Part 6: How the investments fared

Inquiry into property investments by Delta Utility Services Limited at Luggate and Jacks Point.

6.1
In this Part, we discuss:

who was governing the investments from 2009;
how the Luggate Park joint venture fared;
how the Jacks Point investment fared; and
the wider context of Delta's financial performance.

6.2
We then comment on the financial outcome of the investments and their governance and oversight.

Summary of our findings

6.3
The Luggate investment did not fare well in the period covered in this Part. Despite the further efforts of the joint venture partners, only a few sales took place between mid-2009 and November 2012, when the joint venture land was offered for sale.

6.4
The interactions between the Luggate joint venture parties on significant matters in this period are further evidence of a robust commercial arrangement, with each party being concerned to protect its own interests – especially when it had become clear that the joint venture was uneconomic.

6.5
The final outcome of Delta's Luggate Park investment is reasonably clear after the sale of the land in August 2013 – a loss to Delta of about $5.9 million, which might yet be offset by a deferred tax credit of about $1.5 million.

6.6
We can see why the directors viewed the Jacks Point investment as a better proposition than Luggate Park, largely because of the broader benefits to Delta in terms of the rights secured under the related agreements for ongoing work for the company at Jacks Point. The first stage of the development was completed within budget and, in contrast to Luggate Park, the estimated development costs for each section proved to be accurate.

6.7
However, as with Luggate Park, the market has affected Delta's profit expectations. Delta hoped to make a profit of about $70,000 for each developed section at Jacks Point but the sections have sold at a loss.

6.8
The expected gain on sale was only one aspect of this arrangement. However, now that Delta is ending its involvement in civil construction in Central Otago, it will no longer be able to take advantage of all the broader benefits it expected when entering the investment.

6.9
The final outcome of the investment at Jacks Point will be known only after Delta completes the sale of its land, but Delta has projected an after-tax loss of about $2 million.

6.10
The performance of both investments needs to be seen in the context of Delta's wider financial performance. For the nine-year period from 2004 to 2012, Delta returned dividends of $32 million to the holding company. The turnover of Delta and Newtons increased from $63.4 million to $108.6 million in that period, so Delta's growth strategy had some success. However, more recently, Delta has had to restructure its operations and stop work in civil construction.

Governance of the investments from 2009

6.11
From July 2009, Newtons had to manage both the Luggate Park and Jacks Points investments. Newtons' board began meeting more regularly from about July 2009, meeting the day before Delta's board meetings. From mid-2009, Delta's staff reported every month to the Delta board on behalf of Newtons. Staff then prepared a one-page report to the Delta board on the Jacks Point and Luggate Park projects.

The owner board for the Luggate Park investment

6.12
In July 2009, Mr Coburn replaced Mr Liddell as one of Newtons' representatives on the Luggate Park owner board. It appears that Mr Coburn's earlier Luggate Park conflict was no longer considered a problem, and that his expertise in property development was considered useful for the Luggate Park project now that it was in an operational phase.

6.13
Figure 15 shows the membership of the owner board from 2007 to 2013.

Figure 15
Members of the owner board for the Luggate Park joint venture, 2007 to 2013

	2009/10	2012/13
Ray Polson (chairman)
Ross Liddell	x
Michael Coburn		x
Neil Macdonald
Jim Boult

x: Left during the financial year.

6.14
Changes were also made to the Newtons board in July 2009. Mr Liddell and Dr Evans resigned and were replaced by Mr Cameron, Mr Coburn, and Mr McLauchlan (see Figure 16).

Figure 16
Members of the board of Newtons Coachways (1993) Limited/Delta Investments Limited, 2007 to 2013

	2009/10	2012/13
Ray Polson (chairman)
Ross Liddell	x
Michael Coburn		x
Stuart McLauchlan
Grady Cameron		x
Norman Evans	x

x: Left during the financial year. David Frow and Ian Parton joined the board in April 2013 after being appointed as directors of Delta Utility Services Limited.

How the Luggate Park joint venture fared

6.15
The Luggate joint venture project remained largely on hold throughout 2010. There were no sales of lots in the early part of 2010, but the house-and-land package was sold in April 2010. The sale proceeds were used to reduce the joint venture's debt.

6.16
The sewage treatment upgrade and electricity undergrounding projects were completed in the first few months of 2010, with Aurora Energy Limited doing the undergrounding work.

6.17
The bank agreed to extend the loan to up to $1.935 million to cover those costs, but negotiated stricter terms than for previous loan extensions. At first, the bank wanted a valuation, but did not pursue this at the time after discussions with the joint venture partners.

6.18
The bank agreed to a new maturity date for the loan of 31 March 2011, with a new condition requiring four lots to be developed and sold by the end of October 2010. If this did not happen, or if the loan was unpaid at the maturity date or another increase sought, the joint venture would need to get a valuation of the joint venture land.

6.19
The joint venture partners did not seek further extensions to the loan after the increase for the sewage treatment upgrade and undergrounding costs. Instead, they agreed to share any joint venture costs.

6.20
The owner board began to focus on options to clear the debt, with a view to keeping the project on hold until the market improved. The owner board considered, but did not pursue, the following options:

developing 20 of the stage 2A1 lots;
marketing the "high end" stage 2B lots, or developing one of those lots to generate interest and demand; or
selling a block of the developed lots for a discount.

6.21
The higher-than-expected development costs affected the viability of some of the proposals, and the owner board was not keen on increasing the bank debt further. Therefore, the owner board decided in April 2010 not to proceed with stage 2B at that time and that stage 2A would take place in the longer term. Mr Boult's assessment at that time was that the market was "effectively dead", and, in June 2010, the owner board noted that the market was unlikely to change in 2011.

6.22
In July 2010, Delta became concerned about the declining value of its security over the land. It was concerned that the funds borrowed from the bank had not necessarily increased the value of the land by the same amount, given the longer-term nature of the investment. Because the bank's debt ranked ahead of Delta's, the value of Delta's security had gone down. Under the mortgage priority arrangements, the bank would need to be repaid about $2 million before Newtons or Luggate Properties Limited would be repaid any of their contributions.

6.23
In September 2010, the owner board discussed the bank's impending deadline to sell four lots by the end of October 2010. The owner board noted that the sale of the house-and-land package in April would count towards the target of four sales, and an offer had been received for one other lot.⁷² The owner board discussed what its options might be if it did not meet the bank's target, including each joint venture partner taking responsibility for its share of the bank debt. Delta continued to view Luggate Park as a long-term investment that would require keeping the necessary funding in place, either through an external bank loan or from within each partner's own facilities.

