Hertsmere Developments Limited Non-confidential elements of Business Plan 2018 2028 - Hertsmere Borough Council

 
Hertsmere Developments Limited Non-confidential elements of Business Plan 2018 2028 - Hertsmere Borough Council
Hertsmere Developments Limited                                      Business Plan 2018

                                                                        APPENDIX D

               Hertsmere Developments Limited
                    Non-confidential elements of
                                 Business Plan
                                 2018 - 2028

This document sets out a proposed business plan for Hertsmere Borough Council’s (the
Council’s) wholly owned property company, Hertsmere Developments Limited (HDL) for the
development of, and investment in, property and wider investment opportunities.

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Hertsmere Developments Limited                                                  Business Plan 2018

The business plan is described within the following sections:

   Section 1 – Context and Purpose – The Vision and Objectives of HDL.

   Section 2 – Company Structure & Board – Summary structure, including how HDL will interact
    with the Council, its subsidiaries and the market, the principles behind its funding and
    operation.

   Section 3 – Company Staffing & Resources – Summary of company staffing/resource structure
    and how this will be deployed to meet the objectives.

   Section 4 – Funding – – Detail of the funding approach for HDL.

   Section 5 – Company Activities – Detailing the Activities of the company including the property
    investment and development strategies.

   Section 6 – Financial Analysis – Financial analysis including Baseline Business Plan highlighting
    the financial position of the Company and impact on the Council’s accounts Redacted due to
    commercial sensitivity

   Section 7 – Sensitivity and Scenario Analysis – Examining the impact of variations in key
    assumptions and a variety of market scenarios Redacted due to commercial sensitivity

   Section 8 – Risk Management – Highlighting and assessing key risks to meeting the objectives

   Section 9 - Future Activities – The longer term strategy for the Company

    Appendices
   Appendix A – Activity Income and Expenditure Redacted due to commercial sensitivity
   Appendix B – Business Plan Assumptions Redacted due to commercial sensitivity
   Appendix C – Investment Types/ Areas Redacted due to commercial sensitivity
   Appendix D – Site Phasing Redacted due to commercial sensitivity
   Appendix E – Governance Agreement

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Hertsmere Developments Limited                                                       Business Plan 2018

1.        Context and Purpose
1.1.      This section will provide context for why the Council took the decision to establish HDL and
          will articulate the Vision and Objectives of the company.

          Background
1.2.      In February 20151 Hertsmere Borough Council (the Council) began investigating the potential
          to establish a Wholly Owned LA Property Development Company. This decision was taken as
          a result of three major drivers for the Council
              Firstly, to help address the significant housing crisis that is facing the country at large,
               and Hertsmere specifically. Review of the Society of Local Authority Chief Executives
               report on housing demand ‘Addressing the Housing Challenge’ (October 2015)
               identified access to housing and affordability as a key issue for LA’s. Key elements of
               this report focussed on the need for the public sector to “step up” and deliver
               significant housing development. The Council believed and continues to believe HDL is
               the best vehicle to address this.
              Secondly, the desire of the Council to drive economic growth in the local area by
               enabling a faster pace of development of the Borough’s land. Historic land banking and
               slow pace of development is an issue that the Council wished to address; and
              Thirdly, the significant financial challenges facing the Council over the medium to long
               term. The need to become financially self-sufficient is a driver for much of the Council’s
               activity and the significant potential to generate additional income from its asset base
               is seen as a prime driver of this goal.

1.3.      These factors coupled with an emerging consensus that local government and business
          needed to innovate and unlock new ways of developing property led to the Council
          investigating solutions for a Wholly Owned Company (WOC).

1.4.      In investigating these solutions, it became clear that the Council occupies a unique position
          in this market as a result of:
              The Council’s knowledge of the local regional market and stakeholders;
              The land the Council currently holds, and the related opportunities associated with this
               land;
              The Council’s access to low cost borrowing;
              The Council’s ability and willingness to take a longer term return than other
               developers/ investors active in the markets; and
              The Council’s existing skills and expertise in property.

1                                                     th
    Report to Executive, Document Reference O/15/03 – 9 February 2015

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Hertsmere Developments Limited                                                      Business Plan 2018

1.5.      As a result, the Council elected to begin to establish a WOC with the expressed aim of
          assisting the Council to deliver its regeneration, housing, financial and commercial
          objectives. These were articulated in some details in the following set of strategic objectives
          for the approach:
              Revenue generation – in order to achieve financial self-reliance and sustainability one
               of the key drivers for the Council was to secure an ongoing revenue stream to support
               the General Fund and this was the preference over obtaining capital receipts through
               land sales.
              Mixed use development – i.e. to deliver both residential and commercial development
               opportunities. Commercial development opportunities would not only provide much
               needed economic regeneration but also enhance business rate retention for the
               Council.
              Residential development which would provide a mix of tenures including low cost
               home ownership, affordable rents and private rent and not require the re-opening of
               the Housing Revenue Account (HRA)
              The use of surplus Council sites with the Council retaining a freehold interest.

          Benefits of a Wholly Owned Property Company
1.6.      The Council decided in December 20152 to establish Hertsmere Developments Limited (HDL),
          a WOC targeting property investment and development. The benefits of doing so include:
              The ability for the WOC to invest in, and develop, a wide range of asset types in order
               to further the Council’s economic development agenda and generate financial returns
               to the Council;
              Potentially greater speed than the market at large in undertaking property investment
               and development activities;
              Profits from the company can be returned to the Council’s General Fund via returns on
               loans and dividend payments
              Development of realisable capital assets; and
              Opportunity to procure services from within the Council and its other subsidiaries,
               businesses and stakeholders.

