Part 3: Agreements between Waitakere City Council and the New Zealand Retail Property Group
Between May 2009 and October 2010, Waitakere City Council entered into a series of agreements with NZRPG.
In this Part, we explain how agreements between the Council and NZRPG were negotiated and agreed. We discuss:
- concerns about the viability of the project;
- NZRPG offering to sell land for road and infrastructure; and
- the Council's $29 million funding allocated for the project.
By April 2008, discussions between the Council and NZRPG about the project generally and infrastructure needs had been under way for several years. Our review of Council records shows that considerable thought had been given to what land should be acquired and how it should be valued, which party (the Council or NZRPG) should provide the necessary infrastructure, how the provision of infrastructure should be funded, who should bear the up-front costs, how costs should be shared, and how costs should be recovered from those benefiting from the development.
April 2008 – Concerns about delay
In April 2008, NZRPG wrote to the Council requesting an urgent meeting with the Mayor to discuss timing issues relating to the development. NZRPG expressed concern about the time the planning process had taken with still no discernible end in sight. The letter said that NZRPG now found itself at a crossroads where "commercial imperatives and responsibilities to our shareholders must move us to consider alternative options".
NZRPG repeated its support for the Council's desire to establish a traditional town centre, as opposed to another mall, but said that, of necessity, NZRPG had now started down the road of exploring an alternative opportunity to the town centre.
July 2008 – Concerns about the viability of the project
In July 2008, the Council and NZRPG met to discuss the project. According to the Council's record of that meeting, concerns had begun to emerge about the lack of market interest in the development.
The main concern was that lenders and valuers were not seeing Massey North Town Centre as the only viable new city centre development in the north-west of Auckland. According to NZRPG, "the market appeared unconvinced that Rodney or even [Waitakere City Council] would not do another plan change to create more land for development".
The Council's records show that NZRPG indicated it might not be able to finance the development proposed for the centre as originally envisaged. It wanted the Council to look at ways it could be involved in "partnering" with NZRPG to help deliver the new town centre.
Specific options NZRPG asked the Council to consider were:
- providing NZRPG with debt/equity funding;
- lending money to NZRPG at the Council's discounted debt rate;
- buying the land required for infrastructure and facilities (such as parks, roads, libraries, leisure centres, land for stormwater ponds) early at a discounted rate;
- offering NZRPG deferred payment options for rates and development contributions with a view to not charging rates on any commercial developments for a period to attract investors;
- the Council taking over certain "management functions" for the centre, such as beautification and security; and
- some combination of these options.
The record of the meeting shows that NZRPG was also involved in discussions with another commercial property developer at the time, either about selling land in the Plan Change 15 area or about entering into some form of joint venture. This was a concern for officials because they did not want the other developer to be in charge of the development. They were worried that the Council's vision for the town centre would be compromised.
In response to discussions with NZRPG on how to finance the project, Council staff agreed to put a team together to look at how the Council could assist. The team included a person with commercial design knowledge and experience, and a leasehold/ freehold expert to help determine which parts of the Plan Change 15 area the Council might look to either buy or lease.
November 2008 – The New Zealand Retail Property Group offers to sell land for road and other infrastructure assets
At the beginning of November 2008, NZRPG wrote again to the Council. The letter referenced earlier correspondence and recent discussions, and outlined a proposal under which the Council would acquire certain land within the proposed town centre from NZRPG to build roads and other infrastructure. NZRPG said that, by acquiring the land for the public parts of the town, the Council would be in a position to protect the town form and the essence of the Comprehensive Development Plan.
NZRPG also proposed that both parties should consider a shared equity investment in the ownership structure proposed for the building of the town centre and that NZRPG should restructure its corporate structure to provide the opportunity for the Council to take an equity interest in the town centre and existing Westgate Shopping Centre. The letter went on as follows:
In essence, overall, the best assistance that Council can provide at this time is a level of certainty around the first transaction that will allow us to set a stable equity basis for the proposed new structure moving forward … As discussed … we have need to conclude an arrangement as outlined above as to form (not substance) on or before 30 November 2008.
Later that month, officials presented a proposal from NZRPG to the Council under which the Council would acquire land from NZRPG for the purpose of roads and other infrastructure within the town centre.
The proposed infrastructure included:
- land for the proposed town centre road network;
- land for non-riparian "reserve" areas; and
- land for the town centre square, a community building, and large open community space.
When presenting the proposal, officials noted that buying land to build roads was not something the Council typically did.
