Trustee response to CLC advisors

25/11/2025 Strictly Confidential Trustee Board response to comments made by Council technical group The comments made by the Council technical group (set out by them below) are not new. These views were taken into account by Trustees when they made their choice of a “preferred option” on 27th September.

There are generic points to note: 1.

The Trustees have selected a “preferred option”, so moving us on from more than a decade of costly optioneering. If members support the motion, it provides a focus for development of a final business case (FBC) and implementation plan (including necessary funding and management arrangements). Significant detail needs to be developed as we move from the current evidence base, which is sufficient for down-selecting a preferred option, to one that meets the requirements of an FBC and is informed by market realities. This provides opportunity to address questions raised by the Council group that are relevant to the assessments being carried out, as the market voice will be heard and evaluated.

Alongside preparations for putting BCW on the market, and subsequently assessing the attractiveness otherwise of any bids, this next phase includes a more detailed assessment of the extent of options that may be available for a new HQ, and associated costs. This will add rigour to the headline data that already exists from desktop assessments. There will also be ongoing evaluation of major risks that cannot be resolved through market data, with mitigation actions as needed. Examples include managing funds over a short-term transition period, long-term fund management strategy of a designated BCW legacy Fund, and timing of any sale relative to market conditions.

2.

Trustees grouped the 17 options considered by HQSB into 4 categories (sell all and relocate; keep all and fully refurbish; major partnership, requiring significant commitment from IMechE; consolidation, using a part-sale to self-fund refurbishment). Any of these categories would require a member ballot either due to sale or to the likelihood of some form of charge (security) being made on the building. Of these four, based on information available to TB, only “sell all” was seen as viable.

Support by members for the preferred option of “sell all” will allow us to go to market in good faith, as credible sellers and buyers, able to get actual rather than estimated values for BCW. It means we can be ready to act if opportunities emerge that the FBC confirms to be in the best interests of the IMechE. Equally, it does not force us to act in the absence of suitable opportunity – this is not “sell at any cost”.

3.

Trustees are mindful of their duty to take decisions in the best interest of the IMechE, benefitting also from professional advisors contributing their independent expertise. The Trustee assessment looked broader than HQSB analysis, yet replicated the “green book” framework, in which the NPV/ MFA assessments form the bedrock of the “economic case”. This is one of five aspects to consider, the other four covering: •

Strategic case: the strategic need (captured in the vision that TB. has set out for a future HQ) coupled with fit to IMechE purpose. The strategic case was approved by Trustees on 13th November 2024

•

Commercial case: the viability and risk profile of the commercial approaches (noting that TB has a relatively low risk appetite in this area given IMechE’s recent history on commercial activities).

•

Financial case: affordability over time, recognising the strengthening IMechE finances and e.g. new sources of funds/ loans. FB guidance was that any significant investment in the building should be self-funding to avoid depleting resources better focussed on core purpose.

•

Management case: ensuring that the selected option can be delivered successfully by IMechE, and that we have the competencies available to us to deliver what is required.

Information provided for the commercial, financial and management cases, was less mature than for the strategic and economic cases. It was primarily in these areas that a degree of judgement was applied to reflect TB experience of IMechE capabilities and risk appetites.

4.

The Council group had difficulty validating the NPVs produced by HQSB’s external property experts. Trustees acknowledged the efforts made to close the differences in assumptions between this group and the external property advisors engaged by IMechE, and that this was not resolved.

The Council group commented (below) that “Inputting credible but prudent assumptions suggested by the Council experts brings the credible stay options into at least equivalent NPV values as the leave option(s).”

Ultimately, even if NPV values were to be broadly equivalent for credible stay and leave options, judgements on other dimensions such as fit to vision and purpose, commercial risk, delivery capability, certainty of funding and affordability still support the chosen preferred option (for reasons explained in recent webinars). Options implicitly proposed here, such as running an office rental business (whilst renting offices for our own staff elsewhere) and partnering with a hotel company were rejected for reasons other than financial ones. The risk to the Institution of operating beyond its core purpose and competencies, and borrowing money to do so, would be very significant, and Trustees reflected on the recent investment performance of non-core investments.

If members support the motion, and we are able to go to market with BCW, then the responses we receive will reduce valuation uncertainties by giving us actual as opposed to assumed market values and can be used to inform the FBC prior to any final decision.

5.

