|RBTT’s new HQ
Published Thursday 7th August, 2008
The key commercial
question is how the risks and rewards were allocated between the parties
to the deal.
On March 9, 2005,
the Prime Minister turned the sod to initiate construction of RBTT’s new
headquarters at St Clair Avenue, opposite to the QRC.
Three years have
passed and the new complex is nearing completion. The impending move of
RBTT headquarters from “Bankers’ Row” in Park Street to an uptown
location is the second such since First Citizens moved its headquarters
out to Queen’s Park East in January 2002. As such, it will add impetus
to the “hollowing-out” of our capital which we have been lamenting for
some time. It seems that our capital is getting like a donut, with all
the good bits on the edge and nothing in the centre.
readers have pointed out to me that this column has been too focussed on
the State-sponsored office projects in our capital when discussing the
viability gap. They have gone further to say that if those issues are of
consequence in the state-sponsored offices they are surely present in
the privately built office projects, such as RBTT’s new headquarters.
rent is the amount which has to be earned by the landlord to meet the
cost of borrowing for a project. Please note that that figure does not
include any allowance for maintenance or developer’s profit, it is a
bare minimum to meet the cost of capital.
The viability gap
we are referring to is the difference between the break-even rent—which
is very high in these times of sharply increasing land and construction
costs—and the market rent which can be static or declining in these
times of significantly increasing supply.
Quite apart from
the viability issue facing all these A class office projects, there are
other aspects of the RBTT deal which warrant our attention. The initial
report in this newspaper the day after the PM’s sod-turning was so
remarkable that I clipped it out for reference. That report can be found
at http://www.guardian.co.tt/archives/2005-03-10/business1.html and it
specified the identity and roles of the players in this project.
Those details are
contained in the sidebar and one has to consider the implications of the
published arrangements. What are the motivations of the players in this
The landlord would
naturally seek the highest and best rent for their property as well as
the most favourable terms on which to finance the project.
The tenant would
naturally seek the most favourable and lowest rent for their new
The lenders would
seek to get the most favourable terms for the huge loan indicated in the
On the face of it,
this would seem to be a situation with potential for conflicts of
interest to arise. When one considers that the tenants are significant
shareholders in the landlord company (virtually at the level of
associated company), it can give one pause.
chairman’s reluctance to provide details, it is fairly well known that
the principals of Park Court Ltd—the Azar family, also owners of
Ellerslie Plaza—were significant shareholders in RBTT. Many companies
rent their premises from Associated Companies, but the question is the
terms of the lease and the extent to which the interests of the
stakeholders are safeguarded.
established in earlier issues of Property Matters, there is a potent
viability gap to contend with here. The key commercial question is how
the risks and rewards were allocated between the parties to the deal.
That is the issue which must be confronted if we are to develop a
healthy commercial culture in which risktakers can earn just rewards and
those who make more sound investments can secure better terms of
Did the agreement
to lease specify that RBTT would pay a rent which covers the loan
Was there a cap at
the market rent?
Who decides what
is the market rent?
If the lease
secured the landlord’s position by removing the risks of a shortfall in
rental, was there a second level of reward in terms of favourable terms
of finance for a risk-free deal?
Is the landlord a
risk-taker who will absorb the consequences of a high break-even rent in
a market which is about to become awash in new, high-quality offices?
At this point in
time, rents in St Clair are 50 to 60 per cent of the estimated
break-even rents, so the answers to these questions are intriguing, to
say the least. Can the returns from the loan compensate for compromises
which may have been made in the lease negotiations? These questions have
been put to RBTT and they have cited the confidentiality of the
agreements in reply.
To put it plainly,
the typical rents for these high-end offices are in the $16 to18 psf
range; for this volume of space one would expect an astute tenant to
negotiate a significant discount. The rent for this building on an arms
length basis would be of the order of $15 to16 psf ie $1.8
million/month. If the rent had to be set to cover the loan payments, we
would be looking at a figure in the region of $28 psf, at the most
optimistic ie $3.36 million/month.
In the case of a
15-year financing period on terms which safeguarded the developer’s
position, we are talking about an estimated payment of over $280 million
in excess of market rent.
Either the deal
did or did not transfer risk to the developer. If it did, how was this
ensured? If not, why make such a deal in the first place?
Where is the
shareholder in all of this? With the new owners of RBTT being a single,
powerful entity in the shape of RBC, one wonders at the durability of
this deal. At some point, the terms of that deal will become known and
at that stage we can better form judgments.
We can conclude by
noting that when we first set out the break-even analysis in September
2007, it became immediately clear that the poor understanding of this
key issue was not restricted to the public sector.
Players and their roles
Landlord: Park Court Ltd, who purchased the sites and are
erecting the building to rent to RBTT. The press report
stated that RBTT is also a 20 per cent shareholder of Park
Court Ltd, who are also the owners of RBTT’s present
headquarters at Park Street.
Tenant: RBTT is to lease the entire building from Park Court
Lenders: The press report indicated that RBTT would be
lending the landlord the cost of the land and the building.
were informed by RBTT in August 2007 that their new
headquarters building had been expanded to 168,000 sf
(gross) from the 100,000 sf cited at the sod-turning
one makes allowances for the significant carparking included
in the project, it seems reasonable to assume that about 70
to75 per cent would be net office area, hence our figure of
@$1,200 psf $201.6M
On-costs @9% $ 18.14M
Financing Costs TOTAL Assuming a lettable over a 15-year
term SCHEME COSTS area of 120,000 sf the Break-even rent per
$367.11M $611.85M $28.33
$403.83M $648.57M $30.03
$440.54M $685.28M $31.73
Afra Raymond is a chartered surveyor and a director of Raymond & Pierre
Ltd. Feedback can be sent to email@example.com.