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BUSINESS IMPROVEMENT DISTRICTS WORKING GROUP PAPER 04/13
INVOLVEMENT OF LANDLORDS IN BID PROJECTS

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Introduction

2. Members need to reach agreement as to whether:

• Landlords should be formally involved in the funding of BID projects, or
• Landlords should be voluntarily involved in the funding of BIDs projects (as in England and Wales)

3. Advice has been sought from Scottish Executive Estates officials on the practicalities of involving landlords formally; this is condensed at paras 6-9.
5. As members will be aware the majority of those who responded to the consultation believe property owners should contribute towards the funding of BID projects. Views were split on how this should be done due to the difficulty of formally involving owners via legislation. Members of the Working Group have also indicated they think it is important that property owners are involved, and if possible it would be preferable to do this via legislation to ensure consistency.
7. To date no proposals have been submitted on this topic. However the Group has been passed 3 potential proposals for the formal involvement of landlords. Model 1 (paras 10-15) was passed to Secretariat by Stephen Ashworth of the Circle Initiative in London, who had asked for this approach to be included in the English legislation. Attached at Annex A are the proposed amendments to the Local Government Act 2003, which governs BIDs in England and Wales (additions relating to property owners are tracked in red). Models 2 and 3 (paras 16-17 and 18-22 respectively) were devised by Jones, Lang, Lasalle, again for the Circle Initiative, and distributed to members via hard copy. Summaries of these proposals are set out below.
9. Views are welcomed from the Group on the practicalities of the approaches below and whether any other models should be considered.

10. Advice from Estates Officials in Scottish Executive

11. Advice from estates colleagues states that in their view it is fundamental that property owners are formally involved in progressing, instigating, developing, implementing and funding the BID. The funding and contribution via a levy should be compulsory. A mechanism is required to prevent owners (particularly institutional funds) from passing the BID levy onto the tenant/occupier through the service charge provisions of leases. They believe that without the involvement of property owners BIDS are fundamentally flawed as the benefits of a successful scheme are increased property values and/or increased range and speed of lettings which enhances the owner's assets.
13. They also suggest that the Group approach both the Royal Institution of Chartered Surveyors (RICS) and the Scottish Assessors Association for advice on any proposals we consider regarding the involvement of property owners in a BID project.
15. They noted that the recommendations for Ministerial consideration deal with the "involvement of property owners". In addition the Jones Lang LaSalle (JLL) report and indeed the English pilot projects are also concerned with property owners and occupiers. If the Group sticks to that term it would remove the complexity of identifying the potentially extensive layer of landlords between occupiers and owners.
17. Issues for the Group to consider regarding the involvement of property owners are:

• The weighting of voting powers within the BID scheme:

• Whether owners may seek to increase rents in order to cover the costs of the levy.

• Rental increases as a result of improvements made would be reflected in a Non Domestic Revaluation, thus increasing rateable values and ultimately rates bills, with the knock on effect that BID payments would increase unless reviewed. England have allowed for this by enabling BID Boards to use the rateable values at the time of the BID project being agreed, with no changes during the lifetime of the BID.

• Does consideration need to be given to owner-occupiers to ensure their contribution does not exceed that which separate owners and occupiers would pay?

Model 1: Circle Initiative Legislative Proposal

11. The proposal that the Circle Initiative preferred is:

• firstly identify all relevant properties ;
• then identify all interests lying behind these;
• then allocate the percentage of the BID levy to be paid by the occupier, depending on an approximation of the benefits;
• finally allocate the balance of the BID levy to the property owner.

12. The draft legislation proposed would have allowed this to be a feature of any BID proposal, with responsibility for determining exact funding arrangements left to each BID Board. Anyone being asked to contribute would have a headcount vote, but no one would be allowed to vote more than once (this prevents property owners from having a vote for each subject they own in the area). The RV based vote would be split according to the proportion of the BID levy for the property. If the occupier contributed 25% of the levy payment, and the owner 75% then the vote would be split 25/75.
14. It may be useful if the primary legislation included a specific requirement on local authorities, at the request and cost of BID proponents, to use their existing statutory powers to assemble information on land ownerships.
16. Legislation can also address the issue of enforcement against the owners of superior property interests. This could be in the form of the creation of a statutory debt, the prevention of any transfer of that interest in land (or the shares in a company if an SPV) etc.
18. Legislation could also address the issue of any changes in the nature of the superior property interest. For example if a superior lease is surrendered or reaches the end of its term there will need to be provision for the allocated proportion to be borne by the next superior interest.
20. The legislation should ensure that any BID proposals set out the information needed to identify the information required under Clause 48(1A)-(1D) below.

21. Jones, Lang, Lasalle (JLL) Paper

    Model 2: Formula Model

22. The Formula Model JLL devised is based on an apportionment between owners and occupiers based on:

• a banding of interests by reference to lease length (adjusted to reflect the BID business plan and services);
• apportionment of the owner levy between owners on the basis of net rent receivable and lease length subject to a threshold test of sufficient economic interest.

18. The Formula model relies on a calculation based on these two measures of value and is subject to a test of sufficient economic interest. If a party can demonstrate they have insufficient economic interest they can be exempted from the levy.

