Commercial Property Strategy

Overall Objectives:

The Council's commercial property strategy has multiple objectives as stated below:

To support regeneration and the economic activity of the District
To enhance economic benefit & business rates growth
To assist with the financial sustainability of the Council as an ancillary benefit
To help the Council continue to deliver and/or improve frontline services in line with the Council's adopted strategy & objectives.

Desired Outcomes:

The following outcomes are desired by the application of this strategy. Each acquisition or development opportunity will be assessed on its fit with meeting the objectives stated above and should deliver one or more of the following outcomes (benefits):

Job creation or safeguarding
Health & Wellbeing
Town centre regeneration
Tourism / Increased footfall
Business rate growth
Improved asset utilisation
A minimum net yield return of 2% is targeted. However, in some circumstances, e.g. where community benefits are likely to be achieved, a lower return may be acceptable.

This strategy will be achieved by acquisitions and developments within the South Hams District. This will include the focussed acquisition of existing commercial property assets and the development of new properties which are to be let to third parties.

Risk

The risks of acquiring property may be mitigated through the acquisition of assets with secure, long income streams, although this risk will be weighed up against the social and economic benefits of acquisitions to support commerce and trade in the District
Acquisitions are to be made in a careful and controlled manner, with specific analysis of risk criteria carried out in the 'due diligence' stage prior to the completion of each purchase
The portfolio will be relatively risk-averse, targeting tenants of strong financial standing and minimum unexpired lease terms of four years at the date of acquisition. However, these criteria will be considered on a case by case basis and can be outweighed in order to meet the strategy objectives

Location:

Wherever opportunities arise within the District, in order to acquire or develop good properties which achieve some or all of the Council's multiple objectives and desired outcomes as stated above and are deemed as an acceptable risk

Tenant mix:

Where possible, a mix of tenants will be sought to create a balanced portfolio
The final decision over the appropriateness of any tenant would be reviewed at the time of acquisition, SHDC owns a significant number of commercial units already within the District, mainly smaller units and tenants with relatively low credit ratings. This reflects the historic policy of supporting small start-ups which has proved successful and continues to be. Newer acquisitions are likely to be for larger units which may have single tenant occupancy.

Lease length:

A minimum 4 years unexpired (mean unexpired term for multi-let properties) is preferable, however this is flexible if it helps achieve the strategy objectives
For multi-let properties, a mix of lease expiry dates are preferred, thereby limiting void risk (unless the property is purchased with a view to re-development)
Properties would preferably be let to sound tenants on leases with a preference for 'Full Repairing and Insuring' leases for single occupiers and through internal repair obligations and a service charge for multi-let properties.
There may be overriding community benefit and/or economic reasons to move away from these criteria and these will be considered on a case by case basis.

For all of the above:

The final decision over the definition of "good", "secure", "strong", "long", "careful", "controlled", "acceptable", "balanced" and "risk-averse" will be agreed between the property acquisition advisers (including legal due diligence) and the individuals delegated with the responsibility to conclude the acquisition of the properties.

This discretion will be based on both the risk to the capital value of the asset and the fit with the strategy objectives.

Yield:

The Council will only acquire properties where the running cost does not require Council subsidy. Per acquisition, a target minimum net yield (an ancillary benefit) of 2.0% is to be sought, after acquisition, management, maintenance, capital repayment and funding costs
However, the Council may opt to accept a lower net yield return if the community benefits of job creation or safeguarding, tourism, town centre regeneration, business rate growth or effective asset utilisation are deemed more important than a purely financial return

Value & Cost:

Larger lot sizes are favoured - smaller size properties have disproportionately higher management costs and expose the Council to greater property void risks, but the economic and trade benefits of buying smaller units may outweigh this
Acquisition costs are forecast not to exceed 7% (Stamp Duty Land Tax (SDLT) / Legal / Agents / Due Diligence). These costs are to be contained within the overall strategy budget.

Funding:

Acquisitions and development initiatives will be funded using predominantly borrowing or any other unallocated or available Council reserve or capital receipt
This is to be secured on a case by case basis on the most commercially advantageous terms available predominantly through borrowing or any other unallocated or available Council reserve or capital receipt
It is envisaged in December 2018, Full Council will need to approve a revised Treasury Management Strategy which would increase the borrowing limits of the Council to £60 m (capped at no more than £30 m borrowing before 30 April 2019), to facilitate implementation of this strategy
The borrowing term will not exceed the expected remaining life of the property, but the Council wishes to secure borrowing over a maximum 50-year term.
Capital repayments will seek to repay a minimum of 50% of the capital value of any acquired property or borrowing for property development

Tax Implications:

Due to the Council holding acquired or developed assets, it is not anticipated that there will be any corporation tax or income tax implications from this strategy
Some properties may be VAT elected, meaning VAT must be charged to tenants. This will be dealt with on a case by case basis and will be covered by the due diligence connected with that acquisition. The Council is able to charge and recover VAT
Capital Gains Tax would not apply to assets sold from Council ownership

