17 AGENDA lTEM Na - TO : POLICY & RESOURCES COMMllTEE

91

Subject, PROPERTY TRANSFER ORDER

NORTH LANARKSHIRE COUNCIL

Date: June 4, 1996

REPORT

Ref: LS/HM/G/LG/144

1 FROM: DIRECTOR OF PLANNING 8. DEVELOPMENT

THE LOCAL AUTHORIN (PROPERTY TRANSFER)(SCOTIAND) ORDER 1995

I n t rod uct ion

The Property Transfer Order makes provision for the transfer o f all properties to the new unitary authorities with any disputes being lodged with the Property Commission prior to 1 April 1996. A procedure for lodging Appeals was considered at a Meeting of the Policy & Resources Committee on 19 March 1996 and the Council delegated to the Chair authority to approve lists of Appeals to be referred to the Commission prior to 31 March.

One of the more major referrals relates to North Lanarkshire Council’s cloim on the former Strathclyde Regional Council’s Headquarters Complex which has been the subject of intense discussion over many months at the Joint Property Forum chaired by the Director o f Technical Services of South Lanarkshire Council and attended by a representative from the Property Commission. The Chief Executive’s Forum and the Directors of Finonce Forum have been kept advised of the discussions relating to this issue.

Backaround

Attached as Appendix 1 i s a paper identifying the properties which make up the former Strathclyde Regional Council’s Headquarters Complex extending to some 5 1,084 s q metres (55,000 s q feet) of which approximately 33% cons is ts o f accommodation held on lease at full rnarket rental value. A further 14% comprises accommodation within the former High School, o Grode A Listed Building which has been converted to offices bu! 1s riot considered to be particularly valuable office stock. This leaves a balance of 53% of the former +wir::iclrters‘ Complex which could be considered to be more marketable.

.. Valuation

An assessment of the, co;11*31 value of these assets and liabilities has been carried out on the assumption that there is no opportirriit\ to assign any of the existing leases in the foreseeable future. The current office market in Glasgow I S such that not only would it be unlikely that any of the leases could be assigned but it could take several years to dispose of the feuhold properties. Changes in the capital consent regulations mean that only 75% of any Capital Receipt would be available for expenditure in 1996/97 reducing to 50% in 1997/98. In addition, the offices which are currently leased ore expected to attract substantial dilapidation claims in the order of E 1.735M, f0.5M of which will require to be addressed in the short term.

The/

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The annual running costs incurred by Strathclyde Regional Council for the Headquarters' Complex amounted to some f5.5M but on the basis that the premises are left unoccupied, this cost can be reduced to E3.7M allowing for lease rentals at 100% and other running costs such as rates, security, maintenance, energy costs etc. at 50%. Any authority which wishes to retain staff within the Complex will incur additional costs which represent the other 50% of the running costs. North Lanarltshire Council has withdrawn i ts staff but would still retain a residual cost per annum of between €300,000 ond f350,OOO which liability could extend for several years.

The valuation of the Complex i s a particularly difficult exercise bearing in mind the complexity of the portfolio including as it does a ronge of leasehold properties, an unattractive Grade A listed building and o number of 1960 style buildings. The valuations in Appendix 1 indicate a range of volues from minus E3M to plus E8M allowing for a number of variable factors but the most likely achievable positive receipt would be towards the lower end of the range.

Poss i b le So I ci t io n

Given the ongoing revenue implications for all the Authorities and Boords, a sub-group of the Joint Property Forum was given the task of investigating a possible once ond for a11 settlement of this issue and its proposals are contained in Appendix 2. It i s suggested that Strathclyde House 4 be marketed and the proceeds of sale shared amongst 0 1 1 the Unitary Authoriiies/Boards having o sustainable interest in the Headquarters' Complex. In return, all the successor Authorities/Boords would surrender their rights and liabilities in the pool to the City of Glasgow Council. The proposal provides fo ra Capital Receipt up to E l M being shared amongst the respective authorities, excluding Glasgow, with any receipt over E 1 M and up to E2M being passed in total to the City o f Glasgow Council. Thereafter, any proceeds in excess of E2M would be distributed proportionally amongst all of the successor Authorities.

The Joint Property Forum agreed to set up a monitoring group to report back on a proposed marketing strategy and timetable for the disposal of Strathclyde House 4 and North Lanarkshire Council will be represented on this group.

Observations

1 ) Whilst significant in floor area, the Strathclyde Regional Council's Headquarters Complex i s not a particularly attractive portfolio comprising as it does of substantial leased properties, an unattractive Grade A listed building ond a number of 1960s style buildings.

