MIDDLESBROUGH COUNCIL

VACANT COUNCIL OWNED TOWN CENTRE COMMERCIAL PROPERTY

Executive Member for Regeneration and Economic Development:

Councillor Charles Rooney / Deputy Mayor: Councillor David Budd

Kevin Parkes, Executive Director for Neighbourhoods and Communities

23rd May 2013

PURPOSE OF THE REPORT

  1. Middlesbrough Council has a number of commercial properties in the town centre that have remained substantially vacant for many years, and generating market interest in these properties has proved particularly difficult given the prevailing economic conditions. To address this situation, a number of approaches have been trialled by the Council, that have proved successful in generating new interest in previously unattractive property. The purpose of this report is to outline how this approach could be applied to other properties in the Council’s commercial portfolio, and seek the Executive’s approval to such initiatives.
SUMMARY OF RECOMMENDATIONS
  1. It is recommended that the Executive Member endorses adoption of the approach as future policy, and delegates responsibility for implementing it to the Director of Neighbourhoods and Communities.

IF THIS IS A KEY DECISION WHICH KEY DECISION TEST APPLIES?

It is over the financial threshold (£150,000)
It has a significant impact on 2 or more wards
Non Key / X

DECISION IMPLEMENTATION DEADLINE

  1. For the purposes of the scrutiny call in procedure this report is

Non-urgent / X
Urgent report

BACKGROUND AND EXTERNAL CONSULTATION

Vacant Commercial Properties

  1. The Council currently has a portfolio of 241 commercial properties, with an occupancy rate of 92%.
  1. Although the occupancy rate is relatively high (especially given the prevailing economic conditions), there is always a proportion of the portfolio that is subject to ‘churn’ where occupiers move out and a period of time elapses before new occupiers move in. For the majority of vacant properties, the appropriate steps are in place to manage this churn and ensure that the Council maximises potential income.
  1. There are however a number of properties within the portfolio that have remained vacant beyond the period of expected churn, and are showing little sign of attracting market interest. As many of these are located in the town centre, the impact of their under-utilisation extends beyond a loss of rental income. It is also important to look at how the Council can stimulate the economy.
  1. A selection of seven town centre properties have therefore been identified as requiring specific intervention to ensure that they attract the same level of market interest as the rest of the portfolio, and maximise the probability of securing an occupier. As some of these properties have been vacant for over five years, without such intervention it is unlikely that they would attract market interest in the future unless the economic situation improved significantly.

Effects of Empty Commercial Properties

  1. Empty properties can cause a number of problems for the town, such as an increased perception of blight, reduced footfall and increased crime and vandalism. A proliferation of empty commercial properties can impact very heavily on the apparent vitality of an otherwise healthy town centre. It can therefore be as important to fill commercial property from an image point of view as it is from a purely financial perspective.
  1. Much press coverage has been devoted in recent years to the number of vacant properties in town centres, and although Middlesbrough hasn’t been the target of specific headlines, the overall position in national league tables suggests that the issue needs to be a key local priority.

Generating Additional Economic Activity

  1. The Council has a clear role to play in stimulating the town centre economy, and has been responsible for taking forward a number of initiatives aimed at generating new activity. Within these initiatives, a number of approaches have been trialled by the Council that have identified practical steps that can be taken to generate interest in previously unattractive (mainly privately owned) commercial properties, and secure economically productive tenants.
  1. The impact of these initiatives has been significant, for example:
  1. development of an independent quarter at Baker Street – the properties in Baker Street are privately owned and have had high vacancy rates for many years. Working pro-actively with owners has already seen ten new businesses sign leases on shop units, with a list of more than six awaiting the redevelopment of other premises on the street;
  2. the Corner Emporium at the end of the Cleveland Mall, facing on to Grange Road, has supported 32 businesses, six of which have moved into other vacant units within the town centre; and,
  3. We Are Open introduced branding and short-term activity to a number of vacant town centre units that were subsequently let to commercial tenants.
  1. Some of these initiatives have been backed by additional external finance, such as the underpinning physical improvements in Baker Street or the availability of accompanying business support in The Corner Emporium. These initiatives have been primarily stimulating new businesses to come forward, the occupancy of vacant private sector property, and generating new economic activity in the town. Managing such initiatives has however identified a number of basic principles that can be applied to other properties in a low cost, yet productive way.
  1. These principles can be summarised as:
  1. work closely with landlords and agents to ensure efforts to market the properties are co-ordinated effectively;
  2. target activity to bring the space back into use rather than holding out for the maximum commercial deal;
  3. bringing a unit back into active use in the short-term can highlight its potential to longer-term occupiers;
  4. utilising space to allow creative individuals and businesses to test-trade can encourage further future occupancy;
  5. tailor ‘stepped’ rental levels to the occupier and their aspirations;
  6. empower officers to arrange deals appropriate to the circumstances; and,
  7. accept that having some economic activity and rent is better than none at all.
  1. Utilising vacant space within these initiatives has enabled new or fledgling businesses to test-trade, and creative individuals and collectives to explore the commercial potential of their work and has been a much needed ‘stepping stone’ between nothing/incubation and prime commercial lets. Applying the other principles in conjunction with this has enabled them to realise their potential and allow them to grow their ability to pay more commercial rates at the same time.

