Scotland is leading the way in adopting a US-style public sector funding model to assist development. While legislation is required in England and Wales, the Scottish government has already identified the first three projects to benefit from tax increment financing, two of which have been approved, with a decision on the third – Buchanan Quarter – expected in the autumn.
It is an innovative way of kick-starting larger schemes. The local council uses prudential borrowing to fund initial infrastructure and public realm works using the uplift in rates revenue to repay it when the project is completed. For the developer, it takes the sting out of the up-front costs of development at a time when the financial viability of most schemes is precarious.
While most will say they like the innovation of the scheme and can see the benefits, it isn’t without its risks and controversy.
“In making the decision of which TIF to accept, you need to consider very carefully the way in which the local authority will be repaying the prudential payment,” says Virginia Beckett, associate director (capital markets) at CBRE. “Are the assumptions about rates revenue robust? Is it incremental, or just shifting people around?”
Private money
Iain McNiven of law firm Maclay Murray Spens says the TIF model in the US was characterised by regeneration, but mostly led by private money.
“It’s not clear that the structure in place in Scotland allows that to happen. It just increases the public debt as they have to find a way of paying the interest on what they have borrowed, and that potentially creates problems with cashflow,” he says.
The scale of the projects chosen: Ravenscraig town centre, Leith Docks in Edinburgh and potentially the Buchanan Quarter in Glasgow means that it could be years before the first rates revenue begins to flow.
However, the importance of TIFs in helping to bring forward schemes is nowhere better exemplified than with Buchanan Quarter. Land Securities and Henderson Global Investors want to extend their Buchanan Galleries shopping centre by 700,000 sq ft.
The Buchanan Quarter TIF would fund infrastructure and public realm works, but not go towards the actual extension development.
Nick Davies, development director at Land Securities, says: “The public realm works would fall into part of the planning agreement and TIF provides for the reimbursement of that works. In this economic climate it is very important to get the TIF. If it isn’t approved then we would reassess our future development strategy.”
When the Buchanan TIF was first mooted in February, Ivanhoe Cambridge, which owns the St Enoch Centre in Glasgow, threatened to sue the council, accusing it of favouritism and saying it could damage its business.
Retail angle
Whether as a result of the stink caused by the original announcement or not, the Scottish government is dictating that none of the next three TIF projects, for which it has invited proposals, should have a retail angle. It has also said one of the projects must be small scale – a project of under £20m – which would presumably mean a faster turnaround and repayment of the loan.
There has also been a hiccup in Edinburgh city council’s TIF plans at Leith Docks. Forth Ports’ new owner, Arcus European Infrastructure Fund, has put the Ocean Terminal shopping centre up for sale. Ocean Terminal sits in the heart of one of four development zones covered by the TIF and is where a mixed-use development is planned. Any new owner would have to agree to work with Edinburgh city council in order for the TIF plans to be realised.
Dave Anderson, director of city development for Edinburgh city council, believes TIF status will be an added attraction to any buyer. “The only issue would be if the new owners were to sit and sweat the assets, but I can’t see them wanting to do that,” he says.
If they work, TIFs could prove to be a valuable tool in getting some larger projects off the ground, but they aren’t the panacea to all funding woes.
Pros and cons of public sector-led funding schemes
TIFs
What is it? Authorities can use prudential borrowing against expected rates from the project to pay for infrastructure and public realm works.
Pros: Kick-starts projects that would otherwise lie dormant.
Cons: Skews markets, shifting occupiers rather than creating areas of new tax revenue generators and increases public sector borrowing.
BPRA
What is it? Capital allowances for redundant building regeneration.
Pros: Encourages high net worth individuals to invest because of tax breaks.
Cons: Only assisted areas qualify.
Enterprise Zones
What is it? Current English incarnation offers streamlined planning and some tax benefits, being considered in Scotland.
Pros: Encourages inward investment and development.
Cons: Can move businesses around rather than attracting new jobs and disadvantage areas outside the zone.
BPRA – the public sector intervention that works
Glasgow city centre is already benefitting from fiscal assistance to bring forward development via the building premises renovation allowance (BPRA). Assisted areas in the UK, of which Glasgow is one, qualify for capital allowances on building renovation work. It encourages private investors to invest in building refurbishments by essentially giving them a tax credit.
St Andrew House on West Nile Street in Glasgow is just one example. The 17-storey office had become redundant and is being converted into a 210-room hotel. So far BPRA has mainly been used for conversion to hotels .
“BPRA has had a significant impact and it is working in bringing buildings back into play. We will see an awful lot more of it happening,” says Scott Campbell, director capital markets at Jones Lang LaSalle.