Note that progressing without any sale or charge on the building remains as the counterfactual to be considered in the FBC and is one potential fallback option. This would likely involve piecemeal actions funded on a case-by-case basis, constrained by affordability and prioritised according to IMechE needs and would deflect funding from the Institution’s core purpose.

The Council technical group option of smaller scale repairs and refurbishments, initially funded by a small loan and subsequently funded by revenue generation could be considered as part of the counter factual. The Trustee view is that such an approach is unlikely to deliver our stated vision in the foreseeable future and is expected to involve higher risk and cost. Nonetheless, it may be a valid option to consider as a counterfactual.

6.

Trustees have appreciated Council’s involvement throughout the process – including their active participation through a member of Council on HQSB from the outset. Their input has been valuable in providing fresh perspectives that both supported and challenged thinking.

Whilst this note highlights areas of difference, it is equally important to note that there are also areas of agreement. Not least of which is our common vision and purpose supporting future generations of engineers, no matter where they are.

If the motion is supported then, consistent with wider good practice, we will review and potentially refresh current HQ project governance structures to reflect different demands as we shift from optioneering into detailed development and active engagement with the market. As part of this, we will want to retain active involvement from Council to benefit from diversity of thought.

Detailed responses by the Trustees to the CLC technical group comments are set out below.

There is also a more detailed response to the NPV calculations, which has primarily been prepared by HQSB as this relates specifically to their analysis.

Reconciliation of assumptions underpinning the analysis of the Outline Business Case (OBC) covering the evaluation of options for the IMechE’s Birdcage Walk (BCW) Estate CLC technical Group comments

Trustee Board response

Unlike in previous stages of the HQSB process, the Council’s experts were not involved in the setting of analytical processes or the assumptions underpinning the Outline Business Case in particular those underpinning the multi factor analysis (MFA) and the net present value (NPV) calculations.

TB approved the establishment of the HQSB on the 26th July 2024 based on Council recommendation of the 27th June 2024.

Upon receipt of the OBC Council experts found themselves unable to validate several of the core assumptions underpinning the OBC analysis and conveyed this in the CLC advice on the OBC to the Trustees.

CLC reps were involved in drafting the MFA inputs and wordings commencing in Aug 24, as part of work on the Strategic Outline Case.

These were adopted for the OBC, and applied in the session facilitated by an independent external consultant (as suggested by Council) which generated the outputs in the OBC and CLC members’ votes were included in the analysis. They subsequently validated the sensitivity analysis which resulted in the top 5 rankings remaining unchanged.

In order to facilitate a reconciliation of the OBC and Council experts views on the assumptions (as reccommended by all of Finance Board, Past Presidents and CLC), this document compares the significant differences

HQSB included representation from Council – as an equal voting member and were actively involved over the entire period. As part of this, Council reps were given access to external experts who prepared the business case, including legal briefings, up until the point at which due diligence was deemed to be concluded (31st July 2025).

Multi-factor analysis

NPV assessments Trustees acknowledged efforts made by all parties to close the differences in assumptions between this group and the external property advisors engaged by IMechE. This includes additional sensitivity analyses being carried out and, we understand, over 30 emails on this subject alone from 28th March 2025 through to 27th June 2025. In addition, three face to face meetings were held between the professional team and CLC and one with TB members.

As noted above (Para 4), despite these efforts, the differences remained unresolved. Ultimately, with NPV/ MFA is being one of five aspects considered, NPV was not a deciding factor in TB’s preferred option selection.

Further details on the MFA and NPV assessments are included in sections below.

Overview Which sale option was evaluated and assumed in the Trustees decisionmaking?

Whilst 27 options (Including each of the remain options considered credible at the time) were specifically evaluated, it is not clear which of the sale options the MFA and NPV evaluation (and presumably the Trustees decision) is based. Variants of the sale option can be defined according to the following parameters. 

freehold or leasehold sale of the BCW estate



rent or buy new accommodation



Preserve remaining funds or “bleed off” (interest and possibly capital) over time to

The decision being put to members is to confirm our ability to progress a “preferred option” that involves the sale of the BCW estate. In brief, the motion being presented: 

enables the sale of the entire BCW estate on a freehold or leasehold basis.



does not limit options for our future HQ: the expectation is that this will involve purchase of a new, smaller building to meet members’ future needs (leasehold or freehold). Nevertheless, rental options for a new HQ (on a short- or long-term basis) could also be legitimately considered as being within the bounds of the motion should that prove advantageous.



does not allow (without further member vote) part sale of the BCW building or options involving some form of charge on the building, such as using a mortgage to self-invest in full refurbishment or entering large-scale partnerships requiring security linked to the building

Trustees recognise that variants, such as those suggested, will affect the NPV. Determining these would be considered as part of the detailed assessments supporting the FBC, once the market response is

support operations.

known.

