BOROUGH OF POOLE AGENDA ITEM 7 BUSINESS IMPROVEMENT OVERVIEW AND SCRUTINY COMMITTEE 17 MARCH 2016 CABINET 22 MARCH 2016 DEVELOPING A COMMERCIAL APPROACH TO THE USE OF ASSETS REPORT OF THE STRATEGIC DIRECTOR FOR PLACE PART OF THE PUBLISHED FORWARD PLAN Yes 1 PURPOSE OF REPORT 1.1 To introduce Members to the proposal of utilising surplus and underutilised land and buildings for commercial development and investment purposes to deliver the council s stated aims as contained within its corporate strategy with particular emphasis on the delivery of the town centre regeneration. 2 DECISION REQUIRED That Cabinet : - 2.1 In line with the Council s Corporate Property and Asset Management Strategy endorses the principle of developing a commercial approach for Council assets. 2.2 Approve the review to assess how the Council could use its surplus and under utilised assets to deliver Town centre regeneration including proposals to improve the leisure, retail and commercial offer of the town centre Commercial development where this provides economic benefits New homes, including market housing for sale and/or rent. Affordable Housing where sites are identified specifically for this purpose. 2.3 2.4 Approve that the Strategic Director for Place and Head of Financial Services in consultation with the Head of Legal, Democratic and Strategy Services proceed to put in place a contract for the provision of advice that will support the Borough conclude an options appraisal and recommend a suitable delivery model or models to Council. Agree to set aside up to 100,000 as a provisional sum to fund the potential costs identified in 2.3 Page 1 of 9
3 BACKGROUND 3.1 3.2 Through its revised Corporate Strategy (2015 2019), Borough of Poole has stated its priority is to promote regeneration by attracting investment in business, housing and jobs for all. The Strategy expands on this stated aim by adding that it will encourage and enable the development of new market and affordable housing that meets local needs. In addition, the Strategy indicates that the Borough of Poole will develop a Strategic Commercialisation Programme for Council Assets and develop ways of working across the organisation to improve inward investment. The intention is to embark upon a programme that will Support regeneration and economic growth Stimulate development Support long term capital appreciation Create and generate income streams Generate capital receipts for reinvestment 3.3 The Corporate Property and Asset Management Strategy and the Corporate Property and Investment Strategy were adopted by Council in December 2013 and December 2014 respectively. The aims and objectives as stated in in Corporate Strategy are reflected in these documents. The action plans identify how the council will manage its asset management activity and property assets for effective delivery of these stated aims. Officers have undertaken a number of fact finding initiatives including officer workshops, due diligence around gaining intelligence from other councils who are in the process of developing their own programmes and applying the thinking on the subject as detailed by the LGA in its paper on the subject. Officers have also identified the potential assets that could be utilised, identified constraints and opportunities, with a view to adopting a programme. 3.4 In the first instance an options appraisal is required to :- Identify possible delivery mechanisms and recommend one or more which best suits Poole s circumstances Identify and appraise for viability purposes which surplus and underutilised assets could be deployed. Identify a range of viable development proposals and an indicative delivery timetable Simultaneously, the council now has a framework for Estate Services with a preferred supplier. This preferred supplier will work with the Council to acquire strategic investment properties that can support the organisation s financial health. A report on this activity will form part of the Performance Review of the Corporate Property and Asset Management Strategy and Corporate Investment Strategy in 2016/7. Page 2 of 9
4 THE PROPOSED SITES 4.1 The sites identified are split into three categories. a) Town Centre sites that can be developed to assist in the delivery of regeneration in the central part of Poole over the next 10-15 years [as set out in the Town Centre Planning and Urban Design Supplementary Planning Document ( SPD) dated 15 December 2015]. b) Sites outside of the town centre, some of which may be needed to ensure the viability of the development of the Town Centre c) Development utilising the Council s surface level car park assets without compromising the capacity and income from car parking (in the long term) which the town currently enjoys. It should also be noted that the Council also has assets with the Housing Revenue Account (HRA) and these could also be developed through an appropriate delivery vehicle. 4.2 The Council s aspiration extends to developing market housing on some of these sites, including private rented sector market housing. A pro-active approach will ensure that the Borough can Facilitate development coming forward and react to market demand, Contribute to easing the housing need identified by its own Housing Register (now at 996 registrations) and wider Strategic Housing Assessment (750 new homes per annum up from 500 per annum) Contribute to the provision of affordable housing in suitable locations Potentially create either a capital receipt or a sustainable revenue source which will provide an improved financial legacy. In deciding to promote the development of market housing it should be recognised that this is a medium to long-term undertaking and as such this programme will be unlikely to make a significant contribution to the Medium Term Financial Plan (MTFP). 5 DELIVERY MODELS 5.1 The Borough is well placed to take advantage of its ability to borrow funds and finance large scale development and in certain circumstances utilise its covenant strength to enhance the value and deliverability of such projects. Unlike some Local Authorities who are pursuing a similar Strategy, the Borough does not have a team of individuals who are experienced in large scale development of a commercial or residential nature. This is a risk to the proposal that can be addressed by selecting an appropriate delivery model and utilising private sector development experience. Page 3 of 9
