Cabinet Member Decision 6 November 2017 - Commercial Investment Proposal
- Meeting of Growth Overview and Scrutiny Committee, Friday, 1st December, 2017 2.00 pm (Item 33.)
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The following decision taken by the Cabinet Member for Finance on Monday 6 November 2017 has been the subject of a call-in request by Councillors Ashley Baxter, Phil Dilks, Charmaine Morgan, Bob Sampson, and Ian Selby, in accordance with 6.19 of Article 6 of the Constitution on the following grounds:
REASONS FOR EXERCISING CALL–IN:
In April this year Cllr Adam Stokes led a ‘Call-In’ against a decision by the then Cabinet Member for Finance to spend £2 million of this Council’s resource to purchase an office building outside South Kesteven, in a neighbouring authority’s area.
Those calling in the decision were – and remain – all members of the administration and included four current Cabinet members including Cllr Stokes. They argued strongly that SKDC should invest in South Kesteven rather than outside the District to support our local economy.
They also pointed out that the April decision was taken with inadequate/sufficient consultation and insufficient consideration of all options/relative weighting of options and that the decision was
“a big risk and could be spread far better than the present proposal.”
However, seven months later, Cllr Stokes, has himself made a decision to spend £3 million of this Council’s resource to purchase an office building outside South Kesteven.
His decision has been taken behind closed doors, without any reference to any of the Council’s Overview and Scrutiny Committees, and even any discussion by Cabinet, all of which goes against the stated aims and ethos of this Council to be ‘open and accountable’ in its decision-making.
Spending £3 million outside South Kesteven appears to be contrary to the principles of ‘InvestSK’. Indeed, the idea that the Council was even considering making such a substantial investment outside South Kesteven was not mentioned in the recent launch of “InvestSK”, nor was it mentioned in the Council Leader’s recent public statements at Stoke Rochford and elsewhere relating to plans to grow the local economy.
Although not listed as a ‘key decision’ - and despite commercial sensitivities - we believe that an unprecedented and potentially controversial decision to spend £3 million of SKDC taxpayer’s money to purchase a building outside of South Kesteven should only be considered following proper pre-scrutiny and the opportunity for public awareness and informed debate.
Non Key Decision:
That approval is granted in accordance with the Investment Strategy.
A copy of report PD060 (contains exempt information under paragraph 3 of Schedule 12A of the Local Government Act 1972) and associated plan together with a copy of the decision notice is enclosed.
To not support the call-in
The Chairman explained the process that would be followed during the meeting and outlined the possible conclusions that the Committee could reach:
· To support the request for the call-in and recommend that the Cabinet Member for Finance re-considers the decision
· To not support the request for call-in and uphold the decision made by the Cabinet Member for Finance
· To refer the decision to Council (only if the Committee found that the decision did not comply with the Council’s budget or policy framework)
During discussion, Committee members were reminded that their deliberations needed to relate specifically to the decision that had been called-in and not whether they agreed with the principles in the Commercial Investment Strategy.
Early debate centred on the location of the commercial property that was the subject of the decision, as it was not within South Kesteven. Members referred to a commercial investment decision that had previously been called-in by the current Cabinet Member as it was outside the district, querying what had led to the change in perspective. The Cabinet Member explained that his decision complied with criteria in the Commercial Investment Strategy and followed exhaustive searches of potential investment opportunities within the district, none of which had been found to have the level of return that could be provided by this property. Some members made reference to the payment of business rates, which would be received by another local authority.
Reference was made to the Invest SK programme and its ambition to promote investment within the district. The Committee was advised that while Invest SK was designed to stimulate growth in South Kesteven, the objectives were different and so it would not offer the same commercial return as the proposed purchase.
There was some discussion around the payback period for the purchase with some members expressing concern because the period for recouping the purchase price exceeded the duration of the leases held by the existing tenant. While this was acknowledged a range of scenarios had been modelled, including the tenant activating the break clauses with their leases, which had indicated that the purchase was still viable. There was also assurance expressed that if the rental income did cease, the Council is investing in an asset that should increase in value over time and would also enhance the net worth of the Council.
It was noted that if the tenant wanted to leave, it was required to give 6-months notice and that the two leases did not run concurrently. This meant that there would be a minimum of 6-months to market one part of the facility, with a slightly longer lead-in to market the second part. The arrangement of the premises also meant that they could easily be remodelled into two or four units. Members were advised that the current tenant had made significant investment in the fitting-out of the office accommodation, which indicated a commitment to staying put.
There was some discussion about the financing of any such acquisition, with enquiries about whether the Council could borrow money to protect the Council’s reserves. The Committee was advised that whilst it would be possible to borrow to fund any such purchase, it would diminish the level of return that could be achieved.
Further debate ensued on ensuring best use of council tax payers’ money. As commercial investments were being funded through reserves members felt that they should be greater scrutiny of prospective acquisitions and suggested that Council Tax payers may instead prefer to see a reduction in council tax instead of it being used to make a commercial investment. Some members disagreed and suggested it was the Council’s responsibility to get the best possible return on its Council Tax, which it felt would most effectively be achieved through the implementation of the Commercial Investment Strategy. Comparisons were drawn between the return that was achieved from treasury management investments against the yield from rental income. Members were also mindful about the possible risks of making any investment, whether it was in commercial property or through the treasury management strategy.
The Cabinet Member for Finance indicated that the key reasons that formed the basis of his decision were the strong location of the investment property; the covenant strength of the tenant, which he felt exceeded that of the previously proposed acquisition; the opportunity to boost the diversity of the Council’s investment portfolio with the acquisition, thus spreading the risk and the opportunities to remodel the premise if the existing tenant decided to quit that could make up to four rentable units.
Members were interested in how the Council became aware of the investment opportunity and the due diligence that had been carried out around its acquisition including inspections and site visits.
A suggestion was made that the Council could look at investing in purchasing or developing residential properties within the district, however they were reminded that if they were purchased from within the Housing Revenue Account then they would only be available to let out for social rents and would be subject to the right to buy. Gravitas Housing, the Local Authority Controlled Company created by the Council, was working on delivering housing within the private sector. Members were also advised that investing in housing for market rental would not comply with the terms of the Commercial Investment Strategy because the maximum tenancy would be for three years and not the required five years. Suggestions were also made about other industries in which the Council may be able to identify prospective investment opportunities, but it was noted that the most appealing were those that would have light-touch demands in terms of day-to-day management.
Some members indicated that they had hoped to be able to ask questions about the proposed investment when the Cabinet Member’s decision was reported at the Cabinet meeting on 9 November 2017 and were disappointed that they had not had the opportunity.
A majority of members agreed that they did not support the request to call-in the decision made by the Cabinet Member for Finance. Consequently the decision came into force with immediate effect.
- Decision Notice, item 33. PDF 96 KB
- ProposedinvestmentstrategyAppA, item 33. PDF 118 KB
- Restricted enclosure View the reasons why document 33./3 is restricted
- Restricted enclosure View the reasons why document 33./4 is restricted
- Restricted enclosure View the reasons why document 33./5 is restricted
- Restricted enclosure View the reasons why document 33./6 is restricted