Feedback note of the Seminar on “Public Sector Residential Land
Disposal and Development”
Date: 23rd June 2009.
Venue: University of Stirling, Stirling Management Centre.
Programme: See Appendix 1.
Participants: See Appendix 2.
Speaker Biographies: See Appendix 3
Links to the Powerpoint Presentations: See Appendix 4
This event was hosted by Scottish Government and Homes for Scotland
and supported by the Association of Chief Estate Surveyors (ACES)
1. INTRODUCTION
This event asked how the component organisations involved in
residential development could help unlock the potential of public sector
land and help maximise new houses building in a turbulent market
where little speculative development is being financed.
These are testing times for those involved in the disposal of public sector
sites. The housing development community needs to ensure that it has
the best information to aid successful acquisition or disposal. This
conference was an opportunity to hear the latest thinking on disposal
techniques. Key topics covered included: an overview of current
practice; the potential for Development under Licence, Development
Agreements or Long Lease Agreements and innovative joint venture
arrangements to facilitate disposal and subsequent housing
development on publicly owned land.
The benefits of attending the event included: the ability to gain key
information and learn from best practice examples across the sector;
develop understanding of how the financial markets impact on this work
and to provide useful networking opportunities.
This note provides a resume of the presentations made on the day, it
highlights the issues that arose and notes the future action intended to
address them.
2. RESUME OF THE PRESENTATIONS
A. Frank Sheridan (The Council Perspective)
Frank identified 3 main delivery mechanisms involving deferred
payments.
(i) Development lease
This is normally a 175 year ground lease with provision to build within 7
years. The 175 year period satisfies lenders requirements for loan
security. It is normally for commercial developments (they have only one
residential scheme) receipts can be taken as a lump sum upfront, as
rent and profit share. It combines upfront and deferred payments and
can include an overage payment secured at end of the period.
Developers like it because it involves less cash upfront. As parts of the
scheme are built out they move onto a feu disposition which takes it out
of the lease.
The lease normally specifies a full master plan,
development plan specification is also is in the lease together with
timetables and milestones.
(ii) Development agreements
The example quoted was Drumchapel involving 8 sites and potentially
1400 houses, all of which are non-affordable. The developer draws
down particular sites as required. Glasgow Council retains ownership
throughout the scheme and developers bid on the basis of a detailed
document, a detailed infrastructure, specifications etc. The whole
scheme needs to be very flexible as the planning basis of the initial
agreement may not be realised so terms need to be flexible. The
developer never actually owns the sites. This involves a significant
resource commitment of technical staff plus a close and sympathetic
relationship with the local planners that is a strength in local authority led
initiatives.
(iii) Partnership
This is a relationship between 2 or more distinct bodies coming together
in a partnership to create a distinct entity – a Special Purpose Vehicle
(SPV) to undertake a particular project or set of projects. The example
was working with British Waterways and ISIS. The focus of the work is
the Glasgow branch of the Forth Clyde Canal where the Council and
British Waterways have control over much of the land. Glasgow Council
put the land into the pot together with British Waterways and the
arrangement is that ISIS has first refusal as a developer on any
schemes. Control is maintained by the fact that either partner can veto
any proposal. The agreement includes profit sharing, development
proposals, fixing targets, cash flow, and investment funds.
The
partnership offers flexibility. The partners’ master plan the schemes, coordinate community involvement and these are very big upfront
investments in terms of time, staff and resources. They consider it pays
off. Cash flow stays within the project but the council does take out a
percentage of the value. Some of it goes into a canal investment fund
for reinvestment in bridges, locks, tow paths etc. This scheme works
because officials have a large degree of flexibility to work within broad
Heads of Terms that the council have approved. The Heads of Terms
give comfort to both parties but plenty of flexibility.
Glasgow Council assesses best value by assessing the residual value of
the land but includes externalities like improvements to employment,
council tax revenue, and presumably reduction in vandalism, costs of fly
tipping, litter etc. It is a holistic appraisal.
B. Charles Church and Steven Tolson (The Developers Perspective)
Developers are largely dependent on bank lending but even those with
cash resources are being extremely cautious regarding risk. Previously
they were willing to take a long-term view and pay for the cost of
remediation and infrastructure to prepare large sites and then embark on
a rolling programme of development. They are no longer able to incur
the significant upfront cost of improving land by infrastructure and
remediation. Similarly, they are now seeking to offset obligations to incur
costs in advance for Section 75 agreements.
Developers now lack money and cannot lay money out at the start.
They also have significant difficulty dealing with risk
Gladedale have been involved in Oatlands by the M74 near Shawfield
south of the Clyde which they have taken on 175 year lease from
Glasgow Council. The site has flood, contamination including chrome
and other difficulties. They set up a sinking fund and a third of this can
be drawn down by the developer, one third by the council and one third
for the project. It is a 5-8 year programme for around 1200 houses and
this is likely to be extended over a longer period. He agreed with
Glasgow’s 3 deferred receipt disposal methods – long lease – licence
agreement, JV etc and commented that long leases are available to their
bank.
Steven asked a very pertinent question as to what sectors of the market
will remain active, which banks will actually lend consumers money,
which banks will lend developers money and how will the value of the
land be calculated.
He thought there should be deferred payments and he was very keen on
sharing profits and risks. He wanted the public sector to share in risk.
He claimed that the public sector has not participated in risk for years
and referred back to the days when the public sector “created places”
and house builders were merely technicians who built houses within a
framework of places.
He alluded to the Scottish New Town
Development Corporations, URCs and the Crown Street redevelopment.
