APPENDIX A
London Councils Executive
London Councils Premises Strategy
Report by:
Frank Smith
Date:
29 November 2010
Contact
Officer:
Stephen P.W. Davis
Telephone:
020 - 7934 9701
Item no: E1
Job title:
Director of Corporate Resources
Email:
[email protected]
Summary
This report builds on the information considered by the Executive at their
meeting on 29 March 2010 and further explores the options for London
Councils when the current lease for the Southwark Street premises ends
in March 2011.
Recommendations
The Executive is asked to:





Note the pool of potential properties identified by a property
search detailed in this report;
Note the respective estimates of on-going and transitional costs
and potential savings associated with options for moving to a new
premises as well as with remaining at the Southwark Street site;
Agree that officers enter into negotiations with the City of London
to enter into a new leasehold agreement for a reduced amount of
space on the Southwark Street site;
Agree that the budget for refurbishment works and any
dilapidation costs should not exceed current budgetary provision
for depreciation over the life of the new lease; and
Note that approvals for Heads of Terms and final Leasehold
Agreement will be subject to final member approval.
Introduction
1. On 29 March 2010, the Executive considered a report on London Councils future
premises strategy. The Executive noted the report and originally agreed to receive a
further report on the premises strategy in June 2010, at which point the Executive would
be asked to make a decision on the future options open for consideration.
2. As the future size and shape of the organisation has been under review and this has a
major impact on the requirements for the premises strategy, the report was deferred with
the agreement of Group Leaders until Leaders’ Committee had made a decision on
reductions in the scale of the organisation.
3. The current ten-year leasehold agreement with the City of London Corporation for the
occupation of 59½ Southwark Street by London Councils ends on 25 March 2011.
Officers have, since early 2009, been exploring the options for London Councils premises
strategy after this date and this issue has been considered by the officer Corporate
Management Board (CMB). The analysis from that work was presented to the Executive
in March 2010. Since then, the analysis has been further updated and fresh consideration
has been given to premises requirements in the light of the changes in the size and
shape of the organisation.
4. This report, therefore, sets out the findings of the analysis and compares options about
the on-going and transitional costs as well as the potential savings associated with
options to move to alternative premises or to stay at the Southwark Street site. The report
recommends the negotiation of a fresh lease with the City of London on the Southwark
Street site from 2011 but on a reduced space requirement to reflect agreed changes to
the size and shape of the organisation. The savings secured on this, along with other
savings secured in the cost of premises, would be passed on to member authorities via
further reductions in subscriptions.
Current Costs of Southwark Street
5. The costs associated with leasing the premises at 59½ Southwark Street for 2010/11 are
detailed in the table below:
£000
Rental payment to the City of London
NNDR costs payable to LB Southwark
Other premises running costs
Total
863
261
150
1,274
6. The current annual cost of the fully repairing lease at Southwark Street, under which
London Councils contracts for and manages the majority of premises related ancillary
services within the £150,000 detailed in the above table, equates to a comparable service
charge of £5.39 per sq.ft. In addition, an annual depreciation charge of £181,000 is
currently payable in respect of both furniture and equipment purchases (including IT) and
refurbishment and improvements works undertaken and capitalised as fixed assets since
the current lease started in March 2001. This charge is scheduled to reduce to £117,000
for 2011/12 and completely fall out by 2012/13, subject to any further expenditure that
can be capitalised being commissioned.
7. The guiding principle applied when considering this issue has been that the preferred
option has to be managed within the overall level of existing budgetary resources (ongoing premises costs and depreciation) so that no additional costs fall on member
boroughs.
Move from Southwark Street
8. Previous discussions with Group Leaders and the Executive indicated that in terms of
location, the following would be key considerations:

reasonable transport accessibility for members and officers from member boroughs
across London coming to meetings and events at London Councils;

reasonable proximity for City Hall – given the amount of inter-action with the GLA on
lobbying, services and co-ordination activities, as well as reasonable proximity to
Westminster and Whitehall to reflect the volume of work with Government officials,
ministers and other key influencing organisations;

