hm $444922? [/00 Scottish Enterprise Grampian Agenda Item 5.1 Board Meeting 2 May 2000 For Approval Assistance Towards Provision of Business Accommodation and Industrial/Business Land at Hill of Banchory, Him, Aberdeenshire 1. INTRODUCTION AND PROJECT DESCRIPTION 1.1 The North Banchory Co has planning permission for the development of a total of 10.58 acres of business/industrial land at Hill of Banchory, Him. The project being assessed for ?nancial assistance will represent the initial phase of develoPment at the site. The project will address market failure in the catchment area, and as a catalyst to further development. 1.2 Initially the development will comprise: Circa 20,000 net (in 2 phases, ?rst phase of 13,151 sq ft gross)) of business accommodation in a purpose built building. A range of suite sizes will be available to cater for various categories of business user. I A bespoke Business Centre, (2,814 sf of the total) with units in multiples of 150 sq ft, for small/start-up businesses, to let on ?exible terms. I Circa 3.47 acres (sites 2/3 and 10) of serviced industrial/business land for development. It is anticipated that up to a ?rrther 5.25 acres of industrial/business land will be opened up independently by the developer once con?dence in the location grows. 1.3 A fuller description of the project and its phasing is provided in Appendix A. 2. FIT WITH STRATEGY 2.1 Key objectives of the Scottish Enterprise Network and Scottish Enterprise Grampian are to create a competitive place for business and to promote economic growth. The provision of a choice of business sites and locations is essential within this strategy. Network targets currently highlight the provision of start-up and small business accommodation, premises for innovation, and the attraction of private leverage. The project meets all of these Network criteria. Pagt? 2.2 2.3 3.1 To promote SE Grampian's sustainability objectives and to allow employment opportunities to establish/expand, additional business land and premises in the Aberdeenshire area are required. Banchory is a key settlement within Aberdeenshire but has suffered from a lack of choice and availability of employment accommodation, as recognised by previous SE Grampian commissioned Industrial Land Reviews, and a current Strategic Study into land provision in Aberdeenshire (joint with Aberdeenshire Council). A signi?cant number of residents travel to Aberdeen and elsewhere for employment. The project will meet other SE Grampian aims as follows: 0 It will address rural issues through provision of additional local employment opportunities (see Appendix for job estimates), strengthening the existing community and its wider Deeside catchment, providing an alternative employment base in Aberdeenshire, and an alternative to commuting. - It will address e-commerce opportunities by provision of quality IT in?astructure for use by businesses, by promoting connectivity and by use of IT to encourage new ways of working. 0 Technology may permit links to other business centres in Aberdeenshire and business networking opportunities upon the presentation of a business case by the Enterprise Trusts/centre managers. 0 It is possible that part of the building (or perhaps an adjacent site) could provide a location for the Satellite O?ice Initiative, (promoted by Aberdeenshire Council), allowing remote and sustainable working for employees of major companies oil sector) through the use of appropriate technology. (Discussions on this option are ongoing). - Leverage of private sector funds in the ratio of approximately 11.1. OPTION APPRAISAL Hill of Banchory covers an extensive area and will be the only signi?cant business/industrial land allocation for the area. The development therefore satis?es Structure and Local Plan policy as the only opportunity to signi?cantly increase business land in the settlement. Page?2 3.2 3.3 3.4 3.5 4.1 4.2 High costs are associated with opening up the site, partly due to the requirements to upgrade, and ultimately replace, the access road to the main Deeside Road and to pumping/drainage requirements. Ultimately residential development to the West of the industrial/business allocation may give rise to the potential of cross subsidy for access roads to the greater industrial area, but costs cause a barrier to any deve10pment in the short to medium term, by raising the developer?s perception of risk to an unacceptable level and by undermining initial pro?t margins. Demand ?'om local businesses is known to exist. Aberdeenshire Council, in addition to the developer?s agent, have