£4.8m loan for failed Hilton site will not be repaid

A group which was tasked with investigating a decision to lend £4.8m to developers who failed to build a Hilton Hotel at the Arena Quarter in Leeds has said the money will never be repaid and that there were “weak processes” for awarding loans at the time.

The working group will report their findings to the West Yorkshire Combined Authority’s Overview and Scrutiny Committee this week.

Leeds City Council had been in discussions over a hotel project since 2007 on the site and sold the land at Portland Crescent to Oxford GB2 in 2011. Oxford GB2 applied for a Leeds City Region Local Enterprise Partnership (LEP) loan of £4.8m in 2011 and this was awarded in 2013 to facilitate the construction of a Hilton hotel near the Leeds Arena.

The project was due to deliver both jobs and growth in Gross Value Added (GVA) and would be repaid over the next five years. The committee’s report said that the LEP’s position to award the loan was that of “junior lender” and as such it provided £4.8m of funding which was spent ahead of the £19m due to be provided by the Co-op Bank.

The construction company, a separate company within the GB Group, went into administration in March 2015, at which point the foundations and some initial construction above ground had taken place. In February 2016, Oxford GB2 also went into administration. The administrators sold the site in September 2017 to Select Property Group, who now plan to build 273 student apartments on the site.

The report said: “Although the £4.8m loan has not and will not be recovered, efforts by WYCA and LCC have enabled the existing site and infrastructure to be sold on and developed in a way that will realise some intended economic benefits for the City Region.”

It continued: “In 2015, the company went into administration and work on the site ceased. The loan was made from the Growing Places Fund which is designed to support investment in ‘difficult,’ higher risk projects.”

The working group has now completed its review of the project. Its key findings were:

• Issues relating to this failed loan were prior to the existence of the WYCA;
• Roles and responsibilities should have been clearly identified;
• Weak processes in place for LEP loans at the time led to poor judgement by decision makers
• An independent assessment of all applications for grants or loans should be made using outside specialists where required.

The loan was awarded to the LCR LEP by government and for which, at the time, Leeds City Council (LCC) was the accountable body. WYCA took over this role in April 2015.

The report said: “LEPs were set up in 2011 by the Department for Business, Innovation and Skills. They were voluntary partnerships between local authorities and businesses that would help determine local economic priorities and lead economic growth in the local area.

“In 2013, when this loan was made, LEPs were still new structures and were focussed on bringing together the private and public sectors to address market failure in a rapid and agile way following the 2007 recession. Funding was made available by government to encourage investment in difficult to progress projects in an effort to prompt the private sector to follow suit.”

“There was clear Government pressure to make a difference and spend the available funding to help drive growth. At the time LEPs were set up there were, unlike for local government, no governance requirements set out and it was left to each area to determine and develop its own internal processes under the guidance of an accountable body.”

The working group said that WYCA had since developed and implemented its assurance framework to ensure a robust and consistent evaluation of projects and clear governance around decision making.

The report said: “The framework also enables risks to be clearly articulated and understood so that any decisions taken are in full knowledge of such risks. This is a key point to note – it is recognised that a project may fail but this is acceptable if a clear and thorough decision making process, mindful of all the relevant issues and risks, has been adhered to.”