not the  organisation has access to alternative feasibility support
• Whether the project shows evidence of community engagement or partnership working
• Whether the project has the approval of the local authority
• The total cost of the feasibility activities
• The timing of the project i.e. the likelihood of completing the feasibility work within 12 months of the date of receiving confirmation of the grant.
• Whether the application demonstrates the need for the housing proposed
• The type of work to be undertaken with the Feasibility Funding

Assessment of applications to the Feasibility Fund should normally take no more than six weeks.

Main Fund

A detailed appraisal of applications will take place against the five assessment criteria detailed below. 

Assessment criteria

• Deliverability – this will be assessed based on whether the application demonstrates the project can realistically be delivered on time and on budget.  We will consider the various key stages of the project.  We will assess the applicant’s business model. This will include looking at the build phase as well as whether there are suitable arrangements for on-going management, maintenance and in terms of how the completed houses will be allocated and how buyers will be selected. The risk register and technical information provided will be considered as part of the deliverability assessment. The amount of funding (from the applicants themselves or other sources) or staff resources the applicant is providing to the project will also be taken into account in assessing deliverability.
• Housing need / demand and strategic fit – The local authority’s view (as set out in the application) and the basis of any discussion Scottish Government may have had with the local authority about the application will be a key element of the assessment.  By applying to the RIHF, applicants are consenting for their application and associated documents to be shared with the relevant local authority.  Applications must demonstrate how the project fits with the local authority’s Local Housing Strategy priorities – such as the extent to which the application meets housing need, promotes regeneration, tackles homelessness, contributes to the population growth or where it has contributed to stemming population decline and sustains communities.  Applications will also need to demonstrate that there will be demand for the type of housing to be provided in the proposed location. This will involve working with the local authority to demonstrate evidence of need and demand through its Housing Need and Demand Assessment or using a separate analysis of housing need and demand at a local level that has been agreed with the local authority or a mixture of both approaches.
• Value for money – to make an assessment of value for money for a project we will consider things like the grant cost per unit, rent/resale levels, the size and location of the houses, and the intended beneficiaries of the project.
• Community engagement and participation – applications will need to demonstrate strong evidence that they have engaged effectively with the local community in developing the proposal and confirmation that the community is generally supportive.
• Sustainability and wider economic benefits – applications must demonstrate how the project will deliver wider social and/or economic benefits to the local area. For example through creating or supporting jobs, contributing to the population growth of an area, contributing to stemming population decline in area, encouraging new business to the area or supporting existing business to remain, sustaining local communities, regenerating an area where empty properties are causing neighbourhood problems, help attract or enable further housing development opportunities.

Applicants must demonstrate that their application adequately meets all of the above criteria to have their application considered for funding.  Applications which fail to meet one or more of the criteria will be rejected but will be provided with feedback in order that they can consider which areas could be strengthened should they wish to resubmit a future application.

Possible additional prioritisation of funding under the RIHF

In certain circumstances, additional prioritisation of applications may be considered.  For example:

• to more remote rural and island locations where delivery by council’s or RSLs is less likely
• to smaller scale projects/developments
• projects demonstrating greater evidence of partnership working

We will aim to take no more than 12 weeks to assess applications to the main fund and make a final funding decision.  Unsuccessful applications will receive feedback.

Other sources of funding for the project

Projects may require funding from a number of sources, as well as funding from the RIHF in order to be viable. This funding could come from both public or private sources.  Some examples of organisations where additional funding has come from are:- Local Authorities, Scottish Land Fund, Commercial Lenders, Enterprise Agencies, Charitable Organisations, SSE.

However, please note that projects which have received funding from a local authority via the AHSP will not be eligible to apply for the RIHF. The contribution of funding from alternative funders will be considered in assessment of the application when considering deliverability.

Written confirmation from other lenders of financial support secured or agreed in principle is required when submitting an application to the Rural Housing Fund.

Please note that whilst the RIHF provides public funding for housing development, the funding is not being provided via statutory routes so other grant funders (public and / or private) are able to assist.

Local authority engagement

Applicants must inform housing officers from the relevant local authority that they are preparing an application to the RIHF (both Feasibility or Main Fund).  The local authority will be able to provide applicants with useful information on need and demand for housing in the local area. Only where there is an identified housing need in a local area will applications be considered and therefore it is vital that applicants understand what and where housing need is in the local area before they progress with an application.

Applicants may also find it helpful to seek guidance from the local authority on who the target tenants or owner groups for the homes might be.  Once the relevant local authority has been informed about the potential project, and the applicant has discussed the housing need in the local area with them, applicants must ask the local authority for written confirmation of their support (by email is acceptable), which must be submitted along with a copy of the application to the Main Fund.