MFA and NPV results will be significantly different depending upon which combination of these parameters is the sale option recommended by the OBC and chosen by the Trustees.

Options on how to manage any surplus funds (the “BCW designated legacy fund”) will be developed during the next phase of work.

The option evaluated needs to be made clear and the MFA & NPV evaluations confirmed/checked/rerun based upon this option.

Values from the NPV calculations did not materially affect overall judgements made by the Trustees about risk and deliverability of the options (see Para 4, above).

Ultimately, Trustees noted that, as with any property transaction, values remain subject to market conditions; until the estate is placed on the market and firm bids are received, final figures cannot be known.

MFA analyses inevitably contain an element of subjectivity.

As the motion is itself vague upon which combination of these factors, the Trustees made their decision it would be helpful to see a sensitivity analysis of the extremes of these variants.

As NPV did not materially affect the choice of preferred option, a further sensitivity analysis at this time would be of limited value.

Should member approval be given, Trustees will not decide whether to sell and in what form until market values have been established and work to support the FBC has been completed. Consideration can be given at that time to appropriate sensitivity analysis to support the FBC and associated risk assessments.

When to sell?

The London property market is very poor at the moment, institution management is depleted, and the 3 year stable business plan is not yet in place. No consideration seems to have been given to timing of a sale.

The “when” question is surely at least as important as the “what”?

A market analysis will be provided in the case of a yes vote, but before the Trustees are asked to authorise placing the BCW estate onto the market to seek offers.

The timing of any sale remains an important consideration – covering those aspects noted here, as well as other factors such as the potential costs and risk exposure of an ageing building; as well as being clear in how any funds might be managed in the transition period between our current and future HQ. The question of whether or when to sell is ultimately one that the Trustees will make with advice from and inputs from other Institution bodies, including its governance committees and Council, as well as expert external advisors.

.

Page 5 of 14 Financial evaluation (Net Present Value (NPV) calculations) Below are highlighted assumptions underpinning the NPV assessment that Council experts have difficulty validating.

Inputting credible but prudent assumptions suggested by the Council experts brings the credible stay options into at least equivalent NPV values as the leave option(s) and improves the probability of being able to procure a loan for a first stage of repair/refurbishment until increasing revenue can fund ongoing refurbishment.

OBC approach

Council Reps Proposal

HQSB Response

Due primarily to the uncertainty surrounding inputs and assumptions and the huge effect they have on the output value, using 30 year NPV to evaluate options of this nature brings with it many risks compared to for example “real options” evaluation.

Carry out a robust but simple sensitivity analysis of the key NPV inputs.

Various sensitivity analyses were carried out as requested.

To mitigate these risks Council Reps insisted that the Strategic Outline Case (SOC) required that the OBC include a robust sensitivity analysis of the NPV calculations and a “decision tree” to plot the possibilities and associated risks. Neither of these requirements was complied with by the programme team drafting the OBC. The assessment of the stay options included the assumption that staff at 2024 levels would stay in the BCW estate

Carry out a robust but simple assessment of the possibilities using a decision tree (what could change? How will it affect the foreseen outcome?)

Complete a market testing as approved by the membership in January 2025 but never done, to discuss with potential partners/developers/purch ases alternative options or combinations of options.

The objective is to narrow down variability in the data.

The most viable stay solutions and the business model of the Institution’s comparators (and the IMechE in the past) would have primarily member facilities in the prime accommodation with most staff located in good quality but cheaper accommodation. The

As noted, the key uncertainty is the market value of the Birdcage Walk Estate. The professional property advisors recommended that the market was only approached after a member vote, as bidders would then see a credible possibility of a sale, and be more realistic in the analyses.

Going too early, before the vote, could give rise to misleading data.

The professional advisors (as well as the insights gained from previous reviews) gave us a reasonable estimate of likely values – whilst recognising that for a unique building such as BCW it will always be hard to be definitive until the property is on the market and bids received.

The concept of a decision tree (or similar) to deal with some of the more significant uncertainties, is more manageable with the greater focus provided by a “preferred option” and having received a market response.

