2.0 Shared revenue

Similar issues apply here as to the joint venture model, although in our experience, shared revenue arrangements are more likely to be entered into on or after financial close.

As highlighted above financing a shared revenue venture through conventional bank finance can be challenging due to the lack of security that can be offered by the community compared to the other shared ownership models. Sources of public funding may still be available, as well as private equity and crowd funding. In addition, if the developer does not need the community’s funds to finance the project, it may be feasible to agree to defer payment and use the revenues received from the project to finance the community’s payment to the developer. It may also be feasible to agree to capitalise any community benefit payments that the community may be due to receive from the project to finance the community’s investment in the SPV.

Given that the community’s revenue stream from the SPV is dependent on the SPV’s revenues, it is essential that the calculation of those revenues is clear and transparent. This is particularly so when the community’s revenue stream is based on the SPV’s net revenue after deduction of certain items of cost. In that case, the community will be concerned to ensure that the deductible items are not open to any form of manipulation that reduces the payments due to the community and that calculations can be audited by the community to verify the sums paid.

For that reason, a calculation based on the SPV’s gross revenues is perhaps the most beneficial to the community as it avoids the sorts of argument that can arise over deductions made from gross revenue if the community’s revenue stream is calculated based on the SPV’s net revenue. From the developer’s perspective, a calculation based on the SPV’s gross revenues creates the risk that the gross revenues do not reflect the profitability or otherwise of the SPV, which could be adversely affected by fluctuations in overhead costs.

As indicated above, the community should ensure that it has sufficient access to financial and operational information to be able to monitor the SPV’s performance. The community should also consider seeking the right to audit the information provided. The developer may wish to limit the extent to which the community is given access to confidential information, although the community would normally be obliged to keep any such information confidential under the terms of the shared revenue agreement.