86. Surplus assets must be sold or disposed of for at least open market value (OMV). It is not sufficient that the MOD achieves a value which simply makes the scheme affordable. The private sector partner must be prepared to pay at least the OMV for the asset at the point of sale.
87. Identification of OMV requires relevant professional advice. It is recommended that a suitable land valuation is sought from Defence Estates. Acquisition teams may, of course, seek an additional valuation from a suitably qualified and independent valuer and discuss any differences with Defence Estates. However, for PFI valuations, Defence Estates is recommended in the first instance. Acquisition teams may wish to obtain professional advice regarding the marketing of land in order to help maximise disposal proceeds.
88. Where the land included in a PFI project represents only part of the total available estate, steps should be taken to ensure that the item of land sold does not adversely affect the value of the remainder. This could be achieved through Defence Estates valuations or market testing the entire site as a single disposal and comparing the likely figure obtained with the actual cost of sale plus an equivalent market test for the remainder of the land.
89. The acquisition team should also consider whether the value to be derived from land disposals will be improved by the MOD obtaining enhanced planning permission for the land prior to disposal. The advantage of this approach is that the MOD will receive the full benefit of any uplift in value from the enhanced planning permission.
90. Acquisition teams should consider whether overage arrangements are necessary. Overage occurs when the proceeds realised at the actual time of sale of the land by the PFI consortium are in excess of the minimum underwritten value in the project agreement and the excess is shared between the MOD and the Project Company. Hence, the total agreed price for the land would be the minimum of OMV at the time of signing the project agreement plus overage. For example, this may be appropriate where enhanced planning permission is likely to increase the market value of the property. The affordability of the scheme for the purposes of FBC approval should be based on the minimum underwritten value.
91. Overage arrangements will ensure that the MOD receives best value for money from the inclusion of surplus land in PFI schemes in respect of valuation risk and the forward sale of land. The anticipated benefits for any overage arrangements should be compared with any increase to the contract price which the consortium requires in return for agreeing to such arrangements. The acquisition team should also consider whether other arrangements to share in the future benefits which the consortium or other parties may derive from the land will improve the value for money of the PFI deal. For example, the MOD could negotiate for share of future revenue streams in the event that the consortium realised opportunities for developing the land or acting as a building contractor on any development by a third party.
92. As with all claw-back arrangements, the acquisition team will need to assess whether such arrangements will improve the value for money of the PFI deal, taking into account any price adjustment which the consortium may seek for agreeing to these arrangements.
93. The formula for the overage arrangements should take into account the risk and effort that the private sector has taken in enhancing the value of the land. Where the risk taken by the Project Company is insignificant, a higher share of overage should accrue to the MOD. Conversely, where the Project Company underwrites proceeds in excess of market value, a smaller share of overage may be appropriate. Irrespective of risk transfer, underage should not be agreed as this would cause difficulties in obtaining value for money.