General solution agreed upon on 29 April 2010 – "Nexthouse" solution

After laying out the legal considerations on the evaluation of the in-house solution and showing the implementation issues for the venture capital model, a modification to the venture capital approach (Model 5) was developed, called the “Nexthouse” model. This should be understood as its own model, based on Model 5. The main features are as follows (see Figure 11).

Figure 11 – "Nexthouse" model (Step 1)

An independent company in the form of a state organisation to be newly established represents the urban development or community development fund. It would initially be wholly owned by the state.

If establishing it this way is undesirable for budgetary or administrative reasons, an existing shell company can be used. From the advisory standpoint, establishing a new company is recommended in order to avoid taking over existing risks and, especially, to not have to separate the fund assets from existing assets, since this would be little more than the block of finance reserved for the exclusive use of financial institutions. It would also underline the role of the fund as an instrument of innovation.

• Fund volumes: EUR 30 million. The decision for the large solution is based on the advertising impact of such budgets among the municipalities and project developers. This should bring in a much greater selection of projects to the fund.

• The management of the company would conceptually belong to a ministry (the MES is espe-

cially well suited as an ERDF administrative authority), but would legally be in the hands of (one or more) natural persons associated with a ministry, which would delegate them to the company through a management contract.

• The advisory committee of the company is composed of representatives of the Ministries for Finance, Economics and the Environment.

• Initially, “dormant partner’s interests” would be handed out to private project managers and municipal companies13_{. This does not legally require the approval of the KWG if participation} in profits and losses is foreseen. Since in this case – as long as it is not set up as an atypical dormant partner’s interest – there is no, or only limited exertion of influence on the man- agement of the target company, it is not necessary for the fund to acquire additional know- how.

• Capital can be provided to municipalities without their own company in the form of invest- ments in land or real estate transactions: conceivable models are the financing of leasehold rights or land charges. In addition, it is always possible to continue funding following the allo- cation practices already in use.

The following is a potential way of expanding the concept (see Figure 12): The fund conducts a ten- der procedure to attract a private investor with a KWG license. This would create two synergies;

• With the KWG license, the fund could extend loans. This would work if the CDF is run in the legal form of a commercial partnership and the KWG-licensed partner takes on the role of sole personally liable partner. In this case, the fund gains the character of an institution, with the partner remaining the KWG licensee. It is possible for the administrative department to continue managing the fund in this model through an outsourcing contract compliant with the KWG.

• With the additional project and management know-how of the private actor in the fund, a further step is possible which does not seem unlikely from today’s perspective: changing the “dormant partner’s interest” into a real venture capital investment with the corresponding perception of the project on the side of management as an investment vehicle.

13 One characteristic feature of dormant partner’s interests is that they are viewed as equity investments at the project level, but in contrast to normal equity investments, they include a flexible, predetermined repayment plan at a fixed interest rate (like a loan) and a limited participation in profits at the end of the financing period. Insofar, the cash flows for the fund hardly deviate from those of pure lending.

Figure 12 – "Nexthouse" model (Step 2)

Figure 13 – How the Saarland Community Development Fund subsumes the current funding practices

In addition to subsidising urban development projects, the additional funding possibilities enabled by setting up such a CDF include the investment of equity in the first step. By involving banking partners in the investment company, these projects could then be funded with loans in the second step. Fig-

ure 13 illustrates the instruments to be used in addition to the current subsidies. This means that the current funding practices should not be replaced by the new financial engineering instruments (sub- stitution), but that there are no additional resources for these new instruments (addition).

During the meeting at the State Secretary’s office on 12 May 2010, the Saarland decided to further pursue implementation of the “Nexthouse” model (Step 1) and set up the CDF in this structure by the end of 2010. It is not to be set up as an independent company, but rather a subsidiary of the Struk- turholding Saar (SHS), next to the already existing state-owned companies for business development (gw Saar), project management (LEG Saar), commercial land management (SBB) and housing (WOGE Saar). This new implementation structure can be seen in Figure 14. The only problem relevant to im- plementation regarding the planned use of dormant partner’s interests by the Saarland Community Development Fund is still the limited accessibility of the municipalities, since they are not able to profit directly from equity capital investment (or they would have to go through the complicated process of establishing new municipal project companies to obtain CDF funding). The proposal sub- sequently made that the so established CDF also extends interest-free loans to the municipalities does not work out, because the KWG still requires a license in principle if the CDF extends loans to project companies or managers. This is true regardless of how the loan is financially set up, because even interest-free loans fall under the application of the KWG (credit business). The situation is somewhat different for purely subordinated loans, but such a restriction would not fit the model. The consultants have already proposed Step 2 as a solution to this problem.

