Herbert Smith scoops Kajima UK PFI

Herbert Smith has advised a Japanese construction and development giant on its first PFI venture in the UK. It is the first time that Herbert Smith has acted for Kajima.
Kajima Cambridge, a subsidiary of Kajima Corporation, first instructed Herbert Smith in 1998, after it won the contract to build 12,500 square metres of serviced accommodation for the Department for Environment, Food & Rural Affairs (Defra) on a 30 acre site in Cambridge.
Herbert Smith finance partner Jason Fox led a 10-strong team throughout the four-year deal, which Defra regards as one of its flagship projects. The new office building in Brooklands Avenue, Cambridge, will house Defra staff and members of other government departments, including the Inland Revenue and the Valuation Office and Appeals Service.
Fox said that the deal is unique because of the increased flexibility it gives to the government occupiers. "Depending on Defra's future accommodation requirements, it enables them to completely vacate the site and pass the entire occupation risk to Kajima at various break points in the future," he said.
"One of the basic tenets of PFI is that it is intended to be flexible accommodation, but that tends to be illusory rather than real. What we have here is that Defra can terminate the agreement if it finds it does not need the accommodation," he added.
Another innovative feature is that the deal's financial structure is a true hybrid between project finance and traditional property finance.
Fox said: "Depending on the exercise of the Defra break rights, there could be a bullet repayment of as much as 50 per cent of the term loan, 15 years into the life of the facility. The Bank of Scotland is therefore taking a significant residual value risk on the site, which is very unusual in PFI accommodation projects."
Fox said that the site's sought-after Cambridge location has given Kajima some comfort, as it should be quite easy to interest other occupants to move in if Defra decides to exercise its break clause.
A team from Eversheds advised Defra on the deal, while Allen & Overy's Graham Vinter advised the Bank of Scotland.