Royal National Orthopaedic Hospital NHS Trust
Briefing Paper
An alternative financing option for the redevelopment of the Stanmore site
July 2008
1. Introduction:
An approach has been made by an entrepreneur who has outlined an alternative approach to the Private Finance Investment vehicle for funding hospital developments (attachment A). Detailed below is a summary of the Trusts Project Teams understanding of this proposal and the actions required in order to determine if this alternative methodology should be pursued further.
2. Proposal:
2.1 Charity Status and Trading Subsidiary
The proposal suggests that the Trust establishes itself as a registered charity who would then set up a trading subsidiary. The trading subsidiary would then gift aid money to the Trust to finance the redevelopment. According to the NHS Revenue and custom there are no restrictions on the type of trading activities that a charities trading subsidiary company can conduct and, in common with any other UK company, corporate Gift Aid can be used to donate some / all profits to a UK charity before tax is computed thus avoiding tax on the donated profits.
Discussion topics and suggested actions:
1. Should the Trust to seek professional legal advice on the implications on establishing a trading subsidiary
2. The Trust to establish any implications of becoming a registered charity on how funding would be affected or not?
3. What are the implications on the RNOH Special Trustees who are currently a registered charity
4. Would RNOH fundraising activities be affected?
5. Are there implications on our Foundation Trust application? What would Montitor’s view be on this?
2.2 Development proposals:
Our interpretation is that the Trust does not get funds from land sales; as the trading subsidiary company would develop the site. It is suggested that Coutts and Company would provide bridging facilities for the housing development. Following completion, payment of construction, fees, sale of the houses and payment to Coutts a surplus profit would be achieved. This would be then gifted aided to the RNOH Charity to fund the hospital new facility. The paper suggests the housing development would be undertaken in phases, this would appear to imply that the hospital redevelopment would be either be phased as it would be dependent on cash flow or would not occur until all the residential units had been completed and sold.
By the Trust retaining ownership of the land the properties are assumed to be leasehold and that the upkeep and maintenance of the housing and new hospital development would be shared, as would be energy supply source.
Discussion topics and suggested action / risks:
1. The Trust request a more detailed proposal on the phasing plans for the housing and how this impacts of the hospital redevelopment and timescales
2. The Trust to seek clarity as to who will actually own the land
3. The Trust to seek advice from property advisors as to the viability of the proposals and the estimated build costs and marketable value of the properties
4. The consequences of the cash surplus not materialising to fund the hospital development
5. Consideration of other ventures with Spire (for example) for the provision of private patient facilities
6. Any implications for the Ronald McDonald project
7. Based on the draft example given the surplus raised would be £88,889,750 would there then be a shortfall on the amount required for the hospital facilities
8. Will the NHS approve this model to proceed?
2.4 Public Relations:
The Trust would need to fund public relations (PR) right from the outset of the proposals. It was suggested that between £50 -100k would need to be invested by the Trust. It was suggested that the PR marketing strategy would be that the development would be creating a community centred eco campus, and that early market stimulation being essential to the success of the scheme. This interest would be maintained through the involvement of a national newspaper and other media vehicles such as television etc and suitably qualified PR experts would be employed to run the campaign. Furthermore their role would be to pre-empt any opposition and develop strategies and actions to deal with issues in a proactive and positive way.
Discussion topics:
1. Is the Trust willing to commit to this funding upfront?
2. How much control will the Trust have over the PR activities?
3. Other Issues:
1. The impression given is that if the Trust wishes to pursue this option decisions will need to be made swiftly
2. Can the Trust pursue this option whilst at the same time proceeding with the next stages following OBC approval or would pursing this option jeopardize the normal capital investment process?
3. Would the DH support such an approach – and who ultimately approves such a venture?
4. If the Trust is to pursue this option it is unlikely any funding with be released from SHA to support Trust Project Team, is the Trust willing to underwrite these overheads.
Mark Masters
Director of Projects, Estates and Facilities
July 2008
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Appendix A
Laurie Marsh
30 Grove End Road
London NW8 9LJ
Tel: 020 7289 6081
E-mail:
NOTES for meeting @ Royal National Orthopaedic Hospital (Revised 20 May)
NHS Trust, Stanmore, MIDDX
12 May 2008
Donald Hoodless (Chairman)
Andrew Woodhead (Chief Executive)
Tim Briggs (Joint Medical Director)
John Adams & L P Marsh
An argument against the assumed benefits of (PFI) Private Investment in the Public Sector.
The PFI initiative permits public bodies, government, local or national, to finance major public works via the private sector, it is faulted. One of its principal objectives is to “lose” large amounts of debt.( Off balance sheet)
Large public works are almost invariably undertaken by large scale developers or international contractors, they generally have a board of directors, shareholders, large numbers of financial and legal consultants as well as a deep desire for profits and bonuses.