2                                                       th
    Report to Executive, Document Reference EX/15/30 – 14 December 2015

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Hertsmere Developments Limited                                                       Business Plan 2018

           Market Analysis
           Other Council Property Companies
1.7.       Over recent years a number of Councils have established property vehicles, similar to HDL.
           This is clearly demonstrated by the recent Smith Institute report “The Rise of Local Housing
           Companies”3. The key reasons for this trend echo the objectives the Council has for its
           vehicle.
1.8.       Some examples of property companies and specific housing development and investment
           WOCs that have been established include Brick By Brick, the WOC for Croydon Council, Be
           First LB Barking and Dagenham’s company, BexleyCo, LB Bexley’s new property investment
           vehicle, Eastbourne Homes Limited, Eastbourne Borough Council’s vehicle and a variety of
           vehicles owned by LB Barnet, South Cambridgeshire, Wokingham, Broxbourne, Newham,
           Sheffield, Greenwich, Ashford, and Enfield.
1.9.       These vehicles vary in size and objectives and invest in and deliver a variety of property
           types. Options include:
               Purchasing existing properties and renovating them for various uses;
               Purchasing existing income generating assets;
               Investing in property funds;
               Purchasing vacant land for development from the market;
               Purchasing land to achieve planning and realise the planning gain;
               Developing on existing land, as an agent of the Council;
               Purchasing land from the Council; and
               Utilising Council land as equity investment into the vehicle for development.

1.10.      Each of these activities have been considered in developing the scope of the roles to be
           undertaken by HDL in shaping this business plan. The conclusions of this exercise are
           articulated in Section 6 – Company Activities.

3
    The Rise of Local Housing Companies – The Smith Institute October 2017

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Hertsmere Developments Limited                                                            Business Plan 2018

        SWOT Analysis
1.11.   In order to understand the environment in which HDL operates a SWOT analysis has been
        undertaken. This is a process to identify the Strengths, Weaknesses, Opportunities and
        Threats that exist in HDL’s market. It examines the internal and external factors that may
        affect HDL’s future performance over the course of the business plan.
SWOT analysis
 Strengths                                                  Opportunities
  Delivers economic benefit to the areas in which           Potential to bring in private investment.
     HDL invests / develops.                                 A company ‘light’ approach provides for a slim,
  Meets demand not being addressed by the private             low cost organisation
     sector both affordable and market rent                  Provide skills transfer / diversification through
  Developments will provide a variety of tenures –            company activities
     PRS, Market Sale etc.                                   Wider options for raising new/additional
  Increases housing supply in the Borough.                    funding.
  Potential ability to access Homes England and             Can make better use of existing Council assets
     other external funding.                                   (land, buildings and cash).
  Being wholly owned the Shareholder retains                Company can be utilised for other ventures the
     control through the Governance Agreement as               Council may pursue.
     well as within the parameters of the business plan.     Potential to deliver a variety of uses – housing of
  The approach enables the potential to borrow                different tenures / commercial / energy etc. and
     against the assets.                                       meet other needs e.g. Temporary
  Generates income to the Council’s General Fund              Accommodation
     through a combination of investment income and          Potential to expand
     profits.                                                 o Within Hertsmere
  Council’s liability limited to the funds invested and      o Across South East
     . anticipated returns from those funds invested,         o Across country and overseas
     interest and profit                                     Potential partnership approaches
  Reputational benefits / credibility through RICS           o With other Councils
     regulation                                               o With Central government
  Freedom and flexibilities to act commercially.             o With private providers.
  Could utilise expertise and experience and Non-
     Exec Directors from private sector
  Diversifies housing provision delivery approaches
  Ability to invest outside Borough boundaries
 Weaknesses                                                 Threats
  WOC is liable to corporation tax payments                 Lack of land for future expansion.
  Challenges in achieving balance of work for               Market demand and any reduction in yields,
     company / Council.                                        sales and rental values
  Costs to establish and run the company – legal /          Demographic changes
     financial advice, external audit fees, registrations    Legislative changes which could be unfavourable
     with HMRC and with Companies House / annual               to the WOC.
     overheads and running costs                             Increases in interest rates and/or reduction in
  Liable for cost of maintenance to assets                    rate of returns for the Council.
     purchased.                                              Potential capacity of Council staff to deliver
                                                               services to the company
                                                             Competition from other property companies
                                                             Increasing market construction costs when
                                                               developing.
                                                             Supply chain availability.
                                                             Potential illiquidity of the assets acquired
                                                               resulting in inflexibility in the asset base.
                                                             RICS regulations for money Laundering etc.
                                                             Fraud
                                                             PWLB loans may not be available for the Council
                                                               to lend to the wholly owned subsidiary.

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Hertsmere Developments Limited                                                    Business Plan 2018

1.12.   This analysis clearly shows a number of opportunities and challenges for the Company. The
        most pressing overriding factor for the company is the level of reliance it has on the Council.
        The relationship with the Council and the Company’s reliance on it for supply of land and
        funding make the agility and support of the Shareholder crucial for the Company to succeed.
1.13.   The SWOT analysis was closely reviewed by the Board and helped shape the following Vision
        and Objectives for the Company.
        Vision and Objectives
1.14.   The Company has developed the key elements of its Vision in a Directors’ workshop and has
        agreed them with the Shareholder representative, Hertsmere Borough Council.
        The Vision is set out below:
         “Hertsmere Developments Limited (HDL) is a development, investment & management
        company that delivers a portfolio of housing, and commercial property, to support the
        Council’s growth and economic development agendas.
        The company will act commercially to generate financial returns for the Council whilst
        respecting the housing and other priorities of Hertsmere and the values of the Council.”
1.15.   From this definition, a set of strategic objectives for HDL have been developed
        collaboratively by the Board and senior officers. The resultant set of twelve objectives are
        detailed below:
        Objectives
         Develop / Invest in a portfolio of assets that
                 - delivers an appropriate return to the Council, as shareholder, to be agreed on an
                     ongoing basis;
                 -   balances risk and reward across the portfolio;
         In developing / making investment decisions be cognisant of:
                 -   the potential to reduce long term costs and risks to the Council as shareholder;
                     and the Council’s economic development agenda;
         To develop and utilise a series of approaches that are consistent with the Council’s
            corporate strategy whilst maximising income return;
         Undertake housing development to facilitate meeting housing need in the Borough
            whilst delivering policy level affordable housing, unless extraordinary conditions prevent
            this
         Housing development will only be undertaken within the Borough in the initial Business
            Plan.
         Commercial property development and other property investment can be undertaken
            both inside and outside the Borough to contribute to the overall financial return
         To undertake co-investment with public not for profit and private sector partners as
            appropriate;
         Dispose of existing assets and/or acquire new assets in accordance with the terms of this
            Business Plan;
         Aim to conduct itself in line with the values of the Council and be mindful of any impact
            on the Council’s reputation;
         To become known as a credible high-quality development, investment and management
            brand;
         When seeking debt financing, offer the Council the opportunity to match the best
            available offer;
         Deliver the objectives described above in the best interests of the Company, on sound
            commercial principles and with a view to maximising overall return to the shareholder.