noted over some considerable period a number of live business enquiries which cannot be satis?ed within the town. (Ref: FG Burnett Submission). The closest alternative location providing a similar choice in terms of quality and type of site is probably at Westhill. However, prices in this location are very high due to the overspill requirements ?om the restricted land supply in Aberdeen City. Using comparable experience ?'om 'I'hainstone, Inverurie, tenants are likely to be drawn from a wide range of disciplines, including a signi?cant percentage of high technology, high growth businesses, plus those engaging in e- commerce. There are no alternative sites available. To ?do nothing? will not relieve market failure, and economic growth in and around the settlement will continue to be constrained, contrary to the objectives of Aberdeenshire Council and Scottish Enterprise Grampian. FINANCIAL APPRAISAL A contribution to funding of ?185,000 is proposed (in accordance with Section 4 (1) of the Enterprise and New Towns (Scotland) Act 1990). This is against a total project cost of for phase 1 and initial sites plus an additional cost of ?702,000 for phase 2 of the business accommodation. Full ?nancial appraisals together with assumptions are contained in Appendix B. A start on site is subject to obtaining building warrants/road approvals only and is anticipated in late summer 2000. The development period will run for circa 9 months, with the accommodation and sites thus being available in mid Page 3 How 70;, 4.3 5.1 5.2 6.1 7.1 2001. Scottish Enterprise Grampian?s contribution will be paid in the second half of SE Grampian?s ?nancial year 2001/2001 with the remainder paid in ?nancial year 2001/2002. The contribution is needed to the initial phase of the building and the serviced sites. The developer does not achieve their required return until completion and letting of phase 2, therefore clawback conditions as listed in Appendix will not be invoked until this point. APPLICANT APPRAISAL The developer for the site is North Banchory Co a member of the Bancon Group. The Group has been established for 25 years and has carried out a number of projects through the Grampian area. The development company itself is relatively new and it is recommended that Group Guarantees are requested. Construction would be undertaken by a member company of the Bancon Group (Bancon Construction Ltd). Funding would be primarily by bank ?nance. The contribution is subject to satisfactory ?nance arrangements being displayed. EVALUATION The project will be evaluated by quantifying: the take up of the business building the success of the Business Centre, and the take up of sites provided by end year 3 and again by end year 5. Also the development cost at the end of construction of phases 1 and 2 will be evaluated against the estimates in the ?nancial appraisal. RECONIMENDATION The proposed contribution of ?185,000 to North Banchory Co be approved subject to agreement of the clawback conditions stated, and other terms of SE Grampian/SE?s normal standard offer. 338(1)(b) 1 6 Page 4 Appendix A Hill of Banchory Assistance to Bancon Project Summary 1.0 1.1 1.2 1.3 1.4 2.0 2.1 Project Description The North Banchory Company (a member of the Bancon Group) owns considerable acreage to the north and east of Banchory for which a variety of planning applications for a mix of uses are being discussed with Aberdeenshire Council. In addition to seeking substantial residential development, Bancon have outline permission for c. 10 acres net developable area of business/industrial land in the location shown on plan A. The development of this total area depends on the provision of a new link road through the sites to the A93. It is likely that this road will in due course become part of a Banchory "Northern Distributor? and will go on to link to residential development to the west of the industrial/business land. Bancon approached SE Grampian for assistance with the costs of this link road to open up the industrial land in 1999 but their approach was unsuccessful. Bancon are now reconsidering a phased approach to the business development. They have detailed planning permission for a business development (of?ce type accommodation); to be built in 2 phases on a 1.87 acre site at the location shown on plan B. This development can be provided with improvements to the existing Hirn Road access. Also it will be possible to access a number of serviced sites off the improved I-Iirn Road. The business development would act as an initial catalyst for the larger project, with subsequent sites being Opened up in later years on a phased basis. The new A93 road access link would not be required till later in the development programme, and by then may receive some ?subsidy? ?'om residential development, or indeed from a ??rming? of land/site values as the area becomes more established and con?dence grows in the business location. The Proposed Development The ?rst phase of development comprises provision of Phase 1 of the business accommodation. Phase 1 totals 13,151 sq.ft. gross, on 2 ?oors. Access road improvements, estate roads, landscaping etc form part of the development costs. Two serviced sites will also be brought on stream to accompany Phase 1. 