Yield
The Council will only acquire properties and make investment decisions where the running cost does not require Council subsidy, (unless otherwise agreed by the Executive to further a strategic priority with a clear funding plan in place). Per acquisition, no minimum target will be set, but the yield must be balanced against the financial risk of the project holistically.
Where projects deliver key strategic priorities, or where the community benefits of job creation or safeguarding, tourism, town centre regeneration, business rate growth or effective asset utilisation are significant a very low or zero net yield may be acceptable.
Value and Cost
Acquisitions: 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 of properties, land and buildings 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
Following the PWLB Consultation the rules for PWLB investment have changed. The following criteria are the only criteria in which the Council can use PWLB funding as supported by this strategy.
- Housing - activity normally captured in the HRA (SHDC does not have a HRA) and General Fund housing, or housing delivered through an LA housing company including access to the PWLB for land release, housing delivery, or subsidising affordable housing.
- Regeneration projects typically with one or more of the following characteristics:
- the project is addressing an economic or social market failure by providing services, facilities, or other amenities that are of value to local people and would not otherwise be provided by the private sector;
- the project prevents a negative outcome, including through buying and conserving assets of community value that would otherwise fall into disrepair;
- the Council is making a significant investment in the asset beyond the purchase price: developing the assets to improve them and/or change their use, or otherwise making a significant financial investment;
- the project involves or generates significant additional activity that would not otherwise happen without the LA’s intervention, creating jobs and/or social or economic value e. while some parts of the project may generate rental income, these rents are recycled within the project or applied to related projects with similar objectives, rather than being applied to wider services.
- Refinancing would cover restructuring or extending existing debt from any source. The government proposes that refinancing should be a stand-alone category separate from the others on the basis that it is not always possible or meaningful to attempt to trace the link between some debt coming due and the spending that the debt originally supported.
- Service delivery to undertake borrowing to deliver a primary or other service function of the Council.
The S151 officer will determine if the project being considered meets the criteria set out above and define which of the criteria it meets. Further to that:
Acquisitions and development initiatives will be funded using predominantly borrowing or any other unallocated or available Council reserve or capital receipt. The Council shall not borrow more than or in advance of need as part of the funding for investments of developments so as to benefit from the investment of the extra sums borrowed (para 46 & 47 SGLGI).
There are no circumstances in which the Council would seek to disregard the prohibition on borrowing ahead of need, purely for profit. Any investment in renewable energy generation, as set out in the corporate strategy, would be classified as service delivery and would be made with a view to reducing the Council’s carbon emissions.
Liquidity – Compared with other investment types, property is relatively difficult to sell and convert to cash at short notice and can take a considerable period to sell in certain market conditions. To ensure that the invested funds can be accessed when they are needed, for example to repay capital borrowed, the Authority will spread its liquidity profile across its portfolio and also have a spread of the sector in which the Council invests. The Council also documents potential exit strategies as part of its due diligence checks.
Borrowing is to be secured on a case by case basis on the most advantageous terms available predominantly through borrowing or any other unallocated or available Council reserve or capital receipt.
Currently borrowing levels are capped at £60m.
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. Liquidity will be a factor in determining the amount of rent set aside in the Maintenance Management and Risk Mitigation reserve for each investment. This will be reviewed with the same frequency as the risk reporting procedure set out in this strategy.
Capital repayments will repay all of the capital value (through MRP) of any acquired property or borrowing for property development.
For non specific financial investments the period of the loans shall be linked to either the viable business case of the investment or the asset life whichever is the shortest as determined at the time of acquisition or investment.
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.
Where investments in companies (such as SPVs) are made in line with this strategy, all tax liabilities will remain with the SPV.