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Hertsmere Developments Limited                                                   Business Plan 2018

2.     Company Structure & Board
2.1.   Hertsmere Developments Limited. is a private company limited by shares, with a single
       shareholder (Hertsmere Borough Council).
2.2.   It has been established under s1 of the Localism Act 2011 (which says that a local authority
       may do anything that a person – i.e. a legal entity - may generally do); and s4(2) of the same
       Act, which provides a caveat to that power, such that if a local authority wishes to do
       something for a commercial purpose it must do so through a company.
2.3.   The Company is governed by the Companies Act 2006. It was incorporated on 19 February
       2016 with Model Articles of Association adopted (Amended Provisions).

       Activities of the Company
2.4.   As explained above, the Council established the Company in order to achieve four key
       strategic objectives, which can be summarised as follows:
           To generate revenue for the Council
           To deliver mixed use development to provide much needed economic regeneration and
            enhance business rate retention for the Council.
           To deliver mixed tenure residential development; and
           To better utilise surplus Council sites
2.5.   The Board have reviewed these objectives and set their own Vision and Objectives, as
       detailed at 1.13 and 1.14 above. In order to meet these aspirations, the Board has agreed
       the following as the main activities which will be undertaken:
           Development of affordable housing and sale to either Registered Providers or a Council
            approved entity;
           Residential development resulting in letting of properties to private individuals under a
            private rental scheme (“PRS”);
           Residential development resulting in sales to private buyers / third parties;
           Development of non-housing sites for mixed use schemes such as retail and car-parking
            which will most likely be let;
           Investment into the property sector, including purchasing income generating assets;
            and
           Management and maintenance of retained operational units.

       Company Structure
2.6.   The structure of the Company has been designed to deliver the Vision and Objectives and
       undertake the Activities detailed above. It has been designed with the following key drivers:
           Ensuring an efficient and effective governance structure is put in place;
           Delivering the most tax efficient approach possible;
           Limiting liability and ensuring risks are appropriately managed and ring-fenced; and
           Providing flexibility for future structural change.

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Hertsmere Developments Limited                                                   Business Plan 2018

2.7.    HDL is established as a 100% owned subsidiary of the Council. Hertsmere Homes Limited
        (HHL) is an existing Company Limited by Shares that is a 100% owned subsidiary of the
        Council that is currently dormant. HHL is to be moved to be a 100% owned subsidiary of
        HDL.
2.8.    The use of two companies, rather than one is for the following key reasons:
            Focusing activity and ring fencing risk – HDL will undertake all development activity
             whereas HHL will be the specialist owner and manager of the retained rental units that
             are developed by HDL or are directly acquired. By separating these activities, it enables
             these companies to focus on their specialist areas of development and management
             and maintenance activities.
            Tax efficiency – By structuring this way it enables efficient tax treatment of SDLT, VAT
             and Group Corporation Tax positions. This is due to the land/properties being able to
             be transferred to HDL, and on to HHL, with no SDLT liability due to the Group status of
             the Council and these 2 companies. Also, almost all the VAT incurred on all costs
             attributable to property sales and long leases to HHL will be recoverable and group
             Corporation tax treatments should apply.
2.9.    The diagram below sets out the structure of the Group.

2.10.   HDL has commissioned a tax review of this structure from BDO, its tax advisors. The outputs
        of this work have been considered in this Business Plan. This work concluded that this is the
        most appropriate and tax efficient structure to deliver the desired activities.
2.11.   There is the potential in the future for this structure to be adapted to include subsidiary
        companies to undertake specific development / management activity or to enter into future
        joint venture arrangements. This type of group structure is often used again to ring fence
        risk associated with specific developments or activities. The reason such an approach is used
        is to manage the risk of the performance of these activities, for example, if any discrete
        venture were to fail, through this approach it would not cross contaminate any other ring-
        fenced activities or serve to collapse the overall structure. This will also help to secure
        discrete funding packages around each subsidiary. This approach would optimise flexibility
        for the Company and the Shareholder and involve relatively modest set up costs.

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Hertsmere Developments Limited                                                       Business Plan 2018

2.12.   Key aspects of this structure will enable:
           The ability to set up different companies to manage different risks;
           The ability to set up joint ventures with private sector partners to meet the Company’s
            aims
           The ability of the Company, whether on its own or in a joint venture, to source external
            funding on specific development sites;
           The ability to hold specific asset classes and generate a return to the Company;
           The ability to trade and provide services outside of the council; and
           The ability to reclaim VAT on VATable services where these are provided
        Governance Arrangements
2.13.   HDL and HHL are both limited companies with their own Articles, a joint Business Plan and
        Boards of Directors. 100% of the HDL shares are owned by Hertsmere Borough Council and
        100% of the HHL shares are proposed to be owned by HDL. The diagram below lays out the
        governance structure for HDL and how it interacts with the Council.

                                                                                Council
                                                     HBC Executive

                                                   Shareholder
                                                  Representative

                                                                                    HDL
                                                Board of Directors

                                               Management Team

                                  External     Council Purchased
                                                                        Staff
                                 Consultants       Support

                                                                                   HHL
                                               Board of Directors

                                               Management Team

        HDL
        Board of Directors
2.14.   HDL’s Board of Directors shall consist of one Executive Director (Managing Director ‘MD’),
        yet to be appointed, and seven Non-Executive Directors. All Directors, Executive and Non-
        Executive, shall at all times be appointed by the Council.
2.15.   The Directors are responsible for the management of the Company’s business, for which
        purpose they may, with the exception of the matters requiring Shareholder consent and
        expressly reserved pursuant to Article 6 (Shareholder Reserved Matters), exercise all the
        powers of the Company.