He thought there would be great rewards for the public sector and held
up as examples EDI and Edinburgh Park, Fusion Assets (now wholly
owned by North Lanarkshire Council), Stirling Development Co (Valad
and Stirling Council) though he thought that the Council was taking more
risk by placing most of its development assets with one partner.
D. Paul Warner and Alasdair Fleming (Legal Perspective)
Paul highlighted some areas of legal difficulty which often confront public
authorities when selling land for development. Since the purpose of the
conference was to explore how we can remove or abate factors which
can hinder housing regeneration, Paul made some recommendations for
legal changes and suggested the use of certain legal methods which he
believed would simplify the process of achieving land sales and
worthwhile development. I will also refer to some legal protections which
the selling authority will wish to put in place when disposing of its surplus
land for housing purposes.
Legal Constraints
Although, generally, private individuals and corporations can dispose of
their land in any manner they think fit, this wide discretion is not open to
public sector bodies which are under a general duty to preserve the
public purse. The law affects how public bodies should choose
purchasers of land for development and the level of price which an
authority can accept. I will therefore briefly mention the constraints of
procurement law and the law relating to the price which a selling
authority should expect to receive.
(a) Procurement
For years, it was thought that when a public body disposed of land for
development, such a disposal would fall outwith European procurement
law. Even where a disposal by an authority involved an element of
works to be undertaken by the developer which would then be returned
to the authority upon completion, this ‘ancillary’ procurement of works
would not be trapped by the procurement law if it were not the main
purpose of the transaction.
That view no longer applies since the judgement of the European Court
of Justice in Auroux v. Commune de Roanne, a case decided at the
beginning of 2007. In that case, the court decided that the EU
procurement requirements apply to a contract between a regulated
public body and an economic operator where (i) the development is to
provide an economic or technical function and (ii) the development
meets a specific objective of the public body. The public works in the
Roanne case related to the provision of a leisure centre and this was
held to perform an economic function. As for meeting the specific
objectives of the disposing authority, this need not be in terms of a
detailed specification – simply being in conformity with the authority’s
policies for regeneration can be sufficient for the proposed procurement
to fall under EU law.
It is questionable as to whether the construction of housing alone
performs an economic or technical function and, to that extent, the
Roanne judgement may not apply to disposals for the development by a
third party of housing only, but this position is uncertain. However, a
development agreement which involves a disposal for mixed use
including housing might well be caught by the principle in Roanne and
this will require the disposing body to follow the requirements of the
procurement regulations. Such requirements could seriously limit the
disposing authority’s ability to deal with potential developers off-market.
So, a public body with surplus land to be sold for housing development
may well require to adopt formal procurement procedures and advice
should always be taken from procurement lawyers for this purpose.
(b ) Constraints affecting price
The next legal constraint I wish to highlight is the suite of statutory
provisions which require a disposing authority to obtain a certain level of
price or consideration. As a former local government lawyer, section 74
of the Local Government (Scotland) Act 1973 immediately springs to
mind since it prohibits local authorities from disposing of land at less
than the best consideration which might reasonably be obtained without
the approval of the Scottish Ministers. That is a general duty but there
are additional specific provisions too.
Under the Housing legislation, not only is there a duty to obtain best
consideration, but sale of land held on the housing revenue account will
quite separately require the consent of the Scottish Ministers. Where
land is held by a planning authority for planning purposes, a different
statutory regime applies: here, the authority must obtain either best price
or best terms which can reasonably be obtained but, unlike the general
provision under section 74 of the 1973 Act, and the housing legislation,
there is no power to dispose of land at less than best price or best terms
even with the consent of the Ministers.
There are no similar statutory provisions which govern the sale of Crown
land, that is, land held by central government or the Scottish
Government but guidance requires all surplus land to be disposed of
preferably by competitive bidding in order to obtain best price.
The main constraint as regards the price therefore applies to local
authorities. The problem, if any, is the uncertainty which arises when a
local authority proposes to deal off-market with a developer, usually for
very good reasons, for example, where the developer already has a
significant landholding in the area and is in the process of preparing a
planning application. If that developer intends to use the local authority’s
land for a relatively low value use, for example, for landscaping or open
space, the value of that land might well be less than the best
consideration which the authority could obtain if it sold the land
separately, say, for retail – or housing (assuming the presence of a
buoyant housing market). Such a transaction would inevitably require
the consent of the Ministers but, if the land is held on the planning
account, there is no facility to obtain the consent of the Ministers (or
even the consent of the court) to such a disposal.
Where the authority’s land is not held for planning purposes, the
requirement to obtain ministers’ consent to a disposal is not usually a
significant problem since the turnaround time for obtaining consent is
generally within a month. However, The risks in relation to the sale of
planning land are much greater and the authority must be sure of its
position before proceeding to conclude a transaction.
The statutory Best Value regime, introduced by the Local Government in
Scotland Act 2003, intends to amend section 74 of the 1973 Act to make
it a little easier for local authorities to demonstrate that they are obtaining
best consideration but the amendment has still not come into force some
six years after the passing of the Act. I think after six years, it is about
time the legislature either brought the amendment into force or
announces its intention to abandon the amendment. Note also that the
best value amendment only alters section 74 – it does not deal at all with
similar provisions in other legislation and, in particular, not the especially
restrictive duty in relation to planning land. You must bear in mind that if
a local authority does breach these rules, and this is successfully
challenged in the courts, the sale transaction is set aside as void. The
risk of this should certainly not be assumed by developers and lenders,
let alone by the selling authority. I would therefore recommend that the
best value amendment to section 74 be implemented quickly and that
similar statutory provisions in relation to disposals of local authority land
should be repealed.