2) In terms of the Property Transfer Order, all successor Authorities and Boards claiming a shore in the "pooled" property will incur obligations and liabilities which, for North Lanarkshire Council, ore estimated to be approximately f 300,000 i o E 350,000 per arinirm. These revenue charges could be incurred for a prolonged period of time.

3) The City of Glasgow Council will bear the cost of marketing, staff relocation etc. and woive any residuol charges to the other authorities. On the information available, and assuming a Capitol Receipt of f 1 M, North Lanarkshire Council should receive a payment of € 1 67,500.

Recommendation/

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Recommendation

The Committee is requested to:-

1 ) Approve the ogreement os discussed at the Joint Property Forum, see Appendix 2, and:-

2) Authorise the City of Glasgow Council to proceed with the morketing of Strathclyde House 4 subject to the condition that North Lanarkshire Council will receive o Capitol Receipt but incur no residual property costs relating to the former Strathclyde Regional Council’s Heodquorters Complex.

STANLN COOK Director of Planning & Development

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- 9 4 APPENDIX I

STRATHCLYDE REGIONAL COUNCIL DISAGGREGATION OF HQ OFFICES, GLASGOW

PROPERTY FORUM SUB-GROUP DRAFT DISCUSSION PAPER

INTRODUCTION

The Sub-Group has already produced a discussion paper advocating the general principles on which the SRC’s Headquarters ofice property should be disaggregated to the successor Authorities. Although there is a large degree of accord with the paper, final agreement on the disaggregation has not emerged due primarily to concerns over the equity of the disaggregation of not only the owned assets but also the leasehold liabilities. At the time of writing the first discussion paper, the position with regard to continuing occupation of the Headquarters by a number of Authorities was unclear and this tended to complicate discussions which were focused on the revenue expenditure aspects of the issue especially the interaction of fixed and variable costs and the liabilities of those continuing in occupation. Concerns in this regard were exemplified by a submission made by East Ayrshire which was also passed to the Chief Executives Forum. There was also pressure for an assessment of the capital value of the holding particularly in order to demonstrate to successor Authorities that an equitable arrangement was being proposed.

The direction which has been taken to date on this whole issue has probably proposed solutions on all sides which are too complex and too detailed. What is required is a robust solution which produces a once and for all settlement within a short and finite timescale.

The Chief Executives Forum has instructed that an attempt be made to produce agreement on this issue prior to 1st April 1996. The Directors of Finance Forum has also examined this issue and established a small working group to liaise with the Property Officers Forum on this matter.

CURRENT AREAS OF AGREEMENT

Following consideration of the initial Sub-Group paper, it appears that there is general agreement on the following.

1. The properties which make up the Glasgow pool viz. the properties listed in Appendix No. 1 with exception of Charlotte House which is to be treated as a Glasgow SubRegional property transferring to City of Glasgow Council in full.

2. The basis for calculating the extent of successor Authorities rightdliabilities viz. the ratio of resourced posts transfemng to each Authority for the pool properties to the total number of resourced posts as set out in Appendix No.2.

3. The annual running costs identified by SRC for each property (to be adjusted where necessary for ful l year equivalent, apportionment of aggregated costs etc.) as set out in Appendix No. 1.

4. The lease details of the leasehold properties, as set out in Appendix No. 3.

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5 . The most marketable properties in the portfolio are S4, S3 and S 1 1, provided these can be unlocked for disposal. These represent % by value of the SRC asset valuation.

METHOD OF ASSESSMENT OF INTERESTS - PROPOSAL

In order to bring transparency, comparability and equity to the process, it is proposed that the initial approach to disaggregation proceed through an assessment of the capital value of the assets and liabilities and that this process be based upon the following assumptions:-

1. The whole portfolio will be valued as if it were vacant and available for disposal at the 1st April 1996.

2. The liabilities arising through the leased properties be assessed to present value using the running cost figures produced by SRC and a discount rate of 10% with a final adjustment for end of lease dilapidations similarly discounted.

3. The variable running costs of the properties (viz - all costs except rent) be taken at 50% of the SRC operating costs to reflect the assumption of properties being unoccupied.

4. The SRC asset valuation of the feuhold (owned) properties can be used as the basis for assessing the market value of this element of the portfolio but requires to be adjusted to reflect the assumption of 100% vacancy at 1 st April 1996.

FEUHOLD PROPERTY

This comprises S1 - S11 inclusive. The SRC asset value which assumes continuation of existing operational use, is i21m. This requires to be adjusted to take account of the problem of disposal of such a mass of property being available at the same time on the market (375,000 sq.ft.).

.*. assume 5 years to achieve total disposal - straightlining of income/costs.

