The key features of the deal are:
- WCC will buy the land from Reading for NZ$32m. This is based on the valuation we received that it is worth $31.9m. M
- Reading will lease the land back from WCC on a 21-year perpetually renewable lease.
- The annual rent paid by Reading will cover WCC’s borrowing and other costs so that it is fiscally neutral to ratepayers.
- Reading has the first right to buy back the land anytime within the first 15 years of the lease.
- WCC can sell the land to someone else any time after the first 10 years of the lease.
- The deal provides that WCC will only complete the agreement and pay the balance of funds to Reading once we have been satisfied that the new building design meets the civic outcomes we want and has resource consent.
It sounds good to me, any gotchas in this?
It seems odd to sell the land then lease it back. Does Reading pay for the new building using the money from selling the land?
It’s surprisingly common in the world of commercial real estate to free up capital in this way, although it’s usually done with an existing building, rather than a plot of land.
My understanding is they will lease the land and build on it, also reasonably common.
Yeah, it’s not the first time I’ve heard of it, but I guess I’m just trying to understand the reasoning. You’ve mentioned “freeing up capital”, which I guess is a way of saying they own the land but can’t afford to pay for the new building, and can’t get a loan as it’s too risky for the bank. So they sell the land and lease it back, then spend the proceeds on the building. They are in the same position as if they had taken out a loan, but the council has taken on the risk of the venture as they are the one needing to pay back the loan if Readings go broke.
Correct, although they will hopefully be able to lease the land to someone else, so they’re only on the hook for the time between tenants
Yeah I’m not quite sure why it’s being done this way - which makes me suspicious. On the surface it seems to me like this is in effect an interest-free loan of $32M with the condition that Reading fix up the site and make it into something viable once more.
I guess the gotcha is that it would be an upfront cost for the WCC which is already having to make big cuts. You could also argue about the optics of having to pay Reading to actually do something with the site, and not just leave it derelict as they have done for the last several years.
But if this pans out, and helps reverse the decline of Courtney Place, then sounds like an okay plan.
Not really an interest free loan. It says the lease will cover the WCC borrowing, so it’s like WCC took out a loan on their behalf.
My guess is that Reading can’t borrow themselves, so this is more like WCC guaranteeing the loan so that something will happen.
It’s certainly not unheard of, especially in the world of commercial property, to free up capital by selling a building and leasing it back.
It’s also not interest free, if WCC’s claim of being cost neutral is accurate, merely a lower interest loan than they would otherwise get.
I don’t find it suspicious at all.
