Assets will only be sold when the market is right and values are enhanced and the proceeds will pay down the debt first with the surplus falling to you or being shared with your JV partner. Provided the funder is convinced your plan is a good one then he will lend you the money. You get your £50 million up front and as long as the JV partner buys into the business plan he will pay an additional £25 million to be involved. These deals are being done.
Operational Estate, Complex SPV; summary
This SPV, the complex SPV, is complex because of the number of parties and deals that are wrapped up in within one strategy. It allows the parties to take out money at the front end and to share downstream profits, but clearly if more money is taken up front this dilutes the downstream profit.
However the main features can be summarised as
● 3 way structure, Council, Developer, Funder, and aligned interests; so it could be 4 way
● Allows for collaboration partners eg Police, Fire, Health etc.
● Brings in skills and knowledge ● Maximises the early cash receipt
● More complex governance; inevitably some control is lost, it is not possible to have 3 or more partners in the deal and expect to have complete control of everything in the future
● Future profits shared
● Addresses Government policy, for example Single Conversation, shared services, HCA
Operational Estate, Complex SPV; risks
This can be a vehicle for implementation of strategy, it ticks a lot of boxes, it is complicated and not easy to work it through, but it can be done. Inevitably there are some significant risks some obvious and some less obvious. It is absolutely critical that governance is constructed in the right way so that you do not loose control. You may set out with a governance structure that looks like it works very well but, in practice, a lot depends on the relationships within the vehicle.
An SPV is able to take on debt but what happens if that debt cannot be serviced? What circumstances will arise that might bring this about? An option is to bring in a Council guarantee to help to strengthen the covenant of the vehicle although, in reality, there may well be an implied guarantee anyway, because it is unlikely that any council is going to let such a vehicle go bust.
There is a complexity issue. As arrangements become increasingly more complicated the very complexity of the vehicle it might mean it might not get off the ground or might ultimately fail.
And what happens if the JV partner fails to deliver their part of the bargain or even worse, goes bust? This is a significant issue that needs to be planned for in advance. And what happens if your partners, with their different drivers and issues, over time move away from what the vehicle was set up to do; how will you manage that or how will the entity manage that?
There are significant risks to the success of these vehicles and it is essential to think these through in advance and make plans accordingly.
Operational Estate, Complex SPV; benefits
But there are benefits and importantly, if it is done correctly, and if you get it right, then successes are very significant as
● Property becomes an enabler of service transformation. ● By having a plan that is implementable you can catalyse collaboration with your partners.
● Efficiency can be increased and cost reduced. ● It delivers Government policy.
● Improving your assets can create a better working environment for staff, make them happier, make it easier to retain them, and make it easier to recruit the better people.
● Improved corporate image ● Release and re-deploy capital.
Conclusions
These tools are available; they can be used and are being used by public service asset managers. They enable you to deploy strategy, take it forward and accelerate the changes that you need to deliver. They can release cash now; they can transfer risk either in whole or part, bring in the right skills and capacity which might otherwise be difficult to acquire and can enable you to deliver a more strategic outcome from your property portfolio.
Kevin Hines MRICS, Head of Estates and Valuation, Mouchel
ASSET - Liverpool-10
Kevin Hines
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