19. Model 3: An Alternative Approach

20. JLL also devised a less complex approach where occupier and owner interests could be assessed in relation to relative broad value bands (rather than measured in absolute financial value terms).
22. This approach categorises property interests through a subjective assessment of the term of interest and net rent receivable. It is the BID manager who will assess the appropriate value band for the individual interest.

23. Collection and Analysis of Relevant Data

24. The BID Levy assessment model requires the collection of data relating to:

• Rateable value of all interests in the BID area;
• Ownership details for all properties within the BID area.

22. In relation to rateable value data it is anticipated that local authorities/assessors would provide the relevant data to the BID management.
24. The collection of property ownership data for BIDs could be done via the use of statutory powers. Upon service of notice this would require property owners to provide certain basic information regarding their interest to the BID management (or local authority for the use of the BID). Such provisions could be included in the draft BID legislation.

BIDWG Secretariat
November 2004

Annex A

BUSINESS IMPROVEMENT DISTRICTS

Proposed amendments from Circle Initiative

The purpose of the BID arrangements is to enable:

2. the projects specified in the arrangements to be carried out for the benefit of the business improvement district or those who live, work or carry on any activity in the district
4. those projects to be financed (in whole or in part) by a levy ("BID levy") imposed on the non-domestic ratepayers, or a class of such ratepayers, in the district )¹in relation to a hereditament owned in the business improvement district ("relevant hereditament"
6. to that held by the non-domestic ratepayer ("owners of superior property interests") on whom the BID levy is imposed³ of property owners, with an interest in the relevant hereditament superior ²where so specified in the BID arrangements, all or part of the BID levy to be paid by property owners, or a class

48 Liability for BID levy

(1) BID arrangements must specify the description of non-domestic ratepayers in the business improvement district who are to be liable for BID levy for a chargeable period.

2. Any owners of superior property interests must be described in the BID arrangements

3. The means of calculating any BID levy to be paid by an owner of a superior property interest must be set out in the BID arrangements and must be an allocated proportion of the BID levy ("allocated proportion") in respect of the relevant hereditament
5. The BID arrangements must specify the residual proportion (if any) of the BID levy ("residual proportion") for which the non-domestic ratepayer will be liable
7. The aggregate of the allocated proportions and the residual proportion of the BID levy shall not exceed the amount that would be charged if the BID levy were being paid only by the non-domestic ratepayer

52 Approval in ballot

2. BID proposals are not to be regarded as approved by a ballot held for the purposes of section 51 (1) unless two conditions are satisfied.
4. The first condition is that a majority of the persons voting in the ballot have voted in favour of the BID proposals.
6. ⁵For the purposes of the first condition no person shall be entitled to more than one vote
8. The second condition is that A exceeds B.
10. Where BID levy is to be paid by the owner of a superior property interest for the purposes of calculating A and B the owner of the superior property interest shall be treated as voting in relation to the allocated proportion of the rateable value of the relevant hereditament and the non-domestic ratepayer shall be taken as voting in relation to the residual proportion of the rateable value of the relevant hereditament
12. A is the aggregate of the rateable values of each hereditament in respect of which a person voting in the ballot has voted in favour of the BID proposals.
14. B is the aggregate of the rateable values of each hereditament in respect of which a person voting in the ballot has voted against the BID proposals.

53

In deciding whether to exercise the veto a billing authority must have regard to:

2. the identification of the classes of owners of superior property interests proposed to be charged
4. any classes of owners of superior property interests who are not proposed to be charged
6. the allocated proportion proposed to be charged to each owner of a superior property interest

⁷ in relation to the manner in which the projects specified will be financed ⁶and shall exercise the veto unless it is satisfied that the proposed BID arrangements are fair and equitable

[other than an interest created after the date on which the BID arrangements come into force]⁸No owner of a superior property interest shall seek reimbursement of the allocated proportion from any other owner of an interest in the relevant hereditament

Footnotes

¹ The intention is to tie the BID levy to the hereditament.

² This is important. It will be for local BID proponents to identify which classes of property owner should be involved. This will partly relate to issues of equity (who will benefit etc) and partly administrative ease (it is pointless chasing a residual freeholder behind a 999 year lease who has no economic interest in the BID).

³ DWS will check whether this is sufficiently clear and capable of being understood by property lawyers.

⁴ The intention is to ensure that superior property interests are tied to the relevant hereditament. In many cases the owner of the superior property interest will be tied to a significant number of relevant hereditament, eg where a freehold owner has granted several occupational leases. In such cases the owner of the superior property interest would be identified in relation to each of those relevant hereditaments.

⁵ This is required in order to ensure that, for example, the owner of a shopping centre who would otherwise have multiple headcount votes in relation to each of the relevant hereditaments does not imbalance the vote

⁶ "equitable" is used in, for example, s278 Highways Act 1980.

⁷ Care needs to be taken to ensure that, for example, a BID does not come forward identifying a single large freeholder (but not others) in a way which would require that freeholder to make a significant contribution not being one of such scale that the ballot box would provide protection.

⁸ This seeks to prevent the BID levy simply being passed back to the occupier. If a new tenant accepts the responsibility to pay the BID levy then that is fine but it would not be equitable in relation to an existing lease/rent unless there was a balancing rent review