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Funding Brownfield Development Practicalities of accessing and using innovative funding
sources to minimize the risks in brownfield remediation and development
Brownfield Redevelopment: Midlands & North
15th November 2017
Agenda
• Land Remediation Relief (LRR) key features • LRR case study • LRR lobbying update • Tax Incremental Financing overview • Using environmental insurance to manage risk
Land Remediation Relief Key Features
Land Remediation Relief
Key Features • 150% tax relief
• Only corporation tax incentive available to developers
• Investors can also claim
• Cash value varies and depends on tax rate
• Can claim a tax credit of 16% where losses incurred
• Claimed on qualifying remediation costs
• Extra relief available where site is also derelict
Year end of Sale
Corporation Tax Rate
Cash Benefit
April 2013 23% 11.5% April 2014 21% 10.5% April 2015 20% 10% April 2018 19% 9.5%
Year end of Spend
Corporation Tax Rate
Cash Benefit
April 2017 20% 30%*
*CGT base cost subsequently reduced so more CGT paid on sale
Who can and can’t claim
Can
• Developers
• Investment companies
• REITs
• Occupiers – Fit out
• Non-property corporates
• Off-shore developers
Can’t
• Pension funds
• Off-shore investors (for now!)
• Polluters
• Private individuals
• Local authorities or the HCA
Could…..
• Registered Providers
• LLP investors
1 Must Acquire a “Major
Interest” in Land
Into this
Entitlement Conditions
• Freehold • Leasehold of more than 7 years
2
Must be contaminated prior to acquisition
3
Must not be connected to the polluter
4
Must not be in receipt of a subsidy
• Beware deferred land sales • Dangers of operating on a licence
• Beware “slice of the action” contracts • Polluter cannot retain a “Relevant Interest”
• Treatment of purchase price reductions • Plan grant funding carefully!
5
Contam present due to industrial activity
• Water and air not “contaminating” substances • Landfills and engineering works
Making a Valid Claim
Contaminated or Derelict?
Is the land contaminated? Is there “something” that is or could cause Relevant Harm” to: 1. Living organisms 2. Controlled waters 3. Ecosystem 4. Structure of buildings or
interference with building use
Is the land Derelict? Not in productive use since 1st April 1998. Evidenced by: 1. NLUD 2. leases 3. Rating records 4. Historical research
And / Or No
NO CLAIM
For Derelict sites is the Expenditure incurred on: 1. Removal of post tensioned concrete
heavyweight construction 2. Removal of building foundations and
machinery bases 3. Removal of reinforced concrete pile
caps 4. Removal of reinforced concrete
basements 5. Removal of below ground redundant
services 6. Preparatory works
For Contaminated sites is the Expenditure incurred on: 1. Activities to prevent, minimise, remedy or
mitigate the effects of any relevant harm 2. Anything to assess the condition of the
land 3. Japanese Knotweed treatment – on site
Yes VALID CLAIM
Further contaminated land tests: 1. “something” is from an
industrial activity 2. Relevant harm is not caused
by presence of air or water or decaying matter
3. Would the works be required regardless of contamination?
And
Yes
Land Remediation Relief Cast Study
Berry Edge, County Durham
Key Features: • Developer: Housebuilder • Site: Former Consett Steelworks decommissioned in 1980s • Abandoned mine workings from 50s/60s • Developed for housing • Remediation comprised:
• Site Preparation and Clearance • Mine workings Treatment • Excavation of surface structures / obstructions up to 4m • Excavation and Processing of Made Ground up to 4m • In-situ Geotechnical Testing of underlying material • Re-compaction of Engineered Fill and re-profiling of the site to
the finished site levels.
Berry Edge, County Durham Contract Cost Head Qualifying Non - Qualifying
Site investigation including Preliminary Strategy Work £37,041
Remediation strategy / validation report £13,500
Additional Geotechnical testing for NHBC £4,061
Mineshaft grouting £750,000
Excavate contaminated topsoil to stockpile £24,839
Excavate contaminated made ground for testing £624,022
Site management of contaminated material £595,494
Compaction of re-engineered fill £89,147
Screening contaminated made ground £695,339
Excavate foundations and buried structures £1,091,324
Crushing of resuable material £210,206
Removal of below ground redundant services £219,112
Removal of contaminated material £239,971
Make up development platform £419,346
Capping layer to garden and public open spaces £199,009
E.o costs for reinforced raft foundations due to made ground (slag) £1,017,179
Management costs - daywork rates £33,600
Prelims £127,727
Fees incuding development management fee £808,625
Additional indexation agreed due to extension / delay in contract £278,857
Forecast final cost £6,044,243 £1,379,551
Incurred to FY16 £5,962,163
Berry Edge, County Durham
Site Name Prior to 2013 Total
2013Total
2014Total
2015Total
2016Total
TotalCumulative
Berry Edge, Consett £2,771,207 £1,616,537 £1,039,203 £346,401 £188,815 £5,962,163
Site Name Prior to 2013Total
2013Total
2014Total
2015Total
2016Total
TotalCumulative
Balance to claim
Berry Edge, Consett £156,369 £366,309 £532,089 £809,355 £677,741 £2,541,862 £3,420,300
x 50% x 50% x 50% x 50% x 50% x 50%
Tax Rate 24% 23% 21% 20% 20% 19%
Cash Value £18,764 £42,126 £55,869 £80,935 £67,774 £265,469 £324,929
Total £590,397
LAND REMEDIATION EXPENDITURE (WIP)
LAND REMEDIATION RELIEF (P&L)
Fulham Wharf, London
Key Features: • Vendor: supermarket • Developer: housebuilder • Land Interest: 999 year lease • Development Agreement: developer gets long
lease on completion of supermarket • Interim interest: Licence to Occupy • Qualifying Remediation prior to land transfer:
£>£1.5m • Qualifying Remediation post land transfer: £126k.
