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Project Ref: PSP SBC/1

Doc Ref: 001/FS

December 2012

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Town!Hall!and!wider!development!site!2!Scarborough!

e1"2!Explore(Report!

Potential!development!of!the!wider!Town!Hall!site!and!delivery!of!new!Council!office!accommodation!

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Document Control Sheet

Project!Name:! Scarborough!Borough!Council!Project!Ref:! !! PSP!SBC/1!Report!Title:!!! Development!overview!!Doc!Ref:! !! 001/FS!Date:! !! December!2012!

Name Position Signature Date

Prepared by: Adam Cunnington

Managing Director AC 14/12/2012

Index

1. Introduction 3 2. Current proposals 3 3. Current joint venture arrangements 6 4. Current financial arrangements 7 5. Office accommodation review 7 6. Masterplan/capacity study 9 7. Commercial overview 13 8. Development strategies 17 9. Potential future working arrangements 18 10. Timescales and next steps 18 11. Summary 19

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1. Introduction This paper has been produced by PSP Scarborough LLP (the joint venture vehicle created between Scarborough Borough Council and Public Sector Plc) and represents the initial stage of a feasibility study into the potential of the Town Hall and wider site for development and possible options. Its title of ‘e1- Explore’ is part of the four stage process used by PSP to work projects from initial inception through to delivery. It is not the presentation of a detailed masterplan and further work will be required beyond this report to progress the feasibility study to the next stage. The report considers the redevelopment proposals for the site and the links between this project and the Council’s need to develop a new office accommodation strategy. The offices currently occupied by the Council are inefficient to occupy, costly to run and carry a significant backlog maintenance liability. It is essential therefore, that a solution to housing the Council is found in the near future. This report takes into account recommendations from Cabinet of 11 December 2012 regarding the office accommodation strategy and options. Hand in hand with the need to address the office accommodation issue, the Council buildings also sit within the boundary of a major regeneration site that stretches from St Nicholas Street to Foreshore Road. The total site of some 4.2 acres provides a significant regeneration opportunity to improve the linkages and connectivity between the High Street and the seafront. This can make a significant contribution to economic development in Scarborough. Such a development is envisaged in the adopted Planning Development Brief for the site. In an ideal world, the value unlocked from the Council’s land ownership stake in the site will be sufficient to fund the works identified to deliver the agreed office accommodation strategy. This would mean that the project could be capital neutral and would, at the same time, do away with most of the backlog maintenance issues and generate ongoing revenue benefits from providing office accommodation that is cheaper to run and more efficient to occupy. This paper will explore the potential economics of the broader strategy and its deliverability. It will also consider the current position with regard to delivery of the strategy and explore ways in which the newly established partnership with PSP can help to facilitate delivery of the project. 2. Current proposals The site, of approximately 4.2 acres, is predominantly in the ownership of Scarborough Borough Council with the HCA owning a parcel adjacent to Foreshore Road and a number of small third party ownerships in the northern part of the site. The Council owns and occupies a substantial part of the site, including the historic Town Hall on St Nicholas Street. The Council uses are predominantly on the upper part of the site. The lower part of the site, fronting the sea contains the Futurist Theatre and other leisure uses. Opportunities for land assembly will be explored in due course. The image below shows the extent of the site in context. Below that, the plan shows the current mix of uses on the site.

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* red line shows approximate extent of SBC and HCA land ownership

The ownership of the site is shown below. * red line shows extent of planning brief boundary

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Plan 9: Land Ownership

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Current land uses are shown on the plan below.

