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A Brentwood land deal plan so huge that if it went wrong could have endangered the solvency of Brentwood Borough Council is now being rolled back – potentially at the cost of taxpayers.
The plan – understood to be a 55-year hotel deal based on an income strip investment - is similar to a simple sale and lease-back arrangement.
It is understood that the deal, if it went well across the entire period, would earn the council a reasonable sum to help fill funding gaps for its future projects. If it went wrong, the council could be liable for millions of pounds.
Brentwood Borough Council wanted to enter into a 55-year lease for the hotel from Municipal Partners to ensure that it does not need to raise capital for the development – but the strength of their covenant would have enabled a developer to successfully forward fund it.
The council would then have an option to purchase the remainder of the long lease – 195 years – for £1 at the end of the 55 years.
In an income strip investment the benefit to the investor, so it goes, is that the liability for repair and operation of the asset usually sits with the tenant – ie. Brentwood Borough Council – along with the future residual value, allowing the investor to “strip” the income out of the asset.
The investor benefits from relatively stable long-term income.
The benefit to the council, equally so it goes, is that at the end of the lease term it has the option to acquire the remainder of the long lease for £1.
The passing rent with the long lease is frequently less than market rent, enabling the council to sublet at a rent higher than the rent payable to investors, allowing it to take a “profit” rent. It is believed that the collateral for this deal was a covenant on all of Brentwood’s assets.
However, it is believed that after spending large sums entering the deal, the council now faces potential legal and professional fees to abort it.
Without explicitly indicating this, the Liberal Democrats election literature is believed to be referring to this council deal.
In it they say: “Brentwood’s Tories voted for a highly risky investment scheme, backed by our council tax monies. The sums involved were so huge that if the scheme went wrong it could have endangered the council’s solvency.”
The party claims that the council has since indicated that it may not be pursuing this proposal. However, a reversal of their decision has yet to be taken formally.
Lib Dem councillor, Mark Lewis, in the election literature, said: “I have worked in the City of London for 37 years including at senior levels in the international financing markets.
“The Tories approved a hugely speculative financing scheme, one of the most inappropriate transactions that I have seen during my entire city career. The residents of Brentwood deserve much better.”
It claims that not a single councillor has been able to talk about the plans due to a non-disclosure agreement around the deal. It adds that this has subsequently led to disquiet that councillors do not have enough “knowledge and understanding of any such agreements”.
In November 2020, Councillor Mark Haigh (LibDem) proposed a motion that, he said: “This council resolves that before it enters into any further non-disclosure agreements relating to income generating projects, the agreements are disclosed to, and discussed by, all elected members prior to execution.
“It is imperative moving forward that elected members have full knowledge and understanding of any such agreements to protect the interests of investing residents of this borough.
“Furthermore, this council believes that in dealing with the responsibilities of investing residents’ monies, a full and open understanding of the risks and rewards of any proposed investments within the boundaries of pre-agreed strategic policies and an agreement by members is a matter of priority.”
A spokesperson for the council said: “Brentwood Borough Council regularly reviews commercial opportunities that can contribute to the delivery of local services.
“Any proposal that is formally considered by the council must always be subject to rigorous and independent legal, governance and financial assessments.
“For commercial sensitivity and confidentiality reasons, required by law in such cases, we do not comment on specific opportunities.”