Giving projects a timely boost
What can local authorities do to kick-start regeneration projects in a difficult market? Lesley-Anne Avis examines their options, which include deferred purchase prices, geared leases and underage as well as overage.
It has always been a challenge to achieve a viable major regeneration project, even in the good times; look at Liverpool One, for example, where the development costs were apparently significantly beyond expectations. So how much more difficult is it in the worst recession since the 1930s?
Major schemes across the country have simply stalled, and some have succumbed to developer insolvency; Thornfield, for example, had exchanged development agreements for schemes in Winchester, Hemel Hempstead and East Grinstead when Thornfield Ventures was put into administration.
And what of the rest? Most are being re-evaluated – in other words, down-sized, reduced section 106 benefits, lower land values for the promoting local authority (or in fact for many schemes a nil land value) and the need for government funding to plug the viability gap. Then even if development agreements are exchanged for schemes, can the developers find debt funding?
At the time of writing this article we are only aware of two or three banks who say that they are lending in the regeneration market. Of the debt that is available the loan to value ratios are not what they would have been in 2006, and the pre-conditions to drawdown regarding percentage pre-lets, forward sales, etc, are far more challenging than they would have been. Finding concrete examples of such funding having been closed in the current year has proved impossible.
So does that mean there is just no hope for bringing forward regeneration schemes in a difficult market? There is certainly more equity in the real estate market, but at present the returns for those investors that regeneration schemes would produce are simply not high enough and their pre-conditions for drawdown are much like the banks’.
There may be a chink of light with the likes of anchor tenants such as John Lewis now taking smaller stores with less backroom space, which can mean that the cost of agreeing terms for the all important anchor stores for retail led schemes will actually diminish.
In key areas the Homes and Communities Agency’s Kickstart residential scheme has been providing some hope on schemes with residential uses, and many of the first wave of schemes are now on site. The second wave is currently awaiting governmental review, so we just have to sit that one out.
The general review of spending cuts means that many schemes that had hoped to receive funding from the HCA or the regional development agencies, are simply having to consider other ways of achieving a viable scheme.
Where the local authority is promoting the scheme with its chosen developer, deferral of payment of land prices to the promoting authority may be one way of kick-starting schemes; as may both parties taking a share of the risk and agreeing a process for “underage” not merely “overage”.
What is clear is that local authorities cannot expect to receive the kind of benefits from developers of major schemes that they would have anticipated some years ago. This follows through to the planning system where reviews of scheme content include a pared down offering on section 106 benefits.
With potential funding cuts for local authorities and developers offering more limited section 106 packages local authorities may have to consider proposals such as deferral of land price, and more innovative risk sharing opportunities, as the way forward.
One of the difficulties for a local authority in considering some of these suggestions is their need to achieve the “best consideration” reasonably obtainable in the market based on an unrestricted use value.
Whilst well being powers may be a useful tool in this area, for large schemes the £2m limit may not be sufficient. It will be interesting to see whether the number of applications to the Secretary of State for consent to sell at an undervalue may increase if schemes are to get off the ground in the current climate.
One of the other structures that we are discussing with a number of authorities is for them to grant geared headleases with a reduced or deferred premium; the geared rent being based upon the occupational rents which the scheme will produce. This was a structure that was popular in the seventies. Geared leases allow for the promoting authority to realise some of the upside once the market picks up and occupational rents increase. This type of risk sharing arrangement and an appetite for more joint venture structures may be the way forward for a number of schemes.
The gestation period for major regeneration schemes is a long one, and so there must be hope that a development agreement that exchanges in 2010 will find its opening to the public taking place in a very different market. So considering issues such as deferred purchase price, geared leases, and underage as well as overage now may go some way to encouraging developers, and perhaps quite significantly at the present time, some of the equity in the market, to enter into real development partnerships with local authorities for regeneration schemes.
The Berwin Leighton Paisner Real Estate Report The Future of Funding – based upon a survey of our clients carried out in Spring 2010, assessing the prospects for development funding – identified a consensus among developers, investors and banks in favour of a shift in the approach to development finance, with all three welcoming moves towards joint venture arrangements and equity participation. There are clear signs that these equity arrangements will continue to play a part in filling the funding gap, with joint ventures, forward fundings and forward sales being considered as the way forward.
Lesley-Anne Avis is a partner at Berwin Leighton Paisner (www.blplaw.com). She can be contacted on 020 3400 4062 or via This email address is being protected from spambots. You need JavaScript enabled to view it..
A copy of the Future of Funding report can be downloaded here.