5.2 5.3 5.4 If the delivery model that is adopted includes a joint venture arrangement the Borough would expect the partner not only to provide expertise but market knowledge. Above all a development partner should be credible in terms of delivery as this will have the added benefit of bringing other investment to the town and drive other developers to commence construction on sites that are ripe for development that are not in Borough ownership. There are several special vehicle and joint venture delivery models that can be considered and the right one to utilise depends on: Attitude to risk Land/ expertise split Availability of risk capital The package of sites on offer The level of control required by the Borough The time horizon to deliver development The Council s ability to utilise its covenant strength. The following models can be considered and it may be that a combination of delivery vehicles would be required. Many Councils have put in place joint ventures and their own development companies for different purposes. 5.4.1 Joint Venture with Borough and private sector partner using a local asset backed vehicle. This would involve forming a limited liability partnership ( LLP) with the Council and a private sectors partner as founding members. LLP s are separate corporate bodies and are tax transparent meaning that any profits earned by the Council through its participation in the LLP are tax free. Subsidiary LLP s can be utilised to allow other land owners/ investors to participate in particular ring fenced projects. Both parties would share in the risks and rewards and would have input into the nature and extent of the proposed development and programme delivery. This model would enable the Council to select a partner with experience of commercial/residential development. In the current market it is widely acknowledged that the private sector is better placed to deliver improved viability by it s in depth knowledge of managing development risks and taking advantage of its ability to drive down construction costs through large scale supply chain relationships. The public sector partner can assist in securing favourable development finance terms and providing strategic direction through its economic regeneration and planning responsibilities.. Page 4 of 9
5.4.2 Joint Venture between the Borough and a Registered Provider (RP) of Social Housing. This is more appropriate for a specific site and a development agreement approach This would also be structured as a limited liability partnership. The model relies on the site being acquired or leased from the Borough with shared capital receipt or revenue return. The RP will already possess the skills and capacity for the delivery of social housing and would be a good fit with a public sector organisation like a Local Authority. The opportunity to reinvest shared profit is an advantage but it is acknowledged that the construction costs are likely to be higher than when partnering with the private sector. The RP experience of market housing development is likely to be limited. 5.4.3 Joint Venture between the Borough and Poole Housing Partnership (PHP) This is more appropriate for a specific site and a development agreement approach The purpose of the development with PHP would be market housing and this would sit outside of the Housing Revenue Account thereby necessitating the establishment of a new and separate company. Skills and capacity in development could equally be an issue for PHP as they are for the Borough nevertheless; PHP has experience of managing large scale rented sector housing. One of the advantages of working with PHP might be in the ability to simplify the procurement processes. 5.4.4 Borough owned Housing and Development Company A separate company is required. The company would be limited with 100% ownership issued through shares. The principal purpose of the company is to develop market housing on Borough owned sites financed by prudential borrowing. Returns would be payable by dividend from the New Co. The downside of this proposal is that other local authorities that have adopted this approach report that the delivery model relies heavily on the in house expertise and capacity. This option has the advantage of improving response times to opportunities to acquire investment and development opportunities. 6 NEXT STEPS It may facilitate the delivery of the Council s objectives more quickly to consider joining a Housing and Development Company that is already in existence, for example with Bournemouth Borough Council. 6.1 This report has been prepared to set the direction of travel with regard to a new approach for the Council s use of surplus under utilised assets. The next step is to appoint an advisor who can stay with the council throughout the programme and after some research the best Page 5 of 9
method of OJEU compliant procurement of this advice is to select a firm that is pre qualified under a framework and would be willing to enter into a mini competition. The selected advisor would be able to provide the technical expertise to take the council through the viability options of the business case, the soft market testing of the development partners the competitive dialogue process amongst the preferred developers. Appendix A identifies the timeline for this procurement process from viability testing to selection of a development partner. 7 FINANCIAL IMPLICATIONS 7.1 The costs of procuring a development partner should not be underestimated. We are advised that other authorities have had to provide for significant six figure sums to invest in the work needed to promote their regeneration opportunities to potential development partners and select and appoint a preferred partner. 7.2 A number of the potential models are predicated on the Council s use of prudential borrowing. The viability of these models is impacted by the statutory requirement to make provision for both capital and interest repayments over the life of the asset. 