In a "typical" development, such as a privately owned commercial or residential subdivision, it is generally the developer's responsibility to construct roads at the developer's expense. When the land within the development is subdivided (typically, when individual sections are ready for sale), ownership of the roads transfers to the council, usually at no cost.
There is an exception if the council requires the developer to construct an "arterial" road when a smaller road would have been enough to service the requirements of the development alone. The council would generally compensate the developer for any additional road width or construction costs the developer incurs in providing facilities that benefit the wider community, such as wider footpaths or cycleways.
The council typically funds any costs it incurs in constructing roads by rates, rather than development contributions. This is because roads are generally seen to provide public benefit, while other infrastructure, such as water networks, mainly benefit property owners within the development.
The council is generally responsible for providing infrastructure, such as water networks, up to the boundary of the development. The cost of that work might be met from rates, financial contributions or development contributions from the owners of the land served by those services as development occurs, or a combination of these methods. The choice of funding method depends on where the balance between public and private benefit lies. Financial responsibility to provide infrastructure within the development lies with the individual developer.
For "community infrastructure", such as open space for reserves, the council could require developers to contribute land or money to the council's "reserve fund" when the land is subdivided or developed. It might also buy land needed for community infrastructure from developers at market value as required.
However, officials explained that the "typical'' approach outlined above might not work for Massey North. There were two main reasons for this.
The first reason was that, during discussions with NZRPG about its Comprehensive Development Plan for the town centre, NZRPG indicated that it did not intend to subdivide its land as part of the development process. This meant that any roads NZRPG constructed in the town centre would remain the property of NZRPG – as was the case with the existing Westgate Shopping Centre.
Not owning the town centre road network posed an immediate problem for the Council. It meant that the Council might not be in a position to acquire the land it needed to link Hobsonville Road to the town centre network, as required by the District Plan. This was because, if the town centre roads were not part of a public network, the Council considered that it did not have grounds to acquire any privately owned land it needed to build the linking roads.
The second reason was that purchasing Westgate Street would enable NZRPG to buy out one of its minority shareholders in the existing Westgate Centre. The shareholder wanted to exit the company by the end of November 2008.
NZRPG said that, although it had the financial ability to settle the transaction, it was looking to the Council to buy land so that it would be in a position to provide "additional comfort" to its bankers. NZRPG said that it did not require an agreement to be finalised before 30 November 2008. It just needed the Council to commit to buying the land.
Officials also concluded that, because of current economic circumstances (at the time of the Global Financial Crisis), buying the land at that time might prove to be a good investment for the Council. This was because, although there was an expectation of a continuing and declining period of deflation of land prices in the short to medium term, buying land at the current value might be a good
long-term investment for the Council. Officials said that this was especially so if the purchase was a catalyst for further investment in Waitakere City and served to stimulate development activity.
Therefore, it was proposed that the Council buy the land under the Public Works Act 1981 at current market value, subject to several issues being resolved. These included:
- the value of the land – officials noted that the Council had no advice at that point on the value of the land but that, clearly, there would need to be a contestable process for determining its market value;
- how the Council would fund the acquisition;
- the extent to which the Council would be able to recover the cost of buying the land through development contributions and/or financial contributions – there was a particular concern about the extent to which the cost of buying the land needed for roads could be recovered from development contributions;
- the risk of setting a precedent; and
- the risk to the Council if it bought the land but the development did not proceed for some reason.
About the risk of setting a precedent, officials said that, historically, the Council had been a reluctant purchaser and developer of network infrastructure for greenfield development. Therefore, the decision to enter into an agreement of the type proposed by NZRPG might be viewed in some quarters as inconsistent with previous policy and/or creating a precedent that would create encourage similar approaches in the future.
Despite these risks, officials recommended that the Council should consider NZRPG's proposal. The main reason was the Council's strategic intent. Developing a regional-scale town centre at Westgate/Massey North was an established strategic goal of the Council, and its strategic importance had been incorporated into regional planning and growth management policies.
For some years, the Council had pursued a desired urban form for the centre that focused on creating a town, rather than a mall, with active street frontages and civic amenities rather than a closed format. NZRPG had "embraced" these strategic objectives in its proposed Comprehensive Development Plan for the site.
Other factors favouring buying land from NZRPG included:
- the current global economic situation;
- being able to secure the Council's vision; and
- the possibility that it might help the Council find a resolution to problems that had arisen because of the need to relocate the power lines that ran through the middle of the town centre land.