* red line shows extent of planning brief boundary

Most of the buildings on the site including the Council’s own 1960’s office block and the Futurist Theatre require significant investment to bring them up to current standards. Consequently, a development brief has been prepared and adopted for the site with a view to bringing forward comprehensive redevelopment of the site as a whole. This planning development brief was subject to full consultation prior to its adoption and sets a framework for the long term development of the site. Further, broader regeneration objectives, such as forging new and stronger links between the High Street and the seafront can be met through the redevelopment of the site. The development brief anticipates a mixed-use scheme with substantial leisure and residential elements. An illustration of such a scheme, one of several potential options worked up through development of the planning brief is shown below;

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Plan 7: Existing Land Uses

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* red line shows extent of planning brief boundary

Since this information was prepared it has now been agreed that the Council will no longer vacate the site and will remain there in the long-term. EC Harris has been advising the Council on potential relocation and efficiency strategies. A range of options is being considered. Each of these has differing impacts upon the potential masterplanning of the site and the way in which enabling and capital generating development might come forward. Further detail is given on the office accommodation strategy in Section 5. Consideration has been given to an initial masterplan approach, primarily to establish the potential capacity of the site for development rather than to produce a fully resolved masterplan. This is set out in Section 6. 3. Current joint venture arrangements Agreement has been reached between Scarborough Council and the HCA to work jointly to bring forward proposals for the site. With the establishment of PSP Scarborough LLP, there is an opportunity to introduce the LLP to the partnership with a view to establishing the extent of added value that can be generated through its engagement on the project. The involvement of the HCA in this project arose for two reasons; firstly through their inheritance of property assets on the site from Yorkshire Forward and, secondly, through their desire to support ongoing regeneration within Scarborough which is considered to be sufficiently high a priority for them to commit finance as well as land resources to the project. The establishment of a joint venture between the Council and the HCA had been agreed and funds released to the Council, but the operation of the vehicle and the activities that it would undertake were largely held in abeyance whilst the issue of the Council’s office accommodation strategy was resolved. The impact of this is that there were no hard or fast plans about what the JV would do and there is scope to adjust this to suit any strategy going forward provided it meets the primary

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Plan 15: Indicative Proposals – Option A (Land Use at Ground Floor)

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regeneration objectives that drove the HCA to make their commitment in the first instance. A project board has been established an it is envisaged, once there is clarity around delivery of the project, that this will be the primary vehicle for ongoing governance of the project. 4. Current financial arrangements Under the terms of the joint venture agreement with the HCA there was a commitment on both parties to commit land assets and cash to the vehicle. It was intended on the basis of the scheme anticipated at the time, that the HCA would commit £3.25M which they have done and it is currently held by SBC and SBC would commit a further £2M in cash to the project. It is assumed that the priorities for repayment at the end of the project would be to repay this debt and then share any profits on an equitable basis. 5. Office accommodation review As noted earlier, EC Harris has been providing advice on the establishment of an accommodation strategy for the Council. This was presented to Cabinet on 11 December 2012. It is a given that the historic Town Hall will be retained for civic functions and to house a proportion of the Councils staff. Beyond that, a range of options exists for accommodating the balance of the staff. These options were reviewed to establish which offered the best benefits case and were capable of accommodating the necessary numbers of staff.

Of the options set out above, it was considered that Options 3/4 and 5 presented the most viable solutions. Option 3/4 could be accommodated within the masterplan framework that has been developed and is shown on the plan below. This is located on the site of the current King Street Car Park. It would be simple to deliver without any disruption to current

1!• Recon)iguration!of!the!town!hall!and!contact!centre!and!of!21/22!into!modern!of)ice!space!

2!• Recon)iguration!of!the!town!hall!and!depot!with!21/22!for!3rd!parties!(PCT!etc)!

3/4!• Recon)iguration!of!the!town!hall!and!standAalone!newAbuild!on!car!park!

5!• Recon)iguration!of!the!town!hall,!extension!to!the!rear!of!the!contact!centre!for!of)ices!and!move!contact!centre!to!21/22!

6!• Recon)iguration!of!the!town!hall!and!provision!of!new!of)ice!space!requirement!offAsite!

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operations and could be occupied once complete. It does have the impact though of taking up a major block of developable space that could otherwise be sold to raise funds for the project.

Option 5, which seeks to maximise the use of the current contact centre building, also maximises the available land for redevelopment. This ought to produce both a cost effective solution for the new building and create the greatest possible area for redevelopment. There remains technical work to be done on the solution to test, for example, the ability of the Contact Centre building to be extended sufficiently that it could accommodate the requisite amount of office space and the cost of so doing. However, a potential solution to its enlargement is shown below.

