The Leeds City Region Local Enterprise Partnership (LEP) gave Oxford GB2 the loan in 2013 as part of a £32m plan to build a Hilton-branded hotel in Leeds city centre.
The planned hotel, in Portland Crescent, had stood half-built since the firm's eventual collapse in 2016, and the £4.8m loan "will not be recovered", a report prepared ahead of next week's West Yorkshire Combined Authority (WYCA) overview and scrutiny committee meeting has confirmed.
It has also been revealed that the final decision on the loan was confirmed over email by members of the LEP's board, due to "apparent time constraints" on the deal.
Neil McLean, who was the chairman of the LEP board at the time, recorded by email that while he disagreed with the decision, "he would support the majority view to proceed with the project," according to the report.
A working group of councillors at the WYCA has published its findings ahead of next week's meeting, as part of a review into the loan decision sanctioned by the LEP five years ago.On the email confirmation process, it said: "The working group is clear that any spending decisions should be made in a formal meeting and a categoric decision for or against recorded."
It has also blamed "weak processes" in place in 2013 for giving out loans from the LEP's Growing Places Fund, which was set up to support investment in "difficult" and higher-risk projects.
The group's key findings said those processes led to "poor judgement" by decision-makers involved in the loan award.
LEPs were first set up in 2011, and the report stresses that the loan was made during the infancy of the partnerships, while they were "still new structures".
It said: "At the time LEPs were set up there were, unlike for local government, no governance requirements set out and it was left to each area to determine and develop its own internal processes under the guidance of an accountable body."
Leeds City Council was the responsible authority in charge of the LEP when the loan was made, and WYCA became involved only from April 2015 onwards, the same year as the construction firm's collapse.
The report said WYCA has since introduced "significant measures" to improve process, governance and decision-making since it was set up in 2015, including new Assurance Framework guidance.
"The assurance framework provides a consistent and robust process for all schemes with a requirement for completion of standardised forms covering the key points at the different stages of approval," it added.
In September last year, fresh details emerged over future plans for the Leeds Arena Hotel site, near Leeds Civic Hall.
Select Property Group was announced as the new owner of Portland Crescent and revealed plans to invest £56m to turn the site into 273 "premium student apartments”, under their Vita Student brand.
Councillor Andrew Carter, the leader of council's opposition Conservative group, who raised concerns over the “ill fated” loan last year, welcomed the panel’s “thorough” findings and the fact processes have now been tightened.
But he also claimed the affair revealed the “dark side of devolution”.
Coun Carter said: “I am pleased [the working group did] such a thorough job. However this reveals the dark side of devolution when decisions to commit very large sums of taxpayers’ money are made in secret”.
He said the fact the inquiry had found flaws in the loan process “reflects very badly on those who voted in favour of it”.
In the latest report, the working group said that while the £4.8m loan will not be recouped, deals made by the council and the WYCA to move the site on could still bring benefits.
The report added: "Although the £4.8m loan has not and will not be recovered, efforts by WYCA and Leeds City Council have enabled the existing site and infrastructure to be sold on and
developed in a way that will realise some intended economic benefits for the city region."
Timeline of failed hotel development
2007: Leeds City Council begins discussions over new hotel project.
2011: Oxford GB2 buys land at Portland Crescent from the council.
2013: Leeds City Region Local Enterprise Partnership (LEP) awards Oxford GB2 loan of £4.8m to "facilitate the construction of a hotel" near Leeds Arena.
(March) 2015: GB Group's construction company goes into administration, after foundations and some above-ground building work had already been completed. All work at site ceases.
(February) 2016: Oxford GB2 goes into administration.
(September) 2017: Administrators sold the site at Portland Crescent.