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Hertsmere Developments Limited                                                  Business Plan 2018

2.16.   Directors of the company have a duty to act in the interests of the company, even if there is
        a conflict with the interests of each other or the Council. However, in view of the rationale
        behind HDL, and the structure agreed, it is unlikely that conflicts could arise. As the sole
        shareholder of HDL, the Council are able to protect its interests by adding to, or changing
        Directors, as it sees fit.
2.17.   It is proposed that the Company Board meets at least bi-monthly for the first year ensuring
        that the Board and Executive team work closely to ensure that the aims of the Company are
        being met. Action will include, but not be limited to:
           ensuring effective engagement with the [sole] shareholder and any other stakeholder(s)
            as the Board deems appropriate;
           progressing the property investment / development strategy;
           subject to satisfactory financial appraisals, acquiring and delivering the property
            investments / developments in a way that maximises value / return; and
           identifying further opportunities.
        Management Team
2.18.   The Company’s management team report directly to the Board on all operational matters.
        It’s make-up and the staffing structure beneath it is detailed in Section 3.3.

        HHL
        Board of Directors
2.19.   HHL’s Board of Directors shall consist of one Executive Director (Managing Director), yet to
        be appointed, and two Non-Executive Directors, of whom at least one will be a Board
        member of HDL. All Directors, Executive and Non-Executive, shall at all times be appointed
        by the Council.
2.20.   The Directors are responsible for the management of the Company’s business, for which
        purpose they may, with the exception of the matters requiring Shareholder consent and
        expressly reserved pursuant to Article 6 (Shareholder Reserved Matters), exercise all the
        powers of the Company.
2.21.   Directors of the company have a duty to act in the interests of the company, even if there is
        a conflict with the interests of each other or the Council. However, in view of the rationale
        behind HHL, and the structure agreed, it is unlikely that conflicts could arise. As the sole
        shareholder of HHL, HDL is able to protect its interests by adding to, or changing Directors,
        as it sees fit with the consent of the Council.
2.22.   It is proposed that the Company Board meets at least bi-monthly for the first year ensuring
        that the Board and Executive team work closely to ensure that the aims of the Company are
        being met.
        The Council is to be provided with the minutes of these bi-monthly meetings and receive a
        financial and operational reports on a monthly basis
        Action will include, but not be limited to:
           ensuring effective engagement with the [sole] shareholder and any other stakeholder(s)
            as the Board deems appropriate;
           progressing the property investment / development strategy;

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Hertsmere Developments Limited                                                    Business Plan 2018

           subject to satisfactory financial appraisals, acquiring and delivering the property
            investments / developments in a way that maximises value / return; and
           identifying further opportunities.
        The Company will provide the Council with minutes of the bi-monthly meetings and a
        monthly financial and operational report

        Management Team
2.23.   The Company’s management team report to the Managing Director of the Company, or prior
        to that appointment the Company Representative, who reports directly to the Board on all
        operational matters. It’s make up and the staffing structure beneath it is detailed in Section
        3.13 to be agreed in detail at a future date.
        Council
2.24.   The Council wears three distinct hats in its engagement with HDL, these are as follows:
           Shareholder – The Council is 100% shareholder of HDL. As such, its responsibilities are
            to ensure that the company is well run and well managed. As shareholder it does not
            have any rights to be involved directly in company management and does not
            participate directly in corporate decision-making, subject to the terms of the
            Governance Agreement which is included at Appendix E.
           Lender – As the funding section elaborates below the Council is likely to be the main
            source of senior debt for HDL. As such it has a separate role as lender that will be
            undertaken separately from shareholder activities
           Services Provision – The Council may deliver and receive services to and from the
            Company.
        Shareholder
2.25.   A Shareholders’ Agreement has been entered in to by the Council and HDL which sets out
        the governance arrangements, delegated functions and decision making structure. The
        Council has nominated a shareholder representative that may attend Board meetings
        Lender
2.26.   Funding agreements will be developed and agreed on an ongoing basis between the
        Shareholder and the Company.
        Services Provision
2.27.   HDL and the Council will enter into a series of service agreements for the scope of services to
        be provided by the Council to the Company and from the Company to the Council.

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Hertsmere Developments Limited                                                                   Business Plan 2018

3.     Company Staffing and Resources
3.1.   There are three main areas of resource from which HDL will draw to deliver its scope of
       services:
          Internal resources;
          Expertise from the Council, purchased by the Company; and
          External Multi-Disciplinary Services covering services ranging from planning to
           development management.
       Internal Resourcing
3.2.   HDL initially plans to operate as a relatively ‘light’ model with limited internal staff (MD), and
       then procure most of its resources through the Council or other third parties. Predominantly
       the activities of the company will be undertaken under the provision of a series of
       Management Agreements with the Council. The Council will charge the company for their
       time. Additional external support will then be procured as appropriate.
3.3.   The supply of services to the Company from the Council will be at market rates, to comply
       with state aid rules.
       Illustrative HDL Resource Structure

                                                   Hertsmere
                                                 Borough Council
                                         100% Shareholder

                                                            HDL

                                                  Managing Director

                                   Services Purchased                   Services Purchased
                                       from Council                      from Third Parties
                                      Core Activities                      Core Activities
                                 • Project Management              • Investment Identification
                                  • Monitoring activity              • Investment Appraisal
                                      • HR Services                  • Transaction execution
                                 • Information Services                   • Agency advice
                                     • Data Services                     • Financial Advice
                                  • Back office services                • Technical advice
                                   • Accommodation                • Development Management
                                                                   • Programme Management
                                                                      • Project Management

3.4.   The proposed Company staffing structure set out in the diagram above, includes the MD
       who will be head of service within the Company and will hold the Executive Director function
       on the HDL Board and, as such, represents the Board at a corporate level.
3.5.   With regard to the investment / development programme, the MD will have overall
       responsibility for all aspects of the delivery of all component projects and for reporting back,
       via the Board, to the shareholder.
3.6.   All services will be procured either from the Council or from third parties, as appropriate.
3.7.   The current planned resources for the company in the first year of the business plan and
       assumed costs are set out in the detailed Business Plan at Section 6.

