Administrator of Central Coast Council, Rik Hart, said the arrangement that lead to the sale of a building in Bounty Close Tuggerah to its existing tenant for $652,088 was an “unfortunate agreement.”
The 3,622 square metre property at 3 Bounty Close, Tuggerah, has been sold by Central Coast Council to its current tenant, Central Coast Group Training (CCGT) Limited (CCGT).
The value of the property if it was assessed as having ‘vacant possession’ would be about $3.7M – more than five times the actual sale price.
CCGT owned the 3 Bounty Close land which it transferred to Wyong Council in 2013 to secure a Commonwealth Government grant to construct the building it has now purchased back from Central Coast Council.
CCGT entered into a lease with Wyong Council which carried over to Central Coast Council allowing it to pay a peppercorn rent of $120 a year plus CPI increases with a lease until 2054 and two additional five-year lease options.
It also had an option to buy back the land after February 1, 2020.
Hart said the agreement between the former Wyong Council and CCGT was “one sided” but the council at the time agreed to it.
He said Central Coast Council had taken full legal advice in dealing with the matter and the contract was sound so there was little point in pursuing the matter as Council was not going to win.
He said once the contract had been made, managing it was an operational matter.
When asked if it needed to go to the Council for ratification when the matter came up in February 2020, Hart suggested the CEO could have reported it to the Council to note.
During the sale process, valuers Knight Frank estimated a fair market rent on the property would be $175 per square metre net per annum or about $245,000 a year.
The CCGT facility at 3 Bounty Close was built using a Commonwealth Government Community Development Grant via the former Wyong Shire Council.
The recent sale of the Tuggerah building to CCGT came to light when it appeared on a list of properties sold as part of Council’s asset sale program, reported in the agenda for the November 23 Council meeting.
Council said the sale was related to an agreement resolved by the former Wyong Council.
“The lessee of 3 Bounty Close, Tuggerah exercised its option to purchase the land and Council sold this property in line with a market valuation,” the staff report said.
The settlement date was listed as June; the valuation price was $652,088; and the property changed hands at that price.
The Knight Frank valuation report was dated February 3, 2020.
A letter of instruction from Greg Best, General Manager of CCGT and suspended Central Coast Councillor, said: “Given the 40-year lease at peppercorn rent the Lessee expects the valuation to be nominal, however, it is bound by the terms of the option to purchase at valuation”.
The Knight Frank valuation report explained that “the current lease reflects a ‘peppercorn rent’ currently at $130 per annum net”.
“We have chosen to value the property as at the date of valuation taking in to account the Peppercorn Lease Agreement in place,” the Knight Frank valuation said.
“The valuation herein reflects the passing rental until the end of Term Certain, i.e. 2054 and the terminal value of the property at that point.
“We note the tenant has rights of occupation for a further 2 x 5 years, as per the lease.
“Exercising these options would significantly impact on the value assessed herein by extending the terminal value assessment of the property for a further 10 years until 2064.
“The value of the property with Vacant Possession has been assessed at $3.7m and this is the assessment we would be adopting for a mortgage valuation under similar circumstances, i.e. where the sitting tenant is buying the property from the landlord.
“We note in this case the lease would in effect be extinguished with the opportunity of a market rental being able to be achieved.
“In our assessment of value, we have adopted the principle that the tenancy agreement is watertight assuming both the tenant and the landlord fulfill their obligations throughout the lease term expiring in 2054.
“We have also adopted the principle that the market value as at February 3, 2020 (the date the Option Clause was exercised by the tenant) is significantly impacted by the lease until its expiry in 2054 by a Peppercorn Rental only being paid and not Market Rental.
“[A] Call/Put Option [was] agreed with an effective date of any time after February 1, 2020.
“The Call Option is now exercised as at February 3, 2020 with this valuation fulfilling the requirements under Clause 27.4 of the Lease.”
In other words CCGT exercised its right to purchase the property.
The community was assured by Interim Administrator, Dick Persson and current Administrator, Rik Hart, that the asset sale program would not result in “fire sales”.
The valuer’s report suggested it could sell the property on the open market with an extended marketing period over 12 months.
“With the existing lease in place, the marketability of the property would be compromised to the point of a limited number of investors or alternatively the sitting tenant (lessee),” the report said.
“The sale of the property on the open market would require an investor undertaking a similar assessment of value as completed within this valuation.
“We acknowledge there are both positives and negatives associated with the sale to a third party including the upside to an investment being the potential closure of the business and realising the market value at the time (which could be anytime from now until the end of the lease) and the long term growth of seven per cent on the investment.”
Wyong Shire Council and CCGT successfully negotiated the Commonwealth grants to build the Bounty Close centre for about $2M, with another $700,000 for further funding on IT.