Despite positive noises from NAMA itself – at the recent hearing of the Committee of Public Accounts, NAMA said that it expected 12 developer business plans to have been approved by the end of the day on 18th November, 2010 – word reaching here is that no business plans have yet been agreed. By “agreed” I mean signed by both NAMA and the developer. However it seems clear that there is a hive of activity at NAMA hammering out the plans and I understand that several developers have been given a deadline of today to agree the plans or risk the consequences (liquidation, bankruptcy, no additional funding). This entry examines the issues.
Firstly it seems that what is causing most alarm and outrage amongst developers is that NAMA is allegedly requiring transfers to spouses and family members over the past five years to be reversed and the assets to be set off against the debts owed to NAMA or used to part-fund future development. With sensational reporting of transfers to spouses over the past year, there is an impression that 100% of transfers by developers to their spouses in particular were undertaken so as to deprive creditors of debts. There may well be more than a little truth in that but it is also a fact that in any marriage there will be an intermingling of income and wealth, be that amongst Gardai, nurses or developers – that’s the nature of marriage. And the more you have, the more likely there will be more significant transfers. And although it is true that many developers did transfer assets to protect their wealth, they had as much right to do that as someone taking out a life insurance policy. And if the person taking out a life insurance policy knows they are suffering from a disease and don’t declare it, then they risk the insurance company not paying out on death – so also with developers, if they were insolvent and the transfers were to deprive their creditors then the courts and NAMA can unwind those transactions. But just as there are legitimately obtained life insurance policies so also were there legitimate transfers between spouses. But NAMA wants these transfers unwound regardless of whether they were legitimate or not. And the developers are not happy.
Secondly, developers are angry at the confidentiality clause of the agreement and that NAMA can allegedly repudiate the agreement in future without giving reasons if it feels the clause has been breached. The confidentiality terms seem onerous and whilst I wouldn’t want to compare the treatment of developers with child abuse, there is something of the “don’t tell anyone about our little secret or else” to the NAMA approach. The agency is plainly trying to stop developers coordinating a response and to an extent to play one developer off against another. You would have to ask what the Construction Industry Federation is doing to advise its members on these business plans.
Thirdly, developers are, in many cases, concerned that NAMA requires repayment of the loan within 3-5 years. Of course for loans in default NAMA could legitimately require immediate repayment and NAMA might say that it is being generous in extending the repayment period to 2015. On the other hand for most developers whose assets are under water and with a challenging outlook particularly in Ireland (despite some brave noises coming from those whose career prospects will depend in an increase in transactions, if not in prices), it seems nigh impossible to exit their loans within five years. There are others – Paddy McKillen would be a good publicized example – that relied on short term financing on good quality assets that find themselves perplexed as to why they must now liquidate their assets. Typically the assets are generating enough income to repay interest on loans and potentially some capital on top. For most of the past two decades, developers would have managed with rolling over loans, getting an equity release (if an asset was bought for €5m and increased in value to €10m then banks were prepared to additionally lend some part of the increase in values) to fund new acquisitions and repaying the interest and some capital from rent rolls. Sadly for developers. NAMA has stated that the music must stop in 10 years and indeed is requiring developers to anticipate its stopping in 3-5 years. In normal times, the developers would re-finance with another more obliging bank – these aren’t normal times and banks are just not lending and private equity groups are seeing annual returns of 13% on no-risk mezzanine finance and 30-40% annum returns on loan purchases – practically no developer can afford these terms. So developers feel they are being driven down a cul-de-sac. There’s no easy answer to this struggle between NAMA’s need to have a finite life and developers’ plans which anticipated very long term funding (from a variety of competing sources) secured on good assets yielding rent rolls that repay interest and some capital. But it seems certain that small developers with such assets face being washed away by NAMA’s tsunami which is not sufficiently resourced to fashion customized solutions particularly for smaller-scale developers. But if you’re not Currys or Dunnes Stores and you want to compete you join the Expert Group or Spar. If you’re a smaller-scale developer CIF should be helping you.