6.24
The joint venture did not meet the bank's sales target. By the end of October 2010, the joint venture had achieved two sales between April and September 2010 and one sale in 2008, before the joint venture was formally settled.

6.25
In December 2010, the bank told the joint venture that it had arranged for a new valuation of the land.

Events in 2011

6.26
The owner board continued to meet in 2011 but less often, because the project remained on hold. Delta's staff provided regular updates to Newtons' board meetings. The updates were then passed on to Delta's board.

6.27
During 2011:

the bank agreed to extend the term of the loan for another year, to the end of March 2012, but wanted the joint venture to focus on selling the developed lots (see paragraphs 6.28-6.30);
the bank-ordered valuation was finalised in the middle of the year (see paragraphs 6.31-6.34);
Mr Boult offered to sell the Luggate companies' share of the joint venture to Delta, but Delta declined the offer (see paragraphs 6.35-6.40);
the joint venture continued to market the land, including looking for a housing company partner for house-and-land packages and listing the developed lots for sale with different real estate agents;
Audit New Zealand raised the matter of whether the value of the Luggate Park joint venture should be reduced (impaired) in Newtons/Delta's financial statements; and
the joint venture worked with the Luggate Homeowners Association and Luggate Village Services Limited (a company formed to own the sewerage treatment plant) on transferring ownership of an irrigation scheme and the sewage treatment plant to Luggate homeowners.

Extending the bank loan

6.28
In late March 2011, the owner board agreed to:

focus on selling the 11 developed lots rather than do any further work on the undeveloped land; and
request a one-year rollover of the bank loan, with continuing interest capitalisation and facility to fund the estimated operating deficit of $100,000 for 2011/12.

6.29
The bank agreed to extend the loan until the end of 2011. This was conditional on proactive marketing and selling of the developed lots. The owner board agreed on sale prices for those lots in September 2011, and they were listed for sale with several real estate agents. One more lot sold in October 2011.⁷³

6.30
The updated valuation required by the bank was dated July 2011.

The 2011 valuation for the land at Luggate

6.31
The 2011 valuation that the bank required was done by a different company than had done the previous valuations and on a different basis. That company estimated the individual values of the 10 unsold developed lots from stage 1 on both a current market value and forced sale basis. It estimated the value of the undeveloped blocks of land (stages 2A and 2B) as single blocks (rather than for their subdivision potential). This was because the planned subdivision was uneconomic in the prevailing market.

6.32
The valuer considered that the best use of the undeveloped land would be as a single house block, but keeping the excess rural land for its future subdivision potential. This meant the land was valued at far less than the earlier valuations, which had partly been done on a "hypothetical subdivision" basis.

6.33
The 2011 valuation put the combined value of the developed lots and the undeveloped blocks of land at $1.83 million (current market value) or $1.54 million on a forced-sale basis.

6.34
The valuer commented on the state of the market:

The general Wanaka property market entered a period of consolidation with subsequent falls in value levels from circa 2007. The subject development is located within a secondary location that caters for the lower end of the market and demand and sales numbers for 2011 appear weak. With the current property climate we believe the two development blocks to be uneconomic to currently develop with the likely purchaser being an entity who would hold the land for future potential, with the possibility of developing the land in the short term with a residence and grazing the balance.

Delta declines the opportunity to buy out the other joint venture partner

6.35
In early March 2011, Delta began to consider its options in the event that the Luggate companies might wish to exit the joint venture and sell their share of it. Under the joint venture agreement, a party wanting to sell their joint venture interest had to give formal notice to the other joint venture partner and offer the other partner the first opportunity to buy it. The other party could accept the offer, have the "fair value" of the interest worked out under a process set out in the joint venture agreement, or decline the offer. If the party declined and the seller decided to offer it for a lesser amount to another party, the seller then had to offer it to the joint venture partner for that lesser amount.

6.36
Delta summarised its financial position and significant information about the joint venture at that time:

Delta owed the bank about $770,500 (half of the current bank debt);
Delta had an outstanding advance to the joint venture of about $5.3 million, which was repayable only if the land was developed and lots were sold;
the estimated development costs for each lot had risen from $55,000 to $105,000; and
Delta had carried out about $650,000 worth of contracting work for the joint venture.

6.37
Delta needed to consider whether the joint venture development would be viable if it took over the whole project. It decided that it did not wish to invest more money in the joint venture land at that time, but would consider its options if Mr Boult decided to sell.⁷⁴

6.38
In July 2011, Mr Boult formally offered Delta the opportunity to buy the Luggate companies' share of the Luggate Park joint venture, including the joint venture land and their share of the bank debt.⁷⁵

6.39
Delta declined the offer in late July 2011, but noted that, if Mr Boult was not able to sell the Luggate companies' share to another person for that price, then it would consider any alternative proposal.

6.40
In September 2011, Mr Boult told Delta that the Luggate companies intended to sell their share of the joint venture by tender. However, at the end of November 2011, he noted that he thought Delta remained the best option as a purchaser and Delta agreed to reconsider the offer early in 2012.

Events in 2012

6.41
At first, Delta's focus in 2012 was on how it should position itself in the event that the bank called in the loan, and then how to exit the Luggate Park investment.

6.42
Between September 2011 and November 2012, the owner board did not meet, but Delta's staff continued to report on Luggate Park to board meetings of Newtons (re-named Delta Investments Limited from 1 July 2011) and kept in contact with Mr Boult, as required.

6.43
In January 2012, Delta reconsidered its position on buying the Luggate companies' share of the joint venture and again declined the offer. Delta declined again in March 2012, when the companies offered their share for a lesser price.

6.44
The bank did not extend the term of the loan after expiry at the end of 2011. The bank said that the parties would have to pay the interest owing in order to get another renewal. The arrangement with the bank moved to a month-by-month one.

6.45
Delta considered paying its share of the bank debt, but thought this might be to its disadvantage if the joint venture ended and the land had not been developed. Delta got legal advice on its position. One option was to negotiate with the bank for Delta to buy out the bank debt. If Delta did this, it would need to be confident that it could sell the land for more than the amount of the bank debt or that it could afford to hold the land until the market improved.