€21m 0.7885 €16.56~~1 i16.56m

- Current SRC asset value - Deferred 2.5 yrs @ 10% - -

Total annual running costs = € 2.3M Whereof 50% E 1.15

2.11 € 2.43m

- - = 2.5 yrs @ 10%

... deduct l ?xx im

... net market value L.uJim

LEASEHOLD PROPERTIES

The assumption implicit in the approach is that there is no opportunity to assign any of the leases in the current market in the foreseeable future and that the opportunity for any transactions involving these properties would be further impaired in a market which also had available within it

the remainder of the HQ ofice stock, the proposed re-development of Portcullis House and the Phase I refurbishment at Anderston.

The variable running costs are taken at 50% of current operating costs, and again the discountlpresent value rate of 10% is applied.

The discounted liability for dilapidations is based on the level of costs being incurred on . termination of the current leases at Anderston, again discounted at 10% to the end of the lease. No allowance has been made for repairs or insurance or security, where these are not included in SRC figures.

Valuation of Vacant Leasehold Properties

Building Annual 50% 50% Total Periodto Multiplied Dilaps Total

lease (Yrs) Cash Rent Rates Other Costs Expiryof @ 10% Estimate Negative

SI2 (Dalian) €610,300 Richmond Exchange 507,677 Blair Court 85,000 Legal House 73,500 Eagle Building 181,320 May House 129,600 Hannah House 72,000 Ranken House 73,600 Elmbank Chambers 32,500

€120,000 €72,000 €802,000 160,000 97,000 765,000

12,00O(E) lO,OOO(E) 107,000 19,000 37,000 129,000 51,000 140,000 372,000 58.000 125,000 312,000 17,000 47,000 136,000 32,000 24,000 130,000

to be provided

14 17 9

15 4 2 4 2 4

7.4 8 5.6 7.6 3.2 1.7) 3 .2) . . 1.7) 3.2

f0.5m € 6. lm . O.5m 6.2m 0.16m 0.8m 0.075111 I .Om

1.19111 I .03m .... f0.5m A 0 . 4 4 m 0.22111

10 be added f 16.98111

... Total capitalised liabilities (-) €17m (excluding Elmbank Chambers, and allowances for repairs, insurance, security etc.)

SENSITIVITY ANALYSIS

Given the number of variables in the calculations, it is helpful if some form of sensitivity analysis is carried out on all the calculations.

Feuhold Property To reflect a very positive (but unrealistic) view of both the economy in general and the property

to 5% and halfing the total disposal period to 2% years. market in Glasgow in particular, the assumptions could be varied by taking the discount rate down - _

On this basis, the total value of the feuhold property becomes €1 8.4m.

Leasehold Property In this case, optimism can be reflected by assuming that all of the long leases (Dalian, Richmond, Blair Court, Legal House) will be assigned in 5 years, that the discount rate is 5%, that the “other costs” can be reduced to 25% of their current level and that future dilapidations can be ignored. In the case of the remaining leaseholds, a similar adjustment to “other costs” can be made.

If these variations are applied to the calculations, then the “negative value” is reduced to -€10.3m (again excluding Elmbank Chambers and allowances for repairs, insurance, security etc.).

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CONCLUSIONS

It could be argued that the value of the SRC Glasgow HQ pool lies between -€3m to + €8m. It is clear, however, that there is very limited opportunities for unlocking capital receipts and that the leasehold properties are a very significant liability for the successor Authorities even in the long term. Glasgow City Council is the only Authority which can bring the leasehold properties into beneficial use but this would be achieved at a significant cost to it.

The adoption of a capital valuekapitalised costs approach does permit a more effective means of measuring the real value of the pool. It could also provide the basis for a once and for all full and fmal settlement between the Authorities. Agreement to the process by the Directors of Finance would be required at the outset.

A major factor in achieving this form of agreement could be the early release and disposal of S4.

W A B B 25.03.96 (dops0201)

(94-95 Enpendttun flgutes) Verskm 15 (07tWf96) 1 - ,

Sbathcidc House 2 Sbathctyde House 3 Strathclyde House 4 Sttathctyde House 5 Slrallrclyde House 6 Strathclyde Home 7 Strathdyde House 8 Strath&yda House 9 S(raulcly& House ( 0 Sbathclyda House 11 Strathclyde H o w 12 Rlchmond Exchange Eagle Buodlng May Hwss Hanneh House Ranken House Legal How8 Blalr Court, 9orron St Elmbank Chambers

OfT.Acoom Off,Aocom Olf.Accom OfFAccom 0fl.Acwm 0fl.Accom OnAocom OffAccom ORAcoom Off.Accm OfLAccorn

