You are on page 1of 12

Newport City Council

Part 1

26th November 2013


Item No. 3

Subject
Purpose Author Ward

Friars Walk Retail and Leisure Development


For Council to consider the recommendation from Special Cabinet for the funding of the Friars Walk development. Strategic Director Place and City Centre Project Team General

Summary Since termination of the former Development Agreement with Modus in July
2009, significant progress has been made to secure a new development partner (QRE), refresh and re-design the scheme, secure planning consent, and sign up major high street retailers to anchor this scheme, all in the context of a severe down turn in the property development and retail market economy. This report presents to Council, for consideration, the proposal for funding the construction and completion of the scheme, building on the progress made to date, and taking the proposed development to practical completion.

Proposal

It is recommended that:(a) Council notes the progress made to date and the crucial timeline for next stages of the delivery The Head of Finance be authorised to prudentially borrow up to 90 million for the purpose of entering into a Funding Agreement with Queensberry Real Estate (Newport) Ltd on commercial terms to be agreed by the Head of Finance and the Head of Law and Standards, subject to satisfactory due diligence and financial appraisal. The Head of Law and Standards and the Head of Finance be authorised to agree the terms of the Funding Agreement and to attend to the sealing and signing of all the appropriate legal documentation in relation to the loan and security. The Cabinet sub-Group be granted delegated powers, insofar as may be necessary, to agree any outstanding financial issues which need to be resolved before the Funding Agreement is completed and the Development Agreement becomes unconditional. Page 1

(b)

(c)

(d)

Action by Head of Finance and Head of Law and Standards Timetable Immediate
This report was prepared after consultation with: Head of Law & Standards Head of Finance Corporate Director - Place Chief Executive Cabinet Members

Page 2

Background
1. In December 2009, following the demise of the Modus scheme, the Council decided to implement the John Frost Square Compulsory Purchase Order, acquire the land and commission a re-design of the City Centre Redevelopment scheme in order to procure a new development partner. The General Vesting Declaration was duly made in November 2009 and the land was vested in the Council in March 2010. In April 2010, the Cabinet agreed a re-designed scheme and a Restricted Tendering Procedure, to give the Council greater control over the detail of the project and accelerate the procurement process. The scheme was reduced in scale, in accordance with expert advice, to make it more sustainable and viable to potential developers and funders. However, the key elements of the original scheme remained; the redevelopment had to be a retail-led, mixed use scheme, with an anchor Department store, a cinema and restaurant facilities with parking and transport provision and of sufficient critical mass to deliver a stepchange in the regeneration of the City Centre. A fast-track procurement process was then followed, with a target date of 12 months in which to secure a Development Agreement with a new development partner. The OJEU Notice was published in November 2010, a short-list of developers was compiled and an Invitation to Tender was issued in January 2011. Following an extensive tender evaluation process, the bid from Queensberry/Multi Developments was accepted as the most economically advantageous having regard to both funding proposals and quality factors. The tender proposal met all of the essential regeneration elements of the design and established a cohesive development which integrated fully with the established street scene. The Councils external Architects confirmed that the Queensberry scheme had the desired quality and critical mass to achieve the Councils regeneration objectives. The Queensberry scheme was approved by Cabinet in May 2011. It provided for a 350,000 square foot mixed use scheme, with a 77,000 square foot Debenhams anchor store, a multi-screen cinema and restaurant complex, a 350 space car park and a new Bus Station. An independent critical friend analysis of their scheme confirmed that their financial appraisal was robust and deliverable, with realistic costs and investment yields. Following further negotiations, the detailed Development Agreement between the Council and Queensberry was concluded on 30th September 2011. At the same time, a Seed Funding Agreement was entered into in order to provide finance for the initial design, planning and pre-letting work, with the object of reducing the development costs, maximising the return on the Councils investment and accelerating the development programme. Queensberry secured an Agreement for Lease with Debenhams in December 2011 and detailed planning approval was granted for the development scheme in March 2012. Since that time, further pre-letting agreements have been entered into with Cineworld, Next and Top Shop and, more recently, with restaurant chains Nandos, Cosmos, Frankie & Bennys, Prezzo and Chiquittos. At present, the scheme has achieved approximately 40% pre-lets in terms of estimated rental value and over 50% in terms of floor space. Therefore, the scheme has now reached the stage where the key components and conditions of the Development Agreement have now been met and the final stage is to secure funding to construct and deliver the development. The Agreement for Lease with Debenhams has key completion dates and two opening windows in November 2015 and March 2016. Therefore, it is critical for the Funding Agreements to be finalised at this time in order to meet the Debenhams opening dates.