These entities (even offshore) pay UK corporation tax and tax on payment of dividends and bonuses. They also pay UK tax on salaries and non recoverable VAT for legal, consultancy and accountancy work. In addition, of course, they have to bear heavy overheads. There is no VAT payable for charities or residential new build works, except for professional fees.
The over-riding effect of this accepted system is a requirement for a return on the capital employed which is reflected in a high rental requirement and a retention or reversion in most cases, of the capital asset by the private sector.
A registered charity is permitted to form a subsidiary trading company which can usually negotiate to employ all of the appropriate professional organisations or individuals at lower cost without any of the financial dispersal of funds that are set out above. A special purpose vehicle (SPV) has directors, who are usually unpaid (expenses only) and will not receive bonuses, and because this subsidiary will not make any profit, all surpluses will be donated to the parent charity, it will not pay corporation or dividend taxation. It has been established by actual examples that many of the best professional organisations will accept appointments from charity subsidiaries at discounted fee rates and also offer credit facilities.
Local and national authorities and organisations generally give preference to non profit making organisations, particularly since the “stigma” of bonus or profit is entirely removed.
The private sector is unable to compete financially with a properly constituted SPV charity subsidiary, assuming that like for like criteria are employed within both sectors. The present economic down-turn is substantially circumvented by the SPV charity. The examples below will show, the SPV should be capable of attracting a market even in times when economic conditions are unstable.
SPECIFIC PROPERTY DRAFT EXAMPLE for RNOH Stanmore
A single residential small terraced house or apartment, of average size of say 870 square feet, with an open market value of £475 per square foot would expect to sell therefore, at £413,250. Average incidence of land cost in the private sector would be in the region of £200,000. Construction costs would be in the region of £158 per square foot which would include fees to total £137,460 and a cost including land of £337,460 to show a gross surplus of £75,790, a fairly normal gross return of 23%. In the SPV, this gross surplus almost all becomes net. In the private sector this return would reduce by corporation tax of 28% reducing it to £54,569 and higher rate income tax of 40% on the distributed balance would bring this surplus down to £32,741, the difference being £43,049 per unit. In addition, overheads in medium or large private sector organisations of up to 10% of gross turnover would reduce the potential profit even further. The SPV overheads would probably be at 5% which would be £3,789 per unit increasing the differential to £46,838.
Since there will be no land cost, in this draft example, the SPV would have available to it, £275,790 per unit or an estimated £41,368,500, for 150 apartments in three or four blocks or small terraced houses, depending upon local demand. The site area would be relatively small, say around 3 to 4 acres.
In a well designed, landscaped environment it should be possible to create a layout for an additional 45, quite spacious, detached or semi-detached houses of various types, with sizes ranging from 3,000 to 3,500 sq.ft to average 3,250 sq.ft. The total of residential units would be in line with previous discussions with the Local Planning Department. These houses could be costed at a slightly lower rate than multi-storey apartments, at say £150 per sq.ft to include fees. The estimated gross cost per unit would thus equate to £487,500 and £21,937,500 for the 45. With an estimated selling price of £475 per sq.ft to produce an average of £1,543,750 which in turn would equate to £69,468,750 and a surplus of £47,531,250
If the total housing development were to be carried through in accordance with this draft example, a surplus total of £88,899,750 would be achieved. Interest charges, selling and marketing costs have been ignored. Local selling prices have been checked. The current credit crisis might be expected to abate by the time that these residential properties are ready to be offered, in a phased development.
The mix between apartments, terraced small houses and large houses will be determined by market research. Leisure facilities would be designed into both areas of development.
It is assumed that a Section 106 Agreement might not be required to be implemented by the SPV since the whole of its gross surplus would be expended upon the hospital development which would include around 100 affordable residential units for staff, nurses and so forth. There may still be a requirement for additional affordable housing. Detailed examination of the disposition of the site should provide a location for this potential requirement, the cost of which (excluding land) could well be funded by a Housing Association, many of whom have uncommitted funds. Multiple car parking system units could halve the land area required for parking. Both hospital and residential developments could share in an energy efficient supply source.
Different specialist contractors, probably foreign, might be employed for the widely varying styles of development and the spread of the site but in any event, a negotiated set of rates for the hospital would be expected to achieve a competitive price. Following the substantial downturn in building operations in many European countries including The Republic of Ireland and Spain, for example, it is conceivable that a medium to large, well experienced contractor would welcome an opportunity to retain key staff and to negotiate for this level of work, albeit at a low margin of profit.
Phasing would be of considerable importance since a carefully calculated cash-flow analysis would be required to enable Coutts & Company to consider the bridging facilities, which would be made easier because of the nil land cost. The hospital development would also require linked phasing based upon this cash-flow. Coutts have already confirmed their serious interest, in principal, in funding this project.
LPM
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