7.3 Inevitably there will be a need to allocate a budget for enabling the project including further detailed financial modelling, market testing or bidder days, competitive dialogue process, contract and company set up. It is proposed that this activity is phased. Phase 1 of this will deliver:- Initial market analysis and assessment of sites Viability testing of the sites identified to ensure that stated objectives are deliverable Recommendation of a site specific delivery approach or approaches Informal market engagement to ensure that the proposal will be appealing to the market and provide some certainty around deliverability The provisional sum of up to 100k will cover Phase 1. The funding for this initial phase of work will be from the Council s Corporate reorganisation reserve. 7.4 Earlier in this report, the priority of alternative uses for surplus assets was indicated as a move away from both delivery of affordable housing or capital receipt generation in favour of this proposal. This policy decision is therefore impactful on the Borough s budgeting in the short to medium term: the shortage of Affordable Housing has an indirect Page 6 of 9
consequence for the Borough and the ability of the Borough to achieve a major capital injection of funds by selling its surplus sites to a third party developer. 8 LEGAL IMPLICATIONS 8.1 Officers recognise the need to ensure sound legal advice is taken on how best to structure and progress the proposed procurement, joint venture arrangements and any development agreements or establishing separate asset backed vehicles and this will be sought throughout the process. 8.2 8.3 9 9.1 In terms of identifying sites that could be utilised in any strategic commercialisation programme resources should be allocated at an early stage to undertake due diligence on title to ensure that the sites are suitable and available for potential development. Experience shows that there are often issues and complications that need consideration in order to ensure a smoother process when the assets actually come forward for development. It should be noted that whilst the potential operating models above, in the main utilise some form of commercial input or arms length arrangement, any trading for profit undertaken by a local authority must be carried out through a trading company arrangement. Legal advice which has recently come to hand indicates that acting as a developer or as a commercial landlord in a general sense as opposed to an activity pursuant or incidental to one of the Council s established statutory purposes would be very likely to be considered to be trading activity. Further detailed advice will be taken throughout the development of these options. RISK MANAGEMENT IMPLICATIONS Taking a pro-active approach to the Council s assets to secure town centre regeneration is an ambitious way forward and the scale and complexity of this work bring many risks. These include the development and agreement of a viable proposal, the creation of a delivery vehicle, securing alignment and commitment from landowners within the town centre area, and also the larger economic risk of the wider economic climate. These risks can be mitigated through the procurement of an advisor to take the council through the process that has estates, valuation, financial and legal knowledge. The mitigation of risk will involve informal market testing with a series of developers to ensure that there is an appetite in the market to partner with the council to deliver the ambitions of the council to regenerate its town centre and wherever possible deliver private rented sector housing and affordable housing. 9.2 In developing proposals around the delivery of market housing risk mitigation is a major consideration. The report has indicated that the reliance on in house expertise may preclude the Borough pursuing Page 7 of 9
the option involving the Borough in designing, constructing, letting and managing its own estate. A separate management arrangement for the completed development would be required to manage new lettings, voids, rent increases and maintenance. The intelligence received suggests that good front of house is as important to the success of the development as is good systems for managing the Facilities Management of a new development. These risks can be mitigated through delivery models which would provide the Council with established skills and capacity in this area. 10 EQUALITIES IMPLICATIONS 10.1 A positive impact of pursuing the Decision sought by Cabinet would be that whichever model is adopted the outcome will be the construction of residential accommodation in Poole which is advised by the Eastern Dorset 2015 Strategic Housing Market Assessment (Oct 2015). The town now needs to be in a position to supply significantly more housing units than had previously been indicated (up to 750 units per annum). Utilising the Council s assets within the town centre to support regeneration will also produce wider benefits for the community. 10.2 The negative impact of pursuing the option to develop for market residential accommodation is that the Borough s assets that could previously have been earmarked for 100% affordable housing (or a mix of social and market housing) are not now utilised for this purpose. Use of shared ownership models could be used to mitigate this impact and officers will also consider this mechanism in their future business case. Kate Ryan Strategic Director Place Adam Richens Head of Financial Services Contact Sarah Varley Head of Estates Financial Services Page 8 of 9
Appendix A: Outline Timeframe Stage Tasks / Activities Timescale Stage 1: Preparation Stage 2: Procurement (i) Develop overall strategy & plan Establish governance, funding & resourcing arrangements Procurement of consultancy support via framework Options Appraisal: Site assessment/initial viability/softmarket testing/delivery vehicles March 2016 Apr-16 to Jun-16 Stage 3: Feasibility Viability assessment and development of full business case Jul-16 to Jan-17 Stage 4: Procurement (ii) Procurement of development partner via competitive dialogue process Mar-17 to Mar-18 Note: dates shown are best estimates at the current time and subject to change. Page 9 of 9