Prime property: a small two-bed flat in Coulsdon could cost the tenant £27,600 a year in rent. But the council opted to pass the financial benefits of the property on to a private company
Here, he goes through the figures and draws some troubling conclusions over the timing of the agreement
Earlier this week, Inside Croydon reported how what Mayor Jason Perry and Croydon Council had claimed to be a £38million sale of Brick by Brick’s 157 flats at Red Clover Gardens to Regen Capital could end up costing the borough’s residents £60million over the next 50 years.
That £60million figure is the difference between this sale and lease-back financing and what using Public Works Loans Board financing would cost to buy back three of the five blocks to use for affordable housing.
You can almost hear the officials at the council, or Conservative councillors, saying, “But we wouldn’t be able to buy three blocks back unless we agreed to this opaque and complicated lease-back structure.”
Well, if that’s the case, then don’t sell them in the first place. It has always been entirely possible for Brick by Brick, or the council, to keep ownership and use the revenues from the rents to pay off the existing loans. The council’s own figures show that these revenues would easily cover the MRP – Minimum Revenue Provision – and interest costs on the existing loans.
“But we wouldn’t be able to get any more Public Works Loans Board financing to buy them back.”
Again, don’t sell them in the first place then. Just keep them and use the rents to pay the existing financing. I’ve also calculated the costs and revenues for Croydon keeping all five blocks and renting them out and this saves even more – £62million.
What it comes down to is this: if it sounds mad to sell five things and then immediately buy three of them back, that’s because it is.
Here’s the detail of this deal. They sold the entire five blocks for £38million to Regen, then leased back three of them (85 flats) for £127.9million over 50 years.
The lease is so expensive because it is based upon inner London housing allowance rates. Coulsdon, and all of Croydon, as we all know, is in outer London. This appears to be a significant negotiation failure by the council.
There is also a 15% increase baked-in every five years. By the end of the lease, we will be paying £4.52million a year for 3/5ths of what we sold for £38million.
The council will then enter into an underlease with Mears for the three blocks. The revenues from this underlease are only expected to be £73.64million. This is because the council will only receive rents at the outer London rates. This is a net cost of £54.57million over 50 years.
Inner or outer: the council’s cabinet member for finance Jason Cummings appears to have agreed a very bad deal for Croydon
As if this is not a bad enough deal, the council also retains responsibility for lifecycle and major works for the three blocks leased. This is expected to cost £9.59million over 50 years.
The expected savings that the council will make from reducing its temporary accommodation costs are expected to be £43.68million. This transaction is expected to be a huge net cost over 50 years. It only delivers net financial benefits by including the reduction in costs from paying off the loans using the sale proceeds. However, these would be realised irrespective of whether they entered into these lease agreements. Hence, they should not be included in any financial assessment.
It’s worth looking at the property ownership structure of this deal.
The original proposal is:
- Sell the all 5 blocks (157 dwellings) to Regen Capital.
- Headlease back 3 of those blocks (85 properties) for provision of affordable housing for 50 years.
- Underlease those 3 blocks to a Registered Provider (Mears) for 10 years who will manage the properties on the council’s behalf.
- Council will nominate tenants.
This was all laid out in Appendix 1 to the council’s original report, published last July.
This structure shows that the council would pay lease payments to Regen at the South East Inner London Local Housing Allowance (LHA) rates. The council failed to negotiate Regen down to Outer South London area LHA rates. Yet the council will receive lease payments from Mears (less their fees) at the substantially lower Outer South London LHA rates.
This differential in LHA rates results in a total cost of the headlease of £127.91million over 50 years, but with revenues from the underlease of only £73.64million. This is a net loss of £54.57million. The “cost avoidance”, that is in not having to pay for temporary accommodation, is only £43.68million. Therefore, this structure is expected to make a loss of £10.89million over 50 years. It only generates a net benefit when you factor in the MRP savings – however these would be made without this structure if you simply sold the properties and paid off the debt.
So why on earth are they doing this if it will cost around £200,000 a year more than current provision of temporary housing?
The answer seems to be in the accounting tricks that they are able do, and I detect that this may well have something to do with Croydon Mayor Jason Perry and his cabinet member for finance, Jason Cummings, seeking to use the deal to gain some political advantage.
Easy money: Mears get the council contract for the first 10 years
Regen have agreed to waive their lease payments for two years. So the council will make a net profit of about £1million a year in that time. With the savings to MRP, too, they should have more than £2million in savings to their day-to-day budget until June 2026 – just after the next local elections. Coincidence? This deal will lose the council nearly £11million over 50 years, but it will allow them to kick the can down the road until after the 2026 council elections.
The previous Labour council was rightly criticised for their lack of business acumen, but this deal is equally bad.
