This is the third article to deal with some of the factors related to the Council approved project to build a new complex in Gordon Street.
Given approval the project has now been given by Councillors it is important to get the sequence of events settled. Two options exist:
Option 1 – Build First – Then Sell
By using this approach Council can commence the project before the sale of Rigby House. It is a risk as the old site may not sell;
- At all;
- Or, for a price below the asking price, which is not improbable.
Given this is in fact the option that has been chosen then the issue is how it is financed and again there are multiple options;
- Council already has the funds,
- A government loan is available,
- A private loan is taken up.
Magic is wonderful in theory but the notion Council has a lazy $70 million just sitting around is nothing more than magic. But if it has a lazy $70m then there is a serious need to examine the actions of Council given the state of affairs.
State Government Loan
Many projects pushed up by our Council involve application for a loan from the State Government. So it is conceivable this is how Council will proceed. But in this case it is not so clear.
There is a history behind building a centre of Administration. In short land was gifted to the council for this purpose back in the 1990s. The proposal was to develop City Hill as the administrative and entertainment centre hub of the city. Funding has been tied to this proposal for some time and the State Member is on record as saying a new funding arrangement is not on the cards. This makes this option one a substantial risk.
Private commercial Loan
A third option is to take out a private loan to bridge the period of construction and up to such time as Rigby House is finally sold and settled. Newcastle Council did this when it redeveloped the foreshores. It borrowed a sum of $50 million and then got into trouble. So, perhaps out Council should look to the south to see the risk attached to this type of proposal. Another big risk is………
Borrowing from a private commercial source as bridging finance attracts service fees. Council will pay interest on the money. Borrowing $70M and paying interest at 5% per annum (for example) will result in an interest payment of $3.5 M. This assumes the capital component is repaid only after the sale of Rigby House is settled.
But Council is pushing the idea the extent of the borrowing will not be that high. While they have not stated how the initial funding of $30M is to be achieved they might wish to borrow a smaller figure.
- $40M total blow-out attracts $2M in interest;
- $30 M total blow-out less T2S $10M still attracts $1.5M in interest.
So if this is the preferred option residents will see somewhere between $1.5 and $4M used to pay the interest bill each year.
But it will be……. DEAD MONEY. Again.
Option 2 – Sell First – then build.
No Doubt Council will point out it is only $2 per week for every ratepayer. But it is a further $2 on top of the $12.50 from the unexplained initial funding. And no sod has yet been turned.
This is a safer way to proceed but it also has some hidden costs and risks.
- Rigby House needs to sell without being on the market for a prolonged period of time.
- The price realised needs to be $20.5 M.
The risks are found in any conditions the proposed purchaser might enforce or be agreeable to.
Should the buyer want vacant possession then some additional factors have to be considered.
- Rehouse the current occupants;
- Relocation costs;
- Cut backs to existing services.
Subject to agreement the buyer may agree to permit Council to operate out of the premises until the built is completed. This will come at a cost.
- Rent paid for this privilege;
- On-going repairs and maintenance etc.
These costs are (Drum roll)………………………….;
DEAD MONEY! Once more folks
The buyer will want a commercial rent and if the selling price is realistic then we can expect the rent to be of the order of $2 M for a residential site or nearing $3M for a commercial site.
Sorry Council but that is the way it is. It will be another slog on the residents of $600,000 every week. A mere drop in the ocean as it only increases the costs from $12.50 and past our $14.50 figure to now be $1.00 per week and rising.
To make matter worse though there will be other hidden costs to go on top of this like legal fees and the like.
In the final article in a week’s time the matter of the funds from the Transformation to Sustainability project will be examined. More Dead money will be uncovered.
COB worked as a forensic auditor for both State and Federal Governments before retiring to the Coffs Coast.