3.20 In any property scheme of such size, duration and complexity, development partners are inevitably exposed to major uncertainties, some of which would tend to reduce their projected returns while others may offer unexpected upsides. In this scheme the main upsides for English Partnerships are:
■ A payment for the hotel site next to the Dome which will be at least £3.5 million (index linked to retail price indices from September 2004), together with other payments should a casino be opened. There is no specific planning permission for a casino on the site, and any proposal would be subject to changes in legislation and also to the usual licensing and other approvals that may be required.
■ A share in future profits from both the Dome Arena and Waterfront. The legal agreement for the profit sharing arrangement for the Waterfront is still being finalised, though English Partnerships told us that the commercial terms have now been agreed with the Consortium. The extent to which these will generate additional returns to the taxpayer is uncertain, so English Partnerships did not assume these returns in evaluating the deal.
■ Increased profits from real growth in sale prices, particularly on residential units. At present the financial model assumes real annual price growth of three per cent, but if London house prices rise more quickly than this, or if the Greenwich Peninsula "takes off" as a fashionable new location, the partners will earn higher profits.
3.21 But there are also downside risks that English Partnerships must manage, two of which have the potential to be fundamental:
■ The agreement allows Meridian Delta Ltd to defer development, using a force majeure clause which includes unfavourable market conditions. Deferment to avoid a slump in the property market might be useful to English Partnerships in financial terms, but it may not accord with Government's objectives to develop the Greenwich Peninsula without undue delay. In circumstances of persistent failure to deliver development, English Partnerships could seek to trigger their rights in the agreement to bring in a new development partner, but would have to consider that this may result in receiving lower financial returns due to a potential surplus of accommodation being built but remaining empty.
■ The second area of risk is that English Partnerships derive most of their profits later in the life of the agreement than does Meridian Delta Ltd, as opposed to minimum land value which they receive first. Meridian Delta Ltd takes 60 per cent of the joint venture's profits in the first 5 years, tapering down to 25 per cent after 11 years. Although there are arguments for deferment of English Partnerships' profits, (See Figure 17), it will be essential for English Partnerships to continue to devote sufficient resources and expertise to actively monitoring and managing their interest in the joint venture over the next 20 years.