According to officials, the current global economic situation had been shown to have an effect on local and regional development economics and to have affected the affordability, timing, form, and execution of development projects. In this changed economic environment, officials considered it appropriate to consider how the Council might use or modify its resources and practices to assist and stimulate appropriate development that would hasten local economic recovery.
In terms of securing the Council's vision, officials argued that, if the Council bought the land for the roads, it might be better placed to ensure that the adjoining land was developed in keeping with the Comprehensive Development Plan, rather than as a mall or other large retail space.
The power lines were to be relocated underground before any significant development could proceed. Discussions were under way between NZRPG and Transpower about the relocation, and it appears that NZRPG were looking to the Council to fund some of the cost.
Officials said that, if the Council could assist to find a resolution to the relocation of the power lines by entering into an agreement with NZRPG to buy land in the town centre, it might "provide an effective bargaining chip to enable Council to dictate the outcome which it finds acceptable and to resist previous overtures …".
Officials presented four options to the Council to consider.
The first option was to do nothing and adopt a "wait and see" approach to the development of the town centre. Officials considered that this approach would do little for the relationship between the Council and NZRPG, that it would not promote an early start to work, and that it would not promote the Council's goal of securing the Council's vision for the town centre.
They said there would also be the prospect of NZRPG abandoning its investment in the town centre, which might result in inappropriate development and/or diversification of ownership of the town centre land among several parties, making it more difficult to achieve a cohesive outcome. On the other hand, it meant that the Council would not face the funding cost of borrowing to complete the land purchase or any uncertainties that might arise with recovering costs using a development contribution mechanism.
The second option was to buy the land for the road network and open space immediately, and buy the Waitakere City Council Park land on a deferred basis. Officials proposed this option because the road network was critical to development of the town centre and, to a lesser extent, to the rest of the Plan Change 15 area. The open space was critical to the development of the whole of the Plan Change 15 area because of the stormwater management requirements of the catchment management plan.
The Waitakere City Council Park land was not immediately critical. However, an agreement to secure the land would ensure that appropriately sized and located land would be available for the Council's purposes. The disadvantage of this option was that, if market values were declining, the Council would pay more for the land than it would pay if it waited. On the other hand, developing roads and infrastructure normally resulted in an increase in land values, so there was also the possibility that the value of the land would increase over time.
The third option was to buy parts of the road network and all of the open space and Waitakere City Council Park land. Under this option, officials said, the Council would try to limit the amount of road land it bought to the critical elements (the central road link between Hobsonville Road (now referred to as State Highway 16 and Fred Taylor Drive) in the south and Northside Drive in the north) and the portion of the road network that would serve a proposed bus interchange.
The problem with this option was that discussions were still under way about the final form of the road network, so deciding which roads were critical and which were not was not straightforward. Not owning parts of the town centre road network might also hinder the Council's ability to acquire adjoining land under the Public Works Act 1981 to build roads connecting to the broader road network. Therefore, this was not considered a sensible option.
The fourth option was to buy all of the land on offer by NZRPG on appropriate terms, including deferred payment until a significant commitment to development in keeping with the Comprehensive Development Plan had occurred. This option was the best option for securing a relationship with NZRPG.
It also had the benefit of having a certain outcome, and a deferred payment option would reduce the Council's financing costs. However, there would still be a time lag between the Council paying for the land and having its expenditure reimbursed through development contributions or financial contributions. There would also be a risk that the Council would pay more for the land than it would if it waited to buy the land until after any appeals to the District Plan changes had been resolved. Officials recommended the second option – that is, immediately buying land for the road network and the open space land, with deferred purchase of the land for Waitakere City Council Park. This was on the basis that NZRPG should bear the cost of road construction and maintenance, except to the extent that the roads were formed to additional width to provide capacity to handle the traffic from adjoining land.
The Council accepted this recommendation and resolved to buy the assets on the basis outlined in the second option. The purchase was to be made on terms and conditions approved by the Council's Legal Services Manager, at a price approved by the Council's registered valuer or determined by a contestable valuation process. The agreement was also conditional on approval of the proposed capital expenditure in the long-term council community plan for 2009-19.
February 2009 – Waitakere City Council approves $29 million to purchase New Zealand Retail Property Group land and existing infrastructure
In December 2008, the Council obtained a valuation, from an independent registered valuer, of the land NZRPG had offered to sell. There was a considerable difference between the Council's valuation and that of NZRPG.
