Institutional Lease Model

Alan Aisbett,
Tue 13th November 2012

Ravenscraig: Scottish development using TIF

Description and overview

This is the simplest form of institutional investment structure and largely follows a structure favoured by the property industry over the years.

The public sector body employs a developer, probably under a building lease, to undertake the design, construction and finance of the infrastructure.

The infrastructure will be delivered by the developer for a defined price. The infrastructure fund does not therefore take construction risk.

The infrastructure fund will purchase the infrastructure and underlease it back to the public sector body for a rent (indexed to hedge against inflation) and a term equivalent to the period of amortisation. The public sector body will keep the infrastructure in repair throughout the period of the lease.

The structure is probably most appropriate for accommodation where the public sector has an existing revenue budget or it will receive revenue subsidy.

Indeed examples have been seen of RPI leases in Social Housing where housing association registered providers have entered into RPI linked leases hedged by RPI linked increases in rents payable by social tenants.

Pinsent Masons – institutional lease model

Advantages

• Simple and recognisable structure;

• Design, build and finance risk with developer;

• Institutional investors take no construction or operational risk;

• Cashflows hedged against inflation;

• Repayment of debt guaranteed from public sector covenant;

• Potential lower cost of funds due to absence of risk.

Disadvantages

• Infrastructure needs to be simple eg accommodation to guarantee fixed price;

• Public sector takes risk of availability and performance of infrastructure during operation;

• Straight repayment of debt to infrastructure fund over lease period with no incentive;

• Infrastructure fund not incentivised to step in following developer default;

• On balance sheet the public sector as a finance lease.


Conclusions

A structure which will attract institutional investment and is comparable to a public sector lending structure with a public sector covenant guaranteeing repayment of the loan.

However, the absence of risk transfer may question value for money and as a finance lease the cost will be on the public sector balance sheet.

It will be difficult to guarantee fixed construction prices in relation to more complex pieces of infrastructure.

A structure which will attract institutional investment and is comparable to a public sector lending structure with a public sector covenant guaranteeing repayment of the loan.

However, the absence of risk transfer may question value for money and as a finance lease the cost will be on the public sector balance sheet.

It will be difficult to guarantee fixed construction prices in relation to more complex pieces of infrastructure.


Contact Pinsent Masons for more information.


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