I’m a pretty proud generalist when it comes to planning and development. But if I have an area of particular expertise, it might be the subject of property development partnerships. I spend a lot of time looking at how we as an industry can best combine land, money and human resources to achieve positive change in the built environment. I am blessed to have been, and continue to be involved, in some wonderful partnerships.
Stories is completely focussed on being the best possible partner to land owners and investors that care about more than just financial returns. My personal journey that led me to help found this business was borne of a frustration that more developers weren’t truly interested in project outcomes and being a good partner.
“Get me the land and get them out of the way”.
This was a phrase I once overheard whispered between a developer and his lawyer during a particularly high-profile procurement. I quote this a lot, as it summarises an attitude that is pretty common and the antithesis of what the land owner needed and wanted at the time.
The “Triple Lock with Bells On”
As word is spreading that Stories’ commitment to partnership working is not window dressing but at the heart of our business, we are being invited to look at more and more opportunities. What I am seeing a lot of at the moment, though, are landowners declaring that they are in the market for a ‘partner’ but the terms of the opportunity on offer are frankly anything but. There seems to be a model that has appeared over the last ten years or so that goes something like this
“We’re looking for a partner. You must guarantee us a minimum land value and deliver 50% affordable housing and a share of the gross development value. Also, we get to approve all of your professional appointments and your drawings, at our discretion. And if you don’t work at a pace that is acceptable to us, we get to pull the contract from you.”
I’ve called this the Triple Lock with Bells On. And where the landowner is content to allow the developer to select their own team, just the Triple Lock. When pressed, the procuring landowner (or their lawyers and advisors) will say that they need to protect themselves from risk. Fair enough, you might think. It’s their land and their prerogative and developers are a slippery bunch.
The Triple Lock comes from a place of a lack of trust, constrained financial resources and an unforgiving political context;
A lack of trust that the developer will engage openly and transparently in the development process.
A fear that the developer will incur project costs to their own gain and at the expense of the landowner, that they will make “too much” profit from the project.
Add to this over a decade of austerity policies to contend with and there is then an obvious attraction to a guaranteed land payment to help with public sector budgeting.
And of course, politically, the public sector needs to be seen to be maximising affordable housing.
So here we have it - the Triple Lock.
Few people call out this behaviour of declaring a partnership whilst transferring all risk. But let’s be more honest about what this is and not call this partnership then shall we? This is a construction contract with full planning, cost and market risk transfer. And it seems to have appeared as an attractive way to try to put land to work.
A different model is going to be needed for the next stage of the property cycle.
The problem with the Triple Lock, in the event of rising costs and falling prices, is that there are no levers left for the developer to be able to pull to ensure deliverability. 10% cost inflation met by 10% price falls (not unreasonable to forecast that right now) combined with a guaranteed land price and no way to adjust affordable housing tenure or proportion means nothing will happen. And even where the project is blessed with rising values, if costs are rising faster, under the Triple Lock the developer still has to pay a share of the gross value – the landowner choosing not to acknowledge the margin squeeze that the developer is facing.
Well, this is development you might say, these are the risks you take. But I argue that this is not healthy. Where you intentionally inject barriers like this into a project you create a race to the bottom in terms of capacity to invest in good design, to create a desirable public realm, to give the time to properly account for the input of local people and the ability to deliver a scheme that gives back to the community. If you bemoan those identikit developments with no independent retailers, mean common areas, ‘poor doors’, token play facilities - these are all a product of this race to the bottom. And surely, we should be aspiring to be better than this.
When landowners pursue the Triple Lock approach, in anything but benign market conditions, they are setting themselves up for a fall. The failure of development contracts and 'partnerships' happens quite a lot, but we don’t talk about it enough in our industry. Although it’s tempting to name and shame the ones that never delivered anything or ended early when the market conditions shifted, I am not going to – partly because their intentions were perfectly sound and partly because it didn’t end well for Mrs Rooney.
Walking the talk
Stories has put its money where its mouth on this subject. There have been three cases in the last three years that we have bid on projects where we thought the draft contract looked less than ideal but that we might be able to inject some balance through the bid process. In one case, a classic Triple Lock with Bells On but promoted as a ‘partnership’ opportunity, one of our suggestions was that the procuring authority would receive a share of our profit as opposed to a share of gross value. This would allow rising build costs to be factored in before the payment was made and it would give us a fighting chance to deliver a return on the equity we were bringing to the project. There were five marks available for this particular point (the full five for just accepting their drafting). We scored zero for our suggestion. Note that we didn’t say they couldn’t share in the project’s performance, just that we wanted a fairer deal and in the interests of the project as a whole. Not exactly the best approach to building a ‘partnership’.
Can we at least be friends?
Aristotle (yes, I am invoking he) said that “Friendship is essentially a partnership”. I think it’s equally right to say that “Partnership is essentially a friendship”. And the Triple Lock is not how friends would enter into a partnership. We have seen, via the demise of previous ‘partnerships’, that a lack of flexibility in a procured contract can be deadly for a project. The arrangements between the partners must be flexible and suited to navigating a full economic cycle.
Successful partnership working is not just about what is written in a contract but is highly reliant on the relationships ... that arise between people.
There is a fascinating body of research undertaken by a group of Dutch academics in to whether there is any correlation between what is written in a contract and how projects have performed (links below). An interesting and consistent message that emerges from their research (and others) is that successful partnership working is not just about what is written in a contract but is highly reliant on the relationships and informal project management arrangements that arise between people. What the research suggests then is that it's important to create the conditions for trust to be earnt - and then relied upon. Proper partnership working.
For Stories, if a project is a true ‘partnership’ it must have a degree of flexibility and sharing of risk and the desire on both sides to form a trusting relationship. So, for anyone that is seeking our views on how they might structure a property development partnership for the next phase of the property cycle, and a partnership that will actually lead to things getting done;
Factor in the inevitable external shocks and allow for some flexibility.
Put people at the heart of the process – how will decisions be made, fairly?
Ask about the people you will be working with - do they make for good partners? (Why is no-one asking about people these days? – that’s the topic for the next blog.)
Klijn, E. H., and Koppenjan, J. (2016), The Impact of Contract Characteristics on the Performance of Public–Private Partnerships (PPPs), Public Money & Management vol 36 (6) p.455–462.
Kort, M. and Klijn, E. H. (2011), Public–private partnerships in urban renewal: organizational form or managerial capacity? Public Administration Review, 71, 4, pp. 618–626.
Kort, M., Verweij, S. and Klijn E. H. (2016), In Search for Effective Public-Private Partnerships: An Assessment of the Impact of Organizational Form and Managerial Strategies in Urban Regeneration Partnerships Using fsQCA. Environment and Planning C: Government and Policy 34: 777–794