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BY
AFRA RAYMOND
The
key commercial
question is how the risks and rewards were allocated between
the parties to the deal.
On
March 9, 2005, the Prime Minister turned the sod to initiate
construction of RBTT’s new headquarters at St Clair
Avenue, opposite to the QRC.
Three years have passed and the new complex is nearing completion.
The impending move of RBTT headquarters from “Bankers’
Row” in Park Street to an uptown location is the second
such since First Citizens moved its headquarters out to
Queen’s Park East in January 2002. As such, it will
add impetus to the “hollowing-out” of our capital
which we have been lamenting for some time. It seems that
our capital is getting like a donut, with all the good bits
on the edge and nothing in the centre.
Several critical readers have pointed out to me that this
column has been too focussed on the State-sponsored office
projects in our capital when discussing the viability gap.
They have gone further to say that if those issues are of
consequence in the state-sponsored offices they are surely
present in the privately built office projects, such as
RBTT’s new headquarters.
The break-even rent is the amount which has to be earned
by the landlord to meet the cost of borrowing for a project.
Please note that that figure does not include any allowance
for maintenance or developer’s profit, it is a bare
minimum to meet the cost of capital.
The viability gap we are referring to is the difference
between the break-even rent—which is very high in these
times of sharply increasing land and construction costs—and
the market rent which can be static or declining in these
times of significantly increasing supply.
Quite apart from the viability issue facing all these A
class office projects, there are other aspects of the RBTT
deal which warrant our attention. The initial report in
this newspaper the day after the PM’s sod-turning was
so remarkable that I clipped it out for reference. That
report can be found at http://www.guardian.co.tt/archives/2005-03-10/business1.html
and it specified the identity and roles of the players in
this project.
Those details are contained in the sidebar and one has to
consider the implications of the published arrangements.
What are the motivations of the players in this project?
The landlord would naturally seek the highest and best rent
for their property as well as the most favourable terms
on which to finance the project.
The tenant would naturally seek the most favourable and
lowest rent for their new headquarters.
The lenders would seek to get the most favourable terms
for the huge loan indicated in the sidebar.
On the face of it, this would seem to be a situation with
potential for conflicts of interest to arise. When one considers
that the tenants are significant shareholders in the landlord
company (virtually at the level of associated company),
it can give one pause.
Despite the chairman’s reluctance to provide details,
it is fairly well known that the principals of Park Court
Ltd—the Azar family, also owners of Ellerslie Plaza—were
significant shareholders in RBTT. Many companies rent their
premises from Associated Companies, but the question is
the terms of the lease and the extent to which the interests
of the stakeholders are safeguarded.
But, as established in earlier issues of Property Matters,
there is a potent viability gap to contend with here. The
key commercial question is how the risks and rewards were
allocated between the parties to the deal. That is the issue
which must be confronted if we are to develop a healthy
commercial culture in which risktakers can earn just rewards
and those who make more sound investments can secure better
terms of finance.
Did the agreement to lease specify that RBTT would pay a
rent which covers the loan repayments?
Was there a cap at the market rent?
Who decides what is the market rent?
If the lease secured the landlord’s position by removing
the risks of a shortfall in rental, was there a second level
of reward in terms of favourable terms of finance for a
risk-free deal?
Is the landlord a risk-taker who will absorb the consequences
of a high break-even rent in a market which is about to
become awash in new, high-quality offices?
At this point in time, rents in St Clair are 50 to 60 per
cent of the estimated break-even rents, so the answers to
these questions are intriguing, to say the least. Can the
returns from the loan compensate for compromises which may
have been made in the lease negotiations? These questions
have been put to RBTT and they have cited the confidentiality
of the agreements in reply.
To put it plainly, the typical rents for these high-end
offices are in the $16 to18 psf range; for this volume of
space one would expect an astute tenant to negotiate a significant
discount. The rent for this building on an arms length basis
would be of the order of $15 to16 psf ie $1.8 million/month.
If the rent had to be set to cover the loan payments, we
would be looking at a figure in the region of $28 psf, at
the most optimistic ie $3.36 million/month.
In the case of a 15-year financing period on terms which
safeguarded the developer’s position, we are talking
about an estimated payment of over $280 million in excess
of market rent.
Either the deal did or did not transfer risk to the developer.
If it did, how was this ensured? If not, why make such a
deal in the first place?
Where is the shareholder in all of this? With the new owners
of RBTT being a single, powerful entity in the shape of
RBC, one wonders at the durability of this deal. At some
point, the terms of that deal will become known and at that
stage we can better form judgments.
We can conclude by noting that when we first set out the
break-even analysis in September 2007, it became immediately
clear that the poor understanding of this key issue was
not restricted to the public sector.
Afra Raymond is a chartered surveyor and a director of Raymond
& Pierre Ltd. Feedback can be sent to [email protected]
Players
and their roles
Landlord: Park Court Ltd, who purchased the sites and are
erecting the building to rent to RBTT. The press report
stated that RBTT is also a 20 per cent shareholder of Park
Court Ltd, who are also the owners of RBTT’s present
headquarters at Park Street.
Tenant: RBTT is to lease the entire building from Park Court
Ltd.
Lenders: The press report indicated that RBTT would be lending
the landlord the cost of the land and the building.
THE FINANCIAL IMPLICATIONS
We were informed by RBTT in August 2007 that their new headquarters
building had been expanded to 168,000 sf (gross) from the
100,000 sf cited at the sod-turning exercise.
When one makes allowances for the significant carparking
included in the project, it seems reasonable to assume that
about 70 to75 per cent would be net office area, hence our
figure of 120,000 sf.
Land
$ 25.0M
Construction
168,000 sf
@$1,200 psf $201.6M
On-costs @9% $ 18.14M
TOTAL COSTS $244.74M
Financing Costs TOTAL Assuming a lettable over a 15-year
term SCHEME COSTS area of 120,000 sf the Break-even rent
per sf is
10% $367.11M $611.85M $28.33
11% $403.83M $648.57M $30.03
12% $440.54M $685.28M $31.73
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