2.

3.

4.

5.

6.

7.

Page 3

8.

In the meantime, the Council secured up to 1.5 million of Welsh Government grant funding to undertake site preparation and pre-construction demolition work in John Frost Square. This work is due to be completed by the end of January 2014. Special Cabinet meeting on 18th November recommended that the Council should prudentially borrow up to 90 million to provide short-term loan funding to QRE on commercial terms, to be agreed. This was considered to be the most beneficial funding option as it would expedite the completion of the scheme and secure a significantly better return on the Councils investment, as compared with alternative sources of private development funding. In terms of the future development programme, the legal and financial due diligence will need to be completed by the middle of December 2013 in order to enter into an unconditional Funding Agreement to enable Queensberry to mobilise their construction contractors in readiness for a start on site in February 2014, following the completion of the Councils demolition works. Practical Completion of the scheme would then be targeted for November 2015.

9.

10.

Funding Agreement / Legal issues 11. On 30th September 2011, the Council entered into a conditional Development Agreement with the preferred bidders for the Friars Walk redevelopment scheme, Queensberry Real Estate (Newport) Limited (QRE). The heads of terms for the Development Agreement had previously been approved by Cabinet, following a competitive procurement process. The Development Agreement provides for the grant of a 250 year development lease from the Council to QRE at a peppercorn rent when various pre-conditions are satisfied and the Agreement goes unconditional. The Agreement and Lease require QRE to complete the approved development in accordance with the agreed programme of work. If QRE fail to complete the development (for whatever reason) the Council has step-in rights in default and would be entitled to terminate the Development Agreement, forfeit the Lease and complete the development. Although the Council does not receive a capital premium or fixed ground rent under the 250 year lease, the Development Agreement provides for a "profit share". After the scheme has been completed, and following the repayment of the development funding, the Council then ranks next in priority and is repaid all of its Seed Funding together with a priority return on this investment. The Council would also take the primary share of any surplus profit in the scheme once it is sold or re-financed and all of the development costs have been repaid. The first tranche of this profit share would be taken as a small percentage of the future rent to ensure that the Council has an on-going interest in any rental growth and increase in value. For the most part, the pre-conditions in the Development Agreement have now been satisfied; detailed planning consent for the redevelopment scheme was granted in March 2012 and a pre-let Agreement has been completed in relation to the Debenhams anchor store. The only substantive pre-condition that remains to be satisfied before the scheme can proceed is the funding condition. In the meantime, the Council also entered into a Seed Funding Agreement with QRE, again on terms approved by Cabinet, which covered the initial pre-development costs (planning, design, professional fees etc). The seed funding has been drawn down in tranches when key milestones have been met and this includes incentive payments to QRE to ensure that they meet their targets (for example, securing planning consent and securing the anchor store). QRE have also agreed to contribute an element of their incentive fees as part of the Page 4

12.

13.

14.

15.