(c) Common good land
While we are on the subject of legal constraints, I would recommend that
the status of common good land should be abolished since its concept is
anachronistic and unnecessary. The discovery of the fact that local
authority land intended for development is inalienable common good
land can prevent a transaction from completing where there is no time to
obtain the court’s consent to the disposal as is required by law, for
example, where it is critical to complete a disposal to a housing
association by the end of the current financial year. The abolition of the
status of common good land would be in line with the modernisation of
land law brought about partly by the abolition of the feudal system a few
years ago and it is suggested that abolishing common good status would
be relatively simple to achieve.
Imposing Development Conditions
This conference is about promoting and enabling deals which result in
the provision of housing. It is therefore critical, if this objective is to be
met, for the selling authority to retain some degree of control over the
development of the land being sold to ensure that the development
takes place as envisaged and within agreed timescales. Otherwise the
authority’s property might simply be land-banked. Isn’t this not the role
of planning conditions and building standards? Not always. The
legitimate economic and social aspirations of the selling authority may
well be more detailed than anything which can be made the subject of
planning conditions and, of course, it is always open for any person in
the future to apply for a change to the planning permission.
This then requires that the conditions relating to the nature and
timescales of the development be set out in the contracts governing the
disposal, which usually take the form of a development agreement and
consequential conveyancing documents. The need to impose these
conditions also influences the legal method of disposal.
The purpose of the development agreement is to capture the whole
terms of the deal reached between the selling authority and the
developer. It contains the clauses you might expect to find in missives
of sale and ties together what is to happen before entry is taken by the
developer, how the property rights are to be granted and what is to
happen during development and thereafter.
The legal problem which arises here is that a development agreement,
like any other contract, is only binding on the parties who sign it. So,
what happens if a developer gains ownership of land and then sells on
or goes bust prior to completion of the development? This is where the
law of property, as opposed to the law of contract, steps in.
(a) Disposals by way of dispositions/Section 15 agreements
Unfortunately for selling authorities, it is not easy to create lasting
conditions governing development and use of property after a sale as a
result of the new land law introduced in 2004. Some attempt was made
in the Title Conditions (Scotland) Act 2003 to enable some public bodies
to create title conditions where no land is being retained but the scope of
these might prove to be restricted in operation. For example, a local
authority and the Scottish Ministers may impose an economic
development burden which is intended to last in perpetuity but such a
title condition only applies to a condition which is intended to promote
economic development. My own view while at Glasgow City Council
was that an economic development burden could not be imposed in
relation to land to be used for the development of housing since the
resulting use would not be business or economic use.
That interpretation seems to have been adopted in the first case which
has discussed economic development burdens, Teague Developments
Limited v. City of Edinburgh Council, a case which came before the
Lands Tribunal for Scotland in 2008. The title conditions in that case
involved a restriction of use for general industrial purposes with certain
specified qualifications. The determination of the Lands Tribunal in
holding that these conditions promoted economic development suggests
that some kind of business use of the land is required for there to be
economic development for the purposes of creating an economic
development burden. A housing estate clearly falls outwith the scope of
this new statutory form of real burden. For that reason, a straight sale of
land by an authority implemented in the usual way by granting a
disposition is not attractive for the purposes of having some say in what
happens once the developer has gained entry – unless an additional
special statutory contract is entered into.
This special contract is the section 15 agreement – this refers to section
15 of the Housing (Scotland) Act 1987 in terms of which the local
authority, as housing authority, can seek to regulate the use of land
being sold by it, as well as other land owned by the developer, for the
purposes of the development of housing. This agreement is registered
in the Land Register and thus becomes binding on whoever comes to
own the land in future. It is like a planning agreement under section 75
of the Town and Country Planning (Scotland) Act 1997 but, unlike the
section 75 agreement, it is not susceptible to discharge where planning
permission is obtained for another use or development. So, if you
represent a local authority which typically sells land by way of a
disposition, I would recommend that you use section 15 agreements if
you are not already doing so.
(b) Disposals by way of licence agreements
At the other end of the disposal spectrum, we have the licence for
development. A licence is a synonym for ‘permission’ – the landowner
grants permission to the developer to take entry to the land for the
purposes of carrying out the development. Upon completion, whether or
not in phases, the landowner is contractually obliged to pass ownership
to the developer or, more usually, to third parties nominated by the
developer (the house buyers). We used to do many licence agreements
for the development of housing at Glasgow City Council. Sometimes,
the developer would pay a premium upon taking entry to the site at the
outset but the consideration payable to the Council would usually be in
the form of a licence fee which would be paid to the Council in
instalments on the sale of each residential unit to a house buyer. The
beauty of the licence agreement from the Council’s point of view was
that the Council remained the landowner of the land still under
development and, if there was material breach of the licence agreement
by the developer, or if it went bust, the Council could remove the
developer and either procure a new developer to complete the works or
even complete the development itself.
However, the model of the licence agreement became less popular,
particularly since the turn f the century, as lenders increasingly insisted
on obtaining a standard security over development sites in respect of
their loans to developers. As self-financing of development also became
less usual, the use of licence agreements for development became rare.
I very much doubt that the licence agreement model would be used by
anyone in the current economic situation where development funding is
not easy to obtain and where developers are not exactly rolling in
unused capital to be in a position to self-finance.
(c) Disposals by way of lease with an option to purchase
Since a straight sale is not particularly attractive to a selling authority (at
least where the development is to be for mixed use including housing),
and a licence is not attractive to developers and their funders, there has
to be something in the middle which is just right – the ‘Goldilocks’ model
of disposal. This is the grant of a long lease by the authority
incorporating an option to purchase in favour of the developer.