Providing for impairment in the value of the Luggate Park and Jacks Point investments

6.46
In April 2012, Delta directors agreed that the value of the Luggate Park and Jacks Point investments should be written down by $5 million and $2.5 million (before tax) respectively in Delta Investments Limited's 2012 financial statements. This was partly because the new directors of the holding company had said that Delta should exit from its property investments and consider providing for impairment in the value of the investments to reflect their net realisable value in the event of a relatively quick sale.⁷⁶ Denham Shale, the chairman of the holding company at that time, confirmed to us that he and another holding company director had given Delta this message.

Delta decides to sell the Luggate Park land

6.47
In May 2012, Mr Polson reported to the Delta board that Delta Investments Limited had decided that Delta should sell its interest in the Luggate Park joint venture for as much as it could and that Delta staff would work with Mr Boult to achieve that.

6.48
The joint venture partners considered whether to sell the remaining developed lots separately from the undeveloped blocks of land (stage 2A and 2B), including whether to first sell the developed lots by auction. They later decided to market the developed and undeveloped land as a package, after receiving proposals from local real estate firms.

6.49
In mid-2012, the bank was pressing for a loan repayment proposal and considering issuing a notice demanding repayment.

6.50
Delta got advice on its options. It was not a simple matter of Delta repaying its share of the bank debt because this might be to its disadvantage later. Delta also received advice that it was important to keep the joint venture structure in place to get the benefit of any tax loss. This further complicated the situation.

6.51
In July 2012, Delta updated the holding company about the decision to sell the Luggate Park investment. Delta noted that the holding company was comfortable with the direction being taken.

Selling the Luggate Park land

6.52
By the end of September 2012, two more of the developed lots had been sold. This brought the total number of lots sold since the joint venture began to six.

6.53
The joint venture offered the rest of the developed lots and the undeveloped blocks (stage 2A and 2B) for sale by tender, with a closing date of 14 November 2012.

6.54
Three offers were received and the joint venture partners began to negotiate with one of the prospective buyers.

6.55
On 30 November 2012, the joint venture partners entered into a conditional sale and purchase agreement with a company to sell seven developed lots and the undeveloped land (stages 2A and 2B) for $1 million. The sale was conditional on the joint venture subdividing one of the lots to create a separate title for an existing cottage, and settlement was to be 42 working days after the subdivision had been completed and a title issued.

6.56
The bank expected the joint venture debt to be reduced even with the sale and before settlement. This did not happen, but the bank agreed to the sale proceeding on the basis that the joint venture parties would repay the loan immediately after settlement.

6.57
After a delay with settlement (because it took longer than expected to complete the cottage subdivision), the Luggate Park joint venture land was sold on 5 August 2013 for the agreed price of $1 million. The net sale proceeds were paid to the bank to reduce the debt for development costs. Delta then cleared its 50% share of the remaining bank debt.⁷⁷

How the Jacks Point investment fared

6.58
The land Newtons purchased at Jacks Point was in two blocks, known as neighbourhood 3 (N3) and neighbourhood 2B (N2B). Each block had room for 49 developed lots.

6.59
In August 2009, Delta staff told the Newtons board that members of the project delivery group for Jacks Point would be Mr Coburn (project director) and a representative from Peak Projects Limited (a company engaged as project manager). Representatives from an engineering company and a surveying company were engaged to help.

6.60
In October 2009, Delta began to develop 49 lots at N3, with a planned finishing date of April 2010. The Newtons board had approved the work starting, subject to the total estimated price of construction costs for N3 being no more than $2.55 million ($52,000 for each lot).

6.61
The Newtons board monitored progress with the development and the wider property market each month from September 2009. The board received written reports from Delta staff and the project manager. These reports covered progress on matters such as earthworks and storm water, titling, marketing updates, expenditure against budget, and actual against planned timing to complete.

6.62
The first few reports were positive in terms of marketing opportunities, expenditure against budget, and timing. Mr Coburn's responsibilities included preparing a marketing plan for the development, and his marketing efforts in late 2009 included discussing:

possible house-and-land packages with house builders, which were also being considered at Luggate Park; and
the option of selling the whole N3 development to one overseas buyer for the purpose of marketing house-and-land packages.

6.63
By February 2010, the sale of the N3 block to the overseas buyer was looking less likely because the market was softening. Instead, that buyer was considering 12 to 15 house-and-land packages.

6.64
In February 2010, Mr Coburn advised the Newtons board that a company that had acquired a block of Jacks Point sections from Hanover Finance might offer to sell those sections at a low value. Mr Coburn was working on a proposal to mitigate the risk to other land owners of low price sales. The mitigation proposal involved all major landowners at Jacks Point operating from a common sales office under a "master agent" but with involvement of all the main Queenstown agencies.

6.65
A March 2010 report to the Newtons board from Peak Projects Limited named Locations as the master agent for Jacks Point sales, and said that Mr Coburn was going to request a proposal from Locations to act as master agent for Delta's N3 lots. However, it appears that this did not happen. Marketing efforts were put on hold about this time and the minutes of Newtons' March 2010 board meeting do not refer this proposal.⁷⁸

6.66
In March 2010, Mr Coburn told the Newtons board of a possible arrangement whereby Jacks Point Limited or a related company would buy back all of the N3 sections when they were developed in return for a payment of half cash and half land, being another 49 lots at Henley Downs.

6.67
In April 2010, Delta managers told the Newtons board that services at the N3 block had been largely installed, but staff might need to be reallocated to other work and this would delay finishing the construction work until after that winter.

6.68
Managers noted that marketing activity was on hold but that a strategy could be prepared for a summer sales campaign. It would be timed to coincide with the revised completion date for the N3 block of the end of September 2010 (this was later moved to mid-October 2010).

6.69
In June 2010, Mr Coburn said that the buyer of the Hanover Finance sections was selling them for low prices as had been anticipated. Mr Coburn also said that he was expecting to get the terms of the offer from Jacks Point Limited to buy the N3 sections back from Newtons by the end of June, and that he had received some low offers for the N3 sections from other buyers.

6.70
The Newtons directors discussed what minimum price they would accept for the developed Jacks Point sections. They noted that, at the prices other lots were selling for, Newtons would be making minimal profit but also that Delta had made a profit margin on the development work of about $3,000 for each lot⁷⁹ and the development was keeping its staff in work.