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Such a scheme could present a new front door to St Nicholas Street, a new public space within the Atrium and a route that could allow for pedestrian flows through the atrium and on to the lower levels of the site. Delivery of the office scheme is contingent upon the capital that can be unlocked from the remainder of the site and this solution leaves the largest possible area for redevelopment on the remainder of the site. It may also offer scope for the Council to control some retail frontage along St Nicholas Street that could provide additional revenue income. Preliminary indicative costings have been prepared for the preferred options. These suggest that option 3/4 could cost in the region of £3.5M to deliver and option 5 circa £2.74M. Clearly, these will require further and more detailed analysis, but the benchmarks suggest that the outturn costs are broadly in the same order of magnitude as the potential values that might be generated. EC Harris also investigated the overall benefits case of the preferred options. This analysis suggested that Option 3/4 might generate a benefit of £4.9M over fifteen years and Option 5 might generate a benefit of £4.0M. This takes into account both capital and revenue benefits accrued over the 15 years of the analysis. It is considered that the best development outcome is generated from Option 5, but that either option is capable of meeting the long term needs of the Council. Whichever option is taken forward, the masterplan framework developed is capable of accommodating either of them and both will be reflected until such time as a fix is agreed. 6. Masterplan/capacity study A key factor in establishing the economic viability of the broader project is to achieve a cost neutral outcome for delivery of the replacement office accommodation. The work noted above has begun to establish the likely order of cost required to deliver

Option 5!

Town!hall!

Atrium!

Extended!and!Refurbed!Contact!Centre!

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the preferred options. This needs to be set against the potential value that might be generated from the remaining land on the site. At this stage, it is not possible to be definitive about the overall viability of the project, simply to establish whether there is a reasonable likelihood that a viable scheme might be capable of being achieved if the scheme is developed further. In order to ratify the HCA’s investment in the project, in March 2012 Jones Lang LaSalle were instructed to produce a high level appraisal of the development potential of the site. This was based upon assumptions around uses and densities and without a masterplan to rely on. It also assumed release of the entire site for development since, at that time, the Council were seriously considering acquiring an existing office building and vacating the site entirely. As a result of the change in project baseline it was necessary to establish more clearly what the potential capacity of the site might be and, thus, to establish the value that might be driven from such a development. The best way to test the capacity of the site was to produce a high level masterplan framework. The purpose of such a plan was not to try and resolve all of the complex issues that a fully considered masterplan for the site would need to do, but to establish in broad terms how much built form the site might be capable of containing. Whilst the plan is obviously not the finished article, it does need to reflect a layout and built form that could be capable of being delivered. In this way, it also serves to set a benchmark in terms of a development if the value of the scheme is carried forward into further analysis. On this basis, the key point to carry forward from the analysis is that a development of the scale and nature shown on the plans is likely to be required in order to generate sufficient value to unlock the remainder of the broader project. This early plan, does not have the benefit of extensive consultation, is shown below. It contains a mix of uses that is broadly consistent with the adopted planning brief (which was subject to full consultation prior to adoption) and seeks to resolve the issue of connectivity between the High Street and the seafront by encouraging pedestrian flows along Newborough and Eastborough and into the site. The significant fall from St Nicholas Street to Foreshore Road make direct top to bottom routes challenging whilst at the same time presenting the risk that pedestrian flows might be diverted away from Newborough, thus exacerbating the decline of this street. A solution that seeks to bolster flows below the High Street and acts in a complementary rather than competing way is likely to bring about the greatest regeneration benefits.

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The layout above shows new buildings in red/orange, retained buildings in yellow with new open spaces in green and the connectivity within and to the site highlighted with arrows. The masterplan above shows Option 5, but, clearly, is capable of accommodating Option 3/4 by using the block in King Street as office space. The potential layout of the site is quite complex three dimensionally since the significant fall across the site allows uses to be stacked three dimensionally. The block renderings below give a better indication of the potential mix of uses and how they inter-relate. Views are shown from a number of different angles and show how the uses interrelate.