16.

overall seed funding package. Because the Council has funded these pre-development fees, it has secured the intellectual property rights for the scheme, as currently designed. 17. An additional sum of up to 1.5 million grant funding has also been secured from Welsh Government to enable the Council to undertake preliminary site preparation and demolition works in readiness for the construction programme to commence in February 2014 (subject to development funding). The Council has also committed transport grant or capital funding towards the cost of the new Bus Station and has entered into an Agreement with QRE to take a sub-lease of the site for a period of 50 years (with an option to renew) in order to manage and operate the bus station. All of these legal agreements have been completed but, with the exception of the seed funding, they remain conditional until such time as QRE secure development funding to proceed with the Scheme. In accordance with the Development Agreement, QRE must demonstrate that it has sufficient funding to enable the scheme to be completed. The Council has the right under the Agreement to approve the identity of the funder and the proposed terms (subject to acting reasonably). The Council needs to be satisfied that the terms of the funding are sufficient to ensure that the scheme is viable and that there is sufficient residual value in the completed scheme to secure the repayment of the Councils investment. There is a backstop date of 31st December 2014 for QRE to secure the necessary funding, failing which the Council has the right to terminate the Development Agreement. However, in reality the funding needs to be in place before the end of December 2013, to meet the Debenhams opening target dates. QRE have taken the scheme to the financial market and have put forward a number of funding options for the Councils consideration. These private funding options include both traditional Bank lending and private investment funding. However, QRE is a special purpose vehicle established to deliver the Friars Walk scheme. As such, it has no capital of its own and, therefore, the only security for the development funding is the value of the completed scheme. Therefore, as a condition of any private funding, the banks and investment Companies will require the Council to provide some element of public finance itself and also underwrite the repayment of their loans by QRE, either by way of a direct guarantee or through a sale and lease-back arrangement under the head Lease. In effect, the Council would have to underwrite the financial risk for the whole of the scheme and not just its share of the development funding. Consequently, the Councils financial risks in relation to the contingent liabilities under these guarantees are no less onerous than if the Council was providing the whole of the development funding itself. In addition, the arrangement fees for these private loans would be extremely expensive and the funding agreements would take longer to complete. The lenders would also require that the Lease is either granted directly to them or a first charge is secured against the Lease, which means that they would have priority in terms of the value of the asset in any future sale or re-financing. This would have an adverse impact on the security for the Councils investment under the Development Agreement. Therefore, taking all of these factors into account, special Cabinet meeting on 18th November recommended that the Council should prudentially borrow the funding for the whole of the development costs and enter into a separate Funding Agreement with QRE on commercial terms, to be agreed. This was considered to be the most beneficial funding option as it would expedite the completion of the scheme in accordance with the Debenhams opening programme, the borrowing would be much cheaper and quicker to arrange, the Council would incur no greater financial risk than guaranteeing repayment of the private finance and it would achieve a significantly better return on its investment, with Page 5

18.

19.

20.

21.

22.

23.

greater security under the Development Agreement, Lease and Funding Agreement. The Council would have immediate step-in rights in the event of any default and would be able to realise the whole of the value of the asset in the event that QRE was unable to repay the loan, together with interest, 12 months after Practical Completion of the scheme or the back-stop date of June 2017. 24. This arrangement would still leave it open for a private funder or investor to become involved in the scheme at a later stage when the pre-lettings and rental values have increased and the development risks have been reduced. This could involve an assignment of some or all of the Council debt or a pre-sale agreement for the completed scheme. Legal Powers to enter into the Funding Agreement. 25. The Council has the legal power to enter into the proposed Funding Agreement with QRE in exercise of its general well-being powers under Section 2 of the Local Government Act 2000. This gives the Council a wide ranging discretionary power to do anything that it considers is likely to promote or improve the environmental, economic and social well-being of the area and/or persons within the area. It is for the Council to decide whether any particular action would be likely to achieve this. In exercising this power to promote wellbeing, the Council must have regard to its community strategy and any statutory Guidance issued by the Welsh Government. Section 2(4) sets out specific examples of the types of action that can be taken by the Council in exercise of these discretionary well-being powers. This includes a power for the Council to: (a) incur expenditure; (b) give financial assistance to any person; (c) enter into arrangements or agreements with any person; 27. Sub-sections 2(4) (a) and (b) enable local authorities to regard the power to promote wellbeing as including a broad spending power. When undertaking any activity in pursuit of promoting or improving well-being, the power to promote well-being enables the Council to incur expenditure, and specifically identifies the provision of financial assistance as one means of doing this. There is no restriction or limitation on the amount of money the Council can spend in this respect Section 3(2) of the Act places a general prohibition on local authorities using the well being power as a means of raising money. This restriction protects local authorities and public funding from unreasonable exposure to financial risk. The effect of this provision is to prevent local authorities from using the power in section 2(1) primarily to raise money. However, current Welsh Government guidance clearly confirms that lending money and charging interest does not amount to raising money within the meaning of section 3(2), provided that the financial return to the Council is incidental to the main purpose of the loan. In applying these principles to the proposed Funding Agreement, it can be seen that (i) (ii) (iii) the proposed redevelopment scheme would promote and improve the economic and social well-being of Newport and its citizens the development, is consistent with the priorities and objectives set out in the Community Strategy the borrowing and the loan are in accordance with the specific powers to incur expenditure, give financial assistance and enter into arrangements with third parties (in this case, QRE). Page 6

