Head of Finance, Property & Revenue Services
To
Portfolio Holder for Resources
on
th
16 January 2015
PROPERTY TRANSACTION REPORT
ACQUISITION OF COMMERCIAL PROPERTY (DONCASTER)
1.
SUMMARY
This report seeks approval to acquire an additional commercial property within the
United Kingdom.
It is a Key Decision as the capital expenditure is in excess of £250,000. The decision
is to be taken under the General Exception provisions (Paragraph 2.15 Part 4 Council
Constitution refers). The Chair of Select Commission has been advised of the
proposed decision in accordance with the Constitution.
2.
RECOMMENDATIONS
To be resolved by Portfolio Holder for Resources
3.
3.1
(i)
That the Council acquires the long leasehold interest in the commercial
property identified in Appendix D (site plan) and Appendix F (photographs)
for the purchase price set out in Appendix A.
(ii)
That approval be given to Opt to Tax the subject land identified in Appendix
D.
(iii)
That the Corporate Asset Manager be authorised to determine final terms
and conditions of acquisition.
BACKGROUND
In order to assist with achieving a balanced General Fund budget Property
Services have been tasked with reviewing the performance of its existing
commercial portfolio, together with identifying suitable strategic property
acquisitions to bring new income streams into the Council. A search for
suitable commercial property was undertaken by Property Services. Contact
was made with external agents at a local, regional and national level. The
Council’s property acquisition criteria were provided and a number of suitable
properties were identified, some were available on the open market, some
were ‘off market’. The properties covered a variety of sectors and location, but
they all met the Council’s requirements, namely level and longevity of rental
income, potential for rental growth and strength of Tenant covenant. The
investment criteria are detailed in paragraph 4.
4.
PROPOSAL – PROPERTY INVESTMENT RATIONALE
4.1.1 The Head of Finance, Property & Revenue Services has identified a sum of
£460,000 per annum in the draft budget proposals for the financial year
2015/16. After due consideration, it was proposed that this requirement should
be met by a proprietary asset or assets capable of producing a stable income
of extended duration capable of periodic increase.
4.2
In consideration of the Council investing in such commercial property it was
proposed that an objective set of criteria will used to identify and grade a
potential asset. The sieving mechanism was referred to as the Five Q’s, Q
standing for ‘Quality’. This was designed to address what was believed to be
the constituent and salient characteristics of an investment that matched the
Council’s requirements. The criteria and weighting for each ‘Quality’ focused on
the strength of the following:
4.1.2 Income
45%
The income produced by the asset was viewed as being the most important
element of a potential acquisition. The income is governed by the Lease
currently in place. To assess this, the category of income was split into sub
categories:
Lease Length:
The length of the current contractual agreement in
place and the period of time over which rent is paid.
Longer agreements were viewed more positively
than shorter ones, with twenty five years
aspirational.
Rent Review Pattern:
The frequency and methodology by which the
passing rent is reviewed. This represents the
number of times during the term of the Lease that
the rent can have the potential to be increased. It is
the norm within the commercial property market that
the rent is reviewed either to the current Market
level or in line with the Retail Price Index. If there
has been no increase in rent levels between the
reviews, then the rent will not be increased. The
more frequent the rent review, the more opportunity
for the rent to increase, and were thus viewed more
favourably. Rent reviews linked to the Retail Price
Index (RPI) were desirable.
Break Option:
The ability of the Tenant to end the Lease before its
contractual end date is becoming more common in
commercial Leases. They have the effect of
guaranteeing the income only for the period up until
the next Break Option. A lack of Break Options
within a Lease was viewed as desirable.
% of Floor Area:
The percentage of a building’s floor space that was
occupied by a particular Tenant. In a multi let
property, it was important that reference be made to
the areas occupied by specific Tenants, meaning
that appropriate weighting to income would be given
if, in a 10,000 sq. ft. building 1,000 sq. ft. was
occupied by a Tenant of international repute and
9,000 sq. ft. was occupied a small scale, local
operator.
Vacancy:
The occupancy level of the properties under
consideration was assessed as part of the scoring
matrix. It was deemed prudent to purchase a fully
occupied property, and one that did not have the
risk of long term vacancy and the resultant pressure
of re-letting vacant space. Fully let properties were
scored more highly than vacant/part vacant ones.
Management:
The intensiveness of the property’s management
was also assessed. A property let to a single
occupier on a Full Repairing & Insuring Lease,
whereby all responsibility for external and internal
repair and insurance rests with the Tenant, would
be, theoretically the least involving of properties,
with multi let Tenants on internal repairing and
insuring being the most intensive. The interaction
between geographic location and management
intensity is a significant consideration.
4.1.3 Tenant
25%
The financial standing and viability of the Tenant was also considered and
objectively scored using the Dun & Bradstreet ratings. Dun & Bradstreet are an
internationally recognised financial referencing agency.
