Managed by CBRE



Flexible Funding Implementation and State Aid

  1. Introduction


1.1 The SCR JESSICA (the Fund) has secured funding from the SCR Combined Authority in form of a grant that can be invested in commercial property developments on a flexible basis.


1.2 The Fund has considered its options for investing flexibly and identified two methods – Income Guarantees and First Loss Loans (see Appendix 1). In both cases the funding will provided as a loan with the final repayment amount to be determined at the redemption date. The methodology for the repayment amount will be based on the economic performance of the development in respect of actual income generated or estimated development value.


1.3 In both investment options it is likely that State Aid will arise. The Fund has previously sought Legal Opinion from Pinsent Mason that indicates that the Fund is in a position to provide State Aid through a number of ‘schemes’ included within Commission Regulation (EU) No 651/2014 of June 2014 declaring certain categories of aid compatible with  internal market in application of Articles 107 and 108 of the Treaty (GBER 2014).


  1. Forms of Aid


2.1 The Fund anticipates that it will provide Aid through one of four schemes within the GBER 2014. These schemes are outlined below with a summary of some (not all) of the key criteria:


  1. a) Regional Investment Aid:
  • Assisted Areas Only
  • Maximum Intervention €100m
  • Intervention capped at Assisted Rates (10% large, 20% medium, 30% large)
  • Minimum 25% contribution from the beneficiary.
  1. b) Regional Urban Development Aid 
  • Assisted Areas Only
  • Maximum Intervention €20m
  • Minimum 30% contribution from the private sector.
  • Investments shall be selected through an open, transparent and non-discriminatory call which establishes risk sharing arrangements. Or a fair rate of return is established by an independent expert.
  • Maximum ‘loss’ is capped at 25% for equity type of the total investment or 80% of a guarantee.


  1. c) Investment Aid to SMEs
  • Maximum Intervention €7.5m
  • Intervention capped at 20% for small companies and 10% for medium.


  1. d) Investment Aid for Local Infrastructures
  • Maximum Intervention €10m / Total costs €20m
  • Not available for bespoke development.
  • Maximum intervention capped at the difference between eligible cost and operating profit.


2.2 In light of Appendix 1 the categories of aid that might be applicable to the Fund are in the form of:


  1. a) Grants – Upfront payments that are not expected to be repaid although there can be provision for the sharing of any overage.


  1. b) Interest subsidies – Loans’ interest provided at below market rates. The Aid being calculated as the difference between the market rate and what is actually charged.


  1. c) Loans – loans that would not normally be provided by the market. The Aid being calculated on the basis of the reference rate prevailing at the time of the grant.


  1. d) Guarantees – means a written commitment to assume responsibility for all or part of a third party’s newly originated loan transaction such as debt or lease instruments as well as quasi-equity instruments. 


  1. e) Regional Urban Development Aid – Aid can be provided in the form of equity, quasi-equity, loans and guarantees but not grants, repayable advances and interest rate subsidies.
  2. f) Repayable Advances.


  1. Form of Investment


3.1 In terms of Aid being made available to Developers these can be described as:


1) Subsidised interest rates

2) Income Guarantee

3) First Loss Loan/Investment


  1. State Aid Approach


4.1 Compliance with State Aid Regulations is a requirement for the Fund where it enters into a financial agreement with a third party. The approach to be taken is outlined below:


4.2 Non-Assisted Areas:


  • In Non-Assisted Areas aid can only be provided through Aid for SMEs and Aid for Local Infrastructures.


  • Aid for both ‘Income Guarantees’ and ‘First Loss Loans’ can be structured in the form of a Repayable Advance where the amount of repayment is dependent upon the outcome of the project (income and/or value). The Fund will be able to determine the criteria in respect to outcomes within a ‘loan’ agreement.


  • Investment Aid to SMEs is not available to Large Companies and intervention rates are capped at 10% for Medium sized companies and 20% for small. However there might be an option to increase this by a further 10% for both categories where intervention is in the form of a Repayable Advance.


  • Aid for Local Infrastructure, when related to property development, appears to be aimed at speculative multi tenanted buildings.


4.3 Assisted Areas:


In Assisted Areas aid can be provided through all forms of Aid identified in 2.1 above.

Flexible Funding through the scr jESSICA fund


SCR JESSICA Fund has become a well-established mechanism by which the region has been able to invest its £23m European and Growing Places Fund money. It was set up to make loans available to schemes that cannot source finance elsewhere in traditional markets.

In order to further stimulate the SCR property market in economically strategic areas the Fund is in the process of receiving funds from the SCR Combined Authority to invest on a flexible basis. The Fund has considered how it may leverage its governance and investment platform to invest this additional funding in a manner that is efficient for the Fund and maintains the SCR JESSICA brand as a commercial lender. 


It is proposed that the Fund continues to only make loans (or potentially equity) to all projects requiring support. Based on experience to date this will likely be in the form of a senior loan at a commercial interest rate, with a charge against the property and step in rights to construction documents. Normal commercial fees will be applied and the Fund will undertake the usual loan monitoring process. Upon termination of the loan it is expected that the loan and interest is repaid. However where flexible funding has also been provided, in addition to the commercial loan, there will be a final assessment of amount of ‘intervention’ that is justified to determine the final repayment amount.