26.

28.

29

(iv)

the commercial rates of interest being charged under the Funding Agreement are incidental to the main purpose of the loan which is to secure the regeneration of the City Centre and, therefore, this does not amount to raising money

As such, the terms of the proposed Funding Agreement are considered to fall within the Councils discretionary well-being powers. State Aid 30 The Council also has to ensure that the proposed Funding Agreement does not contravene European State Aid rules, to the extent that it uses public funding to secure an unfair commercial advantage for QRE and is, therefore anti-competitive. If the Council was to provide low-cost funding to QRE on terms that were not available in the private sector, which subsidised their development costs and enabled them to secure an increased commercial profit out of the scheme, then this could be unfair State Aid. In order to avoid any State aid issues, it is essential for the Council to ensure that the terms of the Funding Agreement satisfy the Market Economy Investor Principle. The Council has to act in the same manner as a prudent private investor and, therefore, needs to be satisfied that the scheme represents an acceptable investment risk, that the returns on that financial investment would be acceptable to the lending market and that the rates of interest and other terms of the Funding Agreement are on commercial terms. The Council has obtained independent expert advice from Deloittes that the proposed rates of interest charged to QRE under the Funding Agreement represent a commercial rate of return. The short-term interest rates payable by the Council to the Public Works Loan Board for the prudential borrowing to fund the loan are significantly lower than the commercial rates being charged to QRE and are based on an agreed margin above LIBOR, equivalent to the interest rates charged by private funders. In terms of investment risk, the estimated valuations of the built scheme, the projected rental income and investment yields, the development costs and profit margins have all been independently checked by Deloittes. Even allowing for a reduction in income and an increase in investment yields, there is a sufficient loan to value ratio to ensure that the scheme provides sufficient security for a prudent lender. To provide the Council with security for the loan, the Funding Agreement will also contain provisions which a private lender would require in relation to 35 a charge over QREs Development Lease to secure repayment of the Councils loan a charge on the construction contract, to give the Council step-in rights in the event of developer default a charge over the Project Bank Accounts and other assets of QRE

31

32

33

34

The capital loan will be repayable by QRE to the Council in full, together with rolled-up interest, 12 months after Practical Completion of the development or upon the sale or refinancing of the scheme, whichever is the earlier with a backstop date of June 2017. In the event that QRE are unable to repay the loan, the Council can exercise step-in rights under both the Lease and the Funding Agreement, to take possession of the development and arrange for the sale or re-financing of the asset. Furthermore, the Development Agreement contains provisions which require the repayment of the Council loan (together with commercial interest) and repayment of the seed funding and other public monies as a first priority out of any proceeds of sale or re-financing, before there is any profit-share for QRE. Therefore, there is no question of QRE securing any direct commercial profit from the public funding. Page 7

