Charity issues

Derventio Housing’s “cash machine” raises further questions for the Regulator. Will they take legal action?

In a previous article Derventio Housing’s housing benefit ‘cash machine’ now funds 3 Directors on nearly £100k salary each” I highlighted the large salaries paid to the directors of Derventio Housing.

An analysis of the finances suggests that surplus funds are being “transferred” ( described as “maintenance”),  to a separate company (Homes2Opportunities Ltd)  wholly owned by Derventio’s  Managing Director, Sarah Hernandez.

Background

Derventio is a special type of company – it’s a Community Interest Company (CIC) – it is not a Charity. The broad purpose of a CIC is that it trades with the objective of channelling any surplus funds back into the segment of the Community that it is constituted to help.  In the case of Derventio this is single homeless people.

The advantages of a CIC vs a Charity is that it is more flexible, easy to set up, has a social benefit profile, and continuity of purpose. They are regulated organisations with controls to prevent windfall payments being paid to Directors and the “Asset Lock”

Office of the Regulator of Community Interest Companies: Information and guidance notes

This a crtical part of the regulatory framwework.

Derventio’s Surplus

Derventio has just over 600 properties on its books. Over 90% are leased from private landlords. Derventio rent to vulnerable homeless people who require supported housing; for this service they receive enhanced housing benefits. As Derventio is not buying properties it is a relatively easy scaleable model.

Since 2015:

The number of properties available for accommodation in Derventio has increased by ~35%
Consequently the Property Lease charges have increased, in total, by ~35%
The number of non-management staff has increased by ~35%

The average rent income per property has increased by ~40%. This signficant escalation in average rent should have generated an annual surplus of £2million compared to the rates in 2015. The overall reported surplus for 2020 was £120k ( vs £44k in 2015).

How has the surplus been used?

Directors/Management salaries – whilst the total number of people has only increased from 11 to 13 people, the total cost has more than doubled (118%) with the average annual salary increasing by 85%. ( compared to staff whose salary has increased by  just 15% over 5 years). The highest paid staff/ directors is more significant.

 

Paid for Services – has increased by nearly 4 times – from £484k to £2233k , while
Maintenance  – has decreased from an average of £650k ( 2015-2019) to £275k (2020)

Why is the increase in “Services” significant?

At the beginning of 2017 Derventio started to buy its maintenance services from Home2Opportunities Ltd (H2O)- a company wholly owned by Sarah Hernandez, the Managing Director of Derventio; she is the sole Director of H20. H2O’s first year of trading was 2017 when it made a £207k profit. The value of services bought by Derventio from H20 over the last 4 years were just under £3.8m! Split:

2017 £389k
2018 £919k
2019 £1028k
2020 £1433k

The assumption is that the H20 “maintenance service” cost is being shown in “Services”,  in the accounts, not “Routine Maintenance, hence the growth in the number. The material drop in “Routine Maintenance”,  only in 2020,  when the number of properties increased is unexplained.

H20 is not an Asset Locked company; it is a small limited company – there is no public record of its cost base.

Office of the Regulator of Community Interest Companies: Information and guidance notes

There is no opportunity to determine whether Derventio is getting value for money from H20.

Is H20 independent of Derventio?

H20’s registered office is 33 Boyer Street which is Derventio’s office. A Google search shows no presence at all for H20 other than a suggestion that it trades from unit 8, Peter Baines Industrial Estate, Woods Ln. The entrance sign shows Derventio Housing.

There is no evidence that it is independent from Derventio, that it trades with 3rd parties or has it’s own separate staff base.

Is Derventio being Transparent over how the money is being used?

All CICs must subject a standard form as part of its annual reporting. This is designed to promote transparency.

There is no mention of the link with H20 and whether the transactions were for market value, and whether Sarah Hernandez was paid by H20.

Comment

There was an opportunity for Derventio to have returned its surplus of at least £2m pa back into projects to support Derby’s homeless. In fact only £77k of the surplus was used.

The purpose of CIC’s is to use its surplus for “the benefit of the community”.

The salaries paid to the Directors, and senior management are , by anyone’s standards, excessive for a charity of this size and nature.

Office of the Regulator of Community Interest Companies: Information and guidance notes

The running average cost of maintenace in Derventio before 2017 was ~ £600k pa, it is now ~£1.7m …mostly paid through H20. This is far in excess of the growth in housing stock. There should be more transaprency over H20’s cost base. How much is Sarah Hernandez being paid by H20 ( by herself), on top of her £157,000 remuneration package from Derventio?

On the face of it the excessive salaries and the trading with H20, seems to breach the Asset Lock requirement of Community Interest Company regulations.

A breach would could be subject to legal action – something which the Regulator will need to decide upon.

 

 

 

 

Categories: Charity issues

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1 reply »

  1. How on earth can the managing director of any company (let alone a CIC) be allowed to give contracts to a company they own? That seems a massive conflict of interest.
    Were other companies invited to tender for the services contract before it was awarded to H2O? Wouldn’t H2O have a huge advantage in such a process as the owner of H2O had access to all the other bids?
    This seems to be mal-governance at best and criminal at worst.

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