Statutory consents

Statutory consents refer to planning permission and building warrants. Applicants to the Main Fund should ideally have detailed planning permission and necessary building warrants in place. If detailed planning permission has not yet been received, applicants are expected to have at least submitted an application for detailed planning to the local authority.  Whilst we can provide an in principle offer of funding, where statutory consents are not in place, Scottish Ministers will not make any payments until all consents have been obtained and verified.

Community engagement and support

Applicants to the Main Fund are expected to provide detailed information on their engagement with the local community on the development of their project.  This could include setting out evidence from consultation sessions, discussion groups, surveys, local development plans and letters of support.

The Feasibility Fund application form asks about how community engagement will be undertaken. However, we do not expect overly detailed information at this stage in the project. Applicants are encouraged to seek out information from local organisations and the community council for that area. 

Procurement

Applicants, to either the Main Fund or the Feasibility Fund, will be required to demonstrate that, wherever practicable, all consultancy or construction works will be procured in accordance with good tendering practice. See the Procurement Journey website for further information.

Feasibility applications must confirm that at least three quotes have been sought for all services with a value over £1000.  Evidence of these quotes must be provided when submitting the application.  If applicants are unable to obtain three quotes (for example, due to limited availability of contractors) then they should explain why, providing evidence (e.g. copies of emails etc.) to demonstrate that efforts to obtain multiple quotes have been made.

Applicants to the Main Fund are also required to provide evidence of at least three quotes for the project costs. These should be submitted with the application form. If applicants are unable to obtain three quotes then they must provide evidence why this cannot be achieved.

Value for money

Applicants to the main fund should ensure they demonstrate how the project represents good value based on the scale of work required. The benchmark subsidies for the AHSP provide a useful reference on support available.

A project will be deemed better value for money the lower the grant per unit. Total costs should aim to be within acceptable benchmarks used by mainstream affordable housing providers.

Applicants will be expected to provide a contribution to the projects themselves (either financial and/or in terms of significant staff input).  Applications will also be assessed in terms of other funding partners and we will consider how this affects overall value for money. We also ask that applicants provide us with proof of funding agreements with other funders (e.g. agreement in principle offers). This requirement is included in the checklist of additional documents required in the main application from.

Quality standards

Building Regulations

Any construction of a new building or work undertaken to an existing building must comply with the building regulations applicable at that time, including the need to obtain a building warrant prior to starting work where this is required. Information on Scottish building standards is available on the Scottish Government website.

Other Standards

In addition, all completed houses will be expected to meet the Scottish Housing Quality Standard (SHQS), Repairing Standard, Energy Efficiency Standard for Social Housing (EESSH) and Housing for Varying Needs (HfVN) essential features once finished.

In the case of houses for outright sale, there will be requirements of the SHQS, Repairing Standard, EESSH and HfVN which will not be relevant (for example relating to ongoing repairs, maintenance or provision of appliances).  However, all other relevant requirements must be met.

There may be exceptions to these requirements in the case of existing empty properties where an applicant can provide justification that elements of HfVN, SHQS or EESSH standards are not feasible or practical due to the existing design of the houses or for structural reasons.  Where this is the case, applicants must provide detailed information when applying to the fund of the reasons for being unable to meet these standards. 

Risk Register

Applicants to the Main Fund must provide a risk register with their application which identifies any significant risks to the project and indicates how the applicant proposes to mitigate each risk or tackle it if the risk materialises.  An example set of risks are shown below, however, we would expect to see this tailored to individual projects.  The applicant’s risk register will be considered when assessing the deliverability of the project.

Risk	Likelihood	Impact	Owner of Risk	Mitigation
Lack of tenants for rental properties.	-	-	-	-
Unable to sell completed properties.	-	-	-	-
Lack of capacity of funding applicant to deliver project.	-	-	-	-
Delay in project timescale.	-	-	-	-
Funding requirements increase.	-	-	-	-

Robustness of business model and financial viability

The business model underpinning any application must be sound with robust plans for both delivering the houses and on-going management & maintenance.  If this cannot be demonstrated, the application will be rejected.  Applicants may wish to apply to the Feasibility Fund for support to help develop a strong business plan.  Applicants should consider the following points:-

• Plans and timescales for the project – are they realistic and deliverable?
• Cost estimates and assumptions around rental, sale and other income and how these impact on any loan repayment;
• Whether key risks have been identified and adequate plans are in place to mitigate them in the project risk register;
• Requirements for planning permissions or building warrants.

Valuations

A valuation of completed houses for affordable sale is required.  This must be determined upon completion by the District Valuer or an independent Chartered Surveyor.  If the project includes site acquisition, a valuation must also be provided to support the grant requirement.