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Hertsmere Developments Limited                                                    Business Plan 2018

3.8.    The Property Portfolio Management role will be undertaken by the MD and will be
        supported by a combination of third party resource and the Council’s Asset Management
        Team. This role includes client management of specialist consultants and other service
        providers to the Company. The role also includes monitoring and maintaining performance
        on all investments and reporting on progress to the Board, as required.
3.9.    Advising the MD in this role will be a series of other specialists from the Council and Third
        Parties to support the activities in identifying, appraising and transacting investments and
        undertaking all development activity. If required, this will be supported by workstreams with
        external Multi-Disciplinary Teams who provide technical expertise across all necessary work
        packages. This resource is commissioned by a range of multi-disciplinary practices on a fixed
        fee or fixed percentage basis and will be agreed through the MD and reported to the Board,
        as appropriate.
3.10.   Other professional services, such as tax and legal advice, will be procured from the Council
        or third party advisers or a combination of both, as appropriate.

        Available Financial Resources
3.11.   The intention is that the Company will be wholly financially self-sufficient, with all costs
        relating to the operation of the business covered by the proceeds of its activities.
3.12.   However, initial seed funding (‘working capital’) will be required from the Council. This fund
        will be used to pay for all costs relating to the vehicle, up until the time that development /
        investment revenue and proceeds are received by the Company.
        HHL Resources
3.13    HHL Resources to be agreed with the Shareholder at a future date.

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Hertsmere Developments Limited                                                    Business Plan 2018

4.      Funding
        Financing
4.1.    The model developed assumes that the Council will provide the sole source of finance to the
        Company by providing a combination of equity and debt. In addition, the Council will provide
        a working capital loan facility.
        Equity
4.2.    The Company is wholly owned by the Council and therefore the only source of equity will be
        the Council. This could change over time if there is a desire to bring other equity funding to
        the project, but this would have an impact on tax arrangements. At the outset the Council’s
        land value will constitute the equity funding. This is further expanded at 6.22 below.
4.3.    The Council will realise equity returns from the Company in two ways:
            Dividends paid out of profits, based on its ownership at levels which will reflect what a
             private shareholder would expect from the Company
         “Equity” investment made in the form of a loan at a coupon, or interest rate. The
             interest return on this coupon would be realised to the revenue account.
4.4.    It should be noted that equity funding is riskier than other forms of funding, if the Company
        defaults, the equity providers will be the last to get their money back after paying back all
        debt.
        Debt
4.5.    The Council will also provide debt financing to the Company. It will do this by borrowing at
        the most competitive rates available. This could be from internal borrowing, the Public
        Works Loan Board (PWLB) or/and the private sector e.g. pension funds. The cost of financing
        to the Company from the Council will be at a market rate to avoid State Aid implications. It is
        intended that debt funding will finance the majority of investments c.70 per cent of the total
        development / investment value. All lending would be subject to a loan agreement, would
        be secured against the land and would include pre-conditions on draw down, as well as on-
        going performance measurement.
4.6.    The Council would receive a return on its debt funding at the difference between its cost of
        funds (borrowing rate); say 2-3% and the rate loaned to the vehicle; say 6-7%. In this case a
        return of 3-5%. This is to compensate the Council for the funding risk of making these loans
        and is in accordance with State Aid rules.
        Working capital facility
4.7.    The Company, as a ‘start up’ requires access to a short term revolving working capital facility
        provided by the Council to fund any shortfalls. The working capital facility will incur interest
        and may be paid down when the Company has available funds.
4.8.    The Council will need to source this funding, therefore, separately to the core development
        loans that are likely to be secured against the land. This will be a separate loan from the
        Council to the Company.
4.9.    HDL’s programme of works is reliant on its ability to secure finance and as such, will work
        with the Council as its funder to ensure that access to finance is maintained throughout its
        initial development programme
4.10.   Should HDL look to secure funding from an external party, that is on different terms to that
        offered by the Council, the Council will have the right to match the stated terms.

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Hertsmere Developments Limited                                                                                                   Business Plan 2018

5.         Company Activities
5.1.       There are a range of approaches that fall within the objectives of HDL, each with different
           financial, risk and timing profiles

                              Risk/Return                                                               Characteristics
           Lower risk & returns               immediate revenue streams
           - Investment in existing income  low management input, but high level of control
           producing assets / Property funds  no competitive market advantage

           Medium risk & returns                                         delayed revenue streams
           - Develop with risk sharing partner                           shared control, risk & profits
                                                                         competitive market advantage                                    on        Council-
                                                                          controlled sites

           Higher risk & returns                                         no short-term revenue streams
           - Direct development                                          full control and all profits, but all risk
                                                                         competitive market advantage on                                           Council-
                                                                          controlled sites

5.2.       These can further be characterised by a set of 6 core options as per the diagram below
       Existing Assets          Existing Assets          Existing Assets             Development –           Development –                     Self
                                                                                       Risk Share              Risk Share                  Development
           Direct
           Direct                    Direct
                                  Investment                  Direct
                                                         Listed Property                Forward               Joint Venture
        Investment
        Investment                Investment
                                     Funds                 Investment                   Forward                  Forward                      Forward
                                                              Shares                   purchase /
                                                                                       purchase /              purchase /                    purchase /
                                                                                        funding
                                                                                        funding                  funding                      funding

            1                         2                          3                         4                       5                               6
                                                         Increasing Risk & Return

5.3.       The key characteristics have been plotted on the graph below

         Potential
         Reward
                                                                                                                                 Option 6
                                                                                                                              Develop on own

                                                                                                                   Council retains full control,
                                                                                                                    economic benefit and risk liability
                                                                                                                   No short term•Forward
                                                                                                                                     revenue
                                                                                                                                           purchase / funding
                                                                               Options 4 and 5                     Retain flexibility as long term
                                                                                                                                  •
                                                                            Develop with a partner           -5     investment •
                                                                                                                   Competitive advantage        on own
                                                                       Variety of risk sharing models                            •
                                                                                                                    sites                      s
                                                                       Delayed revenue but forward
                                Options 1 to 3                            funding
                                                                             --3   model and early revenue
                                                                                                                                  5
                     Invest in income producing assets                    delivery
                                                           •           Shared control
                                                                 Direct Investment
                  Immediate revenue delivery                  revenue
                                                                       ofCompetitive
                                                           •   Low level   management advantage on own
                  Low level of management input                         .sites
                                                           •
                   required                                • No competitive market
                  Generally full control                    advantage