Should the members vote yes, then Trustees will base their decision on whether and when to sell based on market value rather than estimates (with this considered as part of the overall FBC, with primary consideration being the best interests of the institution – looking at all 5 aspects of the FBC). In this respect the Trustees and the CLC reps appear to be in agreement.

Multiple accommodation assumptions were modelled as part of the DD on a leasehold and freehold basis as requested by the CLC tech reps.

The Council Rep’s proposal is similar to options B,C,D,E,F,G. We understand the logic, but it is less relevant now given the choice of preferred option. It would, in effect, involve a significant capital investment in a commercial property business and diversion of funds/ distraction from core purpose. IMechE has amply demonstrated the risk of its involvement in commercial ventures that it is ill equipped to lead. This risk is amplified if significant debt is involved.

We agree that the FBC needs to look to future needs and staffing numbers as it considers options for the new building and the counterfactual for BCW (Para 5 above).

Page 6 of 14 remaining space would be revenue earning as offices or hotel rooms. The NPV analysis needs to include this possibility.

The analysis needs to be based on foreseen 2026 and beyond staff levels (i.e. post subsidiary divestment and efficiency savings foreseen in the 3 year plan) The NPV analysis for at least one otherwise credible stay options assumes that the current value of the estate is of the order of 1/3 to ¼ of comparators and other estimates

Most valuations and comparisons with equivalent estates have put the estates current value nearer £30 to £60m.

A sense check based on yield from a hotel development (including the cost of 2 refurbishments in 30 years) put the value a hotelier would be prepared to pay as around £80m The consultants’ valuation seems to be too low and has contributed to an NPV that has led to stay options being eliminated too early

At their meeting of 27th September, Trustees considered broad categories including partnering options and keeping all the estate and running surplus space as a business. Trustees were aware of the range of valuations quoted on the left, and the basis for the choice of preferred option is set out above (Para 40.

Property Residual value assumptions for Residential, Office and Hotel uses have been provided to CLC Tech reps. The input assumptions and values used by HQSB correlate closely with the market comparables provided by other independent organisations over the last 12 yrs.

A building such as 1-3 BCW is extremely difficult to value since the building and its location are unique. Should the members vote yes, it will be possible to establish actual market values for different development options. This will inform the FBC.

Page 7 of 14

The NPV analysis for at least one otherwise credible stay option assumes that the estate will have close to zero value in 30 years

Over the last 30 years property in the location of BCW or equivalent has appreciated between 1.5 and 2.5 times inflation. An assumption in line with this would be more credible

This has been considered by HQSB, with input from its external property professional advisors.

Different asset classes will demonstrate different relative performance when different time periods are considered. In general, market forces will mean that assets with a similar level of volatility will produce similar returns when averaged over a sufficient period.

The statement that the BCW estate has doubled in real value over the last 30 years is equivalent to saying that its value grew at an average of 2.3% per annum (real and gross). This does not necessarily represent a good investment, given that endowment managers typically target growth of 3 to 5% (real and net).

The residual value of assets in an NPV analysis can be treated in different ways, noting that the value is only realisable if one chooses to sell. If a discount rate of 5% is chosen, then the discount factor for values in 30 years time is 0.23. If 8% is chosen, then this falls to 0.10. Hence, the effect of residual value on NPV in a 30 year analysis is much less significant than might be thought.

The implication behind the question is that the Institution will ‘miss out’ on capital growth if the building is sold. However, since the intention is to invest the proceeds in a new building together with a diversified investment portfolio, the capital value after 30 years in any ‘sell’ option is likely to be at least as good as with a ‘keep all’ option.

ALL options were modelled with and without residual value at year 30, as shown in the figure below.

Page 8 of 14 The office rent figures per sq. foot used for the OBC evaluation of potential revenue seem low compared to recognised public survey data.

In addition, C&W use higher yield values than one would have expected (thereby reducing the capital valuation)

The Lambert Smith Hampton Total Office Cost Survey (TOCS) is the most definitive independent survey of its type, providing detailed information on office costs for over 50 UK locations and has very different data from that used by the consultants.

Rental and yield figures vary considerably for different locations within London. Figures used in HQSB’s OBC are based on local Westminster comparables rather than the more generic TOCS locations.

39

Page 9 of 14 An “Optimism bias” of 26% has been added to the NPV calculation of the stay options.

This is beyond the range recommended in the “Green Book” to which the team are working

A value for optimism bias should be tailored to each option. So for example, a lower optimism bias would be expected for a partnering option with a quality developer

Each shortlisted option was risk adjusted individually and the effects financially evaluated.

