MIDDLESBROUGH COUNCIL

EXECUTIVE REPORT

Report Title: Enterprise Centre Review ‘Raising Business Hope’

Executive Member for Regeneration: Cllr D Budd

Director of Regeneration: Kevin Parkes

Date: 22nd March 2010

PURPOSE OF THE REPORT

  1. To seek approval to the objectives, recommendations and action plan prepared following a review of Enterprise Centres in Middlesbrough.
SUMMARY OF RECOMMENDATIONS
  1. The report recommends the transfer of all of the Enterprise Centres to the Corporate Property Portfolio to achieve management efficiencies. Three of the Centres, Brentnall Street, Stockton Street, and Beresford Buildings will no longer be designated as Enterprise Centres. It is recommended that the remaining three centres are managed by Strategic Resources following an objective framework, detailed management recommendations and an action plan agreed as part of the review, which are detailed in the appendices to the report.

IF THIS IS A KEY DECISION WHICH KEY DECISION TEST APPLIES?

3 / It is over the financial threshold (£75,000)
It has a significant impact on 2 or more wards
Non Key / X

DECISION IMPLEMENTATION DEADLINE

4.  For the purposes of the scrutiny call in procedure this report is

Non-urgent
Urgent report / X

If urgent please give full reasons


BACKGROUND AND EXTERNAL CONSULTATION

  1. The development and support of new businesses is central to the Council’s leadership role and the delivery of regeneration strategies. The current Enterprise Centre portfolio provides 153 units in 95,000 sq.ft of mature and mostly converted space that supports over 100 businesses employing 480 people. The centres have previously been reviewed in 2002 and 2006.
  1. The report in 2002 was jointly commissioned by the Council and Hyder Business Services, and consultants Project North East highlighted the following issues although these were not addressed at that time:

a) occupancy rates are good overall, but one or two properties more difficult to let than others;

b) customer satisfaction is generally good;

c) turnover of tenancies is low, with less than 16% of tenants being businesses in their first year of trading;

d) signs of investment needed in older properties to compete with developments elsewhere in the Tees Valley; and

e) the level of enterprise support is low, due to the lack of staff resources.

  1. The report also identified the following major problems:

a) the operation is spread over a variety of buildings, so economies of scale are reduced;

b) this results in a weak financial model;

c) management has little time to provide incubation support to businesses;

d) there is little sign of businesses being moved on to free up space for new start-ups (partly due to the operation being focused on income generation rather than SME formation);and

e) investment is needed in the old stock of accommodation if it is to survive long term.

  1. Unsurprisingly, the 2006 Executive report found that the issues identified in the 2002 report still applied, specifically in respect of the ageing buildings, the low turnover of tenancies and the low level of business support/incubation provision. Bids to fund improvements in the buildings in the intervening years had not been successful when compared against competing priorities. In addition the combination of low rents and excessive income targets meant there was a disincentive to move tenants on as intended to release space for new businesses. As a result start-up businesses were finding it hard to find premises in Middlesbrough and occupancy levels hit a high of 96.8%
  1. To address these concerns a number of policy interventions were identified and approved to rationalise budget anomalies, and to provide a modest service investment fund for existing premises. The key decisions were:

a) rents to be increased so that after three years business occupancy they would match prevailing market levels;

b) income targets reduced from over 100% to 85% of occupancy;

c) income above 85% and up to 90% to be ring fenced for service led improvements to the centres to help them compete and support new lettings;

d) stepped rents to be adopted for all centres for new businesses on the basis of 50% year one, 75% year two, 100% in year three under a new form of easy-in, easy-out licence to encourage ‘churn’, with budgets set at the mid point;

e) incubation services to be provided by a mixture of support from the Economic Development team and Business Link; and

f) the development of new centres to be explored at Boho and Riverside Park.

CURRENT POSITION

  1. Despite these actions the Centres are once again operating below their budget target. This is due to a number of factors, both operational and financial:

i.  Operational:

a) management arrangements are more complex than they need to be (being a sub-set of the commercial property management service delivered by Mouchel, and managed overall by the Corporate Property Officer but with client management within Regeneration) and reporting lines are blurred;

b) as a result, decisions about improvements, maintenance and efficiencies are not joined up and the portfolio has continued to deteriorate, and the service is at risk of losing its reputation in the marketplace;

ii.  Financial:

a) whilst policies have been successful in encouraging businesses to move on, the supply of new businesses to replace them, and the ability of younger business to pay full rents, has been adversely affected by the recession;

b) incremental changes have been made to budget targets which are unsustainable, particularly in the current climate, and which cannot be absorbed within the size of the portfolio (for example annual budget increases but with some large leases without annual rental increases);

c) budgets lack transparency as expenditure is managed centrally by Mouchel with little reference to the day to day needs of the service;

d) whilst the Council monitors income it has little control over the achievement of income targets;

e) investment in strategic maintenance has not yet reached this service area, partly due to the scale of works needed, but also the lack of clarity in management roles;

f) despite some improvements some of the accommodation is increasingly unattractive and uncompetitive compared to alternative provision.