reasonable proximity to City of London offices as a significant proportion of London
Councils’ support services are outsourced to the City and, following decisions taken
on the future size and shape of the organisation, negotiations are proceeding to
extend these arrangements so as to reduce further costs and headcount at London
Councils. The geographical spread of the locations that were examined is indicated
below.
9. The City of London and an independent property search consultant have been involved in
work to source alternative properties for London Councils to consider. Using a general
criteria on space and utilisation demands for floor layouts similar to those found at
Southwark Street, the market showed that within a range of 1 mile there were up to 125
properties available but the majority of those were north of the river.
10. The specification was then restricted to those properties under 35,000 sq.ft., that were
available at the required time period of March 2011. The number of properties for
consideration reduced to 95.
11. 64 of these properties had a total cost of £55.00 per sq.ft or over, which was considered
excessive because it equates to 130% of the existing accommodation costs. These
properties were, therefore eliminated from the search.
12. Of the 31 remaining properties, 12 were only offered with leases of less than 5 years, 12
would only provide in excess of 30,000 sq.ft, 3 would only provide areas separated by
more than 2 floors, 4 had floor plates that would not meet London Councils’ requirements
and 4 were in poor locations in relation to transport access. Some of these 31 properties
fell into more than one of the above negative categories.
13. A more detailed property specification was provided to the City, which was based on the
current level of occupancy of 29,500 sq.ft gross and 27,747 sq.ft Net Lettable Area [NLA].
The average rental cost at Southwark Street for 2010/11 is £29.27 per sq.ft. gross or
£31.12 NLA in accordance with the stepped rent operating on the main lease for the
building. However, provisional negotiations with the City of London earlier this year
indicated that a new lease would deliver a potential rental cost of £750,000 per annum,
based on market rates as opposed to a return on capital. This represents savings of
£113,000 per annum on the rent payable under the current lease and this saving is
reflected in the provisional revenue budget proposals for 2011/12, which is subject to a
separate report on this agenda.
Shortlist of comparable alternative properties
14. Three premises were found to closely match this specification in the initial search, which
was augmented by a further four properties brought to the attention of London Councils
by a specialist property finder. All appeared to comply with London Councils specification
on the face of it but each had some drawbacks that made them less attractive
propositions, particularly in cost terms.
15. The detailed comparison for these seven properties was shown in the report to the
Executive on 29 March 2010 and this is attached as Appendix A to this report.
16. A summary of the costs of these seven properties compared against the current
Southwark Street cost is included in Appendix B to this report. This indicates that each
of the alternatives would cost more per annum. There would also be the additional costs
of moving out of Southwark Street as detailed in paragraphs 19 to 22 below.
Accommodation at Westminster City Hall
17. In April 2010 London Councils became aware of available space within the Westminster
City Hall building located in Victoria Street, SW1. A full financial appraisal of the proposed
offers from the City of London and from the City of Westminster is shown in Appendix C
to this report. The increase in corresponding service charges shown for Southwark Street
as compared to those used in Appendix C is the result of the Westminster building
including full electricity, hygiene and cleaning services. The portion of the inclusive rent
that is for the property lease has been quoted as £27.00 per sq.ft (60% of total charge)
which is almost identical to the proposed Southwark Street rent and thus the remaining
£18.00 per sq.ft relates to services and NNDR which cost £19.30 per sq.ft at Southwark.
18. The balanced comparison for both premises, however, must also include two other sets
of factors. One is around suitability for London Councils’ business, including:

although perfectly placed for Westminster and Whitehall, distance from both the GLA
and City of London has relative disadvantages;

accessibility to the sort of meeting requirements consistent with pan London business
and the sort of income London Councils receives on room hire would be
compromised;

existing furniture would cause circulation and layout issues at Westminster. Additional
costs might, potentially, be incurred in making furniture fit with the building.
19. The second set of issues surround the substantial potential costs associated with a move
from the current premises to any new premises. These are detailed below:

Firstly, potential dilapidation costs of up to £685,000, would be payable to the City of
London for the Southwark Street. These costs could not be capitalised over the life of
the new lease at an alternative property, as they would not relate to a current fixed
asset. These costs are explored more in paragraph 38 below; and