It is obvious that NAMA is entering the crucial phase of its existence – having more or less completed the milestone of acquiring the loans, NAMA must manage the loans which will mean disposals/development/demolition or mothballing/renting/management and indeed sale of loans/bankruptcy of developers. We can expect some fireworks for the New Year.
NAMA Wine Lake 
Well summarised NWL.
There is also the issue of the “cash sweep” from all bank accounts and the subsequent payments (or non-payments) towards the developers’ office overheads, which may include a contribution towards the developers’ salaries. There’s a choice to be made between the in-situ developer/builder (e.g. McNamara, Liam Carroll) or a Receiver/Liquidator. Who will bring the best return for taxpayer?
The New Year will be very interesting indeed.
Feedback from my mole in NAMA tells me that no business plans have been signed off to date, nor are any likely to be signed in the near future as the builders/developers are responding with ripostes from lawyers rather than performing as demanded to NAMA’s time deadlines…… it’s getting interesting. It will not be good for NAMA’s chances of profitability, nor in the best interests of the taxpayer, if it can’t deliver agreed programmes.
I missed this story earlier in the week but reported NAMA Top 20 developer John Fleming of the Fleming Group has applied for bankruptcy from Essex in the UK. As the Herald says (link below) he would have been required to have had a business or residential connection with the UK for three years beforehand but having overcome that hurdle there is little to prevent Irish developers from opting for the UK’s light touch bankruptcy that will see them emerge brand spanking new in 12 months (not 12 years as in modern day Dickensian Ireland).
Speaking of bankruptcy beyond the State, David Drumm has run rings around Anglo in Massachusetts and he may emerge early next year with his €5m pension and €1-2m family home and indeed I would say there was more than a snowball’s chance in hell that the US Trustee in Bankruptcy will overturn Anglo’s claim for its loans (she says they may have been advanced under fraudulent circumstances) and may get Anglo to pay her client €2.5m in the claim for lost remuneration and distress.
John Fleming’s bankruptcy application – http://www.herald.ie/national-news/fleming-opts-for-uk-bankruptcy-2458819.html
http://www.independent.ie/national-news/nama-must-give-a-share-of-profits-to-developers-2466545.html
http://www.sbpost.ie/news/cork-developer-declares-bankruptcy-in-england-following-1bn-collapse-53437.html
Mellon is right, but it’s taking a long time for the penny to drop….. two years so far. The CAB/Revenue mentality still reigns in NAMA, but it will never work with the developers. It’s the small town thinking of bullies the civil service.
There needs to be an entrepreneurial ethos in NAMA, one that emphasises the use of the carrot as opposed to wielding the stick.
The attraction of the UK bankruptcy route as a solution is too great. All the builders/developers need to do after spending the year in the UK sourcing funds (and as we know there are plenty of vulture funds out there) is come back as a “poacher” and pick up the best assets at a knockdown price and leave the rubbish for NAMA.
That is not a great solution for either NAMA or the taxpayer… but that’s the road we are on and that’s where the developers are headed. NAMA needs to lose its Revenue collection culture and become more commercial.
WSTT, there might be a need for an entrepreneurial ethos in Nama but I hope that this would be very different from that pursued by developers in the past. This IMHO was characterised by astromomical leveraging, ignorance of the impact of economic cycles, ignoring market demand, absence of diversification, lack of external equity, borrowing short and so on. These guys broke just about every rule in business and management. To think of these people as entrepreneurs is inappropriate – gamblers would be a much better description.
What I don’t understand is the view that these people should be left with any managerial roles in projects. The first thing that is usually done to sort out a major business or organisational problem is to sweep out existing management. We are slow learners on this in Ireland and maybe we need “bullies” to act on behalf of the taxpayers who are going to have pay for the casino debts.
@Brian… And then what?