Locking into a guaranteed loss of around £73million over 50 years, with only “expectations” of savings of about £44million is sheer madness.
If these savings are not realised, the losses will be even higher.
The council is taking all the risk, as their revenues and savings are uncertain – while Regen are getting guaranteed revenues (uplifted by 3% per year) for 50 years!
Urgency was to assist Regen avoid a seven-figure stamp duty bill
Does Cummings think that Regen are waiving their payments for two years out of the kindness of their hearts? Of course, they know the council is desperate and the Tories are eager to get this to the other side of the 2026 elections. It is Croydon’s Council Tax-payers who get shafted in the end.
Another “key criteria” behind the use of this structure is to prevent tenants from exercising Right to Buy on the properties Whatever you think of Right to Buy, this is government policy. What we have here is a classic example of a Conservative council putting in place a complex and expensive structure, entirely to circumvent Conservative government policy. The Conservatives want to have it both ways – loudly championing the policy in central government but then trying to avoid it at all costs (literally) when in power locally.
Backing a tax dodge: Croydon South Conservative Chris Philp
In particular, Chris Philp, who is seeking re-election as the MP for Croydon South (where I am standing as the Liberal Democrat candidate) is trying to ride both horses simultaneously – the government minister defending their policies on TV, whilst also the local MP supporting a Conservative council trying to avoid their implementation.
It is hypocrisy on a breathtaking scale.
Another troublesome aspect of this deal is the choice of the underlease. Other options would have been to use either the not-for-profit Capital Letters (a company joined only by all London Councils), or even the council’s own Croydon Affordable Housing LLP. Capital Letters seem to have been ruled out for not being “experienced enough”, despite the fact that it was set up specifically to deal with the issue at hand – homelessness and temporary accommodation costs in London. If they never get to do this for a member council, how will Capital Letters ever get that experience?
Croydon Affordable Homes LLP seems to have been eliminated because they weren’t trusted to deliver the level of service on repairs required. Given the previous failures of Croydon Council to deal with housing repairs internally, this is probably warranted.
However, on a brand new build, how much deterioration on the properties is expected in the first 10 years (as the length of the underlease)? The proposal in last year’s report seems suggest that Croydon Affordable Homes could take over after 10 years, but surely this is back to front? The best time for them to manage the properties, for the council’s finances, would be when they are newest, and the least repairs needed. The proposal even admits that Corydon Affordable Homes were expected to be the lowest cost provider. Yet they didn’t even submit a bid! Why?
The update to the proposal on May 28 this year, when the council was pushing the deal through with some urgency, throws up even more concerns.
The entire reason for this urgency seems to be to assist Regen Capital in avoiding a seven-figure stamp duty land tax bill.
Multiple Dwellings Relief was being abolished on June 1. Therefore, if the sale went ahead after June 1, Regen would have to pay a substantial amount of additional SDLT. Again, this is gross hypocrisy from the Conservatives – their government is expanding the tax base but their council is trying to help a private company to avoid this.
Only in Croydon: the council sold all five blocks – and then leased back three of them, on very disadvantageous terms for tax-payers
Regen seem to employing the pressure selling technique of saying that if the sale doesn’t go through now, we will pull the offer. As a result, the council has agreed to defer their payment to ensure that it goes through.
A multi-million deal going through at the last minute, with no public scrutiny, all to assist a private company to avoid tax.
This doesn’t look like the kind of governance and accountability that was expected by Croydon residents and promised by the Executive Mayor.
This doesn’t pass the sniff test.
The Tories are setting up a complex structure in order to circumnavigate their own government policies and make their accounts look better until after the next local elections. In the meantime, two private companies get to make a fat pile of cash from this arrangement at Croydon tax-payers’ expense because they know that we’re desperate.
Regen gets guaranteed rising income for 50 years, whilst Mears gets to manage the properties when they are the newest and least in need of any repairs. It’s a fantastic deal for them and a terrible deal for Croydon residents.
Those who thought that the Tories were the solution to the financial mismanagement at Croydon Council are sorely mistaken. Their business acumen is no better than Labour’s. The only difference seems to be that under the Tories, we get screwed by the private sector, whereas Labour screwed it up themselves.
Croydon needs a better choice than either incompetency or something that is looks as if it is getting close to corruption.
- Richard Howard is a professional financial analyst. He is the Liberal Democrat Party’s General Election candidate in Croydon South
Read more: Perry’s ‘sale’ of Coulsdon flats will cost Croydon £60million!
Read more: Brick by Brick’s final flats put up for rent at £2,400 per month
Read more: BxB’s collapse was predictable. Why did no one else notice?
Read more: Building towards the council’s financial ruin, Brick by Brick
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