Over the last few years, the call for Regeneration as a key part of the solution to a number of challenges has been getting louder and louder. With the need to:
Address the quality of existing homes
Through the production of new homes that meet the needs of customers/occupiers
Improve Social Investment
To ensure that developments and community needs are addressed in particular to accommodate the needs of occupiers post covid.
Utilise new technologies
to improve de-carbonisation and environmental impact and ensure that homes are able to meet the needs for the future
Deliver New Homes
To deliver more much need housing across a variety of tenures and requirements.
Regeneration is not a fixed defined term and the beauty of a wide interpretation means that a variety of different projects can potentially be delivered. These can be small changes from disused garages or amenity space to new homes and community infrastructure to large scale multi-phase developments delivering significant infrastructure as well as commercial and residential uses. All of them are important and they all have different considerations that need to be accommodated.
These projects come with significant costs and demand differing levels of financial investment and risk allocation. We are increasingly seeing long term, complex, multi phase regeneration projects utilising joint ventures models in order to share costs/risk/knowledge and obtain access to opportunities and capabilities.
We set out below some of the key considerations for joint venture partners to consider at the outset of regeneration joint venture discussions.
Joint ventures may be structured in a number of ways. The choice of structure is typically informed by factors such as any third party funding requirements for the project, the desire to ring fence risk and the ownership of the land. The most common joint venture structure is a 50:50 limited liability partnership (LLP). This may be
- a single LLP (for a single or multiple phase regeneration); or
- multiple LLPs as (one LLP per phase of the regeneration).
While LLP joint ventures are the most common structure for a regeneration, they are not the only option. Contractual joint ventures remain a popular choice, in particular where there is no requirement to obtain third party funding. These have a particular niche in relation to smaller regeneration projects.
Irrespective of the form of the joint venture, there are a number of key considerations which the parties will need to consider from the outset.
Conditions & Longstops
A regeneration joint venture is likely to require one or more conditions prior to commitment to proceed with the regeneration in earnest, for example
- Planning – if the site does not have planning permission, it is likely that the parties will require a planning condition. Consideration will be needed as to the detail of any such planning condition e.g. is this a minimum number of units only, a more detailed satisfactory planning concept? Ensuring sufficient approvals by the joint venture partners of any planning applications will also be important.
- Funding – joint venture partners usually commit to provide some/all of the funding required for a project. Depending on the business plan, the project may also require additional finance such as grant and/or third party funding. If external funding is required, a funding condition may be necessary.
- Viability (see below)
- Vacant possession – a regeneration project will inevitably involve a site that is at least partially occupied. In addition, replacement homes may be required for those residents who wish to remain.
The parties will also need to consider appropriate longstop dates in the event one or more condition are not met. The parties will need to balance the desire to give sufficient time to satisfy each condition with any requirements to have the ability to terminate the joint venture. Ultimately it is standard to include an ability to unilaterally ‘walk away’ at a certain point. The documentation will need to address whether there are any caps on costs to be incurred prior to unconditionality and how such costs will be met.
In light of the long term nature of many regeneration projects, it is common for the joint venture agreement to include a viability mechanism / condition whereby the parties agree that they will only proceed with the project (as a whole)/phase if a pre agree viability threshold is met. This threshold may apply to the project and/or the applicable phase. Typically, if viability is met the joint venture partners are obliged to proceed. Again, the obligation to proceed may related to the project or a particular phase. It is important that the parties are happy with the scope of the viability test and whether it is to apply to entire projects or certain phases. There is a balance to be considered between ensuring delivery of phases versus longer term commitments that will need to be considered.
Viability mechanisms give rise to a number of questions, for example:
- Should viability be calculated on the basis of the applicable phase or the regeneration as a whole?
- When should viability be run? This is particularly important in a multi phase regeneration. Initial viability may be run on grant of planning, prior to the acquisition of the site, prior to commencement of construction? Does it also need to be run at the same (or different) trigger point in respect of each Phase?
- Are there any phases of the regeneration which the parties do not expect to satisfy viability – how is the requirement to proceed with such a phase to be deal with?
- Does viability of a phase trigger an obligation to proceed with that phase only, or all or some of the future phases in the regeneration? It is not only financial commitments that will need to be considered but also infrastructure, vacant possession approaches, planning and work requirements that need to be factored in when determining the scope of what must be delivered for a viability test.
- How long is the longstop for achieving viability?
- What happens if viability is not met at the longstop – an ability for either party to walk away unless otherwise agreed?
There is a lot to consider in regeneration given the additional layers that such projects bring in addition to the standard risks associated with development of new homes. Joint ventures have the benefit of ensuring that key parties and potentially stakeholders are engaged in the project and that all parties are focused on the successful delivery of much needed regeneration.
We are very excited to be partnering once again at UKREiiF 2024, we expect regeneration and sustainability to be high up on the agenda.
For more information please contact Joanna Bouloux or Jonathan Corris.