  1. The current financial position is summarised as follows:

Centre / Budget £ / Projected
Outturn £ / Variance £ / Occupancy % Budget
Brentnall Street / -15,532 / -18,494 / -2,962 / 85
Stockton Street / -26,084 / -30,043 / -3,959 / 85 + 100
Beresford Building / -77,555 / -67,060 / 10,495 / 85 + 100
Vanguard Suite / -118,365 / -90,038 / 28,327 / 85
Multi Media / -183,441 / -145,181 / 38,230 / 85 + 100
Southlands (Leisure) / -265,497 / -268,145 / -2,648 / 100
Southlands (Managed) / -307,082 / -251,708 / 55,374 / 95 + 100
Southlands (Enterprise) / -22,252 / -28,517 / -6,265 / 85
TOTALS / -1,015,778 / -898,915 / 116,592 / Actual 83%

Outturn excludes bad debt provision currently estimated at £27,494

As can be seen the main pressures are being felt at Southlands Managed Workspace, Vanguard Suite and Multi-Media Project. Occupancy rates are currently reported at 83% (though there is some inclarity caused by the exclusion from this calculation of ‘un-lettable’ units which would reduce the rate to 80%.

  1. The latest review builds on the previous findings and develops proposals to rationalise the provision of the Enterprise Centres and to integrate the premises more effectively into the Council’s corporate property portfolio. Revised management arrangements are also needed to robustly support the integration of business development initiatives.
  1. An action plan has been developed which recognises the need to clarify roles. The Enterprise Centres will also need to provide improved accommodation through careful future investment from the Corporate Property Maintenance Fund and other external sources to ensure that they meet the demands of businesses. The levels of rent charged and the occupancy targets will need to provide support to new businesses, whilst also encouraging migration into business space provided by others. The review therefore puts forward proposals for an objective framework to steer new management arrangements and to achieve results in the current economic climate.
  1. Changes proposed arising from the review include:

a) an objective framework to ensure that current and future supply can best meet the measured gap in the provision of premises needed to support businesses in Middlesbrough;

b) management arrangements to improve effectiveness and provide clear accountabilities;

c) investment in maintenance to be funded by the Building Improvement Programme;

d) the potential to review disposal and development opportunities at certain sites;

e) relaxing the encouragement of ‘churn’ (turnover of new businesses as established businesses move on) through use of stepped rents to reflect the recession and the need to meet budget targets;

f) the development of new services such as virtual office hosting to respond to business need and generate additional income, subject to a business plan;

g) improved communications with tenants and greater outreach of business support at the Enterprise Centres;

h) that any future development of additional premises should be explored with the private and voluntary sectors where appropriate; and,

i) the rationalisation of the Enterprise Centres portfolio including possible transfer to the Corporate Property Portfolio. This is dismissed further in the option appraisal below;

j) the detail of these proposals is set out in Appendices A, B and C.

  1. Regardless of the actions proposed at paragraph 14 there will be continuing risks to income levels caused by a range of factors. A number of existing businesses are having difficulties during the recession and a proposal for a rent reduction protocol to cover this eventuality was identified in the Fees and Charges report for 2009/2010, and how this can be utilised is being looked at on a case by case basis. However, if the Council is to continue to attract new businesses and help them set up in a sustainable way it may be necessary to further develop the existing rent tapering and escalation policy.
  1. Fortunately, through the Working Neighbourhoods Fund (WNF) and ERDF, the Council is on course to invest £4.3m over the next 3 years in the growth of entrepreneurship and supporting sustainable growth in locally owned businesses. The WNF backed interventions over the next two years have set targets to assist 100 new business start ups, engage with 500 businesses, assist 300 businesses, create 335 jobs and get 300 people into employment each year. The Business Support Team has through this means procured Business and Enterprise North East (BENE), which provides the Business Link service across the North East, to deliver support to licensees of the Council’s Enterprise Centres.
  1. The intention is to support companies based within Middlesbrough and the Council’s Enterprise Centres in particular to help them grow and develop. There is therefore much to be optimistic/positive about, and the Council’s workspace will continue to be a key asset, but the financial and management issues do need to be resolved to enable the positive measures proposed to be put in place.

