REPORT OF THE DIRECTOR OF RESOURCES
14 OCTOBER 2013
PARC Y SCARLETS AGREEMENTS
HEAD OF SERVICE AND DESIGNATION
R JONES - Director of Resources
1.1 Following County Council approval in November 2007, a Development Agreement between the Council and the Scarlets Regional Limited (formerly Llanelli Rugby Football Club Ltd and hereinafter called the “club”) was entered into which culminated in the opening of the stadium and surrounding sports facilities at Parc y Scarlets in November 2008.
1.2 Ownership of the freehold of the property resides with the County Council and the facilities are occupied and managed under a leasehold agreement by the Club. Overall funding arrangements for the development were set out in the 2007 report, but for the purposes of this report the following undertakings are relevant.
1.2.1 The County Council was required to provide the Club with a loan up to a maximum value of £2.6m at a commercial interest rate. (The actual loan granted was £2.4m at a rate of 7%). Interest is paid monthly and the loan is scheduled to be repaid in 2023. Interest due on the loan was personally guaranteed by the Club’s funding directors for the first 5 years. An Investment Agreement was also entered into in 2008 between the County Council and the (then) funding directors of the club which granted priority status to the Council debt.
1.2.2 The Club was required to pay an annual sum to the County Council towards a sinking fund, such fund to be used at the Council’s discretion on the facilities in the future. The value of this fund was capped at £0.5m and thereafter to be increased by inflation. Following discussions with the Club, officers agreed the following payment profile:
End of year 1 £25k
“ 2 £50k
“ 3 £75k
“ 4 £100k
“ 5 £125k
“ 6 £125k
1.2.3 The agreements provide for rental to be paid by the club when income generated from rugby related use of the facility exceeds certain thresholds as follows:
Income between £2.2m and £2.8m – rental paid at a rate of 10%
Income in excess of £2.8m - rental paid at a rate of 20%
Both thresholds are subject to annual RPI adjustments
2. CHANGES IN 2010
2.1 In October 2010, following a proposal submitted by the Club the following amendments were agreed:
2.1.1 Whilst loan interest remained at 7%, for a three year period, 3% of this was rolled up and became repayable upon termination of the loan in 2023. The sum due upon maturity now stands at £2.616m. In return the funding directors converted £4.4m of their own loans to the club into equity and also agreed to write off a significant level of accrued interest.
2.1.2 Contributions into the sinking fund were deferred for a period of three years, with the first payment of £25k now becoming due in 2013.
3. CURRENT POSITION
3.1 The changes agreed in 2010 having expired we now revert to the original agreement. The club however, have indicated that they continue to face challenging financial pressures and despite a significant reduction in their cost base, any significant increase in interest payments at this juncture would be problematic to them. They also draw attention to the fact that whilst 7% was a commercial rate of interest back in 2008, since the economic downturn interest rates have reduced significantly .They have therefore requested a renegotiation/review of the terms of the original agreement.
3.2 The interest due on the loan must reflect a commercial rate. A comparison of interest rates over the last 5 years show the following:
Feb 2008 Sept 2010 July 2013
Bank Base Rate 5.25% 0.5% 0.5%
PWLB 15yr 4.68% 3.9% 4.0%
The club argue, given the fall in rates since inception of the loan, a review of the terms is justified and have requested that the reduction approved in 2010 be made permanent
3.3 The inclusion of the sinking fund into the Agreement was a “belt and braces” option introduced by Council officers to provide funds for the ongoing maintenance of the facility in the event that the club defaulted on its obligations under the lease. Specifically the fund was to provide funding for the replacement of the athletics track, replacement of the artificial surface in the training barn as well as general repair and maintenance of the whole facility. In 2010, the Council was satisfied that the club was meeting its obligations under the lease and this allowed for a deferment in the required payments .The following points should also be noted;
1 Any monies within the sinking fund can only be utilised towards the maintenance of the facility and cannot therefore be called upon by Council for any other purpose.
2 If the club defaulted on their lease obligations there would be no requirement on the part of the Council to step in and carry out any works at taxpayer expense.