6.71
Newtons put its first statement of intent in place for the year beginning 1 July 2010. The statement of intent said that Newtons' mission was to become a leading infrastructure investor, and that its principal activities would be to procure and develop land for residential and commercial purposes and to make any other infrastructure investments for a commercial return. The statement of intent noted that these activities would generally be outside the scope of Delta's activities.

Position in September 2010

6.72
As the work progressed, it became apparent in late September 2010 that Delta's (through Newtons) overall investment in Jacks Point could breach the $10 million threshold. At first, Delta had told the holding company and the Council that the investment would not exceed $10 million at any time. That amount was a trigger point that would require specific formal approval from the Council. However, as work had taken longer than planned and as no sections had been sold, the $10 million threshold had been breached.

6.73
On 29 September 2010, Mr Cameron wrote to Delta about the breach. In October 2010, Delta then wrote to the holding company, saying that:

although no sales had taken place, increasing activity on the overall Jacks Point site was encouraging;
Delta hoped to sell up to 16 lots by the end of 2010/11 (consistent with the original projections for the year);
receivers of failed investment companies had been selling some of the poorer quality sites at low prices and this could affect pricing of other lots at Jacks Point;
Delta remained confident that its sites were superior and able to be sold at a price that exceeded the total cost;
total costs were expected to be inside the original estimate;
the plan to complete sales by June 2015 was extended to June 2017; and
it was likely that Delta would be in breach of the $10 million threshold for the next two financial years.

6.74
Delta directors assumed that the holding company would pass this information on to the Council.⁸⁰

6.75
We asked the chief executive of the holding company how the holding company responded to this information. The chief executive told us that the holding company did not respond formally to the letter. He said that by that stage it was clear that investment was well under way and it was too late for anyone to say "No". Also, because the Delta directors and holding company directors were largely the same, they were effectively writing to themselves.

6.76
At the Newtons board meeting in September 2010, Mr Coburn updated directors about the possible deal that he had been discussing with Jacks Point Limited, whereby Jacks Point and Henley Downs interests would buy the developed sections from Newtons for a mixture of cash and land at Henley Downs. He advised that Newtons should not acquire more land in the prevailing market. Mr Coburn said he would recommend a marketing strategy for the N3 sections for launch in October 2010.

6.77
The Newtons board agreed to start construction work on the N2B block of land from October 2010, noting that part of the rationale for the purchase had been to provide work for Delta staff. However, in late September 2010, the board noted that the recent Canterbury earthquake might significantly affect Delta's future workload and the timing of work on the N2B development. The Newtons board later decided to review this in early 2011.

6.78
Construction of the N3 block of 49 lots was completed in late October 2010, within the original budget. The Newtons board decided to begin marketing the sections in early 2011, with section prices starting at $195,000 (including GST).

6.79
In December 2010, Mr Coburn told the Newtons board that the marketing plan would be close to completion for the next board meeting and the direction of the market would become more apparent during the Christmas period.

Jacks Point events in 2011

6.80
In February 2011, Mike Coburn reported to the Newtons board on sales of other sections at Jacks Point and said that the marketing campaign was ready to start. However, he recommended that Newtons hold the release of the sections until the market improved. Mr Coburn also reported on discussions with other land owners at Jacks Point. He said it was hoped that there would be a common sales office for Jacks Point sections in the next six months.

6.81
In March 2011, Delta staff reported that the N2B development had been put on hold until further notice because the Delta resources were to be redirected to another joint venture development at Hanmer Springs⁸¹ or Christchurch in the near future. Titling of the N3 lots was put on hold because rates would become payable when titles were issued and there was no point paying rates on unsold lots. Mr Coburn told directors that a marketing plan was being prepared and that he still expected some sales before July 2011.

6.82
Mr Coburn continued to discuss with interests at Jacks Point and Henley Downs their offer to purchase all of the developed N3 lots in return for cash and some undeveloped land at Henley Downs. The board considered the amount offered too low, but agreed to leave the offer on the table. Mr Coburn:

reported on recent sales of 16 other sections at Jacks Point once owned by Hanover Finance; and
said he was looking to market the N3 lots with a starting price of $195,000, and that a September marketing launch was now planned.

6.83
At the Newtons board meeting on 2 March 2011, Delta staff had advised that the agreement between Newtons and Ruboc Holdings Limited for Mr Coburn's project management services was overdue for mid-term review, including of the fees payable, and this should have happened in October 2010.

6.84
Delta staff were asked to report to the next Newtons board meeting at the end of March 2011. At that meeting, Mr Coburn said that, as from April 2011, he would charge for project management services at Jacks Point at the directors' rate of $200 an hour, rather than for the fixed fee that had previously been agreed. His work would be mainly in marketing.

6.85
There were no sales during 2010/11.

6.86
Newtons changed its name to Delta Investments Limited in 1 July 2011. At a Delta Investments Limited board meeting in July 2011, Mr Coburn reported that the intended spring 2011 launch target date was on track and that Locations was working on the marketing plan. The minutes of the meeting record that:

Mr Coburn told the meeting of his relationship with Locations and asked that it be noted in the company's interests register; and
the interests register would "record that Mr Coburn has an association to Locations Realty Limited, through his son being a shareholder".

6.87
Soon after the meeting, in an interests register disclosure to Delta on 4 August 2011, Mr Coburn confirmed that he was a shareholder, through a trust, in Locations Realty Queenstown Limited.⁸²

6.88
At a Newtons board meeting on 30 August 2011, Mr Coburn noted that Locations and another agency had submitted marketing proposals. The directors agreed that Delta staff would evaluate the proposals and make a recommendation to the next board meeting.

6.89
A report to the Delta Investments Limited board at 27 September 2011 summarised the position and the options:

Delta had paid $8.82 million in total for the land and spent $2.2 million developing the first 49 lots. Holding costs were estimated to be about $6,000 a year for each developed lot.
Based on sale prices during the last 12 months in the area, including a block of plots sold under a "mega sale process", the current market price for Delta's developed lots was estimated to be between $185,000 and $225,000.
Options for the future were to:
- sell the developed lots as soon as possible;
- hold the lots until the market improved;
- sell all the lots as a package to one buyer; or
- work with construction companies on house-and-land packages.

6.90
Delta staff recommended that they continue to work with Locations and others on house-and-land concepts and present a preferred strategy to the board.

