The truth about the sale of Montevetro by NAMA to Google

“It [NAMA] already did a very good deal last week with Google, we saw the kind of deals it can do here….The cash is already gone back to government and a dividend gone back”

Micheal Martin, Leaders Debate, RTE 22nd February, 2011

It was last week when NAMA made an unscheduled announcement with some details of current events. It’s always welcome to get news on how the agency is performing though it would be better to get the quarter three, 2010 report and accounts which have now been sitting on Minister for Finance, Brian Lenihan’s desk for the past 54 days. Included in the announcement last week from NAMA was news of the sale of the Montevetro building on Barrow Street in central Dublin to internet search engine giant Google. This is what NAMA had to say in respect of the transaction:

“Noting the announcement earlier today by Google of its purchase of the 15 storey Montevetro development on Barrow Street in Dublin, NAMA confirms that it has recovered in excess of the combined amount of [1] the monies it paid to acquire the REO plc loan which was secured by the Montevetro development and [2] the additional funding advanced to REO plc in the form of development working capital to enable it to complete this landmark building so that it could be sold on the market.

Working with CIE, the State’s transport holding company, and REO, NAMA provided extensive resources, including working capital and expertise, to ensure the development was completed on time and to a high specification. Frank Daly, Chairman of NAMA said; “the successful completion of the Montevetro development and its sale again reflect the positive potential of NAMA to support the commercial property market in Ireland without compromising its objective of recovering monies owed to the taxpayer. NAMA played an intrinsic part in brokering the deal between purchaser and seller and in putting this deal  together. It is an excellent example of NAMA’s ability to enhance the value of its assets for the benefit of taxpayers.

I believe the sale of a building of the size of 210,000 sq feet will be seen as a very positive sign for the future of the Irish Commercial property market. I also believe that having such an internationally renowned purchaser demonstrates continuing confidence in Ireland and particularly in our attractiveness to major global businesses.”

The sale of Montevetro was regarded as a first but I don’t think that is the case. There were some €1.6bn of disposals under NAMA’s auspices last year and this sale of Montevetro was yet another sale by the developer under NAMA’s auspices. NAMA may feel that it played a greater role in this sale than others but, on the face of it, there is nothing original about this sale.

The building: a 210,000 sq ft, 15-storey with three additional basement levels office building on Barrow Street in the Grand Canal Dock area of Dublin 2 (central Dublin). Architecturally it’s more lines than curves and occupies a broadly triangular footprint.  At 67 metres, it is Dublin’s tallest commercial building. The tallest building in Ireland is the Cork’s 71-metre Elysian Tower which is mixed residential/commercial.

Its history: The application (ref: DD385) for a certificate under section 25 of the Dublin Docklands Development Authority Act 1997 was submitted to Dublin Docklands Development Authority in August 2006 by Montevetro Limited and the certificate was awarded in October 2006 subject to certain conditions. According to Treasury development commenced in March 2008 and completed in January 2011 (according to the Docklands Authority, development had already commenced in 2007)

The sellers: The developer of the property was Montevetro Limited, a company in the Real Estates Opportunities (REO) group which in turn is controlled by Treasury Holdings. The land was owned by CIE (state owned transport company) and it is understood CIE retained an interest in the site and has benefited from the sale to Google. It is also understood that NAMA Top 10 developer, Derek Quinlan had an interest in the development, possibly 30%. The loan underpinning the building was acquired by NAMA in April/May 2010 and since that time, NAMA has had a degree of control over the property through its ownership of the loan.

The underlying loan: Details of the loan have not been disclosed but we might be able to make an informed stab at the value of the loan. If the application for the development was made in 2006, which was close to the peak for commercial property prices in quarter three of 2007, and if the loan was advanced back then, then it seems that the completed development would have been valued in excess of €150m. This is based on the separate reported development by Ashdew Limited (a joint venture between Bernard McNamara and Jerry O’Reilly) beside the DART station on Barrow Street where the 100,000 sq ft development was valued at €70m in 2002. Rents for prime office space in Dublin had reached and exceeded €60 psf at the height of the boom which would have equated to a €180m price tag at a 7% yield. Standard loan to value (LTV) rates were 70%+ so a €150m valued property would have been capable of attracting a loan of €105m. Interest payable would typically have been the ECB rate plus 2%. If it had been rolled up, which was a common feature of property development, then the nominal value of the loan securing the property might well be in excess of €120m today. Because we don’t know the loan terms, we do not know if the loan was non-recourse, that is, secured on the Montevetro site only without recourse to other assets owned by the borrower. We also don’t know if a special purpose vehicle (SPV) was used to obtain the loan – the significance of a SPV is that its liabilities tend to be ringfenced to assets owned by that particular SPV. Of course it may be the case that the loan is secured on other Treasury/Derek Quinlan assets/companies or by personal guarantees – we don’t know because NAMA didn’t provide details.