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In these images, retail is shown in red, leisure in dark blue, residential in light blue, hotel in buff and retained buildings unshaded. As noted the complexity of the site is driven, in large part, by the significant fall down towards the seafront. Thus, to gain a clear understanding of the way the site could be put together it is necessary to understand the constraints and opportunities afforded by the cross-section through the site.

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This shows how uses can be stacked and how elements like the larger leisure elements and car parking can be accommodated on the site with minimal visual impact.

On the basis of the sketches shown above it is considered that up to 180,000 sq ft of new development could be accommodated on the site together with circa 100 car parking spaces. There is some flexibility in the disposition of various uses within this total and this is an area that will require further market testing and analysis in order to arrive at a market focused and deliverable mix. The next stages in the development of a masterplan for the site will need to include the preparation of a detailed brief for the designers and technical teams, a wide-ranging consultation exercise and a robust review of constraints and opportunities to ensure that a well considered and deliverable plan is created. 7. Commercial overview (costs, values and budgets) The importance of producing a layout at this stage was to understand how much value the site might be capable of creating and whether this went some or all of the way towards meeting the likely cost of delivery of the preferred office strategy. The work undertaken by EC Harris suggests that a budget of £2.74M is necessary to deliver the reconfiguration of the Contact Centre building for occupation as office space to replace the 60’s block at the rear of the site. A new build project on King Street car park is likely to cost in the region of £3.5M but also has the impact of reducing the developable site area available to fund the scheme.

Proposed

Existing

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An analysis of the scheme shown above suggests that this mix and density of uses might generate a residual land value in excess of that which was previously identified for the site. The table below shows the basis of this appraisal. It is based upon Option 5 in order to demonstrate the potential maximum land receipt that might be developed. Residual Appraisal

Gross development value £27.7 million

less

Construction, fees and selling costs £18.15 million

Demolition costs £0.85 million

Developer’s profit on cost £4.6 million

Total costs £23.6 million

Total land value £4.1 million

The above figure of circa £4.1M is still highly qualified, but gives some indication of potential value that the site might generate if the full range of uses shown on the illustrative plan could be delivered. Clearly, any reduction in total square footage or change of balance of uses towards less valuable uses will reduce this potential figure. The £4.1M shown reflects a potential return to the land owners. It does not include for the re-provision of the Council offices, which will need to be funded from the land receipt. Further market testing is required, not so much in terms of the mix of potential uses, but the quantum of each particular use. This is a large scheme for Scarborough and the amount of floorspace it could create for the leisure and retail uses represents many years worth of demand within the town. Consequently, further engagement with the market will be required to establish potential demand and uptake. By way of context, Jones Lang LaSalle prepared a market overview for their March 2012 report and it is summarised below for reference;

Offices Scarborough is a regional office centre within North Yorkshire, in the main providing space to regional occupiers. The office market in Scarborough can be split between units provided out of town, mainly at Scarborough Business Park, and that which is provided in town, mainly in converted properties.

The central Scarborough office market is characterised by converted buildings to provide secondary office accommodation attracting local occupiers. In general the standard of accommodation provided is of a good

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standard however not of a grade A standard with perimeter wall trunking and suspended ceilings. Consequently the rental values in the Town Centre tend to be less than those achieved for space at Scarborough Business Park.

Retail and leisure Scarborough is a regional retail centre within Yorkshire serving a catchment population which stretches from Ruswarp in the North to Bridlington in the South. The population within this primary catchment area is 148,000 people and includes a particularly high proportion of retired aged 65 or over and working adults of between 45 and 64. The catchment population is characterised by an above average proportion of adults of working age employed within the skilled manual employment, unskilled manual employment sectors. The number of unemployed and those on state benefits are also over represented.

In terms of the total Town Centre retail floorspace Scarborough has around 99,403 m2 (1.07 million ft2) of retail floorspace which is above the national average for a town of this type.