6.91
Mr Coburn reported that he was working with other parties on a potential bulk sale agreement, as well as individual section sales.

6.92
During the next couple of months, Delta met with Locations and another company about house-and-land packages and with companies interested in building show homes on Delta's land at Jacks Point. In November 2011, Delta managers reported on options that the show-home companies proposed. The Delta Investments Limited board agreed to fund one of the companies to build two show homes.

6.93
The intended marketing launch in the spring of 2011 did not take place. It is not clear whether the marketing plan that Mr Coburn referred to during various meetings was ever formalised or presented to the Delta Investments Limited board.

6.94
Delta managers and Mr Coburn have said that Delta did not enter into an agency agreement with Locations for the sale of Delta properties at Jacks Point.

Jacks Point events in 2012

6.95
In early 2012, Delta worked on or considered the following options to achieve sales at Jacks Point:

continuing to work with various parties on building show homes on Delta's land;
considering a possible bulk sale of sections to a party based in Singapore;
commissioning a master plan layout that would show building platforms and house positions to potential buyers;
taking a "mega sale" approach to liquidate as many of the developed sections as possible, as well as the undeveloped lots in N2B; and
the possibility of a "land bank" to be formed by other Jacks Point owners taking over 10 of the developed N3 lots or all of the undeveloped N2B lots, and the lots being sold in smaller blocks over time to maintain the land value.

6.96
In April 2012, resource consent was declined for Delta's proposed works depot at Jacks Point (Woolshed Road). As part of buying the Jacks Point land, Delta had an option to buy land for a works depot for $1.5 million subject to the necessary resource consent being obtained.

6.97
In April 2012, after considering the holding company's comments and discussing the matter themselves, Delta directors agreed to recognise impairment in the value of the investments in Jacks Point and Luggate Park and to sell those investments.

Going concern discussions for Delta Investments Limited

6.98
Mr Polson, as chairman of Delta Investments Limited, reported to the Delta board in May 2012 that the company was unlikely to be a viable in the long term. He expected that the company would eventually be wound up. He noted that provision had been made for a pre-tax $5 million loss in the company's 2012 financial statements (this was the effect of writing down the value of the Luggate Park joint venture by that amount) and that the Jacks Point investment was also to be written down by $2.5 million before tax.

6.99
As part of the 2012 audit of Delta Investments Limited, Audit New Zealand raised the matter of whether the company could reasonably expect to recover enough funds from property sales to repay the advance owing to Delta. It was agreed that Delta would provide a letter of support to Delta Investments Limited, and would make a doubtful debt provision for the money that the company owed it.

6.100
Delta Investments Limited's annual report for the year ended 30 June 2012 noted that the board intended to sell its property investments at Luggate Park and Jacks Point because of the continuing weakness in the residential property market in the Queenstown Lakes district.

Delta's exit strategy

6.101
In July 2012, a party with an interest in Jacks Point sought Delta's support for a proposal to buy out various other ownership interests at Jacks Point and sell the sections in bulk to other new investors. This would re-launch the Jacks Point brand under new ownership but with a single co-ordinated marketing effort, and provide ongoing development work for Delta.

6.102
In July 2012, Delta agreed to pursue a parallel strategy of direct sales, as it could take some time for the "re-launch" strategy to eventuate.

6.103
In August 2012, Delta Investments Limited received an unsolicited conditional offer to buy one lot at Jacks Point and agreed to sell the section to the purchaser in September 2012.⁸³ Delta also had two other offers under consideration:

from a building company, to buy five lots with a three-month settlement period and an option to buy a further five lots in the next six months; and
from Singapore investors, for a bulk purchase of the developed N3 sections in two tranches.

6.104
Delta had asked the Singapore investors to improve their offer price.

6.105
In August 2012, Delta managers updated the Delta Investments Limited board on negotiations with potential purchasers, including that a verbal offer had been received from a party that was looking to sell house-and-land packages to Singaporean investors. The JPROA and another Jacks Point party had introduced the offering party to Delta. Mr Coburn declared that he was a committee member of the JPROA when the offer was discussed.

6.106
After discussion on the average cost to Delta for each of the developed sections in the N3 block and the effect of the $2.5 million impairment provision on the value of the developed and undeveloped sections, directors authorised staff to continue to investigate bulk offers that would meet or be above Delta's average cost of developing the N3 lots.

6.107
After further negotiations on price and timing of settlement, on 12 September 2012, Delta Investments Limited entered into a conditional agreement with a company acting for the Singapore investors (Jacks Point N3 Limited) for the sale of 25 of its N3 sections. The price was $135,000 plus GST for each section, with the option to buy a further 24 sections for the same price. The purchaser had a 60-day due diligence period before the agreement became unconditional and a 10% deposit was payable.

6.108
In advice to the Delta board on this offer, Delta's staff noted that:

the offer price represented a loss of $6,000 for each section because Delta Investments Limited's average development cost for each section was $141,000, but it was an opportunity to realise a significant proportion of the Jacks Point investment;
should the market price improve in the future, Delta would remain well placed to benefit through the sale of the undeveloped block N2B; and
the holding company board might need to be consulted, in terms of Delta's statement of intent, because the value of the assets exceeded $5 million.

6.109
Delta's directors agreed with managers' recommendation to accept the offer. Some were reluctant, given that the price was lower than they wanted. Mr Coburn said that he supported the sale "under the circumstances we now find ourselves in (pressure from shareholder to reduce debt)".

6.110
In November 2012, Delta Investments Limited agreed to a variation sought by the purchaser to allow the purchaser to confirm 13 of the first batch of 25 lots, rather than all 25 at once, but settle between three and five of those sections earlier than previously agreed when titles were issued (then expected to be February 2013).

Governance changes at the end of 2012 and early 2013

6.111
As noted earlier in this report, the Larsen review had criticised the common director arrangements in the holding company group. The review recommended that directors who were on the holding company board should not also be on the boards of subsidiaries.

6.112
In October 2012, Mr Coburn, Mr Liddell, and Dr Evans ended their terms as directors of Delta, Mr Coburn resigned as a director of Delta Investments Limited, and Mr Frow and Dr Parton were appointed as directors of Delta. Mr Polson and Mr McLauchlan remained on the boards of both Delta and Delta Investments Limited.

6.113
In April 2013, Mr Frow and Dr Parton became directors of Delta Investments Limited and Mr Cameron ended his term as a director of Delta Investments Limited.