                  No competitive market advantage
                                                                                               Risk

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Hertsmere Developments Limited                                                        Business Plan 2018

5.4.        As defined at section 2.5 above the core activities of the Company will be as follows:
            Development

                 Development of affordable housing and sale to either Registered Providers, a Council
                  approved or independent entity;
                 Residential development resulting in letting of properties to private individuals under a
                  private rental scheme (“PRS”);
                 Residential development resulting in sales to private buyers; and
                 Development of non-housing sites for mixed use schemes such as retail and car-parking
                  which will most likely be let.
            Investment

                 Investment into the property sector, including purchasing income generating assets; and
                 Management and maintenance of retained operational units
5.5.        The risk profile of each will be further examined in reviewing the two core elements of the
            Activity – Investment and Development
            Property Investment Approach
            Context
5.6.        HDL is seeking to take advantage of the current economic environment, where interest rates
            are at historically low levels, to access finance from the Council under its Prudential Powers,
            to acquire investment assets, generally focused around property, that have the potential for
            high returns, when compared to other similar investments.
5.7.        The Investment Property Databank (IPD) UK, All Property Annualised Total Return (which is
            the income return added to the capital growth) for the 3, 5 and 10 years to December 2016
            was 13.8%, 10.5% and 5.7% respectively4 demonstrating that even through the recession the
            property sector as a whole has generated returns for investors.

5.8.        However, as with all investments, there is no guarantee of future returns and the nature of
            property investment returns is that they increase as the level of investment risk or
            speculation increases. Following the EU referendum result, the current market volatility has
            obviously added to these concerns and investment returns have eased. Therefore, the
            Company’s strategy for investment is focussed on the longer-term nature of returns on
            property investment, with potential for short term under performance.

4
    source: IPD UK Annual Property Ind

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Hertsmere Developments Limited                                                                        Business Plan 2018

5.9.          The graph below5 shows the potential returns that can be achieved outside of prime areas.
              It shows that upper 6% to mid 7% is reasonable. HDL has the added advantage of being a
              cash buyer in this market which should provide an effective discount and increase the yield
              range below. Therefore, for this analysis a 7% yield is a reasonable assumption.

Strategic Objectives

5.10.         The company has been established with a series of key objectives, as identified in Section 2
              above. The key objectives that inform the Property Investment Strategy for HDL are
              included below
                  Develop / Invest in a portfolio of assets that
                   - delivers an appropriate return to the Council, as shareholder, to be agreed on an
                       ongoing basis;
                   - balances risk and reward across the portfolio;
                  In developing / making investment decisions be cognisant of:
                   - the potential to reduce long term costs and risks to the Council as shareholder; and
                   - the Council’s economic development agenda;
                  To develop and utilise a series of approaches that are consistent with the Council’s
                   corporate strategy whilst maximising income return;
                  Commercial property development and other property investment can be undertaken
                   both inside and outside the Borough to contribute to the overall financial return
                  To undertake co-investment with public not for profit and private sector partners as
                   appropriate;
                  Dispose of existing assets and/or acquire new assets in accordance with the terms of this
                   Business Plan;

       5
           http://pdf.euro.savills.co.uk/uk/residential-property-focus-uk/residential-property-focus-q2-2012.pdf

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Hertsmere Developments Limited                                                                  Business Plan 2018

             Aim to conduct itself in line with the values of the Council and be mindful of any impact
              on the Council’s reputation;
             To become known as a credible high-quality development, investment and management
              brand;
             When seeking debt financing, offer the Council the opportunity to match the best
              available offer;
             Deliver the objectives described above in the best interests of the Company, on sound
              commercial principles and with a view to maximising overall return to the shareholder.

5.11.    Crucially these objectives lay out a requirement to deliver financial returns and a headline
         approach to establish a balanced portfolio that delivers these returns. These headline
         objectives can be interpreted in a number of different ways, utilising a number of different
         approaches. This section of the Business Plan seeks to articulate how they have been
         interpreted by the Board and the portfolio approach that will be taken to investment for the
         period covered by this business plan
5.12.    This strategy aims for HDL to achieve financial returns through the creation of an investment
         portfolio that will generate stable, long-term total returns that grow, as a minimum, in line
         with inflation. The investment portfolio will consist primarily of real property assets with the
         specific objective of achieving annual income on a long-term basis to support the financial
         sustainability of the Council.
5.13.    With the primary focus of HDL being on financial returns, it should also be clear that the fund
         should not limit its investment to within HDL boundaries. It is recognised, however, that
         there will be competing demands for the limited funds available to invest. Therefore,
         investment business cases should also take some account of the wider socio-economic
         impacts that may be delivered from in-Borough investments as well as the pure financial
         returns. This should be considered in line with the recent Statutory Guidance on Local
         Government Investments.6
5.14.    HDL is seeking to undertake a spectrum of activities. As per 5.4 above, the Company’s
         investment approach will be made through options 1-3. These are situated at the lower end
         of the risk and reward spectrum, but should enable HDL to deliver a significant financial
         return

         Types of Investment
5.15.    There is the potential for the Council to invest in a variety of different types of property
         which can broadly be categorised as residential or commercial.
5.16.    Appendix – C shows a matrix comparing the different types of investment considered, some
         explanation and compares the characteristics of residential with commercial property
         investment.

