Mind the gap

The Establishment – in the shape of Carmarthenshire and Pembrokeshire County Councils – is putting up a spirited defence against my attempt to obtain further information about the £300,000+ Property Development Fund grant for an office block in Johnston.

I notice that the young whippersnapper raised this subject at a recent meeting of PCC’s audit committee (at 35 mins) and seemed to find at least lukewarm support from some surprising quarters.

As I observed previously, it appears that the cost of the drainage for the adjoining housing site – which does not qualify for grant aid – has been loaded onto the grant-funded office block, so, back in June, I asked for copies of the Bills of Quantities, in order that I might discover whether other similar “errors” had occurred.

Six weeks later, I was told by PCC that, because the contract had been tendered on a design and construct basis, no BoQs existed.

When I then asked for copies of the tenders, back came the reply that sometime in 2012/2013 PCC’s cabinet had delegated the administration of these grants to Carmarthenshire County Council and a Freedom of Information request should be sent to them.

I responded that, while PCC may may have delegated the function to someone else, it cannot wash its hands of the responsibility for seeing that it is properly carried out.

For instance, you may delegate the sale of your house to an estate agency, but you are ultimately responsible for any misrepresentations they make to the purchaser.

There was a ray of hope when, several weeks ago, I was contacted by an officer in PCC’s internal audit section who suggested I might like to accompany them on a visit to Carmarthen to inspect the files.

Unfortunately CCC put the block on that when they emailed PCC’s auditor to say that, having taken legal advice, they had come to the conclusion that allowing me to see the documents “would put us in breach of our obligations under the collaboration agreement”.

Thank goodness I’m not a conspiracy theorist or I might begin to suspect these people have something to hide.

However, I already have information which casts some light on the subject.

One of the documents I was allowed to see is a surveyor’s valuation of the property dated 31 October 2014, but even that came with the following health warning:

“I am advised to remind you that you should not infer from the right to inspect the document a right to publish or share the document. I am also advised that I should repeat that consent of the authors of the Reports would be required should you intend to do so.”

However, as this report was listed as a background paper at the PCC cabinet meeting in January 2015 which was held in open session, I intend to ignore this advice on the grounds that the information is already in the public domain.

This surveyor’s report gives an interesting insight into the way these calculations are carried out.

I had always assumed this was a scientific process but it seems to involve thinking of a number, then multiplying it by another number you have thought of to reach the final valuation.

How it seems to work is that the price of rents per square foot for similar properties are researched, and this is multiplied by the floor area to arrive at the annual rental income.

A figure is then adopted to represent the rate of return any prospective purchaser would require.

In the present case, the rent per square foot was set at £8 x 3,980 sq ft = £31,835 annual rental.

The required rate of return (10% in this instance) required by a prospective purchaser is then introduced into the mix giving a valuation of £318,350 (10 x £31,835).

Of course, as the mathematicians among you will already have spotted, if you could find a purchaser who was content with a return of only 5%, the property will be worth twice as much.

 

I should warn you that what follows is rather complicated, so better leave that bottle of Merlot unopened for the time being.

Strangely, for whatever reason, this carefully calculated 17-page valuation (which cost £500) was not the final word because on 19 January 2015 (two weeks after the PCC cabinet meeting) a second valuation turned up on Carmarthenshire CC’s doormat.

This revised the rent upwards from £8 to £9 per sq ft and after applying the 10% rate of return arrived at a valuation of £400,000 (* But see below) .

On 11 November last year, I received an email from a PCC officer informing me that the grant reported to PCC’s cabinet had been reduced from £328,553 to £306,053 – a drop of £22,500.

“Subsequent to the reports and Cabinet Approval, Carmarthenshire County Council (who administer the grant process) further clarified costs/issues and the final grant offered reduced with a final Stage 2 award dated 16th February in the sum of £306,053.10. As this was less than previously approved a further [PCC] Cabinet Report was not considered necessary.”

As “costs/issues” seemed a bit vague, I asked for details and on November 24 another email arrived:

“I have made enquiries regarding the adjustment in grant.

The first point to note is that there was a later valuation carried out, also by Rowland Jones and dated 19 January 2015. This gave a “base valuation” of £400,000.

The second point to note is that Uzmaston Developments Ltd entered into a pre-sale agreement with Hayston Business Park Ltd. The pre-sale Agreement Sum was £450,000. This is obviously £50,000 more than the base valuation.

