Union Terrace Gardens & Denburn Valley Development

Tax Increment Finance Feasibility Study: Phase A Final Report

6th May 2010

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PricewaterhouseCoopers LLP (“PwC”), with the support of CB Richard Ellis (“CBRE”), have been appointed by Scottish Enterprise (“SE”) to undertake a feasibility study into the potential role of Tax Increment Finance (“TIF”) in meeting the likely funding gap for the proposed City Square Project at Union Terrace Gardens (“the Project”), Aberdeen.

TIF is a way for the public sector to fund investment in infrastructure, to drive regeneration and unlock economic growth, by borrowing against the future additional tax revenues which the infrastructure investment unlocks. In simple terms “paying for growth with growth”.

The key principals and stages of TIF can be summarised as follows:

This discussion paper represents an initial summary of the findings of Phase A of our study which comprises:

It should be noted that a full economic impact assessment is proposed as part of future phases of work but is outwith the scope of this report.

The Project envisages the creation of a new civic space in the heart of Aberdeen city centre by raising Union Terrace Gardens and the Denburn Valley to the surrounding street level and covering over the existing railway line and dual carriageway. The expectation is that this new public space will enhance the appeal of Aberdeen as a commercial and business centre and will help secure the regeneration of Union Street and the wider city centre. It is intended to act as the first step to a phased programme of redevelopment that will re-position Aberdeen post-oil as a sustainable and attractive investment location.

Total project costs are expected to be up to £140m (excluding indexation) depending on the scheme chosen; for example, the exclusion of the car parking element is expected to reduce project costs by around £20m. Sir Ian Wood has indicated to Scottish Enterprise that he has a figure of up to £50m available to invest in the Project however a significant funding gap would remain. Scottish Enterprise have asked us to consider a range of scenarios in relation to the funding gap requiring to be filled by a potential TIF mechanism and these are summarised at Table 1.2.1 below.

Table 1.2.1 - Funding Gap Scenarios (Real values as at 01 April 2010)

Successful delivery of the Project is expected to have a positive impact on levels of development in the surrounding area and across the city centre. As such the Project is expected to enable new development to take place with a subsequent uplift in non-domestic rates, these are considered in more detail at Section 1.3.

CBRE were instructed to advise on the potential for the Project to generate incremental business rate income. In recent years a number of development opportunities across the city have stalled, been delayed, or face a reduction in scale as a result of the economic downturn and uncertainty about the future of the Aberdeen economy post-oil. Consequently CBRE are of the view that, over a number of years, the Project will act as a catalyst and enable:

Likely sites are illustrated at Figure 1.3.1 below and CBRE have identified in red where they believe levels of new development would most likely arise as a direct result of the Project. Whilst it may reasonably be expected that these developments will be impacted by the Project, the net additionality or likely levels of development uplift attributable to the Project will need to be assessed through primary market research undertaken as part of the proposed economic impact study at Phase B.

Fig 1.3.1 - Indication of Potential Development Sites

The maximum impact is considered to be on those schemes which are in closest proximity to the Project and for this reason CBRE have kept the area of influence to a relatively small “red-line” geographical area. In-turn they believe that the Project will have a catalytic “ripple effect”, in other words the schemes closet to Union Terrace will be developed first and others will follow. As each scheme and area is improved this is expected to act as a catalyst to the development of the next area and so on.

In total approximately 22 new commercial development projects have been identified, many of which are already highlighted in the Aberdeen Local Plan as Opportunity Sites, but also others CBRE are aware of through their knowledge of the local property market. Where an existing planning consent is in place CBRE have used the floor areas and accommodation from these consents. Where there is no existing consent they have referred to the allocation for use in the Local Plan and have estimated the potential net development areas based on other sites of a comparable size in similar locations.

On the basis of the most recent re-valuation exercise, CBRE, as indicated at Table 1.3.1 overleaf, have estimated that there could be a net increase in rateable values of around £17.4m once (and if) all the developments identified are delivered (or £17.1m if the car parking element of the Project is excluded). On the basis of current business rates this could yield additional gross tax revenues of around £7.2m per annum (or £7.1m if the car park is excluded).