OPTION APPRAISAL/RISK ASSESSMENT

  1. In view of the major task ahead to deliver business growth and adequate start up premises but also to improve operational and financial efficiencies in Middlesbrough, the review has considered three options in relation to the possible rationalisation of the portfolio:-

Option 1: Do nothing

Option 2: Rationalise the Enterprise Centre Portfolio

Option 3: Transfer the full Portfolio

Option 1: Do nothing

  1. It is clear from the review that there is no appetite within the Council for this approach. Critically it would not address the current budget pressures and deal with the problem of deteriorating stock. It has though been included for completeness and to act as a benchmark.
  1. If nothing is done the premises will not maximise their potential and with no plans in place there will be a continuing decline in income. In addition, the Council will be unable to fulfil the potential demand for premises it is seeking to create though its investment in business support. As detailed in paragraph 7 the current management arrangements are not always clear and budgets are not sufficiently transparent to allow the development of investment decisions. Furthermore the current performance indicators do not help to create actions to deliver the objectives of the service.

Option 2: Rationalise the Enterprise Centre Portfolio

  1. At its most basic level this option could merely involve the closure and disposal of Centres which no longer meet the Council’s standards or are no longer attractive to businesses. Whilst this approach is likely to reduce the Council’s exposure to risk as a result of business failures in the recession it will not on its own support economic development and regeneration. In addition the Council is unlikely to achieve adequate receipts in the current economic climate to make this worthwhile. There are also wider corporate and political issues which would be raised if the disposal of certain centres was proposed.
  1. A more appropriate approach would involve the migration of premises that no longer play a strong enterprise role to the Corporate Property Portfolio, particularly where they adjoin other premises already managed by the Corporate Property Officer. Under this approach the Beresford Building, Brentnall Centre and Stockton Street Workshops are the best candidates for a transfer, as the tenants do not need intensive business support.
  1. An additional benefit of this option is that this would reduce the need for interventions by the Economic Development Service to allow it to focus on and supporting new business development.
  1. This option would potentially require little management intervention to implement, but would not address the current budget pressures fully. The premises identified are all currently fully let and contribute positively to the current budget position. As a result, if they were transferred in isolation it would increase the budget pressures on the Enterprise Centre Service. It would also be difficult to disaggregate the current facilities management functions delivered by Mouchel.

Option 3: Transfer the full Portfolio

  1. This option proposes the transfer of all estate management functions of all the Enterprise Centres to the Corporate Property Portfolio in April 2010. The Beresford Building, The Brentnall Centre and Stockton Street Workshops would transfer as in Option 2. In addition, the Multi Media Exchange, The Southlands Centre and the Vanguard Suite would also transfer, however these would continue to be maintained as Enterprise Centres using the objective framework and management recommendations outlined in Appendices A & B. Provided that the arrangements for lettings and day to day management are driven by clear objectives, the economic development benefits of the service should not be compromised. Planned levels of maintenance funded from the Corporate Building Improvement Programme should effectively support the rationalisation of premises. There is also a capital budget provision of £70,000 which would be transferred with the portfolio in addition to the improvement programme monies.
  1. This option would help to establish the clearer lines of management required, and the application of expertise in the Corporate Property Service would ensure that decisions about improvements, maintenance and efficiencies are joined up and fully compliant with the Council’s Corporate Asset Management Plan. This option would benefit from the synergies with the Corporate Property Portfolio and also offer a seamless approach to business migration with the result that tenants would be more likely to be retained and helped to grow.
  1. As a result, the Economic Development Service would also be freed up to pursue supporting priorities, using the injection of WNF/ERDF funding to develop and support new businesses.
  1. Future disposals can continue to be considered, but would be more integrated with the Council’s overall disposal strategy and Corporate Asset Management Plan.
  1. This option would better deliver the rationalisation and improvement of the Enterprise Centres. Based on the condition surveys for the properties this will require investment from the Corporate Building Improvement Programme in the order of £505,000 to make a difference in the next three years. Investment can be planned more rationally with the wider improvement programme if led by the Corporate Property Officer, and the overall portfolio managed more smoothly during the investment period.
  1. In short, in this option the transfer of all estate management functions to the Corporate Property Officer will remove the estate management functions to where they can best be managed.

FINANCIAL, LEGAL AND WARD IMPLICATIONS