This mechanism satisfies some fundamental requirements:- the selling
authority retains the ability to enforce development conditions during the
lease since it is the landlord; if there is a serious enough breach of the
lease by the developer (who is the tenant), the landlord authority might
be able to terminate the lease and replace the developer; unlike with the
licence, the developer obtains property rights as tenant and, in the case
of long leases, the lease is registrable in the Land Register which then
enables the developer to grant a standard security over the development
site in favour of the funder.
The development agreement which is the over-arching agreement
between the selling authority and the developer, as well as the long
lease itself, will both contain provisions which allow the developer to
purchase the authority’s ownership of the site once the development has
been satisfactorily completed. If the full price for the land has already
been paid at entry, or in earlier phases, this final stage when the
developer takes ownership usually does not involve the payment of any
price. This option to purchase procedure can be flexible – as with the
Oatlands development in Glasgow - it can be staged in phases or even
on a residential block by block basis with completed blocks or sites cut
out of the lease as ownership passes to the developer.
Site Assembly and Compulsory Purchase Orders
I could cover this topic in significant and mind numbing detail but lack of
time has spared you from this. What I would point out is that local
authorities, as housing authorities, are in a position to use powers of
compulsory purchase, not only for their own housing developments, but
also to assist third party developers who are unable to complete their
site acquisition required for a development. It depends on the nature of
the deal whether the developer is to reimburse the authority for the
whole costs of promoting the compulsory purchase order and the
compensation payable to proprietors but the legal contract, the back-toback agreement between the authority and the developer governing
what is to happen is a tried and judicially approved mechanism for
governing the use of a CPO for the benefit of a developer.
Glasgow City Council has developed a template back-to-back
agreement for this purpose and copies have been made available to
other local authorities through regular meetings of local authority
property lawyers. Although the back-to-back agreement is a stand-alone
document, its provisions can be incorporated into a development
agreement where the promotion of a CPO is required to facilitate a
larger transaction involving disposal of land by the authority.
Deferred Payment of Price
There is nothing new in the concept of a purchaser of land paying the
price, or part of it, either by instalments or on the occurrence of some
future event. In addition to the idea of delaying payment of the price,
there is also the mechanism of profit sharing. Although there are many
ways in which the payment of price can be deferred, I will deal briefly
with three principal methods in turn.
(a) Instalment payments
Instalment payments are easy enough to understand – the whole price
can be agreed at the outset and instalment amounts and dates for
payment are written into the sale contracts. As with the imposition of
development conditions, the most advantageous model from the
authority’s point of view is to have the instalments linked to phases of
the development so that land is only released to the developer once
planning permission for that phase has been obtained, the developer is
ready to go on site and the instalment for that phase is paid. This
process can be made more flexible in a phased release where the
parties agree to negotiate the price for each successive phase at the
time the developer is ready to take entry. Of course, in the absence of
agreement as to price, the contract should provide for third party
determination and the basis of valuation should be clearly set out in the
development agreement to avoid time consuming squabbles.
(b) Clawback
A second model for deferred payment is the situation where there is a
quick sale of the land, with or without payment of price at the outset but
providing for a further payment to be made if a specified event occurs –
for example, the developer obtains detailed planning permission for a
development the detailed nature or scale of which is not clear at the time
of purchase. In this scenario, the grant of planning permission would
either trigger the payment of a known sum, or a sum which can be
calculated with reference to the number of housing units for which
planning permission has been obtained, or the parties can negotiate an
uplift in the value and refer the matter to a third party where there is a
dispute. This kind of deferred payment is called clawback and it should
not be confused with overage which is another term for profit sharing.
(c) Overage
The third model, the payment of overage, is really the sharing of surplus
profit made by the developer since it is usually the case, but not always,
that the developer will want to take the developer’s return, a percentage
of development costs, before any further profits are shared with the
selling authority. Overage provisions were very popular with selling
authorities during a rising market since developers often underestimated
total sales receipts and it remains to be seen when overage becomes a
viable concept again when the economic recovery begins. At Glasgow
City Council, the payment of overage was usually required as a matter of
policy where land was being sold off-market. The sharing of surplus
profits helped the Council to ensure that it was obtaining best
consideration in a situation where exposure to the market had not
occurred. As with the Oatlands project itself, overage can also be used
as the only means of obtaining a price where the land has little or no
value itself; perhaps due to the cost of demolition, site clearance, flood
protection measures and ground remediation works, such as the
removal of contamination. However, in a declining market, reducing the
initial price in the hope of receiving overage upon completion of the
development may not be a good idea if the developer struggles to make
any real profit at all. Such an arrangement might well offend against the
legal duty to obtain best consideration.
(d) Security for deferred payments
It goes without saying that where the authority’s land has been sold or
leased to a developer where any part of the price or overage is payable
in the future, there has to be some security for this liability to be granted
by the developer in favour of the public body. Obtaining a security in the
form of a standard security is generally not a problem but ranking of this
security as a first security can cause problems for the developer and
their lenders. I have always taken the view that payment of instalments
and clawback require a first ranking security in favour of the selling
authority. After all, if all of the price were to be paid at the outset, then
the seller has received all of the price in preference to any sums due by
the developer to the lenders. By arranging for the price to be paid in
instalments or by way of clawback, the seller grants a concession to the
developer and it is only right that the seller should receive its full price
before the purchaser pays off its loan.
The position is a little different in relation to overage where a more
relaxed view can be taken by the selling authority. Since overage is only
payable to the authority where surplus profits are made, it is very likely
that the unexpectedly high sales receipts will be used by the developer
to finance its borrowing and the risk of default in relation to the payment
of overage is consequently very low.