St Nicholas Street is a secondary established retail location with a few national occupiers including the rear entrance of Marks and Spencer, HSBC, Barracuda and Lloyds Bank. The remainder of the shops are taken by local retailers. However St Nicholas Street is a good secondary location within Scarborough and is likely to appeal to both retail and leisure occupiers.

Retail and leisure units are also included within the proposals along Foreshore Road. It is considered that these will appeal to a wide range of retailers or restaurant operators particularly if the links between the South Bay and the Town Centre can be improved.

Hotel/conference In terms of the development of conference facilities within the Town Hall and Futurist complex it is considered that this would be a good location for such a facility. However in order to make conference facilities viable they need to be developed as part of a large four star hotel which can generate additional revenue other than that from the conference facilities. Currently there are no requirements for such a hotel in Scarborough.

Residential Given the site’s proximity to the Town Centre and views over the South Bay it is considered that the site is ideally located to develop apartments. These apartments are likely to attract a wide range of interested parties including owner occupiers and people wanting to invest in holiday homes.

The average price achieved for flats in a similar location in Scarborough is around £2,206.67 per m2 (£205.00 per ft2). However we consider that the Town Hall site is one of the premier residential locations within Scarborough and therefore the apartments are likely to attract a premium above this average.

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It is also important at this stage to address other issues that might affect viability. The key issue here is retention of the Futurist Theatre. As the plans above demonstrate, much of the new development and, hence, value is generated from the development of the lower part of the site, along Foreshore Road. The plan below shows the masterplan overlayed on the aerial photo with buildings sitting on top of the Futurist Theatre buildings shown in red.

If the theatre were to be retained then 65% of the new development area would be lost to the scheme. This would leave a residual land value of circa £1.4M which is unsufficient to fund the delivery of the proposed office elements. Further, significant backlog maintenance and upgrade costs mean that a further £7M of funding would be required to spend on the retained theatre. This leaves an overall shortfall of £5.6M without any funding for the office project. Further, the regeneration benefits that will come with comprehensive redevelopment of the site will be lost. On this basis, it is clear that the maximum range of benefits are achieved if the site is redeveloped on a comprehensive basis. The section below considers how such a scheme might be brought forward. Consideration has been given to potential costs for taking forward development of the site as envisaged below. Expenditure here will allow for a greater level of overall return to be generated and help to de-risk and add value to the site.

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Item Cost

Legal and title matters £50,000

Masterplanning £100,000

Preparation of planning application £250,000

Demolition and remediation £850,000

Delivery of enabling works £250,000

Selection of plot developers £75,000

Total £1,575,000 These costs need to be added to those forecast for delivery of the office accommodation works to consider a total project budget. They are broadly consistent with the levels of cost envisaged previously, but begin to provide further detail over what might be spent and where. They do not include any provision for the acquisition of any further land which will need to be addressed on a case by case basis. Funds from the HCA are available to promote the development of the site and the opportunity exists to establish whether PSP Scarborough LLP can contribute to the funding and help to build value into the scheme as envisaged. 8. Development strategies It is possible to capture the concepts set out in the development brief and as demonstrated above to prepare a comprehensive proposition to take to market seeking a master developer to take on delivery of the whole. This would be a significant undertaking in its own right and would require a clear and concise brief to be prepared setting out areas of fix and areas of flexibility within a defined framework. The difficulty of such an approach is that there is relatively limited clarity at this stage and issues such as the delivery of new or refurbished office space will have a significant impact on the ability to fix a brief to the extent that a developer could include it in a robust way in any proposals. The timescales for developing such clarity may mean that the programme for delivery of the site as a whole moves at the pace of the slowest part. An approach that seeks to take control of the site as a whole and releases specific parcels to the market for disposal will maximise the return that might be achieved from each individual element and reduce risk premiums that any master developer might seek. On this basis, it would be possible for an outline planning application to be prepared for the site as a whole. This could include a process of soft market testing to optimise the scope and content of individual parcels. This would allow the land owners to retain control of important decisions over the development of the site whilst bringing a market focus to the scheme. Further, investment in infrastructure and enabling works to release individual parcels within a robust framework for the site as a whole