5

C

I

5.1

Identifying Business

ment Policy

The basis of the discussion on implementing a Saarland Community Development Fund was the r sult of conceptual work in regard to the sustainable development of the cities and communities of the Saarland. The new instrument

face the challenges of demographic, economic and social structural change tight budget situation in the municipalities is understood

creating integrated community development concepts, the action strategies described in Chapter 2.1.2 were identified, becoming the topical focus

Looking at real estate, a study on circular land use management (REFINA) in the Saarland was also compiled to deal with the vacancy problems which are becoming increasingly more important for the municipalities of the Saarland

and land as a central problem of urban development policy was made even clearer during the project identification process for this

Figure 15 –

Based on these findings, future business areas for the

determined (see Figure 15). The business areas of “urban development and housing” and “business and local supply” (“local business”) were taken directly from the action strategies

NTERVENTION

P

JESSICAI

usiness Areas of CDFs and their Significance for

the discussion on implementing a Saarland Community Development Fund was the r work in regard to the sustainable development of the cities and communities of The new instrument of an integrated community development concept should actively face the challenges of demographic, economic and social structural change

tight budget situation in the municipalities is understood. During the development of a guideline for ating integrated community development concepts, the action strategies described in Chapter

were identified, becoming the topical focus.

estate, a study on circular land use management (REFINA) in the Saarland was also compiled to deal with the vacancy problems which are becoming increasingly more important for the municipalities of the Saarland. The currently explosive situation of vacant and underutilised buildings and land as a central problem of urban development policy was made even clearer during the project identification process for this evaluation study.

– Business areas of the Saarland Community Development Fund

Based on these findings, future business areas for the Saarland Community Development Fund The business areas of “urban development and housing” and “business and local supply” (“local business”) were taken directly from the action strategies

ignificance for Urban Develop-

the discussion on implementing a Saarland Community Development Fund was the re- work in regard to the sustainable development of the cities and communities of

egrated community development concept should actively face the challenges of demographic, economic and social structural change. At the same time, the During the development of a guideline for ating integrated community development concepts, the action strategies described in Chapter

estate, a study on circular land use management (REFINA) in the Saarland was also compiled to deal with the vacancy problems which are becoming increasingly more important for the and underutilised buildings and land as a central problem of urban development policy was made even clearer during the project

ity Development Fund

Saarland Community Development Fund were The business areas of “urban development and housing” and “business and local supply” (“local business”) were taken directly from the action strategies for the develop-

ment of integrated community development concepts, since it was thought to be quite easy to find projects in these areas with a certain profitability (in part) which should thus have been able to repay their funding from the CDF within a certain time period.

Projects for the social and educational infrastructure and technical infrastructure, transportation and the environment frequently represent investments for which financial returns are hardly possible and thus for most of which subsidies are the most effective. For this reason, the two action strategies were combined into a single central business area, infrastructure and the environment. As some pro- jects subsequently reviewed show, in the greater area of infrastructure, there are indeed project types with revolving aspects which are important to central urban and municipal development policy and for which funding through the Saarland Community Development Fund can make a lot of sense. Central areas of intervention in this segment are primarily supplying rural areas with high perform- ance telecommunication infrastructures and more efficient energy generation and utilisation.

Finally, the central REFINA topic of brownfields was also included in the future activities of the CDF, since this is extremely relevant to urban and municipal development policy in a region strongly im- pacted by structural change, like the Saarland. At the same time, redeveloping brownfields will in- volve the other three business areas of the Saarland Community Development Fund as well. Many approaches to projects have failed because all the unpresentable costs were to be taken over by the public sector while the project developer and property developer anticipated standard returns for the industry and could therefore seldom find an alternative to subsidisation.

FIRU and KomCon selected “pilot projects” which match the various business areas as closely as pos- sible. At the end of these efforts, a “project pipeline” for the business areas of the Saarland Commu- nity Development Fund had also been identified.