Tuesday, October 4, 2022

News: Why is Rotherham Council planning to fund Forge Island itself?

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If Rotherham Council decides to fund the Forge Island regeneration scheme itself, it will save nearly £50m compared to an externally funded deal drafted in 2018.

Different routes to fund the key town centre project risk further delays and potentially losing key tenants such as Arc Cinemas.

Rothbiz revealed recently that funding for the key town centre project was under review with the funding available to the Council's delivery partner, Muse, for the delivery of Forge Island "significantly reduced."

Forge Island is a Council-owned site which sits between the River Don and South Yorkshire Navigation Canal. Led by Muse Developments, it will host a new leisure scheme with an 8-screen boutique style cinema, modern hotel, food and beverage (F&B) outlets and car parking. It is set to be completed in 2024.

The Council selected Muse as the preferred partner in 2018 and signed a "Development Agreement for Lease." Contracts have recently been updated for the scheme showing a price of £46.8m.

Further council documents explain: "Very recent volatility of the financial markets and the challenge this may now pose to private funders providing up-front capital within the requirements previously agreed by the Council has resulted in Muse (in line with the Development Agreement for Lease) assessing delivery arrangements and proposing options for the Council to consider, including the Council acting as funder of the whole or part of the development."

Rising inflation has been cited and Muse was informed last month that the markets were not prepared to lend on the terms previously agreed.

The Council's cabinet is due to meet on October 17 where it will "choose from the full range of options for delivery including further supplementing or replacing what was expected to be privately raised capital with the Council's own borrowing and capital resources."

The proposal for the Council to fund the scheme does not reduce the potential capital cost of the development, however, it does allow the Council to maintain the current projected development costs at the current secured prices. It also allows the Council to maintain the current third-party tenants (Arc Cinema, Travelodge and the recently announced restaurants via Thistle Group) that provide the ongoing revenue income to enable the Council to finance the project over the project life.

New council documents show that the 2018 deal had the headlease, that would have been paid to the private sector funder, increasing with CPI (inflation) at 3-5%. This would be replaced by with the cost of the Council’s borrowing, financing costs, which do not inflate and can be structured across the life of the project in the most cost-effective way.

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Council documents explain: "It is anticipated that based on current financial markets, that this option would save the Council around £49m over the life of the project. Due to the benefit of Council borrowing over the private sector funder headlease that would be subject to inflation."

The UK CPI rate of inflation hit 10.1% earlier in 2022. In 2018, before the UK left the EU, the global pandemic and the war in Ukraine, the rate was nearer 2%.

The Council document concludes: "Given the changes in the financial markets that have negatively impacted the original proposal to secure private sector funding, the option of Council borrowing to fund the development becomes the most financial beneficial, stable and deliverable within the confines of the public purse and the Council’s delivery aims for the site."

Options for the Council funding the project include undergoing a full re-procurement but the authority says that this "would result in considerable delay to delivery, and the very high risk that scheme could not proceed at the current tendered price." Similarly, a reduced procurement route "would not allow an alternative developer a reasonable opportunity to assemble and agree the components necessary for the scheme to be costed and delivered."

Another discounted option would be to adjust the terms of the development funding agreement with the funder through, for example, extending the term of the head-lease or increasing the initial head-lease rent.

A direct award to Muse looks to be the desired option, indicated by recently published tender documents.

The council is using a Voluntary Ex-Ante Transparency Notice (VEAT) to allow the market to challenge the decision to issue a contract to Muse without first having published a tender notice.

Forge Island website

Images: Muse / RMBC

2 comments:

Anonymous,  October 4, 2022 at 11:39 AM  

The council doing the right thing here.
This will insure it will be built.

Anonymous,  October 4, 2022 at 6:56 PM  

I will believe when I see it , Rotherham council have a history of demolishing things but not rebuilding.

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