Cabinet Member for Assets and Investments
This item is exempt from call-in under Grounds of Urgency, as agreed with the Chair of the Council.
Grounds of Urgency are:
Significant inflationary pressures in the construction industry have resulted in a shortening of tender validity periods- to a period of a few weeks and sometimes only days, compared with several weeks, or months previously.
The contractor’s price for phase 1 of the HQ redevelopment is valid until 10th June 2022 and therefore a decision needs to be made before this date to enable Babergh Growth to determine whether they can award the contract or not. Babergh Growth cannot award the contract until increased funding has been secured. Further delay to the award of contract in the current market would result in price increases.
Decision:
This item is exempt from call-in under Grounds of Urgency, asagreed with the Chair of the Council.
It was RESOLVED: -
1.1 Approves the increase in peak funding threshold for Babergh Growth Ltd to £7m for use to deliver the redevelopment of the former HQ site in Hadleigh.
1.2 Authorises the Section 151 Officer, in consultation with the Monitoring Officer and the Leader, to negotiate and vary the necessary legal agreements between Babergh District Council and Babergh Growth Ltd to enable the delivery of housing on the former HQ site within Hadleigh.
REASON FOR DECISION
To enable and support the delivery of housing within the district and support the economic prosperity of Hadleigh as a key market town.
Alternative Options Considered and Rejected:
The options that have been considered are: -
2.1 Option 1 – Freehold Disposalof the site.
The Council could look to sell the HQ site on the open market with the benefit of planning consent, however the planning consent is due to lapse if not implemented by September 2022. Informal marketing advice has been received recently which identified a negative land value based on the current planning consent but suggests that a maximum gross capital receipt of circa £500,000 could potentially be achieved. It is likely that any third party would seek to increase the density of the scheme and to mitigate the costs of development, which could result in a less favourable scheme than currently consented.
Whilst this option would enable the Council to receive a capital receipt this would need to be offset against development costs incurred by Babergh Growth to date (circa £320k) and any future control over the delivery of the site could only be gained through the Council’s regulatory powers. This would not guarantee that development would be forthcoming in the near future, as seen with other former HQ sites across the County.
2.2 Option 2 – Increase Peak Debt Threshold to align with current market conditions
In December 2018, Cabinet and Council approved capital funding of £3.77m against the development capital expenditure costs of £12.8m. Current development capital expenditure following tendering the works is anticipated to be £11m for phase 1 and likely to exceed £12.8m for both phases due to significant price inflation in the construction market.
Due to market changes it is no longer possible to deliver the development within the authorised peak debt threshold. The authorised peak debt threshold would need to increase to £7m to progress the scheme. Increasing the peak debt threshold would enable the build contract to be awarded for phase 1 before the expiry of the tender period, thus reducing further potential for price increases and a start on site to occur before the expiry of the planning in September 2022.
Phase 1 is currently forecast to make a small loss (£250k) but potentially could break even if the construction contingency isn’t required. Phase 1 would provide 41 new homes. Phase 2 would be reviewed once phase 1 has progressed, to manage exposure to market conditions. Phase 2 comprises two elements, 4 properties on Corks Lane (Phase 2a) which is anticipated to deliver a profit of £300,000, and 4 properties on Bridge Street (Phase 2b) which need to be reviewed further and as such for this purpose we are currently taking a cautious approach and assuming no profit attached to these properties. On this basis Phase 1 and phase 2a currently show a break-even development with the potential for a small profit (c. £50-100k), further profit could subsequently be available from phase 2b.
Option 3 – Progress Phase 1 with lower peak debt threshold by agreeing to deliver 13 properties to the Housing Revenue Account (HRA) for affordable housing.
The scheme could be delivered within a peak debt threshold of £5.25m if 13 properties are delivered to the HRA for affordable housing. The HRA would pay for the properties on a drawdown basis against works completed on site (similar to the process for acquiring S106 homes on other schemes). This would improve the cashflow of the development and reduce the need to increase the peak debt threshold to the full amount set out in option 2, however this would reduce the viability of the development further.
The affordable properties would cost the HRA in the order of £2.7m (build cost) this shows a negative Net Present Value of c.£500,000 for the HRA, ordinarily the HRA only acquires/builds units which show a positive Net Present Value. This option would however deliver much needed modern affordable properties in the heart of Hadleigh.
The Council delivered Angel Court, in Hadleigh, a fully affordable scheme, providing 19 homes last year, providing a mix of affordable rent and shared ownership homes. All of the shared ownership homes have now been sold or reserved and the scheme is well occupied.
Allocating 13 homes for affordable purposes within the scheme would reduce the viability of the scheme further and would result in a loss of approximately £250,000. This is therefore unlikely to be a viable option without further subsidy.
2.3 Option 4 – Do Nothing
This is not a viable option. The property has been vacant since 2017 and would be an under-utilised asset if no further actions were progressed. There is full time security on site to mitigate the risks of anti-social behaviour in the area. The costs for security are approximately £110,000 p.a.
