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HM Treasury stops public loans to Council’s for Commercial Property

In March 2020, HM Treasury published its Public Works Loan Board Future Lending Terms Consultation. The Consultation not only revealed that between 2016-2017 and 2018-2019, Local Authorities bought an estimated £6.6 billion of commercial property[1] but that this rise of “debt-for-yield” activity had led to Public Works Loan Board (“PWLB”) funding being used for different purposes to what was originally intended, increasing the financial risk to the Government and reducing the availability of PWLB funding for other local authority activities.[2] Its proposed solution was to end access to PWLB funding for Councils who intended to purchase commercial assets to generate income.

Following the Government’s Spending Review 2020, and the publication of the Balance Sheet Review Report, from 9am on 26 November 2020, the lending terms will change and loans from the PWLB will no longer be available to Local Authorities (“LAs”) investing in commercial property to generate income.

This article looks at some of the key questions and impacts for local authorities.

When do the new lending terms come into force?

9am on 26 November 2020.

Do the new lending terms apply to existing loans?

The new lending terms apply to all loans arranged from 9am on 26 November 2020.

What are commercial assets for yield?

PWLB loans can no longer be used to buy investment assets primarily for yield. HM Treasury Guidance[3] states that investment assets bought primarily for yield would usually have one or more of the following characteristics:

  1. buying land or existing buildings to let out at market rate;
  2. buying land or buildings which were previously operated on a commercial basis which is then continued by the LA without any additional investment or modification; and/or
  3. buying land or existing buildings other than housing which generate income and are intended to be held indefinitely rather than until the achievement of some meaningful trigger such as the completion of land assembly.

Can LAs still purchase commercial assets for yield?

LAs that wish to buy commercial property primarily for yield can no longer use loans from the PWLB to fund this and would have to seek alternative sources of funding.

Can LAs still access the PWLB going forwards?

The PWLB can still be accessed by LAs and LAs wishing to borrow from the PWLB will be required to:

  • provide high-level capital spending and finance plans for the following three years, including their expected use of the PWLB; and
  • provide confirmation from the s.151 Officer or finance director that:
    • the LA does not intend to buy investment assets primarily for yield at any point in the next three years; and
    • the LA is not borrowing in advance of need.

Plans will be submitted via DELTA which is run by MHCLG. These can be revised throughout the year.

How often will LAs need to submit this information?

If applying for a new loan, LAs will need to confirm that the plans and confirmation previously submitted are still valid.

What happens if loans are considered to be “deliberately misused”?

If HM Treasury considers a PWLB loan to have been deliberately misused it can:

  • suspend the Local Authority’s access to the PWLB; and
  • in extreme cases require repayment of the loan.

Are PWLB Interest Rates affected?

The Government has confirmed it will lower the interest rate on new PWLB loans, which will likely be welcomed by Local Authorities, especially given the severe impact of Covid-19 on public sector spending.  This change will apply to all new Standard Rate and Certainty Rate loans arranged from 9am on 26 November 2020.

If you would like any more information then please contact our Public Sector Team who will be more than happy to assist you.

 

[1] The Balance Sheet Review Report, Improving Public Sector Balance Sheet Management, HM Treasury November 2020, paragraph 5.5.

[2] The Balance Sheet Review Report, Improving Public Sector Balance Sheet Management, HM Treasury November 2020, paragraph 5.5.

[3] HM Treasury Guidance accessed via the United Kingdom Debt Management Office.

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