With the Flexible Funding two forms of ‘intervention’ are being considered – a First Loss Loan for those schemes that are considered non-viable and an Income/Rental Guarantee for viable projects that are not progressing due concerns about occupier demand. Examples of both interventions are outlined below: 

“First Loss Loan” example

A scheme has been appraised as having £5m development costs and a value of £4m meaning there is a ‘Development Gap’ of £1m. In order to access up to £1m (max) flexible funding from the Fund to address the Development Gap the developer will be required to take a commercial loan that has the ability to incorporate up to a £1m loss. As such the Developer would be required to take a minimum loan of £2.5m loan at a market rate and would build the scheme using their equity and the loan (JESSICA plus other if applicable), with the equity invested first. 

In this scenario £1.5 plus interest would be recoverable whilst £1m would be invested at the risk of not being fully recovered. Conditions will be attached to the non-recoverable amount to maximise recovery should a scheme achieve a certain financial outcome (for example a certain profitability threshold). Given the nature of such investments and risk profiles from scheme to scheme, flexibility in structuring this will be required.  

At the termination date, say year 3, or sale, whichever is the sooner, the Borrower will be presented a redemption statement to repay the whole JESSICA loan. At this point in time it is likely to be in the region of £2.7m. The scheme will be valued by a third party valuer (or the actual sale price used, where an arm’s length sale) and a separate calculation will be undertaken to provide the allowable “loss” level (Gross Development Value – agreed costs and agreed profit). In a worst case scenario for the Fund there would be a £1m loss with only £1.7m being repaid. However in circumstances where there is a development ‘surplus’ after repaying the whole £2.7m JESSICA loan then the Fund require the payment of overage which may be in the form of a higher interest rate applied to the loan or a percentage of the development surplus. 

As part of developing this form of intervention the Fund will need to determine whether there is a minimum recoverable to non-recoverable ratio that will be applied to protect the Fund’s position and deliver value for money for the SCR.

Income/Rental ‘Guarantee’ example

A viable scheme has development costs of £3m but the developer has concerns in respect to occupier demand and, as a result, is not prepared to proceed on a speculative basis without some form of short term (up to three years) income (rental) guarantee.  

In this scenario the developer could access a £2m loan at an interest rate that reflects a high risk position where some of the loan might be non-recoverable e.g. 50% above the applicable rate calculated using the EU Reference Rate. The loan would include an amount of flexible funding to reflect three years income (but expected to be capped at 80% of the market rental value). The developer would build the scheme using their own equity and the loan, the equity invested first.

At the PC date plus 3 years, the Borrower is presented a redemption statement to repay the loan. At this point in time it is likely to be in the region of £2.4m. In addition a separate calculation would be undertaken to provide for the allowable rental guarantee (80% of the Valuer’s assessed market rent, multiplied by the number of years unoccupied minus the agreed rent free period), and the guarantee sum is deducted from the redemption.

As part of the conditions of the loan, throughout the guarantee period the developer will be required to maintain the building, actively market the development and seek to maximise income. In this context the assessment of the final loan repayment will not allow the developer to seek guarantee funding where they let the space at sub-market prices.

As with the Frist Loss Loan the Fund will need to determine whether there is a minimum ratio of how a loan is split between recoverable and potential non-recoverable.

State Aid

It must be noted that the examples above are provided to demonstrate the principles of intervention. Actual proposals will need to be tested against an appropriate State Aid scheme to determine maximum levels of intervention.

How the intervention is provided

The flexible funding (First Loss Loan or ‘Guarantee’) will be provided through the usual SCR JESSICA lending channels. The flexible funds (eg the EZ Accelerator Fund) will be ‘blended’ into the overarching SCR JESSICA loan so that the developer enters into just one agreement that provides for a commercial loan and an amount that might not be recovered. The benefits of this approach are as follows:

  • The Fund has full oversight of the scheme from the initial assessment and through the usual monitoring surveyor channels.
  • The Fund has step in rights to complete the scheme (which ultimately is the purpose of the Fund) and has more control over the scheme than it would otherwise.
  • The intervention is, in effect, applied at the end of the scheme in a “refund” manner rather than as an upfront payment.
  • The Fund maintains its position of providing loans at market rates.
  • The fees and interest that the Fund earns from the recoverable element of the loan contributes to the running of the Fund.
  • It ensures that all funding is provided in the form of capital which is a requirement of the Growing Places Fund and SCR funding.

It is accepted that the above approach may be resisted by some developers who have access to their own funding and just require the Fund to provide a non-recoverable intervention. However it is considered that the points above more than justify the approach being proposed given it means the cost of providing the intervention is covered through the commercial JESSICA loan and imposes greater control and certainty over delivery. 

Only in exceptional circumstances will alternative arrangements be considered and this will require direct support from the relevant Local Authority to take on responsibility for delivering the intervention, albeit with some technical assistance from the Fund.


The proposal has a key benefit of ensuring the Fund operates largely as it does now with the provision of market based loans. This makes the assessment, selection, contracting and monitoring of investments efficient and reduces the need to introduce too many new processes. It also ensures that the brand of the SCR JESSICA is largely protected in that it should still be seen as the provider of loan finance and not a grant giving body.

Given the existing £15m SCR loan finance together with the £5m flexible funding for the EZ together with the prospect of an additional £10m flexible funding, the SCR JESSICA will be well positioned to progress a number of significant projects across the SCR in 2017 with commercial loans but with some having built in ‘flexibility’.