Under the terms of the PDF Agreement that the Applicant was required to sign, disposal at that sale price would result in clawback of £22,500. This was calculated by applying the grant intervention rate of 45% against the uplift in value of £50,000. Legal advice received by Carmarthenshire CC was that as they were aware of the pre-sale agreement, any PDF award should be reduced in the sum of the clawback to avoid any potential difficulties in trying to reclaim the amount from the applicant.”

So the developer had already sold the property for £450,000.

There appears to be a serious flaw in the reasoning contained in this email because, as the following extract from the report that went before PCC’s cabinet on 5 January 20 shows, the base valuation on which the grant was based was £318,350, not £400,000 as the email suggests.

Land West of Hayston Road, Johnston

5,700 sq ft Two Storey Office Development

Stage 2 Total Project Cost (exc Developers Profit)…………..£790,118

Completed Project Value………………………………………£318,350

Development Gap……………………………………………..£471,768

PDF Assistance Requested…………………………………….£330,375.60

PDF Assistance Recommended………………………………£328,553.10 (45% Eligible Costs)

Note: Eligible Costs – Net Development Cost excluding ineligible expenditure and Developer Profit.

As I said previously this is hardly what you would call a good proposition because, even with the grant, the scheme appears to be under water to the tune of £143,000.

PCC informs me that the situation isn’t quite that bad because where it says “exc developers profit” it should read “inc developer’s profit” (£60,000) which, when deducted from the “Total Project Cost” and the “Development Gap”, reduces the “loss” to a more manageable £83,000.

Indeed, as I pointed out above, the £400,000 valuation wasn’t received until two weeks after the meeting so it clearly couldn’t have played any part in the cabinet’s deliberations.

So, if an adjustment was to be made using the methodology described in the email of 24 November, the calculation should have been £450,000 minus £318,350 = £131,650 x 45% = £59,242, and not £22,500.

As regular readers will appreciate nothing involving PCC is ever quite straightforward and rather than this £450,000 pre-sale agreement being something that came late on the scene it was actually known about two months before the cabinet met to agree a grant based on the surveyor’s original valuation of £318,350.

Evidence for this is to be found in a due diligence report dated 6 November 2014.

Naturally, before handing out a grant for a project like this, the funding body is required to to satisfy itself that the developer has the financial resources to see the project through to completion.

In this case the developer had arranged a loan with Finance Wales PLC but there was nothing in the developer’s business plan to show how this was to be repaid.

However, as the author of the due diligence report observed, repayment of the loan was “implied” because “the applicant is to receive £50k deposit on exchange of contracts as a pre-sale and a further £400k on practical completion”.

This is the £450,000 pre-sale agreement referred to in the email of 24 November 2015 (above).

As I said, this report is dated 6 November 2014, though it isn’t clear at what point in the preceding period the author became aware of the pre-sale agreement to sell it to Hayston Business Parks Ltd.

So, even if the pre-sale agreement wasn’t known about when the surveyors produced the report dated a week earlier on 29 October 2014, Carmarthenshire County Council certainly knew about it when the second surveyor’s report dated 19 January 2015 was commissioned.

And, as surveyors’ valuations are hypothetical constructs – the true value of anything being what someone else is prepared to pay for it – you have to wonder why a second valuation was thought necessary when the building had in effect already been sold for £450,000.

Even more puzzling is the statement in both valuation reports that: “In terms of market evidence, there is no evidence of capital sales close by but yields remain depressed as a reflection of the general economic climate.”

Of course, the property in question had effectively been sold for £450,000 and you can’t get more “close by” than that.

And the final mystery is why the figures in the second surveyor’s report don’t comply with generally accepted arithmetical principles.

As we have seen the rental was increased from £8 to £9 per sq ft. Multiplying that by 3980 sq ft gives an annual rental of £35,820 and applying the 10% rate of return gives a valuation of £358,200, not the £400,000 cited in the surveyor’s report.

To get a valuation of £400,000 requires a sq ft rental of £10 – 25% greater than that specified in the first valuation.
To arrive at the figure the property had actually been sold for (£450,000) requires a rental of £11 per sq ft.

Substituting the revised figures into the calculation, we get a different result altogether:

Cost of project (ex developer’s profit)……………..£730,000
Completed Project Value…………………………..£450,000
Development Gap………………………………….£280,000

So, even with a reduced grant of £306,000, what at first glance appeared to be a financial ugly duckling turns out to be a £26,000 swan.

And that doesn’t include the cost of the drainage works (and possibly the roads and pavements, which I will deal with in later post if and when PCC/CCC let me inspect the files) for the housing development next door that were loaded onto the cost of the grant-funded office project.