Roads Roads DIT OIT DIT

Soctal work Clesnlng Roads

C360,963 Li09.503 L1110,684 E29,OaS €92,334 E341 84 E67.044 m,915 E17,921 c32.745 U43,669 MIB,000 c102,961 €1 15.m E34,416 ra4,QQrl €38.302 U4,968

WA NIA N/A NIA NIA NIA NIA NIA NJA NIA

C613,389 C506,677 U 81,320 C l 41,705 tZ4,600 L06,480 m,-

C17,523

C4,432 €2,352 €6,329 C2,519 c4,720 €2,475

NIA f4,969 €3,242 s7,350

NIA NIA NIA NIA

c5,499

(C)

€122,312 E25,015 LIS.119 f.8,661 Mo,752 Cl1.370 €12,595 C l 1,965 fi,m S8.033 r55.509 €52,765 c15,aoo MO, 126 L12,128 €221,215

(C)

€971

E168 €15,400 C210,907 f138,058 €60.215

m,972

f620,975 C 172.21 6 f 160,BSO C50,417

C57,638 €1 13,598 €60,080 C44.548 C 71,067 f1,000,a30 €1,016,608 C569.520 €506,029 €212,w Cl08,105 r t85,774 f24,960

€0

f154,317

NIA - No1 Applicable (A) Figuns held by DARS - Only Total available for whole of Gtasgow SubRegIon E402,448 (e) f lgum held by Chiat EKSO'S -Only Tolel avrflnbfa for SIraVlclyde House cornpkx E127,397 (C) figure lnduded In'Othan' S&Im as part of the uervlce charpes (D) Flgure Included In RenVLeas (E) Flgm includcd In Was

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STRATHCLYDE t - I .Q . 'POOLED' OFFICE ACCOMMODATION

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APPENDIX 11

PROPERTY OFFICERS FORUM STRATHCLYDE REGIONAL COUNCIL

DISAGGREGATION OF HQ OFFICES, GLASGOW RESOLUTION OF ISSUE

Fu nda men tal Approach

After considerable discussion, agreement was reached at the Property Forum meeting on 25 March 1996 that the approach set out within the Discussion Paper dated 25 March 1996 should be adopted. In particular, it was agreed that a once and for all settlement of this matter should be recommended to all of the successor Authorities, based upon an acceptance that an equitable measure of the capitalised net value of the pool portfolio is around the average point of the values identified in the Discussion Paper i.e. + €2 million, after adjustments to take account of the costs associated with Elmbank Chambers, repairs and security expenditure. It was also noted that British Land, the owners of the adjacent property, had continued to express an interest in the purchase of S4.

Details of Settlement

Having regard to the above, therefore, it was agreed that the Property Forum would recommend to all of the successor Authorities that their rights and liabilities in relation to the disaggregation of the Strathclyde Regional Council Headquarters offices property pool in Glasgow be resolved on the following basis:-

1.

2.

3.

4.

The pool comprises the properties identified in Appendix No. 1 of the Discussion Paper under exception of Charlotte House, for which Glasgow City Council shall become solely liable.

In return for a share in the proceeds of the disposal of S4, all of the other successor Authorities shall surrender their rights and liabilities in the pool to the City of Glasgow Council which shall become solely responsible and liable for the pool.

The proceeds from the disposal of S4 shall be distributed in accordance with the percentage shares identified in Appendix 2, subject, however, to the following:-

a) The proceeds up to €1 million shall be distributed amongst all of the successor Authorities except the City of Glasgow Council.

b) The proceeds of sale over €1 million, up to €2 million, shall pass in total to the City of Glasgow Council;

c) Any proceeds in excess of €2 million shall be shared amongst all of the successor Authorities in accordance with the percentages identified in Appendix 2.

In order to facilitate the disposal of S4, all Authorities not requiring continuing provision of accommodation in Glasgow shall endeavour to remove from the pool properties within the month of April. The City of Glasgow shall also endeavour to remove from S4 at the earliest opportunity.

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j. The availability of accommodation and the charge for it will be the subject of separate negotiations with those Authorities continuing to occupy any parts of the pool, after 1st April. There will, however, be no charge made to any Authority which withdraws from the complex prior to 1 May 1996.

6. The disposal of S4 shall be undertaken by the City of Glasgow Council on behalf of the successor Authorities which can, if they so wish, appoint a Sub-Group to monitor, advise and liaise on the disposal and on any negotiations which are necessary in order to bring a transaction to completion.

Recommendation

The Property Forum recommends the above settlement to the Directors of Finance Sub-Group and the Chief Executives Working Group for approval.

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W A B B (dops0207) 29.03.96