In January 2009, NZRPG wrote to Waitakere City Council, repeating its concerns about the commercial viability of the development and about the level of costs NZRPG was incurring. The letter said:
[NZRPG] has consistently held the view that the proposed form of development will offer commercial value in the long-term, probably beyond 15 years. However, in the immediate term it will be extremely difficult to deliver commercially due to higher infrastructure costs, the early provision of commercial space that is not viable, higher commercial risks as perceived by funders due to the unknown market response to the more traditional urban form, and the delivery of serviced land that is unlikely to reach commercial potential within the first ten years. These issues significantly raise the commercial risks of the project and bring increasing pressure to compromise the offer to improve the immediate commercial value or to record early sales of portions of the land, if that is possible, to release much needed capital/return …
… [NZRPG] has continued to absorb significant costs on the project, is subject to significant shareholder pressure to return early commercial value commensurate with the degree of risk, and is also now operating within a business environment that has felt the weight of the international credit crises producing fatalities all around.
NZRPG said that it was against this backdrop that the parties needed to agree on a way to:
… deliver significant commercial value to the project to ensure that the best outcome is assured, no matter how such value was derived. This value could take the form of Council funding infrastructure, delivering bulk infrastructure, delaying development contributions, acquiring/leasing opportunities for civic infrastructure, underwriting some risks on vacant commercial space etc …
Opportunities exist for the Council to assist in risk mitigation by the early acquisition of public infrastructure and also to benefit from being "upfront" in that acquisition thereby acquiring such infrastructure at a significant discount to the normal "develop and vest" process that added major value and Council cost to the assets to be sold at the end of the development cycle.
The opportunity also still remains for the Council to take some "position" within the development to secure certain outcomes and to mitigate its costs and offset its limited risks.
On 21 January 2009, the Council and NZRPG met to discuss NZRPG's letter and how to progress the proposed buying of assets.
NZRPG was told that the Council had formally considered NZRPG's request and supported the notion of providing a level of support to develop the town centre, subject to several conditions seeking assurances about the affordability and prudence of doing so.
The type of support envisaged might involve acquiring infrastructure, the timing of development contributions, acquiring civic facilities, underwriting vacant commercial space, and possibly contracting NZRPG to construct the infrastructure. These were all matters to consider, including in an Infrastructure Funding Agreement.
The parties also discussed the difference between the Council's valuation of the assets and NZRPG's. Officials said that this was not a surprise, but the parties needed to agree on a process for valuation that gave both a clear picture of the costs involved. The timing of acquisition was negotiable and depended to some extent on the framework of the Council's debt profile. The question the Council needed to understand was whether NZRPG was being driven by the immediate need for cash for an assured cash flow or for certainty about the timing of cash.
At its February 2009 meeting, the Council was updated on the progress that had been made on negotiations to buy NZRPG land. It appears that, by this stage,
a firm view had been reached that the Council needed to own the roads in the town centre. Officials reported as follows:
The Council needs to own land for public road so that there is an enduring means of managing and controlling the road asset on which it sits. Other reasons for the Council owning road land include:
- Clear definition of public realm
- Social inclusion
- Traffic access certainty
- Avoidance of negotiated access to privately owned roads and street network
- Single point of road corridor management and responsibility
- Regulation and enforcement of traffic behaviour
- Consistency and defensibility of council policy on road ownership and traffic behaviour
- Provision of emergency services and public transport access
- Provision of public corridors for underground services.
Officials concluded that owning roads was a more effective way of delivering statutory outcomes, particularly a road network, than statutory mechanisms.
For the value of the land, officials noted that the current land value was "pre-zoned" and "pre-developed". However, once NZRPG's Comprehensive Development Plan was lodged (which was expected to be in March 2009), its value was likely to increase. The Council's current valuation valued the land at between $23 million and $29 million depending on resolution of valuation issues, the components agreed on, and negotiation of other matters under the proposed Infrastructure Funding Agreement.
Therefore, the Council approved the continued negotiation of the proposal to acquire land on the basis that a total of no more than $29 million would be paid to NZRPG to buy land and existing infrastructure. The acquisition was also conditional on $16.7 million for proposed capital expenditure in the long-term council community plan for 2009-19 being committed for that purpose in 2009/10.
The Council also approved acquiring other privately owned land in the north and south of the Plan Change 15 area to build roads to link the town centre network to the wider public road network.