Slicker cities

An era of increasingly sophisticated regeneration structures is dawning to rescue inner cities from decline. Stephen Sorrell reports

What do the Cornish town Redruth, Corby in the East Midlands and Barrow-in-Furness in Cumbria have in common? The answer is, in part, history. Each could be defined as being at the centre of a declining industry – tin, steel and shipbuilding respectively. Also, each has suffered physical and social decline for years and, as a result, is looking to comprehensive regeneration to kick-start the creation of new jobs, provide the necessary infrastructure and replenish the indigenous population.

More particularly, they are all at the front end of new public-private partnerships (PPPs) by being three of 14 areas which are now the proud owners of an urban regeneration company (URC) intended to promote area-based urban renewal. These URCs are funded by their public sector ‘parents’, in many cases English Partnerships, the Government’s national regeneration agency, and have been created to underpin commercial, industrial and residential development.

A URC is a company limited by guarantee and intended to facilitate partnerships between public sector bodies – usually local authorities, regional development agencies and English Partnerships – and major local employers, developers and investors.

The most successful to date have primary public sector involvement, enabling the pace of change to be set by urban local authorities and regional development agencies, using their compulsory purchase powers to assemble land for area-based regeneration so as to deliver development platforms to the private sector.

One URC success story is New East Manchester, a URC covering east Manchester – an area almost as sizeable as the city centre itself. Other URCs such as Catalyst Corby are also beginning to see success for more joined-up efforts.

The URC is one approach led by the public sector to ensure the facilitation of regeneration in key areas. However, we are in an environment of increasingly sophisticated regeneration structures and vehicles. It is likely that we will see increasing participation in structures such as limited partnership and limited-liability partnerships (LLPs), as well as the more traditional company and grant structures, as different partners try to align their interests, funding and risks through one vehicle. The big challenge for regeneration is how private sector investment will be leveraged in to the scheme and also (in some ways limited by Planning Policy Guidance Note 3) the need to deliver cohesive, sustainable and coordinated regeneration across whole districts with a multiplicity of public and private sector partners with multiple land ownerships.

In this context, URCs are not the option to actually ensure delivery. Indeed, delivery mechanisms rather than facilitation bodies are required to enable local partners to force the pace of delivery of their visions. While URCs facilitate the vision, some urban local authorities are pioneering new public-private arrangements. These ‘local delivery vehicles’ (LDVs) are still remarkably little known outside of those directly concerned with them. However, LDVs will play an increasing role in the local government landscape – the recent announcement of ‘regional growth areas’ and the ‘housing market renewal pathfinders’ are just examples of where the Government will be looking for appropriate and proportional means for local delivery in the future. As an example, Manchester Council has created a limited partnership with developer Argent to transform the Piccadilly Place city centre site into a new retail, hotel and residential offering, but equally importantly to ensure the long-term viability and management of the completed scheme.

Limited partnerships are a popular choice in the context of property investment schemes, particularly where institutional investors such as pension funds are involved. In a limited partnership (which is formed under the Limited Partnership Act 1907) some, but not all, of each partner’s liability is limited. However, the price to be paid for this limitation of liability is that the limited partners are not permitted to take part in the management of the partnership business. The partner that runs the day-to-day business of the partnership is the general partner, which is usually a limited company. Because limited partnerships are tax efficient (ie income and capital gains are attributed directly to the partners and not the vehicle), the limited partnership is a vehicle of choice for pension funds and institutions. A developer and a pension fund can coexist happily in a limited partnership because the pension fund will not find its tax status upset by the developer.

LLPs are a relatively new form of business entity governed by the Limited Liability Partnerships Act 2000. An LLP is a corporate body and provides limited liability for its members. It is effectively a hybrid between a partnership and a company but is very flexible in its structure. Again, because it is a corporate entity with its own identity, it can operate in its own right. For example, it can own land, borrow money and enter into contracts. An LLP does not have a memorandum or articles of association, a specified management structure or share maintenance requirements. The members simply enter into an agreement between themselves setting out the rights and obligations of the members.

Local authorities and regional development agencies are considering the use of the LLP. Sheffield City Council has entered into such an arrangement already, with others set to follow.

Choosing the right structure to establish a partnership is, however, not the end of the story. Effective PPPs do not in themselves guarantee successful regeneration. To create a unique and local vehicle to deliver regeneration, the best result is achieved if the first step is to establish, in general aspirational terms, what it is that the partnership is going to do. For example, will it be strategic or undertake direct delivery? Will it acquire assets or take on contracts? Who will be a member? How will it be funded? Is it intended to make a profit? What will happen upon termination of the arrangements? And so on. It is vital that the appropriate structure is matched to the aspirations and proposed structure of the regeneration schemes, rather than the aspirations of the partners or proposed schemes being distorted to fit a structure that was predetermined, creating unnecessary regulatory problems or other limitations.

Also, there are factors that are not about local preference but are of a more regulatory nature. These must be considered and factored in from an early stage. Again it can be a mistake to allow these issues to shape the initial aspirations that are set out by the partners – often these regulatory requirements can be accommodated without distorting the partners’ intentions, especially if addressed at an early stage.

The top regulatory issues on the list to consider would usually include:

  • Powers to enter into the proposed structure.
  • The requirements of any funding – especially European funding.
  • State aid – particularly if a separate entity is going to be established.
  • Procurement regulations.
  • Principles of governance.
  • Taxation and VAT.
  • The basis for land and asset disposals to the LDV.
  • Funding requirements and capital finance regime implications.
  • Staffing requirements and implications.

Choose your partners
The main legal entities used for regeneration schemes:

Urban regeneration companies (URCs) – established through companies limited by guarantee, making them suitable for the involvement of publicly-funded bodies and allowing straightforward board changes without transfers of shares. They undertake responsibility for facilitating the regeneration of a defined area.

Companies limited by either shares or guarantee – limited-liability status is a key characteristic of such a company, which has a separate legal identity and can therefore contract in its own right.

Unincorporated associations – a contractual arrangement that does not give rise to a separate legal entity and is not incorporated.

Limited partnerships (LPs) – LPs involve one or more ‘general partners’ responsible for liabilities of the partnership (effectively, the managing partner) and one or more ‘limited partner’ not liable for debts or obligations beyond their contribution. New powers are available to some LPs – for example, the Government created a ‘general disposal consent’ in August 2003, permitting local authorities to sell land in certain circumstances at below market value without the prior permission of the Secretary of State.

Limited-liability partnerships – tax-transparent and are expected to appeal to private sector partners, but are so far untested.

In addition to the above, there are a number of alternatives or hybrid structures, including trusts, industrial and provident societies, contractual joint ventures and, shortly, community interest companies.

Stephen Sorrell is head of the developer sector group at Eversheds