36

The proposed terms of the Funding Agreement and the priority return and profit-sharing arrangements in the Development Agreement are considered to be sufficiently robust as to satisfy the Market Investor Economy Principle and comply with State Aid rules. Impact on the Councils own budget/accounts 37 From this point to the loan repayment date there will no impact on the Councils budget and accounts. This is because: Whilst the Council will pay interest charges on its own borrowing, QRE will also be charged interest on their loan from the Council. This will generate a substantial surplus as the interest chargeable to QRE will be higher than the Councils own interest charges. The Council will be asked to approve that the surplus interest here will be put into reserves to mitigate any risks in the project and this financing as part of the 2013/14 budget setting meeting in February 2014. The Council will not be required to make provision for capital repayments on its borrowings as this is a short term arrangement with the full anticipation that QRE will repay the amount borrowed from the Council, which can then be used to repay the Council loans. Whilst the Councils accounts will show more borrowings over the 3-4 years, it will be netted off with QRE debt to the Council

The Councils own borrowings will be drawn down in monthly/quarterly tranches as needed to match the monthly payments (loans) made to QRE. The loan and interest due to the Council will be repayable together at the earliest of 12 months after Practical Completion of the development (planned to be December 2016) or upon the sale or re-financing of the scheme. The latest back-stop date for repayment is June 2017, which will allow some limited operational flexibility e.g. delays due to weather etc. Earlier repayments will be allowed. Funding Agreement risks 38 In approving this loan facility to QRE, the Council would be entering into a commercial risk, dependant on a future value for the scheme on which the loan is secured against. This carries inherent risks. It is not possible to quantify all risks as there is no certainty in how/when certain risks will materialise or how they will be resolved. In approving this loan, the Council will need to do so understanding the risks and crucially, accepting the risks and potential financial consequences that result from those risks materialising. In saying the above, the risks have been tested carefully where possible and mitigated as far as is possible through the various legal agreements pertaining to this scheme and with professional external advice from Deloittes who have advised the Council on the various financial issues. In brief, the risks relate to those which may occur between (i) approving the funding agreement and completion of the scheme and (ii) those which then occur at the repayment date of the funding agreement. In the case of the former, key risks are cost overruns and/or unforeseen events resulting in significant delays in completion of the scheme which in itself could lead, ultimately, to losing existing agreed tenants, including the anchor store and cost overruns. To an extent, these risks are mitigated by insurances, the use of fixed price design/build contracts for the construction, budget contingency and focussing QRE on project cost control by ensuring Page 8

39

40

41

they take on limited (capped) liability for cost overruns. Officers, with advisors are currently agreeing the finer details of the funding agreement which deal with some of these issues. 42 In the case of the latter, key risks are that (i) the scheme does not realise its target value and QRE do not receive sufficient funds to repay the Council or (ii) are unable to sell/refinance the scheme at all. Council Officers, with advisers, have carried out various sensitivity testing to understand the potential value of the scheme based on various letting scenarios and yields used to value schemes such as these. In understanding what the resulting values mean in terms of QREs ability to repay the Council, there is flexibility in the scheme value being c10m less than the scheme costs i.e. the scheme makes a c10m loss. This is because the Council has: already funded part of the initial development costs as past costs via seed funding and use of the WG grant and as such, there is no on-going funding liability attached to these. the charging of a commercial interest rate on the funding agreement will generate a surplus between that and what the Councils own borrowing costs will be. This surplus will be reserved over the life of the project and be used, if needed, to contribute towards any scheme losses.