Events in 2013

6.114
Delta's focus in early 2013 was on getting titles issued for the N3 sections so that the sale to Jacks Point N3 Limited could proceed. Titling took longer than planned but was completed in May 2013. The timing of settlement was delayed until the titles were issued. Delta agreed to extend the date for the unconditional offer for the remaining N3 lots to become conditional while titling was delayed.

6.115
In January 2013, Delta received an offer for the undeveloped N2B block that was below its expectations. Delta agreed to negotiate but to go to the market if agreement on a satisfactory price could not be reached. In March 2013, Delta agreed to get the N2B block valued, and agreed on a counter-offer price to put to the potential purchaser.

6.116
In April 2013, the Delta Investments Limited board noted that:

agreement had been reached with the JPROA to terminate Delta's licence to occupy the depot land at Jacks Point and that Delta would not be required to buy the depot site for $1.5 million as previously agreed; and
Delta's preferred contractor status for future developments at Jacks Point had been retained.

6.117
At the end of May 2013, Delta managers told the Delta Investments Limited board that:

Delta had been paid for eight of the 13 sections and was about to be paid for the remaining five;
the purchaser had confirmed that it would buy the next 12 sections, but had let the option to buy the remaining 24 sections lapse for the time being; and
the valuation of the undeveloped N2B block was under way, which managers considered would validate the carrying value of Delta's Jacks Point land at 30 June 2013 (along with the recent sales).

Financial information needed to assess the investments

6.118
Here, we set out some financial information to put the investments in the wider context of Delta's overall operations. We also explain the income, expenditure, and financial outcome of the two investments.

Significant financial information about Delta in the period of the investments

6.119
Delta gave us a summary of financial information for the Delta group (Delta and Newtons/Delta Investments Limited) from 2004 to 2012. The summary notes that, during this period:

Delta group's annual turnover increased from $63.4 million to $108.6 million.
Delta's fixed assets increased from $24.0 million to $34.0 million and its total assets increased from $39.7 million to $75.7 million.
The Jacks Point and Luggate Park investment decisions accounted for about $9.4 million of the $36 million increase in total assets (after the write-down of $7.5 million at 30 June 2012).
The group recorded total net profits of $24.5 million (incorporating a loss of $5.9 million in 2012), and returned dividends of $32.0 million to the holding company.

6.120
Delta paid the holding company a dividend of $2 million for the year ended 30 June 2013.

Financial outcome of the Luggate joint venture

6.121
Figure 17 shows the financial projections for the Luggate joint venture when Delta agreed to it in 2007.

Figure 17
Financial projections for the Luggate joint venture in 2007

	$million¹
Sales value of developed lots	30.39
Marketing and selling costs	(1.69)
Development costs	(9.68)
Overheads and funding costs	(0.60)
Land value	(10.75)
Surplus before tax	7.67

1: Figures are rounded.

6.122
The construction work at Luggate had an estimated value of about $5.3 million, and Delta expected to earn a profit of about $1 million from that work.

6.123
The joint venture sold the Luggate land in August 2013 for $1 million. The net sale proceeds of about $943,000⁸⁴ were immediately paid to the bank to reduce the debt for development costs. The total debt at that time was $1.731 million, and this was reduced to about $788,000 when the net proceeds from the property sale were paid. Interest of $17,500 was then charged on 6 August 2013, and Delta cleared its 50% share of the residual $806,000 balance by paying $403,000 in cash.⁸⁵

6.124
It is not possible to do a direct comparison with the financial expectations when Delta went into the joint venture because the development did not proceed as planned. However, in simple terms, as shown in Figure 18, the estimated profit of about $7.7 million for the joint venture turned out to be a loss of nearly $11.4 million.

6.125
Figure 18 sets out, in broad terms, the overall income and expenditure for the Luggate Park joint venture.

Figure 18
Overall income and expenditure for the Luggate Park joint venture

	$million¹
Proceeds from sale of Luggate Park land²	1.124
Marketing and selling costs³	(0.057)
Development costs/bank debt including interest	(1.749)
Land cost	(10.700)
Surplus/loss before tax	(11.382)

1: Figures are rounded.

2: Made up of $124,000, the net proceeds from the sale of a lot at the start of the joint venture where the parties agreed to split the proceeds, and $1.0 million from the sale of the residual Luggate Park land in August 2013. There were a few other sales during the period of the joint venture, but proceeds were used to reduce the bank loan.

3: For the August 2013 sale only.

Delta's share of the loss

6.126
Delta's main expenses for the Luggate joint venture were its $5.3 million advance to Luggate Properties Limited⁸⁶ and its 50% share of the bank debt of about $874,000.

Other costs incurred by Newtons and Delta

6.127
After entering into the joint venture, Newtons paid Armada about $72,000 for some of the costs that company had incurred before Delta invested in the joint venture using a deemed start date for the joint venture of May 2007.

6.128
Under the management agreement, the fee payable to Armada for Mr Boult's time was initially set at $5,000 a month, but was reduced to $3,000 a month when Luggate Park was put on hold, and was not charged in full in 2010.

6.129
From the joint venture's financial records, the joint venture paid Armada management fees of:

$68,000 in 2009;
$28,000 in 2010;
$42,000 in 2011;
$36,000 in 2012; and
$36,000 in 2013.

6.130
These costs were treated as operating expenditure for Newtons/Delta Investments Limited, so the company paid its half-share of $105,000 from its funds rather than out of the bank loan account. Other joint venture costs were met from the bank loan.

6.131
When these payments to Armada of $72,000 and $105,000 are added to Delta's $5.3 million advance and its share of the bank debt of $874,000, Delta's direct expenses increase to $6.35 million. However, this amount is offset by:

about $470,000 (Delta's 50% share of the net income from the sale of the land in August 2013); and
nearly $1.5 million – an anticipated tax credit, representing Delta's loss on the Luggate Park investment for tax purposes.

6.132
The result of these calculations is a loss of about $4.38 million if the anticipated tax credit is realised, or $5.88 million if it is not.

Tax credit

6.133
The joint venture agreement required the two parent entities, Delta and Luggate Holdings Limited, to ensure that their subsidiaries had enough funds to pay Luggate Properties Limited the purchase price of $10.7 million in the event that Luggate Properties Limited had not recovered that amount from land sales.