Management and Maintenance

In terms of letting a home, the application form for the Main Fund asks for information about how completed properties will be managed and maintained, including anticipated costs.  This is an important issue that must be fully considered by applicants when developing proposals.  The information provided around how the completed homes will be managed will be used to assess the deliverability of projects. 

Grant recipients must be fully aware of their responsibilities and the standards required in managing tenancies. This includes issues relating to communications with tenants; complaints procedure, void management; tenancy management; dispute resolution, and management of antisocial behaviour. Grant recipients will be required to maintain the houses to the Scottish Housing Quality Standard and the Repairing Standard

Applicants may wish to contract out management duties to a third party such as an RSL. However, if funding is sought on the basis that management will be carried out by a third party, any future change to this arrangement must be agreed in advance with the Scottish Government.

Allocations

The application form for the Main Fund seeks information on an allocations policy. This applies to both houses for sale and those for letting. The information provided us about the allocations policy will be considered as part of the deliverability assessment of all applications.

The allocations policy must be transparent, fair and ensure equality of opportunity.  As the RIHF aims to increase the supply of affordable housing, the target tenant group should be those who are unable, either because of high rents or low salaries, to access housing at a market rent.  Although priority can be given to people with a local connection, they have to have a housing need to reside in the area. Applicants must ensure that the allocations policy complies with equalities law and ensure that no person or group of persons is treated less favourably than any other person or group of persons because of their age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, and sexual orientation.

Further information on good practice on allocation policies can be found in Social Housing Allocations: A Practice Guide. This outlines the legal rules and flexibilities that housing associations and local authorities have in allocating their houses. It is also a useful tool for other landlords and includes information about local lettings initiatives - ways housing associations can give some priority to local people in the allocation of housing. If a project is subject to a S75 Agreement, early discussion should be held with the relevant local authority as to the conditions of the agreement, in particular around allocation and nominations of tenants.

Applicants may wish to engage with an RSL or local authority for allocations and management or to use their waiting list to allocate properties. However, other solutions are also acceptable and these should be fully explained in applications to the RIHF.

The Scottish Government must be informed about any changes to any allocations policy once the project is underway or after the houses are completed.

State aid

The Scottish Government must ensure that any funding provided to non-public sector bodies is permissible under the new UK/Trade and Co-operation Agreement Subsidy Control regime. Projects supported through this Fund are expected to be considered as permissible subsidies because they were seen as a Service of General Economic Interest (SGEI) under the previous EU rules on State aid in providing ‘social housing’.

These projects will need to be reviewed after the UK subsidy control Bill has passed through UK Parliament and the rules have been agreed with all Devolved administrations

Funding offers and conditions

The Scottish Government will issue its approval of funding in the form of a legally binding grant offer. Applicants should note that the Scottish Government cannot provide grant until an acceptance of the offer of grant has been received. 

The Scottish Government will request recipients to confirm the estimated site start and completion dates for the project.  It is important that recipients notify the Scottish Government of any subsequent delays in beginning the site work.  This will enable the Scottish Government to manage the RIHF budget effectively.

Grant payments

Following approval and acceptance of the grant, payment requests should be submitted to the Scottish Government.  A standard claim form will be issued with the offer letter. The Scottish Government will discuss the timing of payments with successful applicants, so these can be set out in the offer letter.  Please note, no payments can be made in advance of need and will only be paid on receipt of full supporting documentation.

As a guide, the following stages provide indicative timings for payments but are more relevant for new build developments:

Golden Brick - this means that the development has commenced, works are on site and the foundations plus one brick course above ground level has been completed.

Wind and Watertight stage - This would usually mean that the kit shell has been erected on the foundation, the windows and doors have been fitted and the roofing and wall membranes have been applied, although the house may still let in water at this stage.

Completion stage – final payment on certification from the project architect confirming the building is complete.

Standard security

Prior to any payment of grant or loan, recipients must provide a standard security over the properties or land in favour of Scottish Ministers together with a certificate of title from the grant recipient’s solicitors.  This is required to safeguard the funding in the event that the recipient goes into liquidation or defaults on the terms and conditions contained in the grant offer.

Scottish Ministers’ preferred form of security is a first ranking standard security over the houses delivered. Where recipients are borrowing funds from private lenders to finance part of the development costs not covered by the Scottish Government funding, we will discuss the security arrangements with applicants. It may be necessary for Scottish Ministers to take security over certain properties within the development while the private lender (s) take security over others.  An alternative would be for the Scottish Ministers to take a second ranking standard security to the private lender providing additional loan finance for the project.