4.1.4 Location
10%
Location was deemed to be an important consideration when critiquing the
asset. It is important to acquire an asset in an area that is viewed to be
economically buoyant and has the ability of sustainable financial and economic
growth, over the life time of the asset. To this end, areas were categorised as
sub regional, regional cities, secondary cities, prime cities and capital cities.
Greater scoring weight was given to capital cities.
4.1.5 Sector
10%
The sector that the property traded in was also deemed to be of significance.
The strength of the sector was viewed in relation to its location, rather in
isolation. Theoretically, a hotel in Leicester would be scored lower than a hotel
in London, as the investment market would view that, although operating in the
same sector of the economy, that the interaction between sector and location
meant that one was far more desirable an asset than the other.
4.1.6 Building
10%
The age and construction of the building was also reviewed and taken into
account in the decision making process. The potential for future structural
repair, retro fit and refurbishment expenses for both the Council and the
Tenant, should be limited as much as possible. A modern, well-constructed,
energy efficient building was scored highly. Mansfield District Council did not
wish to purchase a property let on a long term, which would not structurally
last the duration of that period.
A scoring matrix based on these factors was produced and was utilised in
identifying a suitable commercial property to acquire for the Council. A scoring
matrix for the subject property identified in 3.10 onwards is shown Appendix B.
4.2
PROPOSAL – COMMERCIAL PROPERTY ACQUISITION
4.3
A review of the commercial properties currently available and the application of
the Five Q’s scoring matrix identified that the subject property (Appendix B
refers) as the most appropriate against the Council’s criteria.
4.4
The property is currently being marketed by Steadman Brierley Limited, a
specialist Investment Agency practice. The vendor is willing to deal with the
Council on a 1-2-1 basis on the basis that a formal offer is made swiftly. If this
is not forthcoming it is likely that the vendor will sell to another party.
4.5
In order to take the subject proposal forward and give further consideration to
the proposed acquisition, the following matters have been identified as being
necessary and prudent:(i)
Negotiations to Acquire – The property has been offered to the Council
by a 3rd party firm of Surveyors. It is industry standard practice that the
Agent is then retained by the Council to represent them throughout the
acquisition of the property. The Council will incur a fee of £40,000 of the
eventual purchase price for their representation and specialist
professional advice.
(ii)
Pre-Contract Enquiries –The pre-contract enquiries and discussions with
the vendor’s agent and solicitor will be undertaken by Property Services,
the Council’s Agents and Legal Services in order to protect the Council’s
position and minimise risk associated therewith.
(iii)
VAT Advice – The property has been elected for VAT and it anticipated
that the sale will be treated as a transfer of a going concern.
Accountancy will seek the advice of LAVAT (the Council’s VAT
specialist advisors) on this matter and their advice will form part of the
pre-contract enquiries.
5. TOTAL ACQUISITION COSTS – these are set out in Appendix A.
6.
OPTIONS AVAILABLE
6.1
There are 2 options available: -
6.2
Option A – Acquire the identified commercial property. (Preferred Option)
The recommendation proposal represents a proactive use of the Council’s
assets and re-aligns them in a way which is beneficial for both the General
Fund in the short to mid-term. The proposal supports the Council’s Medium
Term Financial Strategy in securing a significant revenue income stream to the
General Fund. An additional income stream of £460,000 has been identified in
the 2015-2016 budget and the proposed acquisition would produce an income
stream of £331,410 per annum, with effect from date of acquisition. The
passing rental is reviewed on a five yearly basis, in line with RPI.
6.3
Option B – Do Nothing.
The 2015-2016 draft budget includes an additional income of £460,000 to
maintain a balanced budget. Failure to invest in a commercial property would
result in a shortfall to the Council budget which would have to be made from
other savings or additional income sources.
7.
RISK ASSESSMENT OF RECOMMENDATIONS AND OPTIONS
Option
Option A –
Purchase
the subject
asset
Risk Type
Strategic
Risk
Risk
Assessment
Outside
administrative
district
Risk
Level
Low
Risk Detail
The strategy of reinvestment has been
designed to utilise the
best available assets
regardless of location.
The Council intends to
maximise the longevity
and safety of income
streams
and
those
investments are not
available
within
the
administrative
boundaries
of
the
district.
Management Knowledge
Risk
Gap
Low
Strategic
Risk
Business
failure of
current Tenant
Low
Operational
Risk
Property
Management
Problems Accessibility
Low
Operational
Risk
Knowledge
Gap
Low
The subject property is
of a type, quality and
Tenant profile that is not
replicable locally and
has not been previously
been owned by the
Council. However, the
property will be let on
Full
Repairing
and
Insuring
terms
and
issues are capable of
being dealt with by
Property Services.
The subject property is a
newly built hotel. It is
highly
unlikely
that
Travelodge Limited will
cease trading. However,
due to the property’s
location, if this did occur
there would be interest
from other occupiers of
similar
size
and
reputation to occupier
the property on similar
terms.