Although deferred payment arrangements might seem attractive as a
means of making it easier for developers to proceed with their projects
without too much financial outlay at the start, selling authorities must be
mindful of their legal duty to obtain best consideration and these
deferred payment mechanisms should be negotiated on a strictly
commercial basis with proper security for future liabilities.
Disposals Via Joint Ventures
Finally, I turn to joint ventures. This is an area in which I have not had
much experience since Glasgow City Council preferred to dispose of
land for development in terms of development agreements which state in
terms that no partnership or joint venture relationship exists between the
parties. The development agreement approach also ensured that the
developer alone was taking the business risk. The legal concept behind
a joint venture is that, at least for the purposes of a specific project or
projects, a new business entity is created in which the partners share an
equity interest as well as the business risk. At the informal end of the
scale, the joint venture will simply be governed by a joint venture
agreement, which might look quite like a development agreement, but
for very large scale projects, the business relationship can be formalised
by incorporation into companies, limited liability partnerships and urban
regeneration companies. The establishment of a formal joint venture
company, though, may well have adverse tax implications for any private
sector partner since income received may be taxed in the hands of the
JV and then again when distributed to the JV parties. There therefore
has to be a very good reason for using the JV approach and I would
have thought that this is really only appropriate where a long term
relationship is envisaged not usually required where housing
developments alone are concerned and where a sale by development
agreement might be more appropriate.
Another issue to be addressed when setting up a JV, or even a
subsidiary which is wholly owned by the authority, is whether the
authority’s land is to be transferred into that entity. If so, the requirement
to obtain best consideration still applies. The current guidance issued by
the Scottish Government in relation to applications for section 74
consent make it clear that a disposal of land even to a wholly owned
subsidiary at less than best consideration still requires ministerial
consent. This consent is more likely to be granted where the subsidiary
is wholly owned by the authority but a disposal at less than best
consideration to a JV might be seen in some way as a donation to the
private sector partner. Remember also that a transfer to a JV of land
held for planning purposes at less than best price or on best terms
cannot be sanctioned by ministerial consent. There are no such
difficulties where the subsidiary or JV merely acts as an agent for the
selling authority in procuring a disposal for development at market terms.
Finally, to complete the circle, the authority will require to take advice on
the procurement of a JV partner since, although the intended
development might well be restricted to the erection of housing, what is
being set up is a business entity and this is the economic function I
mentioned earlier in relation to the Roanne case. Again, advice from
procurement lawyers is essential here.
F. Liam Fennell (The Banks Perspective)
RBS has experience deferred receipts work particularly using the long
lease mechanism. Property Ventures, RBS, has the mandate for equity
and mezzanine finance of property projects within UK, though given the
current market the emphasis is towards senior and mezzanine finance.
There are relatively few funders providing mezzanine funding in the
market and there is little or no appetite for speculative funding and
highlighted the importance of having income producing assets. In
assessing a development the quality of the partner is key, i.e. high
calibre and good track record, high quality assets, and a sharing of risk
and reward. He pointed out that the public sector was pre-occupied with
cash receipts but he thinks that getting construction going is much more
vital.
The purpose of Basel II, an international banking standard about how
much capital banks need to put aside to guard against the types of
financial and operational risks banks face Generally speaking, these
rules mean that the greater risk to which the bank is exposed, the
greater the amount of capital the bank needs to hold to safeguard its
solvency and overall economic stability. The impact means that funding
mezzanine and equity is much more capital intensive and returns need
to reflect this position.
In his view the public sector can bring forward development and reduce
the risk profile of projects by pulling together the initial ground work e.g.
master planning/site assembly and infrastructure. Within the current
environment there is a greater emphasis on the development partner
putting cash equity in to projects and not relying on implied land value..
Liam touched on infrastructure fund mechanisms such as the tariff basis
used by Milton Keynes, SWERDA, JESSICA and FIFF. He then
mentioned 3 developments which Property Ventures has with public
sector partners; the Cart Corridor where Renfrewshire Scottish
Enterprise and Renfrewshire Council are working together sharing
surplus income and have an option of a land that they can draw down
on, Higher Broughton, Salford, a complex JV with RBS 41%, Council
19%, City Spirits 20%, He also mentioned the regeneration at
Polkemmet, West Lothian.
G. Allan Lundmark, (Homes for Scotland)
Alan felt that Section 75 Agreements were too extravagant, often over
engineered, over specified and simply unsustainable in the present
climate. During the boom the housing industry was a major supplier of
public sector infrastructure. He felt the public sector had to get to grips
with the reality of the present situation and seemed to doubt whether in
current circumstances the house builders could sustain most forms of
planning agreement.
He considered that the “Firm Foundations” discussion of 25,000 homes
roughly represented replacement levels of housing but that he saw this
year and possibly next year housing output plummeting to 9,000 units
and that it could take many years before we clawback to replacement
levels.
He pointed out that £800 billion have disappeared from the funding
market with overseas lenders with drawing from the residential market
and real estate is fighting for a share of the remaining market which he
estimated at around £300 billion.
Even that is difficult for the
construction industry as many banks will not lend to real estate. Not
only is the supply of borrowing to house buyers highly constrained, but
so is the supply of finance to builders. The supply of land to the house
builders is also constrained.
He pointed out that a 20% drop in gross development value (what the
developers get for the development before the deduction of cost) has a
58% effect on land values. Land values are disproportionately affected
when house prices move up or down.
He made the point that the industry can build units for as little as
£120,000 but what they cannot fund is the land price, and all the
associated infrastructure.
