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An East London borough has admitted that a £40 million loan which helped Premier League club West Ham move into the Olympic stadium may never be repaid.

Newham council said the loan was “damaged” and would only be recouped if the sports and music venue started making money. But town hall insiders said the borough appeared to have given up any hope of getting back the cash because of the poor financial performance of the stadium.

Newham insisted that it had not “written off” the loan and that downgrading its status was merely “prudent and responsible” accounting in response to the stadium’s “challenging” first year in its new guise. But councillors and residents expressed concern as the borough, one of the most deprived in the country, is facing cuts.

Newham Labour councillor Rokhsana Fiaz, a member of the audit board and the council’s chairman of scrutiny, said: “It’s alarming for residents to read about a £44.4 million impairment relating to a loan Newham council has given to refurbish West Ham’s stadium via a company it owns. I’ve asked for urgent clarification and details including any further financial implications facing Newham council.

“Residents need reassurances that their money hasn’t been wasted and that the financial benefits promised from this much-heralded council investment continue to flow.”

The £40 million deal was agreed by the council in 2012, through its subsidiary company Newham Legacy Investments Ltd, with the London Legacy Development Corporation.

The joint venture, through the umbrella company E20 Stadium, was to pay for the refurbishment and transformation costs of the stadium after the Games to make it suitable for football.

The LLDC originally invested £257 million for refurbishment costs and West Ham just £15 million. A year later West Ham was granted the 99-year stadium lease by then-Mayor Boris Johnson in a deal which has been mired in controversy ever since.

A spokesman for Newham said: “The loan is shown, for accounting purposes, as currently ‘impaired’, or damaged, due to the current financial performance of the stadium. It is not a write-off of the loan... it was widely anticipated that the first full year of trading would be particularly challenging.

“Newham council is working with the Greater London Authority, the London Legacy Development Corporation and our other stadium partners on a range of options to improve the financial performance of the stadium. The future value of our loan, and its treatment in our accounts, is directly linked to that future performance.”