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Local asset backed vehicles

This guide was last updated in August 2011.

Regeneration faces major challenges in the aftermath of the credit crunch and a reduction in public spending. Public sector cuts, a lack of grant funding and minimal real estate lending make regeneration difficult. The focus on efficiency and value for money is encouraging the creation of alternative methods of funding.

Local asset backed vehicles (LABVs) are being increasingly used to combine private sector finance and skills with public sector real estate as a means of driving development and investment. In the basic LABV model, a public sector body will create a corporate entity with a private sector partner. The public body transfers real estate to this entity, and the private sector partner matches the value of those assets with cash. These investments form the equivalent of the parties' 'equity' in the LABV.

In this way, the vehicle is endowed with both land and cash. It can invest the cash in a way that enhances the value of the land - for example by obtaining planning permission, providing infrastructure or carrying out development works. Profits will then be shared between the public and private sector partners, enabling the public sector body to either recycle funds into the LABV or use the money for other purposes.

When are LABVs appropriate?

The LABV model can be used where a public sector body holds a significant asset that it wants to develop over the medium term (say 15 years), while influencing what is delivered in terms of quality, infrastructure and timing. It can also enhance the value of the public sector body's investment portfolio.

Private sector companies find the model attractive because, among other things, it:

  • provides an opportunity to invest equity in a way which is backed up by commitments and promises from the public sector;
  • offers a significant pipeline of opportunities over a period of years;
  • generates flexibility.

Public sector bodies approve because this allows them to:

  • regenerate areas while using the land as equity;
  • influence a living business in the form of the LABV;
  • share in any returns generated by the LABV pro rata to their equity stake.

Requirements for delivery

The LABV model does involve risk, but it can be adapted to accommodate the level of risk acceptable to the public sector body.

Investment LABV: this can be used where a site requires significant investment to make it marketable - for example where major infrastructure, remediation or substantial planning input is required - but otherwise the opportunity is viable. A private sector investment partner will fund this requirement. Once the works have been carried out and the value of the site enhanced, the LABV will sell it or parts of it on the open market. The increase in value will be distributed to the partners.

In this model the risk adopted by the LABV is relatively low, but the amount of profit will be fairly modest.

Once the LABV is established it will employ professionals, possibly including a construction team, to help it achieve its aims. The contracts for these will be tendered on the open market. The private sector partner will only be concerned with investment issues.

Value-capture LABV: in this model, the LABV will act as the developer as well as ensuring that sites are ready for development. It will carry out infrastructure works, obtain planning permission and undertake any necessary remediation of the site.

This type of LABV provides greater scope for profit, but the risks will be higher. The development expertise of the public sector partner - particularly its development skills in bringing sites forward - will need to be harnessed in addition to its financial investment to enable the LABV to carry out its activities. However, it will often tender the construction supply chain and sites that are immediately available on the open market.

Integrated delivery LABV: this will deliver most if not all of the required development, and so carries the greatest risk – and the greatest scope for profit. The construction supply chain is procured before the LABV is established. The vehicle potentially carries the risk for land assets, planning, infrastructure, some or all construction and sales.

Market conditions

Under today's market conditions and policies, participants must carefully consider how best to make these models effective. Traditional public sector regeneration funding is more restricted, land vales are reduced or even negative in some areas and development finance is not readily available.

The public sector partner must consider at what time the value of the land will be finalised. In many cases, sites will be subject to conditions that have to be satisfied before the land is transferred to the LABV. This should generate a higher land value, and a consequentially higher cash match from the private sector partner.

It will also be important to consider how best to make use of emerging income streams to increase the value of the land. For example energy service companies, multi-utility service companies and similar structures can be used to harness income streams in areas such as solar power, or to act as partial infrastructure funders where the asset owners are funding the infrastructure costs.

The emerging rental market can generate a yield to cover financing costs, particularly in areas where sale prices are lower than expected.

Existing and future delivery mechanisms

A number of other mechanisms and structures are available to deliver and finance property development and investment. These include:

  • tax increment financing;
  • the community infrastructure levy;
  • rental fund structures;
  • traditional contracts and development agreements.

Public bodies are likely to choose mechanisms that are most relevant to local circumstances.

The emerging public sector co-investment fund structures are also interesting. Under these, multiple public bodies will combine funding streams – and sometimes assets – into a public sector fund relating to a particular area. These funds have their roots in the urban development funds under the Joint European Support for Sustainable Investment in City Areas (JESSICA) initiative. They are, however, wider and cross more than one particular funding stream. The principle thinking is that these funds will recycle receipts generated from projects in the area to which the structure relates, as well as generating a return for public bodies and attracting institutional funders such as local authority pension funds. A number of local authorities are considering the structure as a potential area-based funding mechanism.