Page 10 of 14 For office accommodation it was assumed that the Institution would bear the cost of cleaning and routine maintenance. Normal practice is for landlord to off-charge this to tenants (in addition to rent) at 50% mark up A loan interest rate of 7.5% was used in the NPV calculations.

Recalculate on the assumption that normal practice applies

A value of 6% or slightly lower is much more credible.

The retain all options, which require the institution to upgrade to EPC B (c. £50m+) to allow renting assumes a rental income of £1.56m pa and a rates contribution of £170k pa + utility consumption at cost. Where the Institution leases, a £15 per sq ft s/c is assumed.

The current basis of charging rent is on an all-inclusive basis and if it was to be run differently as a property company then additional management and accounting would be necessary and the funding costs of the mortgage, secured on the building, would materially impact the Income & Expenditure of the Institution.

The model assumes a loan interest of 6.5% in the main analysis. We have also modelled the effects of different interest rates on the NPV.

Page 11 of 14 It is assumed that over £50m needs to be spent “up front” on refurbishment

A more credible assumption would be a staged approach to bringing the estate up to prime fully-refurbished standard.

HQSB analysis has shown that to achieve full refurbishment in a staged, “piecemeal” way would be very disruptive and more expensive overall. For example heating and ventilation systems will need to be replaced as a single item, and it makes little sense to do this without improving insulation etc.

HQSB have modelled and costed spreading costs over 10 years (£51m), 5 years (£37.5m) and 2 years (£36m) as shown in the tables below.

Note Para 6 above: progressing without any sale or charge on the building remains as the counterfactual to be considered in the FBC and is one potential fallback option. This would likely involve smaller, piecemeal actions funded on a case-by-case basis, constrained by affordability and prioritised according to IMechE needs.

The Council technical group option of smaller scale repairs and refurbishments, initially funded by a small loan and subsequently funded by revenue generation could be considered as part of the counter factual. The Trustee view is that such an approach is unlikely to deliver our stated vision in the foreseeable future and is expected to involve higher risk and cost.

Page 12 of 14 Multi – Factor Analysis (MFA) The multi-factor analysis used was compiled by a member of staff without agreement of or consultation with Council experts in this subject. In Council experts view (including that of a professional analyst) it has the following significant shortcomings that need to be corrected or at least factored in.

OBC None of the elements of the Institution’s purpose were in included as factors against which the options were evaluated. Links were to them were “reverse engineered” when this was pointed out halfway through the evaluation.

Council Reps Counter proposal The MFA should be rerun with the Institution’s purposes and subsets thereof as the primary evaluation criteria.

Comment The MFA was undertaken with Council input.

The MFA utilised the approved word metrics from the Strategic Outline Case. This built on the inputs from the CLC tech group member who assisted in advising on the format. The metrics were specifically chosen to relate to the HQ requirements rather than the much broader Institution Purpose. As the CLC reps note, the metrics can be related back to the purpose relatively easily. The MFA workshop was independently facilitated, as recommended by CLC and scored individually. The sensitivities to different weighting factors were tested and did not change the ranking of the top 5 options. Details are given in the table below.

MFA Workshop results 23rd Jan 2025Facilitated by Concerto

12/05/2025

Strictly Confidential DD presentation

15

Page 13 of 14

The weighting of the factors used was inappropriate. For example, the evaluation gave Staff Retention as one of the highest weighted factors but took no account of Member retention at all

To take account of the inappropriate weighting the Trustees asked CLC reps to run a sensitivity analysis on the weightings which gave a significantly different result. This result needs to be made clear to members and their reps

The weighting was reversed on some of the options to increase the importance of heritage and reduce the staff weighting. The ranking of the top 5 options was unchanged. Details are given below.

Page 14 of 14 Some of the factors used were a comparison against maintaining the current estate, as is (itself one of the options being evaluated). This is contrary to normal MFA practice which compares all options against independent criteria rather than status quo. To use the status quo as an evaluation criterion introduces an implicit bias against the status quo option.

All options were being evaluated impartially against the approved Strategic Outline Business case.

This is another reason that the MFA needs to be The sensitivity analysis allowed for a 300% increase to the weighting on heritage and reputation, rerun with more differentiator in the PEI market & Government and the same reduction to staff. appropriate evaluation criteria.

Any MFA is a tool containing an element of subjectivity. It provided useful insight to inform the economic case but, as noted above, this is just one element considered when selecting a preferred option.