6.134
Luggate Properties Limited was then required to use those funds to repay the advances from both joint venture partners. Delta's tax advisors had suggested this during negotiations on the joint venture agreement, so that any loss suffered directly related to the joint venture property development activities rather than the financing activities of each joint venture partner.

6.135
When the land was sold in August 2013, each of the joint venture partners had to contribute nearly $5.3 million to make good the shortfall between the sale proceeds and the balance of the amounts owing to both joint venture partners. In August 2013, after Delta Investments Limited's balance date, both partners contributed their half-share of the loss, with those funds going to Luggate Properties Limited. Luggate Properties Limited, in return, has repaid the $5.3 million to Delta Investments Limited to clear its advance.

6.136
The anticipated tax credit available to Delta Investments Limited for its loss from the Luggate Park joint venture is 28% of that $5.3 million (nearly $1.5 million). The company has accounted for the tax credit from this anticipated tax deduction as a non-current asset in its balance sheet as at 30 June 2013. It has done so because it expects the deduction to be used by another member of the Council's consolidated tax group. Delta Investments Limited also expects that it will be compensated for its tax losses by another member of that group. Our appointed auditor accepted as reasonable this treatment in Delta Investments Limited's 2012/13 financial statements.

Income and expenses not included in our calculation of the overall loss at Luggate Park

6.137
Our calculation of the loss does not include all of Delta's costs during the Luggate Park joint venture. Other costs incurred were:

interest paid by Delta on its loan from Dunedin City Treasury Limited to fund its acquisition of $5.35 million of shares in Newtons;
management time – Delta did not charge the joint venture for time its staff spent on the joint venture;
directors' fees; and
meeting fees for attending owner board meetings.

Financial outcome of the Jacks Point investment

Jacks Point position at 30 June 2013

6.138
The status of Delta's involvement at Jacks Point at 30 June 2013 was:

Delta continued to hold the services agreements for both Jacks Point and Henley Downs. These were the contracts for the water, sewerage, vegetation and meter-reading operations, and maintenance services. The value of the services provided under these contracts was about $300,000 for the year ended 30 June 2013.
Delta had retained its preferred contractor status for all future development and infrastructure work at Jacks Point and Henley Downs.
Delta had recently terminated its license to occupy the existing depot site at Jacks Point, on the basis that the Jacks Point maintenance services could be adequately delivered from another site that was to be made available to Delta (by Aurora Energy Limited) in Frankton, Queenstown. The agreement under which Delta took an option to buy land for a new permanent depot at Jacks Point for $1.5 million had been cancelled.

6.139
However, Delta announced on 5 July 2013 that it planned to close its civil construction operation in Otago and Southland. This will affect Delta's ability to benefit from all the arrangements noted above.

Jacks Point position at January 2014

6.140
The position for Delta's Jacks Point investment at January 2014 was as follows.

The N3 developed lots

6.141
Delta has sold all of the 49 developed N3 sections to Jacks Point N3 Limited.

6.142
Delta sold 13 of the N3 sections in May 2013, and a further 12 sections in November 2013. The sale price for the 25 sections was $3.375 million, which was based on $135,000 per section.

6.143
Delta has entered into an unconditional agreement with Jacks Point N3 Limited for the sale of the remaining 24 developed N3 sections. The sale price for these sections is $2.76 million plus GST (if any), which is based on $115,000 per section. The purchaser is due to pay for 12 of the sections in June 2014 and for the remaining 12 in December 2014.

The N2B undeveloped lots

6.144
Delta has entered into an unconditional agreement with another company for the sale of its undeveloped neighbourhood 2B.

6.145
The sale price is $2.425 million plus GST (if any). Delta received a deposit of $242,500 in December 2013 with the rest of the sale price due for payment in March 2014.

Delta's projected loss

6.146
Figure 19 summarises the financial position for the Jacks Point investment as at January 2014 and Delta's projected loss from the investment.

6.147
The summary includes:

the actual sale proceeds from the 25 N3 sections received prior to 30 November 2013;
the unconditional contract prices for the remaining N3 sections and the undeveloped N2B sections, less sales commission;
the costs to Delta of developing the N3 sections, including development costs and interest costs;
the impairment of the Jacks Point land recognised at 30 June 2012;⁸⁷
the Delta group's construction profit for the N3 lots of $294,000;⁸⁸ and
Delta's overall projected after-tax loss from the investment of $2.009 million.

Figure 19
Summary of the projected financial position for Jacks Point, as at January 2014

	$000
2010/11
Purchase price	8,820
Development costs capitalised	2,196
Interest capitalised during construction	239
Other costs capitalised	203
Book value at 30 June 2011	11,458
2011/12
Development costs capitalised	43
Impairment provision at 30 June 2012	(2,500)
Book value at 30 June 2012	9,001
2012/13
Development costs capitalised	40
Sale proceeds (13 x N3 sections)	(1,755)
Book value at 31 May 2013 after sale of 13 sections	7,286
2013/14
Sale proceeds (12 x N3 sections)	(1,620)
Book value at 30 November 2013 after sale of further 12 sections	5,666
Projected loss after sale of remaining lots
Unconditional contract prices for the remaining lots, after sales commission	5,082
Delta Group construction profit on development of N3 lots	294
	5,376
Less book value at 30 November 2013	(5,666)
	(290)
Impairment already recognised at 30 June 2012	(2,500)
Projected loss estimate (before tax) for Delta Group	(2,790)
Expected tax credit	781
Projected loss estimate (after tax) for Delta Group	(2,009)

Our comments

6.148
We have described in detail how the investments fared and events that happened during our inquiry. The final outcome of the Luggate Park investment is reasonably clear after the sale of the land in August 2013. The final outcome of the investment at Jacks Point will be known when Delta has received all of the sale proceeds from its sections.

The Luggate Park investment did not fare well

6.149
The Luggate investment did not fare well in the period covered in this Part. Despite the efforts of the joint venture partners, only a few sales were made from mid-2009 to September 2012. No further development activities were carried out in this period and the owner board met less often than previously.

A robust commercial relationship

6.150
In 2011, Delta had the opportunity to take over the whole Luggate Park project, but decided not to take on that further risk. Delta also considered partially or fully repaying the bank debt and becoming banker to the joint venture. Delta got legal advice on various scenarios, including if the bank demanded repayment. Delta carefully considered its options at these points, supported by legal advice where necessary.