2.2 2.3 2.4 2.5 2.6 2.7 3.0 3.1 The business accommodation will be modelled on the standard of Davidson House, Aberdeen Science Technology Park and the developer plans to make a signi?cant IT provision (cabling, comma etc) to appeal to a wide range of potential occupiers. The developer envisages that part of Phase 1 (a total of 2814 will be managed as a be5poke Business Centre, with units ranging in size ?om 150 or multiples thereof and available to let on ?exible terms. The developer is formulating proposals for management of this centre. It is proposed that one of the Bancon Group companies will take a headlease of the Business Centre unit. The remainder of the Phase 1 accommodation (0. 7,344 sq.it. net), will be let on normal FRI terms, to tenants of appropriate covenant. Units will be offered in a range of sizes (?om 667 to 2,389 sq.ft.). A maximum of 6 suites in Phase 1 (plus the Business Centre wing) are envisaged. (It is possible in addition that a sister company of the developer would lease a suite of 0. 1,500 sq.ft. for their own occupation). Phase 1 also includes a meeting room of 350 sq ft to be rentalised. Phase 2 of the business building totals 10,527 gross, (9,715 sq.ft. net) and bene?ts ?'om Phase 1 by sharing a common core and associated services. The developer has chosen to phase the building to manage risk of letting, etc. Phase 2 will be let on FRI leases over a range of unit sizes ?orn 1893 sq ft to 2845 sq it. A maximum of 4 suites is envisaged for Phase 2. Phase 2 or the building is scheduled to commence construction late in Year 2, by which time it is assumed Phase 1 will be ?illy let. Potential site deve10pment as part of the initial project totals 3.47 acres, in 2 no. serviced plots (sites 2/3 and 10). Values per acre (serviced) are estimated at ?75,000. A full ?nancial appraisal on Phases 1 and 2, with assumptions made, is attached (Appraisals 1 and 2, Appendix B). The Financial Argument for Gap Funding Appraisal 1 shows the development of Phase 1 of the building, together with the servicing of 2 no. sites. Associated access road improvements, drainage works, landscaping and car parking are included in the cost ?gures. Signi?cant road and drainage costs to open up the (currently green?eld) site are noted. In terms of letting, it is assumed that 1 unit is taken up each quarter (with the Business Centre headlease being taken up and the Business Centre made operational at construction completion). 3.2 3.3 3.3 3.4 3.5 3.6 3.7 The cash?ow shows that without any contribution from Scottish Enterprise Grampian, the development shows a negative NPV and an IRR below 8% (IRR With a contribution of ?185,000 ?'om Scottish Enterprise Grampian, the project breaks even, showing The developer is willing to go ahead with Phase 1 with the bene?t of this contribution, although pro?t levels are well below the accepted development norms, since: I An improved pro?t will be forthcoming on completion of Phase 2 The developer is looking to the longer term and the kickstart to future development possibilities A construction pro?t for the Bancon Group will be made on Phase 1 as a sister company will carry out the contracting works 0 The developer is willing to accept agricultural land value in lieu of acquisition price as the land has been owned by the Burnett family and will be transferred to the development company at agricultural use value. Appraisal 2 shows the subsequent development of Phase 2 of the business building, bene?ting ?'om Phase 1 in terms of core areas and some external works. Appraisal 2 includes the initial phases of the development as described in 3.1 above. The cash?ows demonstrate that once Phase 2 is complete, the IRR for the total development is 10.5%, with the contribution of ?185,000 ?'om SE Grampian. The contribution of ?185,000 is the minimum the developer will accept to achieve their required levels of return. As previously stated they will only receive this total return on completion of Phase 2. Clawback will be agreed for SE Grampian should the developer exceed their target return by completion of Phase 2. By assisting ?iis project it is hoped that the required kickstart to commercial development to alleviate market failure in Banchory will be achieved. Also further commercial land provision for the longer term will hopefully be safeguarded as a growth in con?dence in the area as a business location following completion of Phases 1 and 2 (plus serviced sites) will encourage values and strengthen the potential for ?irther development of the North Banchory Co's land holdings. 