Secondly, the cost of removals, including significant system relocations, and the
fitting out costs for new premises is estimated to be in the region of £1.8 million,
which could be capitalised over the life of the new lease, although over a typical 10
year lease period, this would lead to an annual depreciation charge to the revenue
account of £180,000. The estimate of this relocation cost is set out in the following
table.
Item
Premises Fit out and
space planning
IT switches
IT cabling
Furniture &
Equipment
Removals &
Disposals
Document archive
replacement
Total
Calculation basis
Experience at Angel Square showed £73.50
per sq.ft. Reduced rate to £50 as not
including HVAC, floor coverings or ceiling
tiles
Duplicate operation for continuous working
and existing units 9 years old
Works to cover multi floor layout and
perimeter trunking adaptation
Adapting existing desk sizes and Meeting
Room facilities
Pro rata rate as for New Zealand House
transfer of operations to Angel Square
£000
1,383
60
38
212
77
30
1,800
20. Using a straightforward cash-flow approach and using a discount factor of 3.5%, as
currently recommended by the Treasury to determine the time, or net present value of
the respective cash-flows for investment decisions, the total cash-flows for each option
are as follows:
Westminster City Hall
Southwark Street
Variance
Total cash-flow – no
discount factor
(£000)
13,811
13,729
82
Total cash-flow – 3.5%
discount factor (£000)
12,022
11,854
168
21. Under both scenarios, over an assumed 10 year lease period, remaining at Southwark
Street under the revised terms as proposed by the City of London produces cost benefits
over moving to a location such as Westminster City Hall. The total benefit is £82,000 if no
discount factor is applied, which rises to £168,000 if the 3.5% discount factor is applied.
22. To summarise, the comparison of seven premises on the market that are of comparable
size to Southwark Street suggests that remaining at Southwark Street is the cheaper
option, with additional annual running costs payable of between £123,600 and £704,000
arising if the organisation was to move to any of the listed properties. Furthermore,
potential one-off dilapidation costs of just under £700,000 would be payable on any
departure from Southwark Street, plus an additional depreciation charge to revenue of
£70,000 per annum would likely arise from the refurbishment costs of the new premises.
23. Given the immediate economic climate in the public sector, the recommended course of
action would be for London Councils to remain at Southwark Street and to immediately
start negotiations with the City of London to secure a new leasehold agreement for the
premises on the most advantageous terms possible and to undertake any refurbishment
works within the current level of approved resources.
24. Provisional discussions with the City of London have indicated that there is scope to
negotiate on the basis of a reduced usage of the site to reflect the reduction in size and
shape of the organisation. Any savings for this would be in addition to those already
anticipated in terms of a revised rent referred to in paragraph 13 above.
Remaining at Southwark Street
25. Work has already begun to determine the potential scope for improving the layout of
Southwark Street through a programme of refurbishment. The intention would be to
provide a more efficient working environment. As stated in paragraph 7, the costs of such
works would need to be contained within the overall level of existing resources. As
previously indicated, the range of these works is now being adapted to help identify the
scope for reducing the usage of the building by London Councils and therefore generate
further savings.
26. Staff of the City Surveyor at the City of London have been consulted for ideas on how the
existing layout could be modified and after a detailed inspection of Southwark Street, the
City staff have reviewed the current configuration and provided suggested layouts that
are, at this early stage, designed to maximise the building in terms of meeting facilities
and a more efficient open-plan environment.
27. Whilst this preparatory work was initially undertaken with a view for London Councils to
continue to occupy as sole tenant, it has now developed to take account of the need for
less space and for potential flexibility going forward in terms of space requirement. The
floor / wing layout has already proven its adaptability over the last nine years by
accommodating a range of associated bodies and groups within semi-independent areas.
These bodies have included Floodlight, the Commonwealth Local Government Forum,
CHIN, Carebase, the London Rivers Association, the London Asylum Seekers
Consortium and London Connects in the past whilst the 14-19 Regional Planning Group
was installed and integrated in April 2010 as part of the Services directorate. This gives
confidence that in addition to negotiating an immediate reduction in space in any new
lease, were London Councils to remain at Southwark Street, it would have the ability to
recoup more costs should organisational accommodation demands change further in the
future. This is not the case for many of the alternative premises thrown up in the external
property search because of the lease restrictions preventing sub-letting.
28. The recent exploration with City of London offices on the potential for London Councils to
change the occupancy of the building to a level commensurate with the revised
organisational size has focused on changing the occupation from our sole tenancy to the
City of London taking a separate tenant for the relinquished space. Whilst the detail of
such a change is to be fully formulated, this could provide additional savings of over
£100,000 rent, and a further £38,000 for a proportional reduction in rates, when
calculated using the indicated revised rent levels as detailed in paragraphs 40-41 below.
29. There are also other significant issues that will need to be brought into the equation so as
to make good the wear and tear of the last 10 years occupancy, in particular the
replacement of the air-conditioning system (HVAC).
30. As the replacement of the HVAC would require the removal of the ceiling grids, this would
mean economic replacement of these items could be carried out simultaneously. The
existing grid cannot be cleaned properly due to the materials used and also the type of
outlet and extract grills are now obsolete.
31. Whilst the ceiling grid is being replaced, the simultaneous replacement of more energyefficient light fittings could be accommodated relatively easily.
32. Provisional discussions have been held with the City of London to discuss the key areas
for negotiation and agreement during the process of drawing up a new leasehold
agreement. These are as follows:

