SBC ARGOS Business Case Not Viable
A Letter to the Editor from NICK GREEN, casting a banker’s eye over the business case for the project to ‘regenerate’ the former ARGOS building.
Following on from the Residents meeting on Tuesday 19th October, I have put some numbers together for you and the Planning/Overview & Scrutiny Committee/Audit Committes to consider.
Next, looking into the rates for the Public Works Loan Board (from whom the Council is borrowing the money), it seems that interest rates have risen (from 0.7% in July 2019 to 2.35% if taken today’s rates) for a 40-year loan. (How is this project ‘Public Works’? Was the rate fixed at that time?)
Without adding any extra cost to the project, repayments for a £22m loan over 40 years in July 2019 it was:
Then, at 0.7%, it would equal £52,562.33 per month on a Capital & Interest basis = £630,748 per annum.
Now, at 2.35% it would equal £70,742.89 per month on a Capital & Interest basis = £848,915 per annum – an increase of 34.6% (over one third).
Looking at the student accommodation mentioned above in Scarborough, it is £89 and £99 per week. (See links above). For the purposes of this discussion, let us call it a round £100 a unit (no VAT is charged on accommodation).
£100 x 210 rooms, assuming full occupancy for the full 42 weeks term time, equals £882,000.
Rents for three commercial properties on the ground floor is estimated at £45,000 + £40,000 + £30,000 at today’s asking price = £115,000 pa + VAT (I am assuming it is not the Council letting these separately. If they are, it can make the position evenworse.)
Summer holiday lets on double rooms I have assumed to be to be £30 per person per night (higher than Aberystwyth) = £60 x 70 nights x 210 rooms = potentially £882,000 (VAT will be due on this part), based on 100% occupancy. A potential net income of £735,000. A comparison is at Aberystwyth
So, at 100% occupancy, for 100% of the time, the potential income is £882,000 + £115,000 + £735,000 = £1,732,000.
On a (partial) plus note, the lease is being provided to FutureLets for 10 years – but they have their own expenses which, of course, impacts on their ability to pay.
Fixed Costs, Business Rates on the accommodation premises? No idea, but the Grand Hotel is £390,000 payable @ say 50p in the £ = £195,000. They may do a fiddle re the students at 10% of rateable value (= £19,500) and revalue for summer 10 weeks at £40,000 = £59,500. It may be that Commercial Business on the room side will be ignored to help ease the problem.
Heating & Lighting work out at room and public space (est.) = £181,000
Administration at, say, £45,000 (plus cleaning and maintenance) = £138,000
Sales and Finance team (est.) = £65,000
Actual maintenance on the building – early years £60,000, rising to £120,000 over 10 years
Other fixed costs, say £10,000
Insurance, say £100,000
FutureLets Head Office Management, see below
Total costs = £603,500
Lets say the average occupancy is 80% = £1,385,600 on everything (I have assumed the retail will be via Future Lets, too) 90% is £1,558,800, less £603,500 costs = £781,500 income (at 80% occupancy) and £998,450 (at 90% occupancy)
Of this, FutureLets Head Office will want, say, £100,000 contribution for their input, so they have a potential funding pool of £681,500/£898,450 to pay their rent to the Council.
The Council will need a contribution on top of the loan costs to justify doing it and to cover their own fixed costs and future office administration.
Let’s call it £5,000 for both, the annual costs for the time spent in issuing invoices. No cost is being allowed for any further visits or negotiations.
The cost for 0.7% interest = £680,748
For 2.35%, it will be £899,000
Both at break-even, without any shortfalls.
A commercial lender like Barclays Bank would not provide funding for more than 20 years and would want 150% income with a 40% initial contribution from the borrower.
For a project at this size, the numbers do not work and it gets worse on the borrowing of it increases beyond the £22,000,000 mentioned.
For every £1,000,000 extra borrowed from the PWLB, the monthly repayment for 40 years is £3,215.59. So at £30,000,000, it is £96,467.57 per month = £1,157,611 per annum @ 2.35%.
So basically, I cannot see how FutureLets can afford the deal and Council is either offering favourable off-market rent or, if not, may have to let FutureLets hand back the lease or be forced to offer cheaper rent – just like the Spa deal with Sheffield International Venues, or the Travelodge.
This is a deal that needs booting into the long grass to avoid more salary waste of Council Staff, wasted time and a commitment for Ratepayers over the next 40 years. The Council should not be trying to play Monopoly with the ‘Big Boys’ of Property, otherwise they will get their fingers burned.
Stick to doing real Council Tax things well, like bins and other services, to actually help the Ratepayers.