43

44

The sensitivity testing has confirmed that the potential value of the scheme should be sufficient to repay the Council loan in all but the more pessimistic scenario of a 7% yield / 20% voids. Further details on the results of the testing can be given verbally at the meeting, if needed, but this would have to be done in Part 2 with the press and public excluded as it would involve the disclosure of commercially confidential information. . If the scheme cannot be sold / re-financed; QRE or the Council would need to operate the development as owners, the Councils own borrowings would need to be re-financed and the development net income used to fund the Councils on-going costs in relation to its own borrowings. It is difficult to be precise on the exact financial implications as that will be affected by why the position has arisen and what this may mean for the value of the scheme at that time and the prospect of the timeframe before a sale could be achieved. As an estimate, the Councils own costs in re-financing its borrowings could be in the range of 4m-7m per annum and would need to be funded through the Councils revenue budget, though this would be partially funded by the net income from the scheme. Further details of the income levels from the scheme can be given verbally at the meeting, if needed, but this would again have to be done in Part 2 with the press and public excluded as it would involve the disclosure of commercially confidential information

45

Exercise of discretionary powers 46 Therefore, the proposed Funding Agreement with QRE is in accordance with the Councils discretionary legal powers. However, when exercising discretionary powers, the Council must comply with general public law principles of reasonableness; it must have regard to all relevant material considerations and must act reasonably in all the circumstances. In this case, when considering the use of its well-being power, the Council must have regard to its fiduciary duty to council tax payers and must balance the economic and social benefits of the scheme against the financial risks of borrowing and lending this level of funding. The regeneration benefits of the scheme have previously been accepted in relation to the earlier decisions taken to make the Compulsory Purchase Order and to acquire the land through the General Vesting Declaration. The restoration of the City Centre as an attractive place for shopping, leisure and tourism remains an essential component of the Corporate Plan in terms of making Newport a Safer City. The Friars Walk redevelopment Page 9

47

scheme is the pivotal project in delivering this regeneration strategy. Therefore, the economic and social benefits of funding the scheme are well-established. 48 In terms of risk, the cost implications of the borrowing and loan arrangements have been set out in detail in the financial comments contained in this Report. In effect, the financial risks of the Council borrowing and lending the whole amount of the development funding to QRE are no greater than the Council underwriting any private finance, whether through guaranteed loan repayments or rental income. The need for any public sector guarantee would only reduce as pre-lettings and estimated rental value increases. However, the scheme is unlikely to go beyond 40% pre-lets by value until the project has commenced and construction is underway. QREs letting agents have advised that only the major chains will commit to pre-let agreements before the scheme has commenced and most will only sign-up afterwards, during the construction programme. Therefore, development funding needs to be provided up front before the next stage of the lettings programme can be delivered and this will either require a full Council guarantee or loan. The Council does not have the option of delaying any decision in the hope that lettings will increase to a level that private finance can be secured without any guarantee. The capped sum of 90 million prudential borrowing to finance the development loan cannot be used for any other purpose. This is a special purpose loan taken out over a short term and secured against an income generating asset, with a view to securing a return on the Councils investment. It cannot be used for any other capital project or to support operational budgets. Therefore, the Council only has to consider and weigh up the cost benefits of using the loan for this project and not whether the funding could be used more appropriately for any other public benefit. The financial comments have confirmed that the loan is affordable and can be serviced in the short term without having a major impact on the Councils borrowing or revenue budgets. The Funding Agreement would also have safeguards built in to mitigate the financial risks to the Council and to secure the repayment of the debt, by securing this as a charge against the scheme. Therefore, provided there is sufficient realisable value in the scheme, once completed, then this should be sufficient to cover the capital repayment of the loan, together with rolled-up commercial interest 12 months after practical completion. At present, 40% of the estimated rental value has been secured through pre-letting agreements with tenants. QREs letting agents estimate that the pre-lettings should reach 60% of estimated rental value within 12 months after the work has commenced and they should reach 90% by practical completion. If these lettings targets are achieved, then the completed scheme would have a secured income level which is sufficient to re-sell or refinance the development. Based on QREs current financial appraisal, they would be able to sell or re-finance the scheme 12 months after practical completion, repay the Councils loan with interest, repay all of the seed funding with a priority return and still generate a surplus profit for sharing with the Council. This financial appraisal has been independently verified by Deloittes, who have also remodelled the appraisal and returns on investment based on different yields, void rates and rental levels. The appraisal still generates enough surplus with increased yields, increased void units and lower rental to more than cover the Council loan and interest. Therefore, the only risk to the Councils investment is if the lettings do not increase significantly during the construction phase and that the scheme is not sufficiently viable to be re-sold or re-financed by November 2016. However, the Council would then have the option of enforcing its charge and step-in rights to take over the scheme, use the rental income to service the debt charges and continue to let and market the scheme itself. The only remaining uncertain development cost within the financial appraisal is the cost of the construction work costs because QRE are currently out to tender for the work and the tenders are not due to be returned until 25th November 2013. Therefore, these costs and Page 10