Are you proposing a national property development company or a nationalised “run-off” one, which we now effectively have, run by project managers, civil servants etc? If that is the thinking NAMA is already proving that the model will not work.
You cannot prop up values at an unsustainable level.
Mellon, is quite right when he says that the asset values have to be rebased and the assets dealt with at their market value. That is the only way that we will have an economic recovery. Inevitably, the rebasing will inevitably happen whoever sits in the managerial or indeed ownership seat.
And those two roles of management and ownership are different. We (the Irish) do not have the commercial structure of the US or UK property or construction companies (we do not even have REITs), we have an industry based on family ownership.
What happens to its ownership in the future is in the lap of the gods – a nationalised managership run by civil servants (NAMA); the original owners; new purchasers (the vulture funds); UK housebuilding companies (they tried it before and all got the plane back home); IPOs of packaged offerings (who wants bundles of Irish property?) or a combination of all the above ….
It is yet to be written, but nothing that our civil servants or government has decided to date, and that includes the decision to form NAMA, gives me hope that they are going to make the right decisions. And the evidence of NAMA’s negotiating expertise with the developers does not inspire confidence in the future.
If NAMa doesn’t get this right, the casino debts that the government (not the developers) placed on the taxpayers’ shoulders in September 2008 will indeed increase substantially.
I don’t pretend to have answers – my crystal ball has cracks in it. However, I’d opt for the National Propoerty Development Company on the grounds that the property market has a lot further to fall and any forced sell-offs in the next few years will be at fire-sale prices. I’m talking about retaining the better inventory and envisage that the rubbish be disposed of quickly.
I have argued previously that Nama’s life should be 10-15 year to ensure that it sees (hopefully) the next sustained upturn in the economy. I wouldn’t be a fan of Nama. I’d prefer that Nama be reversed and the banks (I mean the bank’s bondholders) left to sort things out. With BoDs comprising heavy hitters and with lots of their skin in the game, they would be very commercial and ensure that maximum returns are extracted. See http://www.planware.org/briansblog/2010/09/nama-could-become-toxic-dump.html
BTW, Brian, I don’t disagree with any of the comments below.
“This IMHO was characterised by astromomical leveraging, ignorance of the impact of economic cycles, ignoring market demand, absence of diversification, lack of external equity, borrowing short and so on. These guys broke just about every rule in business and management. To think of these people as entrepreneurs is inappropriate – gamblers would be a much better description.”
They did lack those skills. Very few had a formal education beyond second level. Many were hardworking bricklayers and skilled construction workers. The fact that they lacked the economic and managerial skills that we are all so aware of now is also a reflection on their advisors.
Funny though that very few of those advisors that had these skills didn’t see it coming either. Many were cheerleaders of the boom working in the DofF and the banks, others were advisors to our government. But of course, they all saw it coming when you listen to them prognosticate now. And, of course, “it’s all the other guy’s fault.”
Yes, I agree that the advisers have a lot (in some cases a huge amount) to answer for. However, I suspect that few advisers who worked directly to developers had strategic roles and that most were hired guns to advise on tax, do audits, help raise finance, provide legal advice etc. I also suspect that if they had advised caution, they wouldn’t have lasted long.
The big problem was that boards were stuffed with family and yes people. Because there were few external equity partners, the boards (I sense) would have been dominated by one or two strong personalities who saw everything through rose tinted glasses. A few strong NEDs could have played a very useful strategic role and provided well-informed independent advice.
Hi Brian, yes you make a very good point as does WSTT on the structure on most Irish property development companies – the issue arose on here sometime back and I recommended that in future, budding developers play Diplomacy (Gibson Games) rather than Monopoly (Waddingtons). There is a need for the new generation of Irish developers to have strong equity bases, professional oversight and a balance between entrepreneurial buccaneering and professional management accountable to stakeholders.
From the ashes of the current mess, I hope a strong industry can be resurrected and we don’t lose a lot of the expertise of the past decade (yes we need learn from mistakes but there were many successes also).