6
 Statutory Guidance on Local Government Investments (3rd Edition) - Issued under section 15(1)(a) of the Local
Government Act 2003 and effective for financial years commencing on or after 1 April 2018

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Hertsmere Developments Limited                                                           Business Plan 2018

            Target Investment Portfolio
    5.17.   The Board has considered a variety of these asset classes, and the balance between them
            and has defined the target balance of the portfolio across the life of this business plan in the
            table. It is acknowledged that this balance will not be achieved from the outset but will be
            targeted as investments are built up over the five year term of this Business Plan.
            The table below sets out an indicative level of target return for each asset class and type of
            investment that is within the scope of the company’s £5m investment strategy within the
            first four years. It also shows the assumed build-up of the investments over time.
    5.18.   It should be noted that it has been assumed that HDL can invest outside of the boundaries of
            the Borough. Some of the target yields shown in the table may be harder to achieve in the
            Borough rather than outside, and instead of limiting the market the broadest approach has
            been assumed.
                                                                                                             Maint. &
                         Investment            Purchase    Net
                                       % of                                          Yield    Gross Rent     Manag.
    Asset Class           Allocation            Fees & Investment
                                     Portfolio                                        (%)     (£ / Year)      (% of
                              (£)              SDLT (£)    (£)
                                                                                                              Rent)
Residential Flats         £1,000,000      20.0%      £58,905      £941,095           7.00%      £65,877        15%
Residential Houses        £1,000,000      20.0%      £58,905      £941,095           7.00%      £65,877        15%
Retail & Service          £2,000,000      40.0%      £104,265    £1,895,735          7.00%     £132,701        15%
Property Investment       £1,000,000      20.0%         £0       £1,000,000          7.50%      £75,000        15%

    5.19.   It should be noted that in the baseline analysis for the business plan, the residential units are
            operated over the long term and rental income provides the yield to the company. There is
            an option to realise a level of capital appreciation in these assets by selling them
            incrementally to realise their increase in value over time. This approach is common practice
            within residential based investment portfolios. In the Financial Analysis section below
            sensitivities and scenarios have also been shown where this capital appreciation is realised
            to show the impact.

            Property Development Approach
            Context
    5.20.   HDL is seeking to take advantage of its unique position as a development vehicle that is a
            100% owned subsidiary of the Council to:
                 Exploit its knowledge of the local regional market and stakeholders;
                 Access Council owned land that is surplus to its requirements;
                 Access equity and debt from the Council to undertake development;
                 Exploit the Council’s ability and willingness to take a longer term return than other
                  developers/ investors active in the markets; and
                 Utilise the Council’s existing skills and expertise in property.
    5.21.   From this position it is seeking to undertake development activity across the Borough on a
            series of Council owned sites.

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Hertsmere Developments Limited                                                   Business Plan 2018

        Strategic Objectives
5.22.   The company has been established with a series of key objectives, as identified in section 1
        above. The key objectives that inform the Property Development Approach for HDL are
        included below:
           Develop / Invest in a portfolio of assets that
            -   delivers an appropriate return to the Council, as shareholder, to be agreed on an
                ongoing basis;
            -   balances risk and reward across the portfolio;
           In developing / making investment decisions be cognisant of:
            -   the potential to reduce long term costs and risks to the Council as shareholder; and
            -   the Council’s economic development agenda;
           To develop and utilise a series of approaches that are consistent with the Council’s
            corporate strategy whilst maximising income return;
           Undertake housing development to facilitate meeting housing need in the Borough
            whilst delivering policy level affordable housing, unless extraordinary conditions prevent
            this
           Housing development will only be undertaken within the Borough in the initial Business
            Plan.
           Commercial property development and other property investment can be undertaken
            both inside and outside the Borough to contribute to the overall financial return
           To undertake co-investment with public not for profit and private sector partners as
            appropriate;
           Dispose of existing assets and/or acquire new assets in accordance with the terms of this
            Business Plan;
           Aim to conduct itself in line with the values of the Council and be mindful of any impact
            on the Council’s reputation;
           To become known as a credible high-quality development, investment and management
            brand;
           When seeking debt financing, offer the Council the opportunity to match the best
            available offer;
           Deliver the objectives described above in the best interests of the Company, on sound
            commercial principles and with a view to maximising overall return to the shareholder.

        Activities
5.23.   HDL will undertake development activities, in line with its objectives, on those sites
        identified by the Company and which the Council will transfer at value as its source of equity
        into the company (as detailed at 5.2 above) and other sites identified as part of the normal
        business of the Company.

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Hertsmere Developments Limited                                                   Business Plan 2018

5.24.   The Company will undertake all aspects of developing sites, including:
           Identifying opportunities;
           Viability appraisal;
           Design management;
           Funding approaches / sources;
           Third party / Contractor procurement;
           Development management;
           Sales and marketing strategies; and
           Branding.
5.25.   HHL will hold and manage properties where appropriate. Examples could include private
        residential stock or commercial/industrial assets developed by HDL or purchased under the
        Investment strategy.
5.26.   The Company will undertake all aspects of managing these assets, including:
           Letting strategy;
           Responsive maintenance;
           Lifecycle maintenance;
           Rent collection;
           Service charge collection;
           Variety of management service delivery;
           Third party / Contractor procurement; and
           Branding.
5.27.   The initial Business Plan includes eleven development sites currently owned by the Council
        together with the acquisition of other development opportunities which have a gross
        development value of in excess of £88m and the aim is to develop around 300 housing
        units.
5.28.   This forms the basis of the majority of the financial cost modelling and business projections
        for the first 3-4 years of HDL.
5.29.   However, whilst this represents a sizeable programme the Company will require a pipeline of
        sites/development opportunities to succeed and grow into the medium/longer term. Unlike
        most commercial undertakings, HDL’s focus will inevitably (at least initially) be on the
        Borough of Hertsmere. Further and ongoing site identification will remain a significant
        strategic priority. The process by which sites will be appraised and ultimately committed to
        HDL is as follows:
5.30.   The performance of HDL is reliant on the supply of sites from the Council and on timely
        response times in order for the Company to act commercially. The detailed process to be
        discussed with the Shareholder process. In addition acquiring other development sites.
5.31.   The assumptions regarding site drawdown for this Business Plan are included in Appendix D
        and are shown below.

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Hertsmere Developments Limited                                                                                                                                                                                                                                             Business Plan 2018

                Proposed Development Programme

5.32.           HDL’s initial development programme comprises short and medium sites is as follows:

                                                                        Address
                   Land at Kimptons Close, Potters Bar
                   Land at Millbrook Road, Bushey
                   Birchwood Newcombe Road Shenley
                   Kimptons Mead, Potters Bar
                   Norfolk Gardens, Borehamwood
                   Meadow Road, Bushey
                   Caishowe Road, Borehamwood
                   Green Street Shenley
                   Orchard Close Radlett
                   Eldon Avenue Borehamwood, South of 77 to 83
                   Directors Arms, Borehamwood
                   TOTAL

                A range of dwellings, between 2 and 20, will be built subject to site characteristics.