49

50

51

52

53

any impact on the financial appraisal will need to be verified before any Funding Agreement can be concluded. There will also be a requirement to undertake a legal due diligence to verify the terms of the current agreements for lease, to ensure that they have been properly evaluated as part of the projected rental income. In the circumstances, having regard to the benefits of the development and the safeguards to mitigate the attendant financial risks involved, it is not considered to be unreasonable for the Council to exercise its discretionary powers in this way. Risks: 54 The main body of the report deals with the main financial risks of entering into this funding agreement and some of the mitigating factors in place. As noted, this carries inherent risks. It is not possible to quantify all risks as there is no certainty in how/when certain risks will materialise or how they will be resolved. In approving this loan, the Council will need to do so understanding the risks and crucially, accepting the risks and potential financial consequences that result from those risks materialising. Links to Council Policies and Priorities The restoration of the City Centre as an attractive place for shopping, leisure and tourism is an essential component of the Corporate Plan in terms of making Newport a Safer City and a better place to live for all our citizens.

Options Considered/Available
(i) To accept the recommendation from special Cabinet and agree that the Council should prudentially borrow up to 90 million to provide short-term loan funding to QRE on commercial terms to be agreed. Not to accept the recommendation and instruct officers to explore other options with QRE for private development funding to meet the requirements of the Development Agreement

(ii)

Preferred choice and reasons


To accept the recommendation from special Cabinet and agree that the Council should prudentially borrow up to 90 million to provide short-term loan funding to QRE on commercial terms to be agreed Other options for private development funding would take longer to secure, would increase the costs of the development and would still require the Council to guarantee or underwrite the whole amount of the QRE borrowing. Therefore Option (i) is considered to be the most beneficial funding option as it would expedite the completion of the scheme in accordance with the Debenhams opening programme, the borrowing would be much cheaper and quicker to arrange, the Council would incur no greater financial risk than guaranteeing repayment of the private finance and it would achieve a significantly better return on its investment, with greater security under the Development Agreement, Lease and Funding Agreement

Page 11

Comments of Chief Financial Officer


In entering this agreement, the Council should be clear on the various risks attached to this, some of which cant be quantified or predicted with certainty. Significant work has been completed to understand, quantify and test the financial risks, to the extent possible, and the impact on future year budgets. These are contained in the main body of the report and further details can be given verbally at the meeting to Members, as needed. Given the due diligence completed, I am comfortable with the proposals, set against the benefits of the development. Any surpluses from interest rate charges must be reserved during the life of the project as that is a key risk mitigating factor, as explained in the report.

Comments of Monitoring Officer


The proposed action and funding arrangements are in accordance with within the Councils discretionary legal powers under Section 2 of the Local Government Act 2000. Having regard to the benefits of the development and the proposed safeguards and securities within the Funding and Development Agreements to mitigate the financial risks involved, it would not be unreasonable for the Council to exercise its discretionary powers in this way.

Staffing Implications-: Comments of Head of Human Resources and Policy


There are no HR implications arising from this report

Local issues
The recommendation to enter this agreement will benefit the whole city of Newport, and beyond.

Page 12