Interim interest must be at least a 7 year lease
Technical Reports Pricing Documents
Into this
Tax Intelligent Procurement (“TIP”)
Grants
HMRC will request technical reports to justify and substantiate the technical argument for claiming tax relief
Purpose
Affected Reports
“TIP”
Issue
Pricing documents provide the underlying evidence of qualifying costs achieved under tender conditions
To make sure the impact of grants on the ability of the recipient to claim tax relief is fully considered
Reports can contain ambiguities that can undermine a claim for tax relief – primary technical driver is key
Pricing documents do not always readily identify qualifying costs meaning retrospective estimates required which can be contested by HMRC
Grants improve viability but can prevent the tax relief from being claimed if not structured correctly thereby denying the project of further subsidy
Review documents prior to final issue to highlight any ambiguities and agree any amendments required
After technical review add in specific pricing elements to highlight qualifying costs; consider impact of any contributions / grants
Consider the purpose of the grant and allocate towards non-qualifying works where possible
• Site Investigation • Validation • Remediation Strategy • Waste Management reports • Meeting Minutes
• Pricing schedules in tender documents • Two Stage tender – 2nd stage • Preliminaries • Variation Accounts • Lease Incentive Agreements
• Grant documentation • Development viability models
Lobbying for Change
Land Remediation Relief Lobbying
• Bring the tax relief “above the line”:
• Introduce a taxable Expenditure Credit similar to R&D
• Move from a Post-tax benefit to a Pre-tax benefit
• Increase value of Relief:
• From 150% to 175% generally to offset impact of decreasing tax rates
• From 150% to 200% for small sites of less than 25 homes from the Register
completed within 12 months of planning permission
• Scope of Relief:
• Derelict Land date qualifying date changed from 1998 to 2008
• Flood prevention costs to be reinstated as allowable costs
Current Position
Response from HM Treasury
• Political and / or Economic argument
• Economic argument would need case studies and
calculations on additionality v cost
• Political argument – >50% of plots now developed on
greenfield sites
• EIC to raise as a potential issue to be picked up with one
of the cross party Select Committees
Land Remediation Relief Lobbying Request for Supporting Information From The Fiscal Incentives Group In collaboration with:
Tax Increment Financing
• Fiscal devolution has created opportunities for more innovative prudential borrowing for local authorities.
• The aim of TIF is to raise funds now to pay for enabling infrastructure to derive an incremental economic benefit to the authority through growth in business rate receipts.
• TIF operates within the Business Rate Retention Scheme which is available to all councils at their own discretion. Generally split 50/50 between local and national pots but with a move to 100% retention by 2019/20
• 5 pilot studies already launched to trial 100% retention and further pilots to be announced in December aimed at pooling between authorities
• Grants foregone in exchange. Primary concern is the volatility in rates income
• The authority has discretion as to how the money is spent to could be used to fund land development especially for commercial developments.
Key Features
Environmental Insurance
Responsibilities for Contamination
• Transferred to Contractor for management • Damage already caused remains with Employer Known Existing
• Remains with Employer • Can be minimised by investigation Unknown Existing
• Remains with Employer • Can be subject to a claim against third party Third Party Existing
• Transfers to the Contractor • But may not be discovered until later
Exacerbation of Existing
• Depends on who causes it! New
Development Liability
Scenario Indemnified by Contractor
Covered by Public Liability Insurance
Covered by Environmental Insurance
Pollution already present on site
Yes – remediation priced in contract No – not a fortuitous event No – purpose of the development
works
Pollution already migrated from site
No – beyond the control of the contractor
No – PL only covers sudden / accidental pollution that impacts third parties
Yes – third party (and regulator) claims for impact caused
Pollution caused by Contractor
Yes – only if damage can be attributed (ie needs to
be discovered quickly)
Yes – only if damage can be attributed to works, is sudden / accidental and
impacts a third party (ie damage to the environment excluded)
Yes – both during and after completion of the works
Pollution left on site post development
Yes – only if the contractor warrants that its removed (ie NO if design is to keep
in situ)
No – not a fortuitous eventYes – “re-opener” clean up or future damage (including third party loss of
value)
• Liability (ultimately) rests with the landowner – insurance strategy should be set by them
• Include as many people as insured parties – in case one party goes bust
• Vendor should consider insurance to prevent liability bounce back if the developer becomes insolvent
• Get specialist advice!
Rules for Success
Duncan Spencer [email protected] t: +44 (0) 1424 777 874 m: +44 (0) 7825 884 222
Questions
www.tfigroup.co.uk