Vacant Council Properties / Opportunities

  1. The vacant properties identified within the town centre as requiring intervention to secure a longer-term paying tenant are:
  1. 67 Gilkes Street;
  2. 69 Gilkes Street;
  3. 71 Gilkes Street;
  4. Unit 4 Broadcasting House;
  5. Unit 5 Broadcasting House;
  6. 45-47 Corporation Road; and,
  7. 55 Corporation Road.
  1. These properties all share common issues such as low footfall and detachment from core shopping routes. As a result, many of the more common approaches to attracting occupiers such as offering reduced rental deals have had little or no impact on their own. By applying the principles that have proved successful in the Baker Street, Corner Emporium and We Are Open projects, it should be possible to increase the likelihood of these properties being utilised in the short-term, and secure a productive longer-term future. Initial work to establish new interest in these properties has already generated a number of potential occupiers and three are now in the process of negotiating terms, and bringing new economic activity into the town.
  1. It is therefore proposed that the above principles be applied to any town centre property falling vacant within the Council’s commercial portfolio, where a robust economic case for applying them exists.

Current Market Comparisons

  1. Analysis of private sector commercial property in the town centre highlights that the rental expectations of the Council’s property portfolio have not moved with the rest of the property market, which may represent a barrier in achieving lettings. Similar units in private ownership are currently being advertised with rental levels equivalent to 80% of their rateable value, whereas the identified vacant Council units are being advertised at an average equivalent to 140%. This would suggest either an unrealistic expectation of income, or a reluctance to lower the advertised rental level for fear of compromising agreements with other neighbouring tenants.
  1. The agents responsible for letting the private sector properties used as a comparison have also indicated that they would on average expect to be agreeing rental deals at around 47% of the rateable value rather than the advertised 80%. Achieving a similar deal on the identified Council units would require the advertised rental level to be discounted by 65% to compete.
  1. It should also be noted that may town centre property owners are currently allowing people to occupy space on rent free deals to either retain their tenancy in the longer-term or to cover their Business Rate liabilities until the market picks up.

Guidelines

  1. In order to enable officers to apply the proposed principles effectively within the market context detailed above, it is necessary to set appropriate financial guidelines for them to act within. The proposed financial guidelines would be:
  1. a reduction of up to 50% of the full rental value over the period of the agreement – approval delegated to the Principal Estates Surveyor; and,
  2. a reduction of over 50% of the full rental level over the period of the agreement – approval delegated to the Director for Neighbourhoods and Communities.
  1. As this approach is more about applying fundamental principles than it is about seeking and utilising external funding, it is also proposed that this approach is applied as a matter of ongoing policy rather than being ‘badged’ as a fixed term initiative. Although the proposed guidelines provide a framework within which to manage how principles are applied, the health of the commercial property market in the town centre would continue to have a significant influence on demand and therefore the extent to which larger reductions are necessary to fill vacant units.

Implementing the Policy

  1. Implementation of the policy would require business facing services to work closely with property related services, to ensure that the networks of potential short-term occupiers are introduced to the right opportunities and given the necessary encouragement to progress to longer-term arrangements.
  1. The flexibility to offer appropriate terms to such potential occupiers already exists in practice, but establishing this principle more formally alongside the role taken in generating new interest, would provide a more comprehensive policy picture. The Council’s property related services would continue to manage the letting process and agree the rental offer to reflect the location, occupier and circumstances, but would do so within this revised policy context.
  1. As with any new policy, it would be necessary to review the corresponding impact on a regular basis, and it is proposed that this is done annually to ensure that the overall economic gain is being realised.

IMPACT ASSESSMENT (IA)

  1. An impact assessment is not required at this stage.

OPTION APPRAISAL/RISK ASSESSMENT

Option Appraisal

  1. A number of options have been explored in the development of this approach, including:

Increased Promotional Activity

  1. Increasing levels of promotion could potentially highlight the opportunity to a wider audience, but the fundamental issues of footfall and detachment remain and any gains from additional promotional activity on its own are likely to be outweighed by the cost of doing it.