The property is not capable of being occupied without considerable expenditure and as such doing nothing would result in the property remaining vacant and under-used. It would fail to deliver any benefits either financial, social or economic for the community and increasingly become a magnet for anti-social behaviour with further deterioration of the listed buildings within the property.
The recommended option to enable housing delivery at the former HQ site within Hadleigh, is Option 2. This option enables the Council to deliver housing in a timely manner prior to the expiry of the tender validity period and planning consent and mitigate further construction cost increases in a highly inflationary construction market. It will control the quality of the housing and support further housing delivery within the district.
2.4 Option 5 – Alternative phasing of development to minimise peak debt threshold
Alternative phasing has been considered including extending the period of construction to keep the peak debt below the agreed threshold, however this is not a viable option as contractors will not agree to a fixed price on this basis and there would be increased costs of site set up for the longer period as well as inflationary pressures, which could result in significant losses for Babergh Growth and its shareholder and ultimately would delay the completion of the whole development.
2.5 Option 6 – Alternative mixed-use development
Alternative developments have been considered including retaining some office/ commercial uses within the development. Office/commercial uses would require more car parking to be delivered to serve this use compared to residential units and as such this would reduce the overall built area and the gross development value of the scheme, whilst build costs would be high in terms of creating additional car parking and refurbishing and upgrading any commercial space to meet current standards. This option is less financially viable than the current consented scheme, a high-level appraisal has indicated a negative return to the shareholder in the order of minus £1.4m, compared to breakeven or small return if phase 1 and 2a are delivered as set out in option 2 above.
An alternative development could not be delivered under the current planning consent and as such a new planning application would need to be submitted. Progressing this option would delay any start on site for at least a further circa 12 months whilst the scheme was re-designed, consulted on and planning obtained as well as incurring further professional fees and holding costs. Due to the current market conditions any alternative scheme would also require an increased peak debt threshold. This option is therefore not viable at the current time.
Any Declarations of Interests Declared: None
Any Dispensation Granted: None
Minutes:
9.1 The Chair, Councillor Ward introduced the report on behalf of Councillor Busby.
9.2 Councillor Ward proposed the recommendations, as detailed in the report, which was seconded by Councillor Osborne.
9.3 In response to questions from other Members attending the meeting the Assistant Director – Assets and Investments, clarified that there had always been a Phase One and Phase Twoin the development of the sites. The refurbishment of the existing building continued to be Phase One and the new build formed part of Phase Two. There had been some change to the flood zones. Phase 2 had been sub divided into Phase 2a and Phase 2b. A viability study and further assessment would be undertaken before going forward with Phase Two. Appraisals had also taken into account the work intended for the site as this was a challenging site. With regards to the financial implications for Phase One, it had never been the aim to deliver this part of the scheme for profit and the projections were for the project to break even. However, the increase and availability of building materials should be taken into consideration. The existing development plans for Phase 2A was expected to deliver a profit to the Council. She reminded Members that the report being presented today was to bring Phase One of the development forward.
9.4 The Chair confirmed that the increase in the debt threshold was to enable the delivery of Phase One. The part of the development would either bring a modest profit or break even.
Note: The meeting was adjourned between 3:19 pm and 3:25 pm.
9.5 In response to questions from other Members attending the meeting Councillor Busby stated that the Council followed the lates and most up to date advice received for the Former HQ Site.
9.6 In response to further questions from other Members attending the meeting the Monitoring Officer informed Members that the decision was not ultra-vires, but an executive decision, and Cabinet was not limited to the amount of funding it could agree, as long as it was within the agreed budget which was set annually by Full Council. The Section 151 Officer had confirmed that the funding was within the agreed budget and therefore Cabinet could make this decision.
9.7 The Chair stated that the Grounds of Urgency for the decision had been approved to ensure that an agreement could be progressed to prevent an increase in cost for the development of the site. The deadline was Friday 17 June 2022.
9.8 Members debated the options in the report and agreed that Option 2 was consistent with the decision made by Full Council in 2018. The objectives remained the same for Babergh Growth Company, which was to minimise the losses to Babergh Council and if possible, gain a profit. However, the cost of material and work had increased in the past 3 years since the project began and there were challenges which had to be addressed on the site, including the listed buildings.
It was RESOLVED: -
That Cabinet:
1.1 Approves the increase in peak funding threshold for Babergh Growth Ltd to £7m for use to deliver the redevelopment of the former HQ site in Hadleigh.
1.2 Authorises the Section 151 Officer, in consultation with the Monitoring Officer and the Leader, to negotiate and vary the necessary legal agreements between Babergh District Council and Babergh Growth Ltd to enable the delivery of housing on the former HQ site within Hadleigh.
REASON FOR DECISION
To enable and support the delivery of housing within the district and support the economic prosperity of Hadleigh as a key market town.
Supporting documents: