3: Background

Inquiry into Christchurch City Council's five property purchases.

To provide context to the views expressed in this Appendix, we set out relevant background information to the Council’s decision-making process.

Existing Council strategies and plans

Central City Revitalisation Strategy

The Council has been working on central city revitalisation since 2001, when it adopted the Central City Revitalisation Strategy. The strategy is an overarching policy directing the Council’s work programme in the central city for a 25-year period.1 Key priorities of the strategy are to increase the residential population, increase the business and commercial sectors, and redevelop under-used sites. The strategy lists initiatives that the Council should focus on to address these priorities in the next five years. This includes initiation of further redevelopment partnerships and the redevelopment of precincts, particularly in the area south of Lichfield Street, and around the Catholic cathedral and the Christchurch Polytechnic and Institute of Technology campus.

Except for one, the properties purchased by the Council are located in the central city area south of Lichfield Street.

For the central city area, further work was carried out in 2006 when “Stage II” of the Central City Revitalisation Strategy was adopted after a consultation and public planning process. Stage II provides more details about likely redevelopment partnerships and mentions precinct developments, with a focus on the city south area. It also refers to a budget for strategic land purchases, $23 million for the next 10 years2 that may be used to lead regeneration projects in the central city.

Stage II notes that one way to encourage redevelopment in the central city area is to develop a master plan for this area and change the City Plan to promote compatible mixed-use development. The revitalisation of the area south of Lichfield Street has been described by the Council as a cornerstone of the Council’s revitalisation and continued improvement programme for the central city.3

The Greater Christchurch Urban Development Strategy

The Greater Christchurch Urban Development Strategy was adopted by the Council after a public consultation process, and launched in June 2007. It was prepared in partnership with other agencies.4 One of the actions within this strategy is to implement the Council’s Central City Revitalisation Strategy by providing information and incentives for increasing the number of people living in the central city.

Long-term Council Community Plan

The Council’s 2006-16 Long-term Council Community Plan (LTCCP) reflects community outcomes of strong communities, healthy environment, liveable city, and prosperous economy. One Council objective addressing the liveable city outcome is the maintenance and enhancement of the quality of development and renewal of the city’s environments, including the championing of high quality urban design and protecting heritage buildings.

Supporting these outcomes, the LTCCP presents the Council’s activities, one of which is city development. This covers urban renewal, central city revitalisation (strengthening the city centre as a vibrant place to live, work, and do business), and heritage protection. It also refers to the Central City Revitalisation Strategy. Within this activity, the Council has forecast capital expenditure, including strategic land purchases, for urban regeneration and renewal projects.

The LTCCP includes a summary of the capital works programme of the Council’s forecast overall strategic land purchases. These purchases are intended to address strategic objectives for development of open space, conservation, stormwater management, and urban regeneration.

The LTCCP included a budget of $20.5 million for urban regeneration property purchases. We were told by the Chief Executive that this budget had since been used for different purchases for the south west area plan. As a result, there was no remaining budget available for strategic land purchases for urban regeneration at the time the Council considered the property purchases in July 2008.

The LTCCP also notes a specific loan of $60 million5 that the Council intended to raise to create a revolving reserve fund for land purchases, with the funds invested until needed. Of the total loan, $39.5 million was provided for in the LTCCP between 2007 and 2016. This reserve fund has not been created. The Council is raising specific loans for strategic land purchases as required.

Urban regeneration agency

In October 2007, the Council considered a staff report about establishing an urban regeneration agency to achieve the Council’s regeneration objectives more effectively and efficiently. The Council agreed to establish such an agency. Its objectives would include achieving redevelopment through the acquisition of real estate to promote the Council’s strategies and developing flagship, prestige projects to act as catalysts for private investment and development.6 Council staff were directed to further consider an appropriate structure for this agency, to identify funding options, and to report back on the necessary pre-establishment activities by August 2008.

We were told by the Chief Executive that there have been delays in finalising the funding arrangements for this structure. We understand that the Council has not yet made a final decision on whether, or how, to progress this option.

Events leading up to the decision

From about the end of 2007, staff at the Council had been in general discussions with the developer of the properties in question. They discussed the integrated development of properties owned by him (through various companies) and the Council in the area south of Lichfield Street. The developer had previously developed SOL Square, which was considered to be a successful example of what the Council envisaged for revitalising the central city area in keeping with its strategies and plans.

The Chief Executive told us that he was intending to bring a report to the Council later in 2008 to approve a joint master plan for the area, and to agree staging of any development.

We were told that Council staff became aware that a meeting of creditors was to be held with companies associated with the property developer. Staff were worried that this could lead to important properties for central city revitalisation being sold to a third party and developed in a way that would not support the Council’s revitalisation aspirations. We were told that Council staff were aware of market interest in the Sydenham Square site for “big-box retail” uses.

The Chief Executive thought that the Council should consider purchasing these properties before this happened and approached the developer about this.

Given the timing of the creditors’ meeting, the Council assessed there to be some urgency in its consideration of this matter. The Council understood that it had about two weeks in which to decide whether to purchase any of the properties.

On Tuesday 22 July 2008, a routine workshop with Councillors was scheduled. The Chief Executive used this workshop to raise the potential purchase of the properties and to outline the issues that Councillors would need to think about if they wanted to consider purchasing any of them. This session lasted about four and a half hours. The Councillors agreed to hold an extraordinary meeting to consider the decision later in the week.

We have been told that the workshop on 22 July 2008 was originally intended for a different purpose, and that Councillors were not told what the workshop was going to be used for. We understand that this reflected the urgency of the matter to be considered.

On Thursday 24 July 2008, there was a scheduled Council meeting. After this meeting, the Chief Executive distributed to the Councillors a report that he had prepared since the workshop. We understand there was some informal discussion about the proposed purchases at this point.

Chief Executive’s report

The Chief Executive’s report was five pages in length, and was accompanied by aerial photographs of the five properties in question, a two-page legal opinion, and a draft conditional option agreement (see paragraph 3.43).

Three potential options were identified in the legal opinion that was included within the Chief Executive’s report:

  • to acquire all of the properties listed;
  • to acquire none of them; or
  • to acquire some of them.

No further detail or analysis was provided for these or other potential options. The legal opinion recommended that the Council purchase all of the properties referred to in the Chief Executive’s report.

It was noted that the Council usually purchases properties on a case-by-case basis, and that the difference with this situation was that the Council was effectively purchasing several properties from one owner, rather than a collection of owners, and at one time. It also noted that the purchase would be consistent with the LTCCP and the Council’s Central City Revitalisation Strategy. It quoted a report by the Auditor-General7 that, where an unforeseen opportunity arises requiring an urgent decision, the decision should be consistent with the LTCCP and relevant policies.

The Chief Executive’s report included:

  • a summary of the five properties being considered (with the individual titles listed, as some sites comprised more than one title);
  • a brief description of each block;
  • why each block was being considered for purchase;
  • possibilities for development; and
  • approximate values.8

The properties and values were: Para ($5.9 million), Odeon Theatre ($1.04 million), Welles Street Electrolux ($5.25 million), Penny Cycles ($2.95 million), and Sydenham Square ($4.0 million).

The Councillors were told that the proposed purchases provided the Council with the opportunity to acquire significant properties with the critical mass to effect a development change. It would allow the Council to support ongoing urban residential development.

The Chief Executive’s report commented that the Council and the developer had discussed how the Council could purchase all or some of the properties, obtain the developer’s intellectual property (concepts, plans, and consents) in relation to the sites, and keep the developer involved in the Central City Revitalisation Strategy, if appropriate. The report also commented that the Council would procure valuation updates for any property it wished to purchase, as the basis for establishing the purchase price. The purchases would be funded by an interest-only loan. The expected overall annual interest costs, if all properties were purchased, would be equivalent to 0.68% of rates.

The report also noted that the Council could decide to purchase any number of the separate titles of land. Because none of the separate titles would have a value in excess of $5 million, one of the factors noted in the Council’s policy on determining significance, there was no obligation to consult on any of the purchases. The report also noted that there was no remaining budget provision for the proposed purchases in the LTCCP or in the 2008/09 Annual Plan.

Council decision – 25 July 2008

The Council met to consider the Chief Executive’s report at an extraordinary meeting on 25 July 2008. The meeting was held in private with the public excluded, and lasted about four hours. Three Councillors were not present at all, and one councillor was present for only part of the meeting. An external lawyer was present to provide commercial law advice to the Council. The lawyer had been instructed after the 22 July 2008 workshop, as a result of Councillors requesting commercial advice generally, particularly in relation to the proposed conditional option agreement.

The Council voted to purchase four of the five properties referred to in the Chief Executive’s report. The voting record shows that different councillors voted for and against the various properties.

We were told that, for the Para site, which had an approximate value exceeding $5 million, the Councillors discussed the properties on a title/combination of titles basis, and not just as an aggregated property. All other properties were discussed as aggregated sites.

No details were provided in the Council minutes about the Councillors’ reasoning for purchasing the properties. We were told through our discussions that:

  • Para site: Purchase of this site was a straightforward decision for the Council, because it was thought to be vital to the central city vision. The property was divided into north and south sites when the sale and purchase agreements were prepared after the Council meeting. This brought the individual titles under the $5 million threshold within the Council’s policy on determining significance, and we were told this would also facilitate any staged re-acquisition by the property developer under the conditional option agreement.
  • Welles Street Electrolux site: This was also a relatively straightforward decision with little debate. The property is suited to rental/student accommodation.
  • Penny Cycles site: This site is next to the Odeon Theatre. The Council was concerned that a developer would buy it and the theatre, knock both down, and create a large corner site. The Council bought the Penny Cycles site to stop this happening.
  • Sydenham Square site: The Council wanted this site as a catalyst to start redevelopment. The Council acknowledged its interest in the developer’s plans, and also wanted to protect the site from “big-box” development. Other than the Odeon Theatre, the proposed purchase of this site was debated most.

The Council voted not to purchase the Odeon Theatre. The five properties that were considered for purchase reduced to four as a result, and the division of the Para site noted above increased the number of properties purchased back up to five. We were told that the Councillors were keen to buy the Odeon Theatre, but did not do so because earthquake strengthening and refurbishment work was needed and would involve significant cost.

We were told that the Council considered what would happen if it decided not to purchase the properties. There was no guarantee that the Council would be able to subsequently buy all the properties it wanted to protect, should the titles be sold through a mortgagee sale. Purchasing the properties was to provide certainty for the Council. It was considered that, if the Council lost influence over the properties’ development, the Council strategies for the central city area may not be able to be implemented.

The Council also voted to:

  • authorise the Chief Executive to obtain valuations and conclude sale and purchase agreements for the properties that incorporated all relevant intellectual property within those valuations;
  • borrow the funds required to purchase the properties on the usual terms and conditions for external borrowing in accordance with the Council’s liability management policy;
  • authorise the Mayor, Councillors Shearing and Wells, and the Chief Executive to finalise a conditional option agreement between the Council and the developer; and
  • acknowledge that the decisions were made in keeping with the Council’s policy on determining significance and that no special consultative procedure was required.9

Subsequent actions

Council staff obtained external valuations from registered valuers for all but the Sydenham Square property on 28 and 29 July 2008. The valuations were carried out by the same valuers who provided the earlier valuations for the property developer. The valuers were instructed by the Council to update the earlier valuations, and to treat the request as a joint appointment to arrive at a fair current market value for a transaction between the Council and the vendor.

The valuers were among a number of firms that the Council uses for similar work.

The Council relied on a valuation for the Sydenham Square property obtained earlier by the developer (dated 14 July 2008). We were told that the Council did so because the valuation was current and the valuer was also one that the Council would usually use. No further instruction was issued by the Council to the valuer in relation to this property.

The acting Chief Executive, on behalf of the Council, subsequently entered into five agreements for the sale and purchase of the properties. These were dated 1 August 2008 and referred to 31 July 2008 as the settlement and possession date. Council staff told us that the agreements were not settled until 8 August 2008. The final purchase prices were the same as those in the updated valuations obtained by the Council, where these were obtained. For Sydenham Square, the purchase price was the same as the most recent valuation that was not updated. The combined final purchase price for the properties was $16.925 million.10

The Council funded the purchases through an interest-only loan, expected to cost about $1.4 million annually, in the form of commercial paper issued to a bank. The funds were drawn down by the Council on 29 July 2008 and were transferred to the Council’s solicitor on 7 August 2008. The solicitor settled the purchases on the Council’s behalf on 8 August 2008. We were told by Council staff that this is the first time that property purchases have been funded through borrowing, with previous purchases being funded out of cashflow.

The sale and purchase agreements were conditional on the Council being satisfied that it would receive all the developer’s intellectual property relevant to these sites. This included resource consents, building consents, and architectural and engineering specifications, master planning documents for the Sydenham Square site, and concept designs for the Para site. No additional payment was made for this intellectual property.

Some of the agreements were also conditional on the vendor immediately providing copies of leases and licence documents and related correspondence. The rental details for the Penny Cycles site had been included in the Chief Executive’s report to the Council.

We understand that the Council did not carry out any detailed due diligence, or business, commercial or valuation analysis.

On 1 August 2008, the acting Chief Executive also signed, on behalf of the Council, a conditional option agreement between the Council, the developer, and a company associated with the developer. The conditional option agreement confirms that the Council will begin preparation of a “master plan” for the integrated staged development of the properties acquired and other properties owned by the Council in the central city area, expected to be completed within six months. It also confirms the Council’s intention to pursue a staged development of the Sydenham Square property, based on work already carried out by the developer (the “Sydenham plan”).

This agreement provides an option for a company associated with the developer to re-purchase the properties at a price that is the greater of:

  • the Council’s purchase cost plus holding costs (borrowing costs, rates, and compliance costs), excluding repairs and maintenance, and any development costs; and
  • a valuation, based on a report commissioned by the Council.

The agreement provides for the conditions that must be met before the option can be exercised. Essentially the Council must be satisfied that the developer will, after any re-purchase of the properties, proceed to develop them in accordance with the “master plan” or the “Sydenham plan”, as appropriate. Should the developer fail to do so within six months of any re-purchase, the Council can buy the properties back at the same price as the developer paid the Council.

The purchase was made public on 8 August 2008 by a Council press release. The Council had considered how the purchase should be made public, and had intended for the Mayor to make the announcement. However, the purchase was finalised later than expected, and the Mayor was then unavailable.

The Council has told us that it will develop a master plan for the properties south of Lichfield Street, and establish time frames for development. The costs of the master plan are already included in the Council’s budgets, as this work was always contemplated. We were told that the Council will develop a staged plan for the development of the Sydenham Square site. We were also told that the Council does not anticipate carrying out any of the development or construction work, and so does not anticipate incurring any development costs for these properties.

1: Policy Register: Central City Revitalisation Strategy, taken from the Council’s website 18 August 2008.

2: This budget was reduced to $20.5 million in the 2006-16 Long-term Council Community Plan.

3: Project Central City South brochure.

4: Other agencies involved being Environment Canterbury, Transit New Zealand, Selwyn District Council, and Waimakariri District Council.

5: 2006-16 LTCCP, page 82.

6: Council meeting, 4 October 2007.

7: Turning principles into action: A guide for local authorities on decision-making and consultation, September 2007.

8: The approximate values had been obtained by the property developer from valuers between March 2007 and July 2008 and were included to assist the Council’s deliberations.

9: The Council’s policy on determining significance notes that it is the responsibility of the substantive decision-maker, such as the full Council, to satisfy itself that the requirements of the policy are complied with.

10: Para site (south): $1.6 million; Para site (north): $3.875 million; Welles Street Electrolux site: $4.9 million; Penny Cycles site: $2.55 million; and Sydenham Square site: $4.0 million.

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