Funding - An A-Z of the key terms and issues

The sources, priorities and application mechanisms for public sector funding remain confused and are too often relied upon for pump priming. Furthermore, the risks inherent in regeneration projects and the risk aversion of the private sector mean that it is difficult to fund work through private equity and debt. The solution probably lies in a combination of more innovative funding mechanisms and greater collaboration between key stakeholders. For this to work, the industry needs to understand more about the source of funds and the factors that influence the ability to access it. This A-Z guide of some of the key terms and issues should go some way to dispelling the myths and mysteries of regeneration funding.

A

Allowances

Capital allowances remain one of the government’s preferred tools to encourage investment in certain technologies and to correct market inefficiencies by encouraging specific types of expenditure. Allowances effectively act as a grant delivered through a reduction in the amount of tax paid and have the advantage of relative certainty compared with grants themselves.

B

Banks

There are five main UK-based clearing banks – Royal Bank of Scotland, Bank of Scotland, HSBC, Lloyds TSB and Barclays – as well as a number of smaller banks providing debt finance to the property development market. A number of these also provide private equity.

C

Contaminated land

This is still seen as a major barrier to development. The risks are difficult to assess and the regulatory and liability issues are complex. Regeneration agency English Partnerships is tackling the problem through its national brownfield strategy, which is looking at the barriers to the regeneration of long and medium-term derelict land in 12 local authority areas under a pilot programme. The programme is aiming to regenerate at least one site in each area. Lessons from the programme will feed into a full strategy report which is due to be published next year.

D

Debt finance

Clearing banks and to a lesser extent, merchant banks, provide loans for property development. Loans are generally secured on collateral beyond the property to be developed. Interest is charged on a fixed or variable basis. It can be defined as loans on property unsupported by outside collateral.

E

The European Union

European Union structural funding comes by way of national and regional authorities, and is available for projects in assisted areas that meet social and economic targets. Between 2000 and 2006, the EU will invest £4.5bn in Great Britain of which £3.5bn went to England. After 2006, new mechanisms will be in place that will take into account the new EU member states. The European commission has the responsibility of monitoring and control this aid.

F

Funding strategies

In commercial loan transactions, the decisions affecting project funding are paramount in ensuring its success and the right level of return on investment. Typical factors affecting funding are: the level of equity, interest rates, calibre of covenant, term of lease, resources, deal size, experience of borrower and advisers, as well as property security or collateral.

G

Grants

These are one-off payments for specific projects. The eligibility for grantees and projects varies between schemes and there are numerous sources such as the EU, government, lottery, trusts and foundations. Usually grants must be awarded in advance of work commencing so they require early planning. Grants are usually focused where there is evidence of need and demand.

H

High risk and low risk

Risk and funding are closely correlated. The higher the risk, the more expensive the funding; the lower the risk, the cheaper and more accessible the funding becomes.

To improve the commercial viability of an investment proposition you must be able to identify, assess, measure and demonstrate ability to control the risks.

I

Infrastructure

Many sites are blighted by poor infrastructure, which can severely limit development potential and discourage private sector participation. The public sector needs to take more responsibility for the funding and managing of the infrastructure albeit with contributions from developers through the planning process.

J

Joint-venture partners

There are several types of joint ventures. The concept involves the coming together of partners to undertake a transaction. Reasons for joint ventures are lack of equity on a project, the need to raise adequate levels of funding from a variety of investors and the desire for investors to share in the development risk.

K

Knowledge

Knowledge and understanding are crucial for effective investment decisions. Without knowledge you cannot effectively measure or control risks. Where knowledge is missing, greater emphasis must be placed on the track record and experience of the project advisers.

L

Land remediation relief

This underused benefit offers 150% tax relief for money spent on clearing up contaminated sites. It is available to developers and investors, provided they are not the original polluters. It reduces the amount of tax paid and can assist with cash flow. An option to increase the scope of the relief is still under review.

M

Monitoring

The identification, evaluation and monitoring of the risk associated with finance lending is crucial. The process involves the analysis of key development documentation such as construction and development costs, programme, warranties, building contracts, consultant appointments and insurances. Once this review is undertaken the risks are evaluated and the decision to lend funds will be authorised. There is a continuing process of reviewing that facilitates the release or draw-down of funds as a project progresses.

N

Net present value

Proving financial viability is a key component of successful funding. Regeneration projects can take years to complete and the timing of cash flows can have a significant impact on overall financial returns. NPV calculations allow a project’s value to be assessed in both absolute and relative terms.

O

Option appraisals

This is essential for all projects at the early stages. The appraisal should examine and compare alternative possibilities. The end use of the project is a key consideration – whether it is retail, mixed use or residential. Most funding bodies will want to see evidence that this has been done as part of their evaluation and assessment of the project.

P

Private equity

Private equity is money and resources provided by the developer, partners and investors who participate in the risk and profit of the scheme. The equity return for the person who puts up the money is determined by the success of the enterprise. The person shares the profits, and if there are none, then of course there is no return.

Q

Quangos

These key stakeholders and players in the regeneration sector are growing in number. They are officially national or regional non-departmental public bodies with financial support from, and senior appointments made by, the government. The main quangos are English Partnerships, regional development agencies, urban regeneration companies, urban development corporations and delivery boards.

R

Regional development agency

The nine RDAs receive funding from central government and they spend their money as they see fit to achieve their individual priorities as identified in regional economic strategies. As key regeneration funders they are a good starting point as they can fund clean-up of derelict and contaminated land and can back projects delivering economic prosperity. RDAs are investing nearly £2bn a year in their regions.

S

Sustainability

Developments should be working to meet the needs of the present without compromising the ability of future generations to meet their own needs. The UK has four key priority areas: sustainable consumption and production, natural resource protection and environmental enhancement, sustainable communities and climate change and energy.

T

Timetable

Regeneration projects can take time, and financial incentives available at the beginning of the development timetable may not be available at a later date due to changes in legislation or a change in fund objectives. Ongoing review is therefore essential to ensure that the impact of any changes are fully considered and effectively managed.

U

Urban regeneration companies

Twenty URCs have been established to co-ordinate and facilitate direct development in specific areas. Although they have no funding to give out themselves, they can facilitate and co-ordinate private and public investment.

V

VAT

Opportunities exist to take advantage of the reduced or even zero rate of VAT. The reduced rate applies to various residential conversions and renovations. Sales of converted properties by developers and the conversion services supplied to housing associations are zero rated.

W

Warranties

Warranties are predominantly for the benefit of successors in the title, funders and tenants. These warranties extend the benefit of the development contract with the professionals involved. Typically, an organisation will be asked to warrant that it has exercised its duties in its professional capability and give assurances to future owners.

X

X – the unknown quantity

The decision to regenerate an area is affected by many factors, be it a socio-economic or purely a commercial decision. Recent government incentives and pressure on the housing market have increased the need to redevelop brownfield and inner city areas to ensure that the green belt areas around major towns and cities are maintained.

Y

Yields

The yield is the rate of return achieved or expected to be achieved on investment and can generally be expressed as the rental value divided by the capital value. The yield required by an investor will depend on two broad factors: the return available on alternative investments and the level of risk.

Z

Zoning

These are sites or areas that are awarded special status to encourage regeneration. This makes them target locations for receiving grants eg assisted areas or priority areas. Or in the case of Enterprise Zones they are eligible for relief from paying business rates and relaxed planning restrictions.

By Ben de Waal, partner, Davis Langdon Crosher & James – Regeneration Incentives Group