3.4 Given that the club continue to meet its lease obligations and in view of the current economic climate they have submitted a request that the requirement to contribute into the sinking fund be reviewed once again and in support of the request they have set out the following
3.4.1 Athletic Track
The track is subject to an annual inspection by UK Athletics (UKA) with the most recent one taking place in April of this year. Overall UKA are very happy with the management and current condition of the track and the club continue to work closely with the Athletics club to ensure that the track remains fit for purpose and no major issue have arisen to date
Based on discussions held with the company that laid the track and based on current usage and maintenance a further 10-12 years life expectancy could be expected before any major replacement /
refurbishment would be required. At today’s prices this would cost in the region of £86-120k.
3.4.2 Training Barn Surface
Correspondence received from the manufacturers/installers of the playing surface states that with continued good maintenance the surface could achieve a further 4-6 years of use before it required replacement. Current cost of replacement is estimated at £55-60k.
3.4.3 General Repair & Maintenance
A recent inspection by officers from the Authority’s Technical Services department found that the general condition of the building/s was satisfactory but some minor works were required. Officers have met with representatives of the club to agree the required programme of works to be carried out over the next 12 months. In future annual inspections will be carried out by Council officers and any remedial works required will be agreed with the club.
3.5 In return for the Council agreeing to this request the club would offer the following:
1. The club would make available its squad members to promote Council services or any initiatives that the Authority wished to undertake. The number of days to be subject of further debate and agreement between the parties
2. The income thresholds at which point the club are required to pay rent would be reduced from £2.2m and £2.8m to £1.5m and £2m respectively, with no RPI adjustment whilst the Council loan remains outstanding. This would bring forward the potential for the Council to generate rental income from the facility.
3. Interest to be charged on both the original £2.4m loan and the rolled up interest of £216k
4.1 The financial plight of the club is well documented and reflects the wider economy as a whole. Whilst a review of historic funding arrangements is something many businesses may be looking at currently with the financial institutions that support them as regards the club’s request utmost in the mind of members must be the interest of the taxpayer.
4.2 With regards to the sinking fund given the arbitrary nature of setting the original funding contributions within the Lease Agreement and taking account of the evidence presented by the club both in terms of their record of meeting their obligations to date and the likely costs to be faced in the next 10 years or so, a review of the payment profile would appear to be justified.
4.3 This could be achieved in a variety of ways. For example a further deferment (say 3 years) could be agreed for payments due into the fund, which would ensure that by January 2018 sufficient funds should be available to replace/repair both track and indoor barn surface. Payments due would then be as follows:
Payments post 2018 would then be subject to a further review, and if no agreement was reached then annual payments would remain at £75k
Alternatively, the current timetable could be maintained but with a revised payment profile as follows:
2013 – 2015 £10k p.a
2016 - 2022 £15k p.a
2023 0nwards £25k p.a
4.4 Turning to the loan interest, whilst the points made by the club as regards the current financial climate are valid there is no requirement for the Authority to review the terms unless they choose to do so. However members need to balance the interest of the taxpayer with that of the club and to also ensure continued occupation of the stadium. It should also be borne in mind that the current economic conditions will not last forever and it is hoped that sometime between now and 2023 , the financial climate will improve
4.5 One option which may satisfy both parties would be to convert the loan from a fixed to a variable rate linked to the bank base rate. If the loan was set at base rate plus a premium of 3.5%, this would give a current rate of 4% and slightly improve the level of income currently received by the Authority. As interest rates are at historically low levels it is also likely that interest payments will increase in future thus increasing investment income to the Authority. However longer term, if interest rates were to increase significantly it could place an unaffordable burden on the club. This could be avoided by introducing a maximum cap on the interest rate of (say) 10%
5.1 That the Executive Board amend the terms of its agreements with the club as follows:
5.1.1 with effect from April 2013 contributions to the Sinking fund be amended to the following:
2013 – 2015 £10k p.a
2016 - 2022 £15k p.a
2023 Onwards £25k p.a
5.1.2 the interest rate due on the County Council’s loan to the club be set at 3.5% above the bank base rate, with interest to be capped at 10%.Interest to be charged on the principal sum of £2.616m and again to be effective from April 2013.
5.1.3 the above being subject to the offer put forward by the club and set out in paragraph 3.5 above.