English Partnerships URCs Symposium Leicester

1
English Partnerships URCs Symposium Leicester
19 September 2002

• Development Appraisals and Gap Funding Update
• A Workshop led by Michael King and Nicholas
  Lambert

2
Agenda

• 1. How will URCs use development appraisals?
• 2. Example Appraisal
• 3. Gap Funding update
• 4. Questions

3
How will URCs Use Development Appraisals?
Land
1. To determine sale price of public/
partnership land
Profit
Completed Value
Cost
a) Where there is a straight land sale/single
premium b) Where, instead (or as well), there
is a share of profit based on value - to act as
a baseline for monitoring
4
How Will URCs Use Development Appraisals?
2. For Assessing the public contribution
Gap funding or infrastructure
a/b
a) Infrastructure input b) Gap Funding
Cost
Completed Value
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How Will URCs Use Development Appraisals?

• 3. Enabling Calculations

Enabled Works
Land

• What public realm works can the scheme pay for?
  (planning gain)

Profit
Cost
Completed Value
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How Will URCs Use Development Appraisals?

• 4. As a basis for Economic Appraisal
  (Cost/Benefit Analysis)

Compare
Intangibles
Public contribution
gap funding
Spin off e.g uplifted values around
Private contribution

CBA
Induced jobs
Indirect jobs
Direct jobs
Value
Cost
Economic Benefits
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Development Appraisal Nicholas Lambert
8
Case Study - Rochester Riverside, Medway

• ? Real life example (spoof numbers)
• ? Complex development (and appraisal!) issues
• ? Gap funding required
• ? HM Treasury Green Book/CPRG approach

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Rochester Riverside - Strategic Context

• ? what urban renaissance is all about
• Lord Rogers of Riverside
• ? 30 hectares - 60 Medway Council 40CPO
• ? Significant abnormal costs
• ? 8 year, mixed use development programme

10
Case Study - Proposal

• 1750 new dwellings
• 15,000 sq m 4 hotel/conference
• improved river wall
• 2 form entry primary school
• public open space
• multi story car park
• 20,000 sq m employment
• public art
• improved access to Rochester train station

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The Development Equation
Profit Finance Contingencies Fees
40m
Funding Gap
50m
Construction
125m
200m
Revenues
240m
Infrastructure
25m
Enabling
30m
Land
10m
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How does Financial Masterplanning help?

• Stress tests viability and scenarios
• Appraises options - what is right public sector
  option?
• Determines cashflow
• Reconciles private sector financial returns to
  public sector returns
• Allocates risk and responsibilities eg river wall
• Should ensure a deliverable scheme
• Quantifies extent of gap funding
• Provides a mechanism for structuring and
  capturing overage

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Appraisal Philosophy

• Assumption driven financial model establishes
  baseline cashflow projection
• Option appraisal tests effects of different
  public sector interventions
• Key modelling assumption is that public and
  private sectors require different returns on
  capital deployed

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Appraisal Methodology
For every 1 of costs, public sector requires say
6 IRR
Public
Profit foregone plugs the gap
For every 1 of costs, private sector requires
say 15 of costs
Private
Costs
Profit
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Requirement of Development Model

• What is the minimum public sector expenditure
  required to plug the gap?

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Strategic Options
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Strategic Options
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Development Model Structure
Assumptions
Workings
Outputs
Stage 1
Stage 2
Stage 3
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Assumption Sourcing

• Property - Chartered Surveyors
• land uses, land values, rents, take up, growth
• Planning - Chartered Planners
• planning obligations, off site infrastructure,
  CPO
• Costs - Engineers and QS
• infrastructure, building, remediation,
  contingencies
• Financial - Chartered Accountants and Bankers
• finance costs, discount rate, nominal or real
  modelling
• Economic - Economists
• impact of macro and micro trends, effects of
  kicker events
• Design - Masterplanners
• site capacity, densities, layout

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Workings
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Outputs

• Option Appraisal
• NPV
• IRR
• relative ranking
• Executive Reports
• financial headlines
• graphic summaries
• conclusions

• Project viability
• cashflow projections
• profit and loss
• distribution of profit/costs
• Risk appraisal
• scenario testing
• sensitivity analysis
• goal seek outcomes

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Outputs - Financial Summary
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Outputs - Cashflow
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Outputs - Balance Sheet
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Outputs - Profit Loss
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Outputs - Sensitivity Appraisal
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Outputs - Executive Reports
Financial Highlights
NPV 9.256m IRR 19.849
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Conclusions