He put up a number of graphs which showed that the housing market is
polarised between those on benefit/pension who are provided for
through affordable housing, and the private house building market which
deals with the financially better off. What is deeply concerning is that the
gap in the middle where people on modest, medium and average
incomes lie cannot quality for affordable housing and cannot afford to
buy a house.
Alan questioned the emphasis on large sites with huge infrastructure
requirements that cannot be provided in the foreseeable future. He
noted that the immediate future lies with smaller sites within the urban
envelope with existing infrastructure. He also pointed out the enormous
pressure that our carbon reduction programme will impose which
basically means that one has to develop where there is good public
transport.
What Homes for Scotland would like the public sector to help ameliorate
risk for developers, reduce the administrative, planning and regulatory
burdens on the sector, cut costs and make procurement easier.
3. ISSUES FROM ROUND TABLE AND PANEL DISCUSSIONS.
(i) Disposal of Public Land
There was extensive discussion on the 1/3 “sinking fund” for market
failure as used by Gladedale in Oatlands. Participants would welcome
more information on how this works in practice.
There is a significant role for performance bonds to cover some of
the assets if developers go bust.
The meeting agreed that any follow up work should look at the
implications of the Housing (Scotland) Act 1987 Section 15 which
can record an agreement in the Land Register which is binding.
There was a lot of concern expressed over the affect of the current
downturn on existing development agreements. In best practice long
lease arrangements values can be re-appraised as the project goes
along. However, the significant drop in land values over the last year
will be having an affect on existing agreements that do not have reappraisal clauses. Information on re-appraisal clause was sought.
Landowners have aspirations of land value based on their asset
management. There was concern that a number of owners do not wish
to sell at current values and will await uplift as the market improves.
There was a wish for clarity on the scope that local authorities had
and were willing to take on whether to accept housing / other
delivered development as their receipt rather than capital receipt.
There was also discussion also around whether capital receipt income
should be ring fenced for reinvestment in property. However there was a
recognition that this cuts across the autonomy of local government.
Could the public sector budgets be re-profiled over time to allow them to
enter into JVs, etc, and share the cost of infrastructure in the knowledge
that the government or the share in uplift in value of the development will
replace their budgets in years to come.
The developers asked for greater consistency across the different public
bodies in their approaches to development and their expectations of
developer obligations. There was discussion on whether local authorities
sometimes apply a different policy regarding to Section 75 Agreements
(including affordable housing) to central government sites than they do
to local government land.
Some of the developers, however, also noted that whilst the pressure on
public sector budgets was acknowledged there also needed to be much
more public sector led approaches to development in new models.
The meeting asked for a review of different models e.g.
Drumchapel, Oatlands and a comparison with the new Kick Start
scheme in England would be useful to understand in more detail
how different approaches and models might be developed to
respond to the current economic situation.
The meeting welcomed the fact that all public sector landowners in
Scotland were being brought into this debate.
Some Council participants were concerned that in practice Audit
Scotland’s `working’ definition of best value may lead to criticism of
innovative disposal activity such as the deferred receipt mechanisms.
They would welcome Audit Scotland being consulted on deferred
receipt mechanisms and its impact on best value in situations such
as disposal at less than best consideration.
There is a perception that pace of implementation and decision making
by the public sector was too slow. In many cases large projects are
taking too long to reach the market. Raploch implementation timescales
were cited with the delay now impacting negatively on the project.
It was recognised that existing positive arrangements should be
better publicised, eg the Highland Housing Alliance and Oatlands
arrangements. It was felt that we could do more to share knowledge
on best practice. This would be in addition to the functional best
practice advice that may be useful in the form of a toolkit for
technical issues regarding deferred receipt mechanisms.
(ii) Lending
The present position seemed to be that lending institutions are seeking
to de-risk investment and they are working towards a "flight to prime" /
"flight to certainty of return (e.g. PPP, PFI) agenda that will see many
sites not considered for development regardless of ownership. The
meeting agreed that close liaison with the banking sector on this
issue was necessary as the market develops.
In discussion developers said there had been recent changes to or
withdrawals of existing bank overdraft facilities. Often these changes are
announced by the banks with only a short period of notice with the effect
of undermining the viability of planned investments by developers.
Where overdraft facilities have been extended these have often been
provided on condition of payment of high arrangement fees in addition to
rates of interest far exceeding the inter bank rate. Some banks have
placed a blanket ban on issuing loans for whole categories of properties
of investment such as residential development in City Centres.
(iii) Legal
The long lease arrangement for deferred payments best suit our highly
specialised agencies and NDPBs which on the whole do not have staff
resources or the breadth of portfolio to justify an SPV
Head leases have proved problematic for certain local authorities in
the past. It would be useful if the potential for this initiative to act
as a catalyst could be investigated.
There remains the issue of how the public sector would maintain its
capital programme if long lease arrangements were put in place. Could
the government underwrite? Would the banks be prepared to release
short term funding to make such arrangements possible?
There might be a case for legislative reform to allow residential
leases of over 20 years, and introducing a public sector title
restriction for housing to remedy the gap in Title Restrictions Bill.
Questions also arose around the need for Legislation to implement the
changes to Section 74 of the Local Government (Scotland) Bill.
The ability of local authorities to have agreements on housing land
under the Housing (Scotland) Act 1987 s15 could be extended to
central government.
The meeting considered tax proposals to capture uplift in land
values but highlighted the difficulties England (and UK in past) has
found in implementing such initiatives.
