Key property challenges facing independent schools

Independent schools face unique challenges related to property and its management. This article covers 4 property issues facing independent schools and how they can be addressed.

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Protecting Assets

The potential loss of charitable status, imposition of VAT on school fees or some other form of levy under a possible future Labour government adds considerable uncertainty to the independent schools sector. Some schools are seeking to protect their assets by entering into PropCo OpCo arrangements under which a lease is put in place.

We would strongly recommend that expert independent property advice is sought on the detailed lease terms. These can have material implications for the value of the interests, control, securing mortgage funding and other such matters.

Releasing Capital

The need to invest in school facilities in order to order to enhance parent-appeal and attract and retain pupils is a never ending issue at the majority of independent schools. Inflation and budgetary pressures for schools have impacted on some schools’ ability to undertake new building projects. However there are a number of options for schools to realise capital from their estate to invest back into the school.

Debt funding through secured lending founded on a realistic business plan remains the ‘go to’ for many schools. Whilst the cost of debt has increased since the former Chancellor’s ‘mini-budget’ there are still a number of lenders active in the market and we are beginning to see a recovery in the number of secured lending valuations being undertaken of schools. Having a Red Book valuation prepared by a valuation firm that is embedded in the schools market is key.

We have been involved in a number of sale and leasebacks and ground rent disposals in the independent schools market, which can be an innovative way of raising valuable capital for schools without adversely impacting upon trading operations. A sale and leaseback is an established method of releasing capital from property holdings whereby the occupier would sell the asset to an investor and simultaneously take a lease for a fixed period of typically 15 to 35 years at a market rent. A ground rent disposal is a lower risk option for both the occupier and investor and can provide schools with long term security of tenure with the potential to recover the freehold for a nominal sum after say, 50 to 75 years. The leaseback period in a ground rent deal is generally 100 to 150 years at a low and sustainable rent. This can be an attractive funding option for those with weaker credit profiles/covenant strength and those requiring a commitment to the property for the foreseeable future.

Many schools may also have surplus assets that can either generate income or be disposed of to release capital. This may take the form of surplus land within the school estate, underutilised staff houses and/or surplus school buildings that you may be able to sell / lease to another user.

Finally, there have been a number of mergers and acquisitions in the schools market in recent years. There are opportunities to explore mergers, joint venture or shared services opportunities to improve economies of scale, pool expertise and enhance market share in a more competitive market.

Project Management

School estates are continually evolving in response to changing educational priorities, the need to replace outdated infrastructure, to create more flexible accommodation or to add new facilities.

Whilst new projects are exciting and are enthusiastically welcomed by governors, parents and staff, for the bursar they can be a time consuming diversion from day to day responsibilities, particularly where they have little previous experience of running construction projects or the many decisions that are required.

In recent years we have seen an increasing number of independent schools appointing an external project manager to lead the process and to provide a single point of contact with the professional and construction teams, allowing the bursar to concentrate on strategic issues.

Whilst projects vary in their complexity, in our experience, the key issues of the moment can often be distilled into the following:

Estate strategy

Before embarking on any major capital project, it is important to understand how that project fits within the longer term plans for the school, to ensure that classrooms meet the future needs of the curriculum, that obsolete facilities are replaced at the end of their life and that the wider infrastructure is sufficient to support future plans. The estate strategy should clearly set out the schools’ vision for the future and the overall timeline and budget within which individual projects are to be developed.

Governance

Projects require input from an array of external advisors but also input from a cross section of internal teams to include teaching, facilities and IT, together with governor support. Establishing a Project Steering Group at the outset with representation from all, and input from the external project manager, is the right forum for key decisions and consistent reporting.

Brief

The brief for any project should clearly set out the key deliverables, milestones, budget and programme. Crucially, it should help avoid “scope creep” as the project develops.

Programme timing

The majority of problems that occur on any project are due to unrealistic expectations about programme, particularly with the length of lead in and design periods. Schools have short windows within school holidays to carry out disruptive works in existing buildings and critical dates to hit with the start of term. Many independent schools are located in historic and listed buildings which adds further complications. A disciplined approach to programme management is needed at the outset.

Budget

Construction costs, as elsewhere, are currently at an all-time high and agreeing fixed price contracts is becoming more challenging. In addition to the build costs there are also site investigations, professional fees, enabling works, temporary facilities and VAT which can add 40 to 50% to the overall cost.

Environment, Sustainability and Governance – ESG

ESG is no longer just aspirational. Recent increases in energy costs, for example, are biting and parents and children want to know what schools are doing to address environmental concerns in their long term planning. New projects also need to be sustainable in the widest sense by being flexible and accessible to all.

Business Rates

Business Rates are one of the biggest bills any organisation can face, and there have been some recent changes with the closing of the 2017 and start of the new list on the 1 April 2023.

Many schools challenged their Business Rates before the 31 March 2023 deadline and the Valuation Office are still working through a large back log of appeals. The Rateable Value is essentially a rental value of “non-domestic” property (boarding and staff accommodation falls under Council Tax). Andrew Altman Partner at Gerald Eve worked hard, together with two other firms, to agree a national basis with the Valuation Office, applicable to the majority of independent schools in England and Wales, where there is no rental market and the rating valuation is linked to re-building costs. This has been very beneficial to the sector with refunds back to 2017. For schools in Central London and some other city centres where there is a clear rental market for schools, the Rateable Value are based on that evidence and the scope for appeals has been more limited.

Although some substantial rates refunds have been achieved for our school clients, we have had to be cautious where new buildings and extensions have been omitted. Where the Valuation Office have failed to catch up with changes made since 2017, they can still backdate increases in the 2017 Rating List until 31 March 2024. Although of course schools want to save money, most also value advice on budgeting, accruals and risk.

The 2023 Rating List took effect on 1 April with a new set of Rateable Values and fresh opportunities to appeal. With above average increases in most cases, compared to other sectors, Business Rates continues to be a concern, particularly with the continued threat to the Charitable Relief (already lost in Scotland). We have started to compile details of the new school valuations and to establish what evidence there may be to mount another round of appeals. The more interest from schools and instructions, the more that Gerald Eve and other main firms can resource this research and carry out discussions with the Valuation Office nationally, as we have done for each rating revaluation since 1990.

For schools in England and Wales to access their 2023 valuations (and to appeal in due course, as appropriate) they need to be registered on the Valuation Office part of the Government Gateway. This can be difficult to navigate, but we have a guide to the process and are always pleased to assist. There is currently no deadline for appeals in England and Wales in most cases.

For Scottish schools the Business Rates system is very different. The deadline for appeals against the new Rateable Values is 31 July 2023. We urge bursars based in Scotland to urgently check their assessments to ensure they meet the strict deadlines, especially with the loss of the charitable relief.

Conclusion

With an ever changing market, bursars must keep wise to the key challenges facing the property market. A practical step every bursar can take is to check your business rates bill. The new list has come into force from 1 April 2023 and it is imperative that all bursars ensure they are paying the appropriate amount for their school.

For detailed advice on any of the topics discussed in this article please speak to one of the team.

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