• Robust market driven financial masterplan
• Identify and quantify the key risks
• Marry the public sector objectives with private
  sector objectives to broker a deliverable scheme

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Gap Funding Update Michael King
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Gap Funding Advantages

• Public money pays for the gap (say 25) not for
  the whole cost
• Infrastructure can be used in lieu of gap funding
  but
• developer knows his scheme best
• need to overcome public interest in land rules

Money goes further?
31
Gap Funding

• Only 2 reasons for grant
• 1. Abnormal costs
• 2. Market failure (depresses rents/yield)
• Grant is negotiated to minimum
• Clawback agreement ensures a sharing of any
  unforeseen super-profit

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Paying for Physical Regeneration
A Changing Culture
2002
1980s
Public Regeneration Funding
?
PIP Survivors
1980s
2001/2
New Schemes
Grants to Developers
2000
?
Dec 23 1999 EC Steps in
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The 5 New Schemes (Now 8!)

• Up to 100 of cost
• Outside State Aids rules
• Anywhere (not just Assisted Areas)
• Stating the obvious!
• Approved March 2001
• ODPM Guidance November 2001
• Largely Assisted Areas only

• 1. Environmental Regeneration Scheme
• 2. Community Regeneration Scheme
• 3. Direct Development
• 4. Property Development - Speculative
• 5. Property Development - Non-Speculative

plus
6. The Housing Scheme 7. The Dereliction
Scheme 8. The Heritage Scheme
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House of Commons Select Committee

• June 2002
• The loss of PIP has been a disaster!
• 2½ years of urban regeneration activity and
  outputs will have been lost by the time the new
  housing scheme is approved
• A loss of private sector interest with many
  developers closing their regeneration arms
• Successor Committee to see the Minister in 6
  months time
• What we have now in its place is a real mess and
  the Department must accept some responsibility
  for that

Concerned about English Cities Fund and URCs
being restricted to Assisted Areas (for gap
funding)
Poor communication between Government
Departments, Agencies and Front Line staff
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How well have the new schemes been adopted?

• ODPM has undertaken some enquiries with RDAs

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A Scheme is not a Fund!
Approved EC Schemes
Designated Funds at RDAs/EP
Advertised Schemes of Grant
ODPM Guidance
Coming?
Not yet
All except Dereliction X Heritage X
All except Housing X Dereliction X Heritage X
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The Property Development Scheme

• Confined to Assisted Areas (except for SMEs)
• Joint Ventures allowed (instead of/as well as
  grant)
• Clawback of 50 - only if sold! (but within 5
  years)
• Approval for RDAs/EP - but can be used also for
  ERDF and Las e.g. Knowsley Development Partnership

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Grant Rates

• (Aid intensity Ceilings for Property Development
  Schemes)

Tier 1 Assisted Area
Tier 2 Assisted Area
Elsewhere
ALL applicants
35
10-20
ME applicants
15
7.5
10
SE applicants
15
15
10
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The Housing Scheme

• Approved by EC 23 May 2002 (but no guidance yet)
• Guidance likely to be linked to Market Renewal
  Fund (not announced in July Spending Review -
  likely to be before Christmas)
• RDAs not caught up yet - how will they prioritise
  within Single Pot?
• Housing for sale - anywhere (not just Assisted
  Areas)
• Not greenfield
• Grant up to 60 - who will fund it?

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The Dereliction Scheme

• Not approved by EC yet

Two parts

• 1) Dereliction Aid Instrument
• 100 of eligible costs
• 15 profit allowed
• Clawback

• 2) Business Relocation Instrument
• For relocating polluting industry
• Move must be on environmental /regulator grounds
• Clawback

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Need for Streamlined Approvals
Developer Applicant
Submits
URC
Combine matched funding e.g. ERDF
Approves
Approves under 5m
RDA
Approves 5-20m
Approves over 20m
HM Treasury
ODPM

• URCs can lobby RDAs for funds
• Consider a block fund
• Propose delegation limit for URCs

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Typical Questions Michael King Nicholas Lambert
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Gap Funding

• Will RDAs publish schemes, give block funds to
  URCs?
• Will URCs publish schemes?
• Will there be enough funds for the housing
  scheme?
• How to combine with ERDF?

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Development Appraisal

• How to treat land purchase cost?
• How to treat developers profit?
• How to treat clawback?
• How to deal with projects phased over a long time
  period?