                All developments will require statutory planning permission and all other necessary consents

                Development Phasing

5.33.           The key assumptions that underpin the business plan in terms of phasing have been
                developed separately for the initial programme and Medium Term sites allowing for
                particular site complexities, particularly when acquiring from third parties.
5.34.           The tables below lay out the headline timescales. It should be noted that not all starts
                commence at the same time, instead they are phased as shown in Appendix D.
                                                                                                                                                                             Development Phasing
                                                               Start on                                                       Fees                                                    Enable / Demo                                                              Construction
                                                                 Site                                    Start                                Finish                                Start        Finish
                                                                                                                                                                                                                                                          Start (mth)
                                                                                                                                                                                                                                                                            Finish
                                                                                                         (mth)                                (mth)                                 (mth)        (mth)                                                                      (mth)
                Initial Programme                                  Sep 18                                  1                                     9                                    7             9                                                          9              24
                Medium Term                                        Mar 19                                  1                                    13                                   10            13                                                         13              37

                                         1      2      3      4     5      6      7      8       9    10     11     12     13     14     15     16     17     18     19     20     21     22    23     24     25      26     27    28     29     30     31     32     33     34     35     36     37      38     39     40      41     42     43
                                       Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21
Short Term
Decision to Commence Project

Professional Advice (Fees) including consultation
and planning
Enabling works / demolition

Construction

Medium Term
Decision to Commence Project

Professional Advice (Fees) including
consultation
and planning
Enabling works / demolition

Construction

                                                                                                                                                                                                                                                                                                       23 | P a g e
Hertsmere Developments Limited                                                 Business Plan 2018

        Development Locations
5.35.   The sites included in the initial programme are all within the Borough boundaries and are
        well spread geographically including sites in all major settlements.

        Future Pipeline – Development Activity
5.36.   The Board is aware there are additional Council owned sites which may become available as
        possible opportunities. Once the response to the Local Plan Call for Sites is in the public
        domain the Board will review the outcome.

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Hertsmere Developments Limited                                Business Plan 2018

6.     Financial Analysis Redacted due to commercial sensitivity

                                                                      25 | P a g e
Hertsmere Developments Limited                               Business Plan 2018

7. Sensitivity Analysis Redacted due to commercial sensitivity

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Hertsmere Developments Limited                                                  Business Plan 2018

8.     Risk Management
8.1.   The Property Development and Investment strategy and operational programme detailed
       above show a series of development and investments to be undertaken by HDL and ongoing
       operational activity by HHL.
8.2.   In undertaking these activities, the Company intends to take on a significant amount of debt.
       The shareholder will be loaning to HDL to develop, invest and sell assets. HHL will manage
       and operate assets. All of these activities carry with them significant risks that need to be
       considered and mitigated, as far as possible. This section will set out the risk management
       strategy, including a risk register that will look to manage risk at a company level
       Risk Strategy
8.3.   The Company has a risk management strategy that addresses corporate risk, through its
       governance processes and project risk, through the project investment / delivery managers.
       In order for risk management to be effective, risks must be:
          Identified – The risk must be described, and possible consequences outlined
          Assessed – Each risk must be ranked in terms of its estimated impact and immediacy
          Controlled – Appropriate responses to risks must be identified, owners assigned, and
           responses must be monitored over time.
8.4.   The process to manage risks is set out in the flowchart below:

8.5.   To facilitate the above strategy, a risk register is maintained and discussed in meetings with
       the Board of Directors.
8.6.   Company management will be responsible for risk management, risk reporting and ensuring
       regular reporting to the Board.

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Hertsmere Developments Limited                                                             Business Plan 2018

 Risk                                                  Mitigation
 Investment
 Unbalanced portfolio – Risk is not defrayed by        Robust development of property investment strategy with a
 investing in a variety of types and risk level of     diverse well balanced portfolio.
 property type / use

 Cash flow management – investment returns do          Robust financial modelling and management of investment
 not match outgoings resulting in unfunded             portfolio with appropriate reporting arrangements and
 elements of the business plan                         active management.

 Property sector exposure – ensure a well              Robust financial modelling and management of investment
 balanced portfolio is developed including             portfolio with appropriate reporting arrangements and
 diversity in property type; geography; risk           active management.
 classification; life cycle of the asset; investment
 structure; and management                             Board to agree criteria for investment and sale

 Leverage – Ensure appropriate loan-to-value           Appropriate ratio analysis should be used to review
 (LTV) ratio / Loan to Cost (LTC) ratio is             portfolio and manage it on a day to day basis. Appropriate
 maintained.                                           reporting mechanisms put in place to review these metrics
                                                       and take appropriate actions.

 Development
 Planning
 There is a reputational risk of the Company not       Pre-application planning advice with support from third
 obtaining planning permission from the Council        party advisers will be sought.
 or planning permission not being obtained on a        The decision to grant planning permission will sit with the
 timely basis                                          planning committee.
                                                       Ensure planning permission is granted in advance of
                                                       construction start.
 Construction
 Risk of unforeseen ground / site conditions which     Ground investigation work will take place prior to tender
 may delay demolition or construction.                 process
                                                       A site conditions report will be provided with ground report
                                                       in tender documentation
 Construction price risk may cause construction        Ensure there is appropriate contingency available in
 costs to be higher than anticipated – impacting       business plan to cover any overall price increases
 the profitability and cash flow requirements of
 the vehicle
 Services/utilities are unavailable or lack capacity   Utilities enquires will be undertaken to ensure availability
                                                       and capacity prior to development commencement

 Specifics regarding legal title may adversely         Council legal team or third party advisers will be requested
 affect development costs and timescales               to perform an early title review for all sites proposed in the
                                                       development

 Risk in overpaying in the procurement process         The Council will use expertise of in house procurement and
                                                       legal officers, outsourcing where necessary, to ensure
                                                       contracts are robust
 Defective design and/or construction causes           Appropriate warranties/performance bonds will be written
 delays and additional costs                           into contracts completed prior to development
 Construction costs are higher than estimated          commencement

                                                       Post letting of contracts effective contract management
                                                       processes will be put in place
 Insolvency of contractor                              Financial checks performed as part of procurement process
                                                       and guarantees taken out where required

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