338(1)(b) PLAN A 1 - .roposed- Business Centre Hill of. Banchory Hill of Banchory Appendix Financial Info Summary A. Current Drawings Business Centre Business Centre 97/ 1318/ 001H Elev/layout phase 1 Indic Layout phase 2 2 ?oors Phase 1 Gross Net (ground 700.2 561.37 1 521.3 414.95 TOTAL 1221.6 976.32 (13,151 sq.ft.) (10,508 Net to gross 79.9% Phase 2 Gross Net Qromd 579.36 527.07 1 398.64 375.52 TOTAL 978 902.59 (10,527 sq.ft.) (9,715 sq.ft.) Net to gross 92% Notes 1. One wing of Phase 1 will be let as a Business Centre 2,814 sq.ft.) in unit multiples of 150 sq.it. Business Centre will be let on the basis of ?exible terms. 2. Sister company to developer may occupy 1,500 on a lease. 3. Remaining space proposed to be let in unit ranges 667 sq.ft. to 2,845 sq.ft. (approx) on normal FRI terms. 4. ?Ladder effect? to be encouraged, moving up from business centre to bigger units, onto serviced sites, etc. etc. Sites Drawing No 97/13 1 8/ Site Layout/Location Site 1 1.87 acres (Business Centre) Site 2/3 2.57 acres Site 4 0.54 acres Site 5 0.99 acres Site 6 0.47 acres Site 7 1.09 acres Site 8 1.08 acres Site 9 1.07 acres Site 10 0.90 ?es TOTAL 10.58 acres Notes 1. Business Centre occupies Site 1 (1.87 acres) 2. DeveIOper has options of providing additional sites with Him Road access improvements only sites 2/3 and 10 (2.57 0.9 acres 3.47 acres). 3. Other sites require more in?astructure works, access road, ponds, etc. (see drawing e. g. Beyond 2/3 and 10 have to put in link road; beyond 2/3, 4, 9, 10 have to put in second pond, etc. Planning Permissions 1. Full PP for Business Centre at Site 1 Dated 23 August 1999 Ref For North Banchory Co Outline PP exists for the industrial/business park for a total of net development of 4.5 ha 10 acres) Dated 6 January 1999 Ref 5980202PP (See Planning Committee reports on ?le) Egg?(ills? inn.- 5- a a ?as alas-.819 Ila?ii Eu 5- .80 35E. 3: a! snag-?ne Ila; he. Re. REE. 532. Inna-.0 i I a Fli?ii Appendix Economic Appraisal C1 C2 C3 C4 Direct Employment Assuming a space allowance of 80 sq.ft. per person in the Business Centre and 100-150 sq.ft. per person (to allow for ?nniture, ?t out, equipment, etc.) in other suites: Direct Employment Phase 1 84 108 Direct Employment Phase 2 64 97 TOTAL 148 205 Additional direct employment will be achieved on the serviced sites, although FTE numbers will be heavily dependent on the ?nal use choice (business (of?ce) or industrial). Displacement Taking a pessimistic view that only 30% of the jobs created will be truly additional results in a range for net job creation of 44 61 ?ill time jobs. Indirect and Induced Employment The potential for such jobs is considered to be high. Using a local level multiplier of 1.4 and a Scottish level multiplier of 1.5 gives an additional 17 - 24 local jobs, and 22 30 jobs at Scottish level. Construction Employment The total construction costs associated with the project are ?1,959,740. Full time equivalent jobs at Scottish level are therefore 7, of which 4 jobs are at local level. Appendix Required Clawback Conditions - Ifa total capital value (net of 5.25% costs) greater than ?1,937,539 is achieved on the total development (phases 1 and 2 of the business building), Scottish Enterprise Grampian shall receive 50% of the excess. 0 If a total capital value greater than ?75,000 per acre is achieved on the serviced sites, which form part of the initial development (sites 2/3 and 10) Scottish Enterprise Grampian shall receive 50% of the excess. 0 If development costs (here consisting of construction costs and professional fees thereon) are less than ?2,152,170 for phases 1&2 and sites (total), then Scottish Enterprise Grampian shall receive 50% of the savings (see calculation below). Calculation of Clawback on Costs Development Costs: Phase 1 Construction ?1,174,000 Fees ?117,400 Phase 2 Construction ?608,490 Fees ?60,850 Sites Construction ?177,250 Fees ?14,180 TOTAL ?2,152,170