What is State Aid?
State aid is when a public authority* provides an advantage to an organization in a way that could distort competition or trade in the EU.
The definition of state aid is very broad because ‘an advantage’ can take many forms. It is anything which an organization engaged in economic activity could not get on the open market. The rules can even apply to funding given to charities, public authorities and other non-profit making bodies where they are involved in commercial activities.
There are exemptions for certain activities such as providing social housing.
*Using state resources
Could Lambeth’s lease to the Trust be deemed as State Aid?
No. The Trust will pay a market level ground rent for the lease. As this will be at a market level it will not be deemed as the Council providing an advantage. So no state aid at this stage.
Could the development be delivered in way that could trigger State Aid?
As set out in the early community consultations, Lambeth Council is considering setting up a new company (Special Purpose Vehicle). This new company will:
- Contract the construction company to deliver the development.
- Have a head lease for the land.
- Provide a sub-lease to the Trust.
If Lambeth Council lends this new company the funds to develop the land, it must charge a market lending rate and expect the same conditions as a market lender to avoid being deemed as providing an advantage (unless exemptions for activities such as social housing are used).
So what would a market lender expect?
Generally, lenders look at a new company’s assets, income, track record and governance to help set the loan rate. All of this particular new company’s income is likely to come from the Trust so the ability of the Trust to pay the rent is an important factor. Residential rental income is attractive as it is offers a reliable stream, provided that the housing is well-managed.
The community, Lambeth Council and especially the tenants of the new housing will similarly require an appropriate level of experience in the management and operations team to ensure good quality, prudent management and the delivery of the Trust’s objectives. It is in nobody’s interest to set something up to fail.
Could the development funds be borrowed commercially?
Yes. If Lambeth are unable to use the exemptions to provide better terms than are available commercially, then it may be better to borrow the development funds commercially.
Does the development require Lambeth to set up a new company?
No. The Trust could have two stages. One where it acts as the developer (with additional oversight rights for Lambeth), and one where it acts as the landlord.