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would simplify and de-risk the development of individual parcels, again, with the intention of maximising the receipts obtained for plot disposals. Such a process is best described as strategic land development, with plot developers subsequently sought through engagement with the market to deliver maximum value back to the land owners. On this basis, it is possible to envisage the following works being undertaken and delivered by the strategic land owner’s team (SBC, HCA, LLP);

• Cleaning up title and legal matters • Undertake land assembly if required • Appointment of professional team • Masterplanning with a commercial focus • Securing outline planning permission • Demolition and remediation of buildings and structures on the site • Delivery of enabling works (utilities, highways, public realm etc) • Selection of plot developers • Management of interfaces and overarching planning matters

On the basis of the scheme highlighted in the emerging plans, it is possible to see that the site might come forward in three parts with the middle plateau along King Street being brought forward early. The major mixed-use element along Foreshore Road is probably only deliverable with a number of key pre-lets in place enabling a developer to be sought to deliver the whole with the certainty of substantial parts of the scheme already having tenants in place to occupy the space. The upper tier is largely driven by the pace of the Council’s office accommodation project. Only once this is complete can redevelopment of the released parts of this area take place. An important element in both the development of the scheme and the successful delivery of the site will be to secure an interesting and exciting leisure occupier for the scheme that can act as an anchor for the project and as a draw for footfall to make the remaining retail and leisure space attractive to other occupiers. It is likely that substantial work will have to go into seeking out and securing such an occupier and this can only take place when there is certainty that an offer can be made and followed through. To this end, it will be important to build certainty and support for the project to provide credibility to the scheme. 9. Potential future working arrangements On the basis of the points set out above, it is considered that there is scope for the new LLP in Scarborough to step into the current arrangements between SBC and the HCA to bring additional funding and expertise to help deliver the best possible outcomes from the assets held by them. As part of the next stage in the process, and assuming that the outcomes of this stage of the process are sufficient to secure commitment to move forward, then an ‘e2 - Examine’ report will be prepared providing further financial analysis and building a detailed business case demonstrating both the investment required and the likely returns to each of the partners.

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If the project does move forward then it is considered that use could be made of the resources within the HCA in addition to those in the Council and PSP, having both a local presence and relevant skills for delivery of the project. This will be explored further as part of the next stage of the process. 10. Timescales and next steps Consultation on office accommodation project has taken place, but it clearly sits within the context of the broader redevelopment project. Assuming that the outcome of the review and consultation process is positive, then it will be necessary to prepare the ‘e2 - Examine’ report noted above building, primarily, upon the commercial strategy set out in this paper. This will seek to fix budgets and agree workstreams moving forward and spell out exactly how investments will be made in the project and returns generated from it and shared amongst the partners. It is understood that further work on the development of the office accommodation strategy will also be required in order to refine the two preferred options and then to select the preferred scheme. Detailed timetables for both sets of work will be discussed and agreed with the officer groups responsible to ensure that good progress is made and any internal and external deadlines or milestones are met. 11. Summary A significant quantity of work has been undertaken to establish the potential viability of the development of the site reflecting the need for a new office strategy to be accommodated within the site boundary and for the scheme to be, ideally, self-funding from the value released from the remainder of the site. The indications provided from the work to date suggest that it may well be possible to meet these two primary objectives. The site looks to be capable of containing the office needs of the council and leaving sufficient developable area that can generate value to cross-fund the cost of that project. This is based upon the assumption that the full extent of the site is developed in order to maximise the capital receipt available to cross-fund the new office accommodation. Careful consideration will need to be given to engagement with the market to test the proposals and establish a mix of uses that meets the regeneration objectives for the site and maximises the value from it. The next stage in the process, assuming that matters are taken forward, will be to robustly test the business case and spell out clearly the contributions required from each of the partners, their roles in the project and the commercial outcomes from the process.