The amendment of building occupancy to multi-tenancy

The replacement of the air-conditioning system (HVAC);

The potential for secondary core improvements such as the windows and thermal
film;

The consideration of rental levels post March 2011 that are in line with market
changes; and

Pre-agreement to the overall project management being carried out with London
Councils integration with the City of London’s own contract supervision.
33. These issues are discussed in greater detail below.
Replacement of the HVAC
34. The replacement of the HVAC is crucial to providing a satisfactory working environment
for the future. A modern system would be less intrusive, more energy efficient and
reduce maintenance costs, whilst improving our environmental credentials.
35. The existing work area units are in excess of 15 years old, contain refrigerant gas that is
now illegal to refill, are in need of constant maintenance and are extremely costly to run.
A new 3-pipe VRV system would cost approximately £400,000 - £480,000 to install but
the energy and maintenance savings would be significant. Consequential improvements
in the Display Energy Certificate rating (DEC) and very positive moves to back the
commitment to the Nottingham Agreement would be further benefits.
36. If formally agreed, this work would need to be funded by the City of London as part of
their freeholder responsibilities, without any direct contribution from London Councils.
The City has indicated orally that it understands this argument. If the work was not done,
the City would find it very difficult to secure alternative tenants if London Councils moved
out, particularly in the current commercial property market. The mechanical units for the
VRV system are smaller, cleaner and quieter and could all be installed on top of the 4th
floor roof with pipe-work routing down the current HVAC boundary wall. The addition of
fan-coil units in the ceiling voids would then be able to provide heating and cooling
controllable by smaller zones.
37. The City of London has also indicated it to be positive to the idea of any such project
being jointly managed by London Councils. This would improve site control and interlink
the logistical demands so that interruption to work area availability is minimised by one
floor being installed at a time.
Dilapidations works
38. As previously indicated, if the organisation moved to any alternative property dilapidation
works for Southwark Street are likely to be in the region of £685,000. The City has
indicated orally that if we remain it will consider allowing any dilapidations to roll over into
the new lease as part of the negotiations. Should we remain but with reduced occupancy
levels, dilapidations would be applicable to any areas relinquished but the costs of this
would be balanced by the reduced amount of refurbishment for that same space.
Secondary Improvements
39. Secondary core improvements such as the enhancement of the secondary doubleglazing in the first-floor meeting rooms would give acoustic and thermal insulation
improvements. This would help reduce future energy costs and the environmental
impact. London Councils would therefore further improve its DEC rating and further its
commitment to the Nottingham Agreement.
Rental Levels
40. The current average rent at Southwark Street is £29.27 per sq.ft. Gross (2010/11 prices)
and is open to negotiation with the City of London. Informal conversations have indicated
that they would charge a market rent, replacing the return on capital basis of the current
lease, but this definition would normally cover a range with a higher or lower band.
Strong negotiations for a rent level at the lower end for Southwark Street have now
shown it would be possible to obtain a rent reduced to £27 per sq.ft., or £750,000 per
annum. This in itself would give an annual saving of £113,441 or £1,134,410 over a 10
year lease period, which equates to £34,375 per borough. This figure is calculated for
the entire building and therefore additional savings would be expected for a proportional
reduction in space occupied. The potential for this extra reduction is over £100,000 as
indicated in paragraph 28 above. In addition, it might also be possible to negotiate a
short rent free period with the City, particularly whilst any landlord’s refurbishment works
are taking place.
41. The negotiations for rental have indicated the favourable reduction in the rent would
apply if the new lease term is say 10 years without a break clause. However, the
agreement could include a “wind up” clause so that if London Councils ceases to operate,
for whatever reason, it would be relieved of its obligations under the covenants.
Project Management
42. Works to replace the HVAC system and other remodelling works will require careful
planning to minimise the disruption to usual working patterns. Discussions are on-going
with the City to agree upon a joint approach to managing the overall refurbishment
project to achieve this. A key factor here will be to investigate the feasibility of
undertaking all required works on a floor by floor basis, rather than a functional basis, i.e.
HVAC works and ceiling grid, then replacement flooring etc.
Other Works
43. There are a number of areas of additional works that would be required. A preliminary
indicative estimate for these works is £744,585 or £25.24 per sq.ft., although this would
be less if the area occupied was reduced.
44. An initial estimate for meeting room improvements and refurbishment of furniture, whilst
recycling all serviceable items within the overall changes to room size, location and
capacity, is some £64,700. In addition, remodelling the reception area could cost up to
£100,000, although again, this would be dependent upon the actual area of future
occupancy.
Financing of refurbishment costs
45. As detailed in paragraph 7, it is assumed that these works must be funded from within
existing resources. The existing depreciation charge at Southwark Street will be fully
written down by 2012/13, which will release a sum in the region of £100,000 per annum
to fund this work. Over a 10 year lease period this would equate to the potential for up to
£1 million to cover this cost, which would be capitalised and depreciated over the life of
the new lease, which is assumed to be 10 years. Indicative figures detailed in the report
suggest that this will be sufficient to fund the required works and produce a saving to
boroughs and is summarised in the following table:
£000
Estimated refurbishment/dilapidation costs
Estimated adaptations to meetings rooms
Estimated adaptations to reception area
Sub-Total
745
65
100
910
Current budgetary provision over 10 years
1,000
Potential saving
90
Financial Implications for London Councils
46. In summary, in respect of a move from Southwark Street:





To move to a similar sized property as Southwark Street is cost prohibitive. Market
research carried out covering seven similar sized premises in the near vicinity
revealed additional leasehold costs of between £124,000 and £704,000 per annum.
As this has been calculated on a cost per square foot basis, it is assumed this
argument will hold if smaller sized properties are compared against reduced
occupancy costs at Southwark Street.
The latest estimates from the City suggest that potential dilapidation costs of at least
£685,000 could be payable if London Councils fully vacates Southwark Street at the
end of the current lease.
The estimated fit out costs for a property the size of Southwark Street would be
roughly £1.8 million. This would lead to an annual deprecation charge of £180,000
per annum, assuming that a 10 year lease was negotiated for the alternative property.
This is £80,000 per annum above the current budgeted depreciation provision.
A combination of the above would, therefore, result in a significant additional
recurring call on resources from member boroughs, which is deemed unacceptable
given the current financial climate.
In addition, moving to Westminster City Hall produces additional overall costs of
between £82,000 and £168,000 over an assumed 10 year lease period
47. In summary, remaining at Southwark Street creates the potential to:



Remodel the existing layout to provide a more efficient open plan environment, and
introduce more environmentally-friendly improvements to the building;
Negotiate with the City of London to replace the existing HVAC system, as part of
their landlord obligations. A new system would be significantly more effective than the
current set up, be more environmentally acceptable, produce cost savings in terms of
running costs and potentially provide more usable space;
Negotiate with the City for a potentially reduced rent for the premises under a new
lease;


Negotiate with the City of London to amend our occupancy from sole tenant and
achieve an early adjustment to space commensurate with the reduced size of the
organisation.
Achieve further cost savings - current estimates indicate that the refurbishment works
(excluding the HVAC replacement) is achievable within the overall current level of
approved resources and may even generate further savings for member boroughs in
the medium to long-term. In addition, remaining at Southwark Street will allow London
Councils to continue to explore with the City the potential for extending existing
arrangement and realising further cost savings and a reduction in headcount in
respect of the provision of a range of support services.
Legal Implications for London Councils
48. There are no direct legal implications from this report. Full legal advice will be secured in
respect of negotiating future property arrangements.
Equalities Implications for London Councils
49. All works would need to be carried out whilst complying with Health and Safety, building
regulations and DDA.
Summary
50. This report details the options for London Councils when the current lease for the
Southwark Street premises ends in March 2011.
Recommendations
51. The Executive is asked to:





Note the pool of potential properties identified by a property search detailed in this report;
Note the respective estimates of on-going and transitional costs and potential savings
associated with options for moving to a new premises as well as with remaining at the
Southwark Street site;
Agree that officers enter into negotiations with the City of London to enter into a new
leasehold agreement for a reduced amount of space on the Southwark Street site;
Agree that the budget for refurbishment works and any dilapidation costs should not
exceed current budgetary provision for depreciation over the life of the new lease; and
Note that approvals for Heads of Terms and final Leasehold Agreement will be subject to
final member approval
Appendices
APPENDIX A – Report to London Councils Executive -29 March 2010.
APPENDIX B – Property Search Costs Comparison
APPENDIX C – Westminster City Hall Property Comparisons