“We have seen that analysis by IPD which states that the value would drop by between 18% and 20%. We have done some calculations with our people in-house as to whether that is valid and we have spoken with potential investors who might buy assets. They have said to us that a full ranging change would be a 20% hit.” NAMA CEO Brendan McDonagh telling an Oireachtas committee in September 2011 how the abolition of Upward Only Rent Review clauses in commercial leases would impact NAMA.
You’ll be forgiven for being confused about the effect of rent reductions at NAMA’s commercial buildings. In May 2010, NAMA took the exceptional step of writing directly to the then-Minister for Finance, the late Brian Lenihan warning the Minister that if the Government moved to abolish Upward Only Rent Review (UORR) provisions in pre-February 2010 commercial property leases, then that would have a significant impact on NAMA’s portfolio. How significant? It was claimed by NAMA that it would result in a 20% loss on its commercial portfolio, totalling about €2bn. In the event of course, and despite both coalition parties’ pre-election commitments, the Government abandoned its efforts to abolish UORR terms in older leases, and made an announcement to that effect to the Dail in December 2011. All straightforward up to now, but here’s the confusing bit.
On 6th December 2011, when announcing Budget 2012 and the abandonment of UORR changes due to constitutional issues and the compensation payable to landlords, Minister for Finance Michael Noonan announced that NAMA was to introduce its own scheme – available here – to deal with requests by commercial tenants for rent reductions in buildings which were under NAMA and its debtors’ control. So far NAMA has received 150 such requests and we know that of the 120 that have been processed to date, all but one was agreed. So how much have these requests cost NAMA? €2bn? €1bn? A couple of euro? Zero, according to Minister Noonan responding to a question in the Dail last Tuesday from Sinn Fein’s finance spokesperson Pearse Doherty, or in the Minister’s own words “Any short-term loss of rental income arising from rent abatement and any short term decrease in the value of the asset where there is rent abatement, therefore, is likely to be more than offset by these long-term benefits”
In Ireland we have UORR leases which means that rents are reviewed throughout the life of a business lease but if the lease was entered into before February 2010, then these reviews cannot lead to lower rents even if the market falls, and in Ireland’s case commercial rents today are 50% of those that obtained during the boom in the mid 2000s.
So in 2010 you had NAMA claiming that giving tenants the right to obtain market rents on their property would cost the Agency €2bn, and today we have the Minister for Finance blithely claiming the cost is likely to be nil. Of course there are pre-qualifications before a commercial tenant can obtain a reduction in their rents, they must demonstrate that rents are jeopardising their businesses and the reduction in rent may not be to a market rent but something between the current market rent and the rent specified in the lease, and it is also the case that the rent reductions pertain for just one year whilst a pre-February 2010 lease might be for 25 years with 23 years to run.
Still it’s remarkable that NAMA providing in no small measure what was threatened by the Government with the abolition of UORR terms has had nil impact on the Agency.
You’d almost think the Agency had been crying wolf. You might also think that if the Government introduced emergency legislation to compel all landlords to deal with tenant requests in line with the NAMA scheme then the compensation payable by the State to such landlords would be…nil. Still confused?