(iv) Special Purpose Vehicles (SPV)
The meeting discussed the benefits of SPVs and urban regeneration
companies. The participants would welcome more information on
the performance of existing SPVs in the current market. Some
developers felt that a well managed Joint Venture (JV) or SPV could
continue if one of the partners went into administration. Whereas in a
long lease market failure may prove to be an insurmountable problem.
Some Council officers felt that their structures would work against JV
involvement as their decision making processes can be slow. Others felt
that this has not been a problem to date as members knew that they
have to act primarily as Board Members in a JV.
JVs may be best used if they had a wider regeneration purpose and the
commitment of a number of partners and especially the Council SPVs
also may best suit local authorities that are multi agency, and have
considerable internal resources to help them staff, support and monitor
an SPV. It might occasionally serve large health boards with a number
of sites to dispose off such as NHS Lothian or Scottish Water. Joint
ventures may seem attractive but they pose resource challenges for
public bodies including URCs. This is in relation to the time involved,
whether the capacity is there to participate effectively and more
importantly to be able to assess and manage the risks involved.
When entering into any joint venture arrangement all parties should take
a long term view on the returns from this. The public sector wants its
maximised return early and the developer needs to show early profit
winners. However a longer term view should not be an excuse for
delayed implementation. Developers are looking for turnover at present.
(v) Infrastructure and Planning
The developers would welcome a review of planning agreements and in
particular what can be expected in the current climate from Section 75
contributions. Planners, like others involved in residential development,
are having to tailor their authority’s expectations of developers, of the
revenue implications that will flow from planning agreements and the
subsequent contribution to infrastructure development. It was hoped that
current work around SPP3 and “16/96” would help there to be more
consistency in how planning agreements are managed.
Some Council officers felt that their prudential borrowing powers could
be a useful tool in supporting development as it allowed them to support
specified development.
Some developers suggested that diversion of resources into
infrastructure would be welcome. There was a tacit assumption that the
public sector could fund up front infrastructure. There was, however,
also recognition of the political nature of funding for large sites hungry
for infrastructure. It was suggested that there may be a need to switch
policy towards looking at sites in urban areas with existing infrastructure
of schools, roads, drainage etc
Appendix 1
Programme
10.00-10.30 Registration and Coffee
10.30-10.40 Welcome from Chair
Craig McLaren, Scottish Centre for Regeneration, Scottish Government
10:40-10:50 Introduction and context
Patrick Flynn, Housing Investment Division, Scottish Government
10.50-11.20 Council Experience of Deferred Receipt Mechanisms
Frank Sheridan, Glasgow City Council
11.20-11.40 Coffee
11.40-12.10 Developer Experience of Deferred Receipt Mechanisms
Charles Church, Gladedale Ltd Steven Tolson, Ogilvie Ltd
12.10-13.00 Round Table Discussions
13.00-13.45 Lunch
13.45-14.15 Current Legal Aspects of:
a) Development Agreements/Licence
b) Long Lease Arrangements Paul Warner, Biggart Baillie LLP
Alasdair Fleming, Brodies LLP
14.15-14.45 Current Financial and Risks Aspects of
a) Development Agreement/Licence
b) Long Lease arrangements
Liam Fennell, RBS
14.45-15.00 Coffee
15.00-15.50 Panel Discussion and Q&A
Featuring all speakers from throughout the day
15.50-16.00 Closing Remarks
Allan Lundmark, Homes for Scotland
Appendix 2
Public Sector Residential Land Disposal and Development
Stirling Management Centre
23 June 2009
Participants List
First Name
Geraldine
Paul
Craig
Patrick
Frank
Charles
Steve
Paul
Alasdair
Liam
Gareth
Jim
John K
Derick
Surname
McAteer
Ballantyne
McLaren
Flynn
Sheridan
Church
Tolson
Warner
Fleming
Fennell
Beaton
Low
Ferguson
Reid
Alan
Bauer
Organisation
Scottish Government
Scottish Government
Scottish Government
Scottish Government
Glasgow City Council
Gladevale
Ogilvie Ltd
Biggart Baillie
Brodies
RBS
RBS
Perth & Kinross Council
North Ayshire Council
Meridian Residential
East
Dunbartonshire
Council
Calum
Murray
CCG Homes Ltd
Andy
Wyles
Taylor Wimpey
Stan
Hugh
Richard
Mike
Stephen
Jim
Mansoor
Stuart
David
David
George
Mathieson
Blake
Hughes
Duncan
Booth
Preston
Ali
Rennie
Stewart
Metcalfe
Adamson
NHS Grampian
Argyll & Bute Council
Tulloch Homes
Aberdeen City Council
Aberdeen City Council
Carronvale
Barratt (East Scotland)
Lomond Timber Frame Ltd
SFHA
Clackmannanshire Council
Clackmannanshire Council
Lucile
Stuart
Alan
Jack
Rankin
Beveridge
Stewart
Orr
Scottish Government
Moray Council
East Renfrewshire Council
West Lothian Council
Steven
McLucas
Brian
Peter
Clarke
Thomson
Moira
Alasdair
John
Douglas
Chris
Jackie
Kirsty
Anderson
Morrison
Dobbie
Davidson
Burrows
McGuire
Davidson
West Lothian Council
Park Lane Development
Ltd
Miller
NHS Greater Glasgow &
Clyde
GVA Grimley
Dundee City Council
Dundee City Council
John Dickie Homes
Brodies
Brodies
Bill
Audrey
Ian
Rhona
Miller
Greenwood
Muir
Cameron
Alan
Colin
Tom
Jim
Brian
Ross
Connell
Axford
Kirkwood
Skinner
City of Edinburgh Council
South Ayrshire Council
Muir Homes Ltd
Scottish Government
Redrow Homes (Scotland)
Ltd
Persimmon Homes
Scottish Water
Allanvale Land
CB Richard Ellis Ltd
Sandy
Watson
Scottish Government
_________________________________________________________
_____
Appendix 3
Speaker Biographies.