Mansfield
District
Council currently owns a
property
outside
its
administrative boundary,
and it is not envisaged
that the management of
the subject property
would present an issue.
A site visit can be
completed
within
working hours.
As
mentioned
previously,
all
proprietary
matters
arising
from
the
ownership of the subject
property are capable of
being dealt with by the
Council’s
Property
Services
section,
however 3rd Party advice
can be sought, as and
when,
from
the
Doncaster
property
Financial
Risk
Failure to Opt
to Tax
High
Financial
Risk
Opt to Tax
Low
profession.
Do nothing and the
conditions of the TOGC
will not be met. This
would result in VAT
being added to the
purchased price and no
VAT being charged on
the rental income. This
would risk breaching the
partial exemption limit.
This option is not
recommended.
Elect to tax the property
as
shown
on
the
boundary
map
in
Appendix
D,
which
would
enable
the
conditions of a TOGC to
be met and reduce the
risk of breaching the
partial exemption limit.
This is the preferred
option.
8.
ALIGNMENT TO COUNCIL PRIORITIES
8.1
In order to deliver its Corporate Plan and Medium Term Financial Strategy, the
Council has to ensure its land and property assets are used effectively for the
delivery of services either directly in the case of operational properties or
indirectly with non-operational properties. The acquisition of an additional
commercial property will create a new income stream and assist in delivery of
these objectives.
9.
IMPLICATIONS
(a)
Relevant Legislation -
(b)
S.120 Local Government Act 1972
S.1 Local Government Act 2003
S.12 Local Government Act 2003
S.13 Local Government Act 2003
S.1 The Localism Act 2011
The Local Authorities (Capital Finance
Accounting) (England) Regulations 2012.
and
Human Rights - The Human Rights Act 1998 is not contravened as an
individual is not directly affected by the recommendation.
(c)
Equality and Diversity - It is considered that the proposed actions are fair and
equitable in their content and are not discriminative on the grounds of equality
and human rights.
(d)
Climate change and environmental sustainability – No implications on the
Council.
Crime and Disorder No implication
(e)
(f)
Budget /Resource The capital programme was amended and an
additional budget of £9.8M approved by Council 16 th December 2014. The cost
of the acquisition of this property is contained within this capital sum. As
outlined in the report the rental income stream from this property will assist with
the draft budget for 2015/2016.
10.
COMMENT OF STATUTORY OFFICERS
Head of Paid Service: No specific comments.
Section 151: - The budgetary implications are as set out in the report.
VAT implications: These are set out in the report.
Monitoring Officer: In addition to S120 of the Local Government Act 1972 which
empowers a principal council to acquire by agreement land inside or outside its area,
under the general power of competence set out in Section 1 of the Localism Act 2011:
(1)
A local authority has power to do anything that individuals generally may do.
(2)
Subsection (1) applies to things that an individual may do even though they are
in nature, extent or otherwise—
(a)
unlike anything the authority may do apart from subsection (1), or
(b)
unlike anything that other public bodies may do.
(3)
In this section “individual” means an individual with full capacity.
(4)
Where subsection (1) confers power on the authority to do something, it
confers power (subject to sections 2 to 4) to do it in any way whatever,
including:-
(a)
power to do it anywhere in the United Kingdom or elsewhere,
(b)
power to do it for a commercial purpose or otherwise for a charge, or without
charge, and
(c)
power to do it for, or otherwise than for, the benefit of the authority, its area or
persons resident or present in its area.
The Council would have all the necessary powers to purchase assets anywhere in the
United Kingdom. Any procurement of expert estates or property advice would be a
Part B Service under the Public Contracts Regulations 2006 (The Regulations).
Although any procurement would fall below the current threshold for a service contract
of £172,514 and the Regulations themselves do not require any form of prior
advertising or competitive tendering of Part B services it would be prudent to ensure
that any procurement of services on a key project complies with the general
obligations of transparency, equal treatment, non discrimination and proportionality
that derive directly from the Treaty on the Functioning of the European Union.
The Local Government Act 2003 (S1 and S2) gives the local authority the power to
borrow and invest money for any purpose relevant to its functions. The council has a
fiduciary responsibility to ensure public funds are safeguarded and it should be noted
that even prior to exchange of contracts if a letter of intent or similar is issued by the
council, it can be potentially deemed as legally binding. The council must ensure that
robust due diligence is carried out by qualified and competent advisors, if the council
does not have the expertise in-house, prior to entering into a contract.
9.0
CONSULTATION
9.1
None
10.
BACKGROUND PAPERS
None
Report Author
Designation
Telephone
E-mail
- Philip Colledge
- Principal General Practice Surveyor & Corporate Asset
Manager
- 01623 463231
- pcolledge@mansfield.gov.uk