Using Private Sector Property Agents

  1. Using private sector property agents to market the properties more pro-actively might also highlight the opportunity to a wider audience, but the issues causing the vacancy extend beyond mere awareness. The shorter-term opportunities that are likely to animate the space and generate at least some income are likely to be realised through contacts and networks that private sector property agents do not have significant relationships with.

Rent Free Deals for VCS Organisations

  1. Previously units have been offered to charitable organisations on a rent-free basis, in order to cover the rates. This approach can be effective in reducing the rates liability for the Council, but does not tend to lead to an increase in economic activity or the potential to grow future occupiers. Although this option should not be discounted completely, it is a less desirable option than is proposed.

Risk Appraisal

  1. A number of risks have been assessed in the development of this approach, including:

Opportunity Costs

  1. Offering any financial reductions or deals brings with it the corresponding risk of not maximising the return to the Council, i.e. would the occupier have taken the unit at a higher price or is a short-term occupier preventing occupancy by a longer-term tenant. This risk has been assessed as minimal in this instance, on the basis that the recent occupancy history of the identified properties is so poor. It would however need to be factored in to any decisions made around applying this approach to other properties with better recent occupancy histories.

Poaching From the Private Sector

  1. The risk of attracting occupiers that would otherwise have gone into private sector properties cannot be completely eliminated. The approach is however targeted at the groups that are least likely to move straight into lease agreements for private sector properties. The longer-term benefits of an increased flow of new creative and retail businesses in the town centre should also be viewed as a positive opportunity for private sector property owners.
FINANCIAL, LEGAL AND WARD IMPLICATIONS
Financial
  1. The seven properties identified initially have generated a combined net cost to the Council in 2011/12 of £12,791. The following table shows the financial position for each property:

Property / Annual
Rent / Business
Rates / Vacant
Since / Income / Costs / 2011/12
Outturn £
67 Gilkes Street / £5,700 / £2,015 / July 2012 / Rent (£5,700) / None / £5,700*
69 Gilkes Street / £5,700 / £2,092 / Dec 2010 / None / Rates (£2,092) / -£2,092
71 Gilkes Street / £5,700 / £2,092 / Oct 2009 / None / Rates (£2,092) / -£2,092
Unit 4 Broadcasting House / £12,000 / £2,925 / Jun 2007 / None / Rates (£2,925) / -£2,925
Unit 5 Broadcasting House / £13,750 / £3,600 / Jun 2007 / None / Rates (£3,600) / -£3,600
45-47 Corporation Road / £27,000 / £6,870 / Sep 2009 / None / Rates (£6,870) / -£6,870
55 Corporation Road / £15,000 / £4,095 / Jun 2011 / Rent (£2,500) / Rates (£3,412) / -£912
Overall / £84,850 / £23,689 / £8,200 / £20,991 / -£12,791

Business Rate payments by occupiers not included as income as not retained by the Council

*Occupied throughout 2011/12, becoming vacant in this financial year

  1. As the likelihood of letting the properties in the next 12 months is minimal without such activity (based on recent vacancy history and the prevailing economic conditions), the identified approach would benefit the Council if the financial performance on an individual property could be improved, either through the attraction of limited rental income or mitigation of the rates liability (as responsibility for the business rates would pass to the occupier).
  1. Although the potential income if all seven properties were occupied at full commercial rates is around £84,850 per year, this does not represent a realistic aspiration. Additional economic activity, a reduction in the Council’s operating loss on individual properties and the potential to generate a modest income on others perhaps represent more realistic short-term goals, and would at least provide a contribution towards service level income targets.
Legal
  1. Legal Services has been involved in the development of this approach and the implementation of previous property initiatives, and would continue to be involved in the implementation.
Ward Implications
  1. The identified properties are located in Middlehaven ward, although the economic benefits of the approach are likely to extend beyond the ward boundary.
RECOMMENDATIONS
  1. It is recommended that the Executive Member:
  1. endorses the adoption of this approach as an appropriate longer-term policy for such properties; and,
  1. delegates responsibility for implementing the policy to the Director of Neighbourhoods and Communities.
REASONS
  1. The financial implications of moving to a more flexible approach should at least reduce the Council’s costs, and may potentially generate additional income, as well as stimulating new economic activity in the town centre.
BACKGROUND PAPERS

No background papers were used in the preparation of this report.

AUTHOR: Julie Marsden

TEL NO: 729567

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Address:

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