The sale price: €99.9m in cash. Equates to €476 psf. It is understood that part of these proceeds will be handed over to CIE, the original owner of the site.

NAMA’s purchase price and development costs: Not disclosed. NAMA Chairman Frank Daly did say that NAMA’s purchase price and additional development costs were less than the sale price. And on that basis, NAMA claimed a profit from the sale. The purchase price of the loan should have reflected the value of the Montevetro development on 30th November 2009 (NAMA’s valuation date). In addition NAMA paid the banks a Long Term Economic Value premium which has averaged 10% for the first two tranches acquired by the agency in 2010.

The good news: In my opinion the price achieved by Treasury under the auspices of NAMA in the current marketplace is outstanding. And NAMA also did very well to generate a profit on the transaction despite firstly, commercial property values dropping 10%+ since November 2009 and secondly, NAMA paying a long term economic value premium.  With a paucity of large transactions of similar buildings recently it is difficult to ascribe values but I note that the Department of Transport bought a more traditionally prestigious, though internally dated, building for €283 psf this month 500 metres away on Clare Street. Furthermore it is my opinion that the outlook for commercial prices is challenging for the next two years with a general oversupply, a difficult economy and the prospect of retrospective downward rent reviews. The sale to Google, one of the world’s great companies is most welcome to the economy now, both for the vote of confidence in the country’s future and for giving us one of the few major commercial transactions we are likely to see in 2010/2011. And our reputation as a technological hub for non-EU companies will be enhanced so in the years to come, we may well attract the EU operations of baidu , yandex or guriji.

The bad news: The sale of the building to Google is likely to have resulted in a loss to the taxpayer because the nominal value of the loan is likely to be more than the €99.9m sale price achieved by NAMA. The State owns 100% of Anglo, INBS, EBS and effectively owns nearly 95% of AIB. The State owns 36.5% of Bank of Ireland and were it not for the Minister for Finance concluding that he didn’t have the mandate to fulfil Ireland’s commitment to the IMF/EU, then by next Monday 28th February, we would likely have majority control of BoI as well. So the loss incurred by the banks is in fact a loss to the taxpayer. Because we don’t have details of the price paid by NAMA for the loan, NAMA’s development outlay or the nominal value of the loan we are not able to conclude that there was a loss or the quantum of the loss but we can arrive at an educated proposition. NAMA may care to comment if the proposition is invalid.

No news: it is not clear why NAMA sold the property at this time and didn’t wait for a recovery in prices. Given that the IMF was urging the agency to dispose of assets sooner rather than later and with rumours of an IMF staff member permanently occupying a desk in NAMA’s offices at Treasury Building, perhaps the final decision to sell was not NAMA’s to make…

UPDATE: 1st March, 2011. It seems that Simon Carswell at the Irish Times has been dabbling in the Black Arts as he is today seemingly able to bring us some inside details on the project. There was, he claims, an AIB loan of €30m advanced after April 2009 to REO/Treasury for the development. This was acquired by NAMA at a nil haircut because of a deal done between NAMA and the banks that post-April 2009 lending would not attract a haircut as otherwise banks would be reluctant to make the advances. It is not clear what pre-April 2009 lending had taken place. Simon claims that in total there was €40m of development lending on top of the €30m post-April 2009 from AIB. This €40m presumably includes the pre-April 2009 lending PLUS the additional advances made by NAMA to finish out the project. Whilst AIB and NAMA “declined to comment on the transaction” Simon also claims that the CIE obtained €21m from the deal (they apparently had a development deal with REO and CIE was the original owner of the land) – this echoes the claim made by Michelle Devane in the Sunday Business Post a couple of days ago. Simon concludes today with “the profit made by Nama is estimated to be less than €10 million, according to sources familiar with the finances behind the property”. It is noteworthy that at least 3/7ths of the lending was made after April 2009 when Montevetro was well advanced at that stage. Of course what we would all like to know is how much the taxpayer lost on the deal, but NAMA is not likely to reveal that voluntarily but who knows what the Black Arts might reveal.