Table 1.3.1 - CBRE Estimation of Gross Additional Tax Revenue (per annum)

In addition to the impact of new developments CBRE have assessed the potential increase in the rateable value of the properties immediately adjacent to the Project (comprising Union Street, Union Terrace, Belmont Street, Little Belmont Street, Back Wynd, Gaelic Lane and parts of Schoolhill) which are expected to benefit significantly from delivery of the Project and subsequent regeneration of the city centre. It is has been assumed that these properties could experience an average increase in rateable value of between 10% and 20% depending on their proximity to the Project with a small number of properties on Union Terrace increasing in rateable value by up to 50%. CBRE have estimated that the net increase in the rateable value of these properties could be approximately £3.0m yielding, as illustrated at Table 1.3.1 above, approximately £1.2m per annum in business rate revenue.

While business rates are expected to be the primary source of incremental tax revenue the anticipated levels of new development are expected to make the city centre a more attractive location for residential developments also. An uplift in Council Tax receipts from new residential properties could therefore be expected and CBRE has estimated that this could be in the region of £2m per annum. Furthermore the Project itself is likely to accommodate rent generating developments which could yield an income of up to £400,000 p.a to the Project.

CBRE have held initial discussions with representatives from the Assessor's Department and have agreed appropriate rates and methodologies to be applied in assessing the likely rateable value for the projects identified. CBRE are further awaiting discussions with local planners in order to obtain their views on the profile of development identified. As a result these figures may be subject to some future revision depending on the outcome of these discussions.

Table 1.4.1 overleaf summarises the assumptions we have used in undertaking an initial review of potential TIF funding streams. The potential incremental tax revenues are derived from the work undertaken by CBRE and, where required, we have made some further assumptions regarding the timing, build up and indexation of these revenues.

Table 1.4.1: Key Assumptions for Initial Financial Model

It is important to note that we have not modelled the contributions from Council Tax income as it has been our experience elsewhere that the sponsoring Council will wish to retain this revenue in order to provide the public services that residents moving into the area will require.

On the basis of the above assumptions and the Scenarios outlined at Table 1.2.1 we undertook a review of funding implications in order to understand the:

The results are outlined at Table 1.5.1 below and for each Scenario we have considered a:

Table 1.5.1: Key Outputs from Initial Financial Model

It is important to stress that the above figures are dependant on the assumptions outlined at section 1.4 above and consequently are subject to more detailed discussion and review.

While we cannot pre-empt the outcome of any economic impact assessment undertaken in relation to the project, based upon other similar studies we have completed previously, our initial view would be that any such assessment would be unlikely to support levels of net additionality much beyond 60%. We therefore suggest that scenarios A & B form the basis of further discussion, development and appraisal until such time as a full economic impact assessment has been completed.

In addition, under each of the four Scenarios there is an early years interest gap where the project revenues are insufficient to meet the interest payments due. For the purposes of our modelling exercise we have assumed that this interest is `rolled up' into the existing debt and paid off over time. In reality the prudential borrowing framework does not allow for interest to be rolled up in this way and future consideration will therefore have to be given to how this early years interest gap is covered.

This initial feasibility report suggests that TIF could provide a feasible means of meeting the funding gap associated with the Project. We propose that subsequent phases of this study would:

Source: Scottish Enterprise (2010). Davis Langdon (2009), Union Terrace Gardens Technical Appraisal. Note that these figures do not include, at this stage, any land acquisition costs which are still to be finalised.

This figure does not include the impact of indexation over the duration of the construction timetable. However, the impact of indexation is considered as part of the financial assessment at sections 1.4 & 1.5.

Figure is extracted from the Aberdeen Local Plan (2008).

Note the re-valuation is still subject to appeal and as a result the figures used may be overstated if appeals are successful.

Note that this currently relates only to rental income from assumed retail/food uses on the site and excludes at this stage any rental income from Peacocks or other Civic Uses.

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