Charles Church, Land Director, Gladedale Ltd
Charles is a Chartered Surveyor and Economist with over 25 yrs
experience in the property Development Industry having worked across
all sectors including commercial and industrial but has concentrated
recently on housing and regeneration opportunities. He is currently
working with Gladedale , based in Stirling who are one of the largest
Private National Housebuilders with offices across the UK.
His remit is to secure and negotiate new land and development
opportunities in Scotland covering all the major cities including Glasgow,
Edin, Aberdeen and Dundee.
Liam Fennell, Director Property Ventures, Royal Bank of Scotland
Liam Fennell joined RBS Property Ventures in April 2006. Property
Ventures has the mandate for equity and mezzanine investment in
property projects across the UK. His particular focus is on joint ventures
with the public sector .
Liam has over 17 years working in economic regeneration projects
across Scotland with Scottish Enterprise. He has experience of private
public sector partnerships in area regeneration initiatives, commercial
property development and specialist science and technology park
developments. In addition he has extensive experience in the support
and development of industry sectors including biotechnology, life
sciences and chemicals.
Liam joined the Real Estate Finance in April 2006.
Alasdair Fleming, Partner, Brodies LLP
Alasdair is a highly regarded commercial property lawyer who heads the
firm’s urban regeneration group. Alasdair's reputation and experience
as a deal maker, together with his commercial awareness and focus on
achieving the best outcome for his clients, has been instrumental in
securing his reputation as a leader in the regeneration and commercial
property market.
With over 20 years' experience in commercial property work, he has
been involved in almost every aspect of commercial property, ranging
from large scale residential and regeneration projects, to investment and
site assembly and disposal. He is admired for developing strong and
flexible working relationships with his clients, in both the public and
private sectors and is well experienced in developing innovative
solutions in ever-changing markets.
Allan Lundmark, Director of Planning & Communications, Homes
for Scotland
Allan joined Homes for Scotland from local government where he dealt,
in the main, with economic development and environmental issues. By
profession, Allan is a Chartered Town Planner, with extensive project
management experience both in the UK and overseas. Allan is
responsible for all aspects of planning policy relating to the release of
housing land, the design and layout of housing developments and the
provision of supporting infrastructure. He also speaks for Homes for
Scotland on a range of policy matters and is responsible for developing
its communication strategy.
Steven Tolson, Director, Ogilvie Ltd
Steven is a Chartered Valuation Surveyor and has worked in the
development and valuation sectors for some 25 years. He has
experience in both the private and public sectors and following his post
graduate urban design studies at the University of Strathclyde has
developed a niche interest in the value of good urban design.
Steven has been engaged in the delivery of a number of master plan
projects such as Crown Street Regeneration Project and Craigmillar
PARC URC. He also acted as facilitator on the at Homes for the Future,
Glasgow City of Architecture and The Drum Housing Project in Bo’Ness.
He is now a Director of Ogilvie Group Developments working on mixed
use developments throughout Scotland.
In addition, Steven has been a visiting lecturer for some 16 years on
Urban Design and Planning post-graduate courses at the University of
Strathclyde and Edinburgh College of Art and continues to contribute to
CPD programmes on urban design and development. He represents
RICS Scotland on the Built Environment Forum Scotland and the
Scottish Centre for Regeneration Learning Networks and is a member of
the RICS Regeneration Forum.
Frank Sheridan, Property Development Manager, Glasgow City
Council
Frank Sheridan is a Chartered Surveyor employed by Glasgow City
Council as the Property Development Manager in the Development and
Regeneration Services Department. He leads a number of teams with
responsibility for Land & Property Development, Valuation, Marketing,
Property Information & Mapping.
The Land and Property Development Team, was set up to identify,
prepare and progress development opportunities, to release additional
resources, and to investigate and bring forward opportunities for new
and innovative approaches to implementing development, through joint
ventures and partnership working. The team is currently at the forefront
of developing and implementing development agreements on behalf of
the Council and has been responsible for development agreements for
Glasgow Harbour, Tradeston, Custom House Quay, the Canal Corridor
and the New Neighbourhoods, of Oatlands, Garthamlock & Drumchapel.
Paul Warner, Associate, Biggart Baillie LLP
Paul joined Biggart Baillie as an associate in the firm's commercial
property department in July 2008, having worked previously for Glasgow
City Council where he led the in-house commercial property team as
Legal Manager for the Council’s Development and Regeneration
Services department. In addition to having gained considerable
experience in many areas of property work, including disposals,
acquisitions, leases and compulsory purchase orders, Paul specialises
in multi-faceted, large scale urban regeneration projects.
Paul’s previous achievements include acting for Glasgow City Council in
the conclusion of a framework agreement governing the £500m Glasgow
Harbour project and the conclusion of a development agreement for the
regeneration of a 50-acre site in the Oatlands district of the city to yield a
development value of approximately £200m.
Paul acts for Falkirk Council in connection with the proposed
regeneration of Grangemouth Town Centre and generally works closely
with colleagues in the Property and Infrastructure, Environment and
Transport departments in developing the firm's public sector and projects
practices.
Appendix 4.
Presentations.
Please find below a hyperlink to the presentations given on the day.
http://www.scotland.gov.uk/Topics/BuiltEnvironment/regeneration/pir/learningnetworks/mixedcommunities/recentevent
s/PublicSectorLandEvent.