The potential time-bomb under Durham County Council’s finances

What follows is the text of a speech I delivered today at County Hall. Surprisingly council agreed!

This motion looks dry, but is actually dramatic. It’s about a potential hole in the council’s finances that will be there for decades. It’s about this council’s risky hidden investments.

These investments are headleases, and this is what has happened.

By agreement, investment firms have lent money to developers to build developments in Durham. Simultaneously the council has agreed to take control of, and make the payments for those developments. It will pay large and (and sometime increasing) amounts over a very long period to those private investment companies and hopes to meet its own payments from the tenants’ rents. It could make a profit. It could make a loss.

In the long run, council tax payers will either reap the rewards, or shoulder the loss.

So where are these headleases in County Durham? The public isn’t meant to know that. The council has made all these agreements behind closed doors and never released the papers, but just enough can be discovered in the public record to make out the broad outline.

The smallest, for just £5 million, is at Merchant Park in Newton Aycliffe and has been publicised.

The bigger ones have all been kept under wraps. They are all close to the riverside in Durham City. That may be why the council didn’t want it to be public.

The Land Registry shows two 35 year headleases at Riverside Place and Freeman’s Reach, sub-leased from the council by the Passport Office and National Savings. Unfortunately both have only taken a 15 year lease so payments are only secure for the first 15 years, not the following twenty. Then everything  will depend on whether they still want city centre premises, and the rent will presumably depend on the going rate for office space at the time.

The leap from these smaller headleases to the £120 million affair at Milburngate is of an altogether different order. Although there is no council press release, the investment company, Laselles, is very pleased with the arrangement. Their web page says they are looking for other similar schemes which will give them “long-term, inflation-linked income streams”.

No wonder they are happy. The council isn’t going to miss a payment and can’t go bust!

What about the developer. They will be happy too. They build the development and move on without much risk.

And the council? The council may be happy, but it also collects the risk. And unlike the investment company’s secure inflation linked income stream, the council gets an uncertain, market-linked income stream which may not match its liability.

To weigh-up the risk we need to know the nature of the development; we need to know what will be there, who’ll be renting it and what the prospects look like.  

Here’s what Laselles says. “the development includes 5,000 square metres speculative office building, alongside 153 built-to-rent apartments.

“Tenants already secured include leisure operators such as a cinema, restaurants and a hotel.”

I wish every one of these tenants success, but I fear they face a challenging future in post Covid Durham.

We can all work out why the council’s cabinet didn’t want a waste-land near its flashy new headquarters building, or so close to its much vaunted Aykley Heads flagship business park.

We all want new business and leisure opportunities for local people. But I believe it was a bad financial mistake to let bullish optimism  over-ride cold commercial logic. If the private sector didn’t want the project it was almost certainly a risk too far. And that was true even before Covid.

Finally, and worse than just a mistake, was making decisions like these behind closed doors, and then keeping them buried from view.

That’s why I have brought this motion. The people of Durham deserve to see a clear-eyed analysis of where recent changes in commercial and social behaviour leave us.

Council tax-payers will pick up the bill if things go badly. That’s why the review needs to be in public. The people who foot the bill need to know the truth.

The case for this motion is unarguable, and I believe that the portfolio holder should accept it. I hope he will.

The motion under debate reads as follows:

This council is aware that that the council has taken multi-million pound headleases in respect of four developments in County Durham:

1.         Two office developments at Freeman’s Reach, Durham City

2.         An industrial development at Merchant Park, Newton Aycliffe

3.         The major development currently under construction at . Milburngate, Durham City

Council is also aware that at the time of approving these headleases, cabinet took into account the significant transfer from the private sector to the council of both the potential risk and reward that could flow from these developments. At that time cabinet judged that the potential rewards outweighed the possible risks.

In the light of the coronavirus pandemic and the significant changes that are taking place in both commercial practice and consumer behaviour as a result of it, council requests that a report be brought to the next meeting of Cabinet after 1st February 2021 setting out the cabinet’s latest detailed assessment of these changed circumstances and their likely impact on the council’s budget in future years in terms of:

·         The current and future expected range of commercial activity to be undertaken by leaseholders/tenants of these properties

·         Potentially changed lease or rental levels for each of these tenant types

·         The likelihood of the council being able to re-let the properties where the leases of current or contracted occupants come to an end before the council’s headlease itself ends

·         The revised best and worst-case scenarios the council envisages in terms of Income and expenditure from these investments.

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