Council to underwrite office block scheme with TIF
Tue 20th August 2013, 3:45 pm
A new tax increment finance deal could allow Sheffield City Council to reap a £16 million windfall without spending a penny on up-front infrastructure.
Sheffield councillors voted this week to borrow against future business rates to underwrite the construction of the 3 St Paul’s Place office scheme if developer CTP can’t sell it on the private market within one year.
The agreement means that the council would still collect 100 per cent of the uplift in business rates on the development for 25 years even if it doesn’t end up buying the building.
A report to the council said: “The retention of 100 per of business rates… will apply to this development whether or not the council actually acquires the property.”
The council document says that the intention of the deal is to ensure that the speculative development of the office takes place in an environment where securing bank funding is practically impossible.
CTP will only be liable for around half of the development costs, with the rest paid for through a European loan. The developer is trying to secure funding for the remainder of the costs, estimated at between £15 and £20 million, from a variety of lenders, including the Joint European Support for Sustainable Investment in City Areas (JESSICA) fund run by the European Union.
Tax increment financing was introduced by the government with the intention of enabling councils to fund key infrastructure and capital projects by borrowing against future income from business growth – cash which would normally be split with central government.
However, the Sheffield deal could allow the council to reap all of the income on 3 St Paul’s Place without any prior investment in traditionally-defined infrastructure.
The council said the additional income could be worth up to £660,000 per year, which works out at £16.5 million up to 2038, which could be reinvested in city centre regeneration.
Ben Morley, strategic development and funding manager at Sheffield City Council, said: "The legislation on TIF doesn't define what we should spend the money we borrow on, which enabled us to be imaginative in the way we drew up this plan."
And he said that the council considered enabling major office developments to go ahead as infrastructure funding. He said: "An office block is part of the key infrastructue of a city, as much as a new road is."
It said the additional income to the council could be worth up to £660,000 per year, which works out at £16.5 million up to 2038.
Alan Aisbett, partner and specialist in PPPs at law firm Pinsent Masons, told SocInvest: “In this case, the money is being used as a guarantee, and that the government would argue that it is helping development that otherwise might not have taken place.”
The council said that if it bought the block but it remained empty, it would be liable for £1.5 million each year in running and maintenance costs.
Sheffield was named as one of three councils, along with Newcastle and Nottingham, to be allowed to retain business rates under a "type two" TIF, where business rates will be ringfenced from a new cyclical resetting process aimed at narrowing the gap between the richest and poorest councils in England.
Last year, the government said it was rebranding "type two" TIF schemes as "new development deals".