Agenda item

The Investment Advisory Board is exploring the advantages and opportunities that would be offered should the Council set up a property company.  Most important amongst these is the ability of a company to pursue opportunities to acquire commercial properties that are beyond the Council’s powers i.e. solely for income generation purposes.

The Executive is requested to consider these advantages and the opportunities and challenges such a vehicle might offer and to approve the creation of a company as set out below.

Recommendation

It is recommended that:

1.         the Overview and Scrutiny Committee be thanked for their consideration and comments;

2.         the Council be recommended to create a company as described in this report, after the consideration of detailed legal advice; and

3.         the Council agree to delegate the final details of the matters set out in paragraphs 12 and 13 above, in relation to the initial set up of the company, to the Investment Advisory Board after consideration by the Value for Money and Customer Service Overview and Scrutiny Committee.

27.1    The Investment Advisory Board is exploring the advantages and opportunities that would be offered should the Council set up a property company.  Most important amongst these is the ability of a company to pursue opportunities to acquire commercial properties that are beyond the Council’s powers i.e. solely for income generation purposes.

27.2    The primary objective of the Council’s Investment Strategy, and therefore of the Investment Advisory Board, is to contribute to offsetting the overall budget deficit.  The Council is currently constrained under s.1 of the Localism Act 2011 when it comes to acquiring property for investment purposes.

27.3    Should the Council wish to do so it has the ability to establish a ‘Local Authority Trading Company’ via section 95 of the Local Government Act 2003.  Such a company would in effect be a subsidiary company of the local authority and as such the shareholder (i.e the Council) would have ultimate control over activity and operational matters.

27.4    The company as a property vehicle would target a specified minimum return with funding either from loans from the Council or commercial sources. The aim would be to maximise the opportunities within the existing portfolio where there is a clear business case and an acceptable level of risk, and to bring in new opportunities to increase the assets the Council already owns in cases where this falls outside of the Council’s legal powers.  Every property option would be looked at on its own merits to decide whether to purchase through the Council or the Company dependent upon the business case and legal implications of the opportunity concerned. 

27.5    It is the intention that the company has enough flexibility to acquire and work on a commercial basis across a range of activities if appropriate. This may include joint ventures, special purpose vehicles, operating existing council assets and possibly the development of management agreements.

27.6    Initially, the focus of the company would be to concentrate on property investment and development work both inside and outside of the Borough which is needed to provide a valuable income stream to the Council. The company would mainly operate in situations where the Council can’t or where there is a need to respond more quickly and effectively to market opportunities where the Council is more disadvantaged by the regulations on decision making which affect speeds of response.

27.7    The detailed legal implications are included at Annexe 2 which was the information reported to the recent Investment Advisory Board Meeting. A summary of the main points is below.

1.    An appropriate governance structure will be needed to ensure sound and robust management alongside protection of the Council’s financial and reputational investment. The Council as shareholder would control the company and delegate operational matters via a Shareholder’s Agreement.

2.    The company would be subject to the Local Authorities (Companies) Order 1995. The order sets out regulations that are specific to controlled companies and start from the basis that the public should be aware that the company they are dealing with is controlled by the local authority. It should be noted that the company would be liable to corporation tax in the normal manner on profits, and would need to charge VAT.

3.    The Council would also need to consider how the support services required by the company will be contracted out. This would include legal services for property acquisition and accounting services provided by local authority staff (and re-charged to the company).

4.    The following documentation is required to complete the establishment of a company and associated governance arrangements.

·         Articles of Association

·         Shareholder Agreement.

·         Loan Agreements

·         Director Appointments

·         Appointment of Company Secretary and an Auditor.

·         Business Plan

27.8    The company would need significant funding to purchase property in the open market.  Therefore, as well as the Council having the powers to form the company it would also need to be able to provide it with the necessary loans (which it can do via the Localism Act 2011 and also s24 of the Local Government Act 1988) and equity funding. The company would also need working capital and this is likely to be provided by way of short term loans from the Council.

27.9    The creation and operation of a company by a local authority is a complex matter.  It is however, an action that a number of other local authorities have taken successfully. To ensure that the council maximises the opportunities from having a company and manager the associated risks effectively to safeguard the council’s finances, and it will be necessary to seek specialist advice. This advice will aim to cover Waverley’s specific aspirations and include advice on:

·         Structure, including subsidiaries if appropriate.

·         Tax.

·         Raising finance, including borrowing from the Council.

·         Support costs and other overheads.

·         Investment criteria.

·         Further scope for the company’s activities in future.

27.10  The creation of a Company presents opportunities to the Council that could otherwise not be realised. Subject to the Council approving the creation of the company, the following matters will be resolved by the Investment Advisory Board after taking specialist external advice.

·         Governance arrangements

·         Structure

·         Authorisation

·         Scope of activity and types of investments

·         HRA interface (in particular the use of revenue from disposals to the company for affordable housing)

·         On-lending (i.e. any restrictions around the Council’s ability to loan money to the company).

27.11  The Value for Money and Customer Service Overview and Scrutiny Committee was supportive of the proposal for creating a property company as it would provide more flexibility for the Council.  However Members felt that a clear system of monitoring and reporting needed to be put in place so that the Members could be updated on progress with property acquisitions.

27.12  It was noted that the matters set out in paragraph 27.10 of the report would be delegated to the Investment Advisory Board for final approval and the Committee requested to have sight of the precise details of this delegation.

27.13  The Executive thanked the Overview and Scrutiny Committee for their consideration and comments and agreed that once finalised by the Investment Advisory Board, the governance arrangements for a company would be reported back to the Executive.  The Executive therefore

RECOMMENDS that

9.         a company be created as described in this report, after the consideration of detailed legal advice; and

10.       the Council agree to delegate the final details of the matters set out in paragraph 27.10 above, in relation to the initial set up of the company, to the Investment Advisory Board, after consideration by the Value for Money and Customer Service Overview and Scrutiny Committee.

[Reason: to give consideration to setting up a company to pursue commercial opportunities that are beyond the Council’s powers]