6.151
The interactions between the parties about these significant matters are further evidence of a robust commercial arrangement, with each party acting in its own best interests – especially when it had become clear that the joint venture was uneconomic.

6.152
However, the complexity of the negotiations between the parties and with the bank does show a significant risk of a joint venture that each joint venture partner's position can be affected by the other partner's approach. The parties had agreed with the bank at the start of the joint venture that interest costs would be capitalised up to a certain amount. However, because interest was not paid at any point during the joint venture, those costs continued to be capitalised and the overall debt increased. Delta could have started paying interest on its share of the increasing bank debt but it might have been to its disadvantage to do so if its partner did not also pay interest.

Deciding to sell the Luggate land

6.153
By mid-2012, the joint venture partners had no choice but to sell the Luggate land. The new holding company directors had directed Delta to do so. Delta had written down the value of the land in its 2012 financial statements by $5 million, paving the way to sell the land at a loss. The bank was also applying pressure on the joint venture to repay its loan and the Luggate companies had wanted to sell their interest in the joint venture since the end of March 2011. The partners resumed their marketing efforts and sold the land in November 2012. After a delayed settlement, Delta paid its share of the bank loan in August 2013, and intends to formally end the joint venture arrangement before the end of the financial year ending 30 June 2014.

Jacks Point was a better investment

6.154
We can see why the directors viewed the Jacks Point investment as a better proposition than Luggate Park, largely because of the broader benefits to Delta in terms of the rights secured under the related agreements for ongoing work for the company at Jacks Point. The investment was consistent with Delta's growth strategy for Central Otago at the time. The directors made a careful decision, informed by a comprehensive and robust business case.

6.155
The first stage of the development was completed within budget and, in contrast to Luggate Park, the estimated development costs for each section proved to be accurate. The directors were satisfied that the price they paid was reasonable, based on their financial modelling and their own knowledge of property prices in the area. As with Luggate Park, they made active efforts to market the land and considered various options, initially through Mr Coburn's efforts under his consultancy arrangement, and eventually succeeded in selling all of the sections.

6.156
Because of the state of the property market, it took longer to sell the sections than had been planned. This meant that the investment breached the $10 million limit that is the holding company's spending authority from the Council. Delta told the holding company of that at the time but, because of the overlapping directorships, this was telling the directors what they already knew. The holding company did not consider it necessary to pass that information on to the Council.

6.157
In our view, the Council should have been told. When Delta proposed to invest in Jacks Point, it told the Council as a courtesy but did not seek approval. Delta assumed that the $10 million threshold would not be breached. It would have been better for the holding company to tell the Council when that changed, although it was too late to get approval because the costs had already been incurred.

6.158
As with Luggate Park, the market has affected Delta's profit expectations for its Jacks Point investment. The first 25 developed sections were sold at a loss of $1,000 a section, when the estimated profit had been about $70,000 a section. The next 24 developed sections were sold at a loss of about $21,000 a section,⁸⁹ and the undeveloped land was sold for about $2 million less than Delta paid for it.

6.159
The expected gain on sale was only one aspect of this arrangement. However, now that Delta is ending its involvement in civil construction in Central Otago, it will no longer be able to take advantage of all the broader benefits it expected when entering the investment.

6.160
The directors we spoke with were consistent in their view that the decision to invest in Jacks Point was a long-term investment. Some would have preferred to hold the land until the market improved, but the fact that Delta can no longer access all the broader benefits might change that view.

Governance and oversight

6.161
Delta used Newtons as the vehicle for the Luggate Park and Jacks Point investments, and the company became actively involved in overseeing the investments from mid-2009. New directors were appointed at that time. Delta managers reported regularly on Luggate Park and Jacks Point matters to the board meetings of Newtons held the day before Delta board meetings. Any additional reports or comments arising from those meetings were considered at the Delta meetings.

6.162
In our view, the reports that Delta provided were of good quality and comprehensive, and were supported by information that Mr Coburn and the project management company provided. Delta kept good records of discussion at meetings.

6.163
We consider that Delta could improve its "bring up" system to ensure that matters agreed for follow-up at one meeting remain on the agenda until completed. The unsigned consultancy agreement with Ruboc Holdings Limited is an example of why such an improvement is needed.

6.164
The governance and oversight arrangements for both investments were comprehensive and worked well. The fact that Newtons did not have a statement of intent in place when making some of the early decisions did not affect its governance and oversight.

72: This lot sold in September 2010 and the proceeds were used to reduce the bank debt.

73: This was the fourth lot to be sold since the joint venture began.

74: Minutes of Newtons' board meeting, 2 March 2011.

75: The interests of Luggate Holdings Limited and Luggate Properties Limited in the joint venture were referred to in the offer as "the Boult assets". For convenience, in this section of the report, we refer to those interests as those of "the Luggate companies".

76: Audit New Zealand had raised this issue during the audit of the 30 June 2011 financial statements. The directors took advice from Delta management and decided not to provide for impairment of either investment at that time.

77: See paragraph 6.123.

78: Mr Coburn disclosed an interest in Locations Realty Limited at a later board meeting in July 2011, when marketing options for Delta's land at Jacks Point were again being considered.

79: This amount appears to have been conservative. In August 2011, Delta managers told the directors of Delta Investments Limited that the average construction profit on the N3 sections was $6,000 for each lot.

80: Minutes of Delta Utility Services Limited board meeting 27 October 2010.

81: Delta put some effort into negotiations about this venture, which had a similar structure to the Luggate Park one but was smaller. The venture did not proceed.

82: Mr Coburn is a trustee of a trust that holds shares in two related companies Locations Realty Limited and Locations Realty Queenstown Limited and has no beneficial interest.

83: This sale did not proceed as the offer was withdrawn.

84: After marketing costs of about $57,000.

85: Figures in this paragraph are rounded.

86: Initially $5.35 million, but reduced to $5.288 million in 2008 when Delta shared in the proceeds of the first section to sell at Luggate Park.

87: The impairment provision of $2.5 million in 2012 had the effect of anticipating the expected loss. Now that Delta can better calculate the loss, the impairment provision has been added back in Figure 19, to allow the full actual loss to be estimated.

88: This is the profit to Delta Utility Services Limited for construction work on the developed lots.

89: The loss amounts in this paragraph take into account Delta Utility Services Limited's construction profit of about $6,000 per developed N3 section.

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