Exit Strategy:

The Council is not looking to actively trade commercial property within the first 5 years of ownership of any acquired property, however this is flexible if required to meet this strategy's objectives
If it is determined that the most prudent action is to sell an individual asset, this will be considered on a case by case basis and will be acted upon in consultation with Executive Members, the S151 officer and the Head of Paid Service
It is proposed that all properties will be held as Council Assets. This may change if the Council were to set up a trading company and it was found to be commercially advantageous for such a vehicle to hold the asset
It is important to note that there would be early repayment charges if borrowing used to acquire a commercial property were to be repaid before the end of the loan term. However, Public Works Loan Board (PWLB) lending is not secured against property, so would not inhibit the asset being traded during the loan period. An alternative asset could be purchased (& held) with any sale receipt.

Governance Arrangements:

Acquisitions and developments must conform to the adopted commercial property strategy. Any deviation from the agreed strategy will require Council approval.
Before a final decision to proceed with a development or acquisition is made, local ward members will be briefed and be able to share their views with Executive Members.
Executive Members, along with the Head of Paid Service and S151 officer, will consider each and every proposal on its own merits and specifically how each proposal meets the Council's multiple objectives and desired outcomes.
Executive Members will consider proportionality on a case by case basis for each acquisition as part of the decision-making process, with information provided to them and the s151 officer, the Head of Paid Service and the Leader of the Council.
Officers, working with their specialist advisors in the market will sift opportunities and only present to Executive Members, opportunities that closely meet the Strategy. They will then lead the Executive Members into debate over the specific benefits and risks of each opportunity before the Executive Members make a decision. In this way, risk will be transparent through the process.
Projects and their outcomes will be kept under constant review by officers and reports to Executive and Audit Committee.

Development on Council-owned Land

The Council will delegate the authority and decision-making function relating to 'Development on Council Owned Land' to the Executive, assuming that the proposed expenditure complies with the Council approved total borrowing limits.
This delegation is to include the granting of associated leases in excess of 15 years as and when required, as recommended by the Assets CoP Lead, on a project by project basis
In parallel, the Council's Senior Leadership Team (SLT) are required to approve any development. Any project will be subject to Due Diligence and Legal Searches and occasionally other data as need arises.
Specialists will be commissioned to act on behalf of the Council to source suitable development and tenant opportunities and manage the due diligence process.
Officers will provide Members of the Executive with a set of data and an indicative cash flow for each project under investigation. These will aid decision-making on whether to proceed or not.
Commercial Property Acquisitions within the South Hams
The Council will delegate the authority and decision-making function relating to 'Commercial Property Acquisitions in the South Hams' to the Head of Paid Service and Section 151 Officer, in consultation with Members of the Executive, assuming that the proposed expenditure complies with the Council approved total borrowing limits.
In the event of three or more Executive Members expressing their opposition to the proposal, then the matter will proceed no further.
In parallel, the Council's Senior Leadership Team (SLT) are required to approve any acquisition. Any project will be subject to Due Diligence and Legal Searches and occasionally other data as need arises.
Assuming the bid remains as per that authorised at the time of sign off, the final sign-off prior to exchange and payment of deposit (typically 10%) is made by the S151 officer and Head of Paid Service. If anything has changed, the Executive Members will need to vote again in order to proceed.
This process of delegated authority is required because there is often very little time (a number of days) to secure a bid on a property, especially if it is off market. Off market bids avoid price inflation caused by competing bidders.
The Executive Members have been made aware that they will be required to process and respond to information similar to that in Appendix B in a very quick timeframe (minimum two working days) to provide their decision. They may also be asked to attend meetings on similarly short notice. These meetings may be held virtually to expedite decision-making.
When South Hams District Council acquire a Commercial Property in line with this strategy, a report will be presented (for noting purposes) to the subsequent meeting of the Executive.

Running / Review

If the management of acquired or developed assets cannot be managed in-house by existing resources, it will be outsourced to property professionals.
The cost of this management is to be deducted before calculating the net yield.
The Executive will receive regular reports to confirm portfolio composition and performance. Regular portfolio performance reporting will be presented to Audit Committee as required

Disposal

Once acquired, decisions relating to the ownership of any acquired or developed properties will be dealt with in-line with the Council's constituted scheme of delegation.
Disposal will be considered if the portfolio breaches the approved strategy. Decisions to be made in consultation with Executive Members, the S151 officer and the Head of Paid Service.

Resources:

The work to filter, appraise and recommend investment and development opportunities will be undertaken within the Assets CoP. This will be supplemented by specific consultant advice as required and associated costs built into the business case for each project
The Assets CoP has strong relationships with a number of local and national consultants who will be required to support the projects. Examples of this include (but are not limited to): CCD Properties (development specialists), Arcadis (building technical due diligence), Womble Bond Dickinson (legal due diligence) and Savills (commercial property investment advice).