With the stated aim of making money, Redland City Council decided in late 2014 to set up its own real estate development company – the Redland Investment Corporation (RIC).
A plan to sell several blocks of ‘surplus’ Council parkland was envisaged but community outrage during City Plan consultation put this in the category of ‘seemed like a good idea at the time’.
So far, RIC has booked just one property sale on which it seemingly made a mark up of more than 100%. Closer inspection shows that this huge mark up was achieved only because the land was transferred from the Council to RIC at less than half of its market value.
The RIC also appears to have a role in negotiating the Development Management Agreement for the Toondah Harbour PDA Project. More for the community to worry about?
Can residents and ratepayers be confident they will benefit from the Council’s property development company? So far, there is no evidence to suggest that RIC is adding value. Its role, activities and performance should be clarified through more transparent reporting.
Council moves to sell 108 Old Cleveland Road
Council owned land at 108 Old Cleveland Road, Capalaba was used for years as overflow parking for adjacent sports fields. In 2014, Council decided to sell this land because it was underused and a replacement carpark could be provided nearby.
A recommendation to sell this land (and allocate part of the proceeds to providing a public car park nearby) was endorsed at Council’s General Meeting on 19 March 2014.
The officers report (Item 13.2.4) noted that:
Disposing of land falls within the provisions of the Local Government Act, specifically Sections 224 and 227 Div 2 and Section 236 Division 4, which state that Council must invite tenders or offer the land for sale by auction before entering into a contract.
For more than a year after this meeting there was no information on the public record detailing how Council would sell the property.
Redland Investment Corporation (RIC) established
Details in Council minutes about setting up RIC are scant, other than references to confidential sessions in late 2014.
In November 2014 Council resolved to create RIC and to appoint Council’s Chief Executive Officer and Chief Financial Officer as directors. The RIC was quickly registered (2 December 2014) with Australian Securities & Investments Commission (ASIC). Soon after, Council resolved to transfer land described as “underutilised” to RIC (the parcels were listed in a confidential report).
Subsequently, Council appointed a Director and Chairperson and agreed to other directors being appointed in consultation with Council. Council noted the sequence of pre-approved land transfers and resolved to change the financial treatment for the transfer of pre-approved land.
The forecast RIC dividend policy for 2015/16 was discussed as well as procedural matters including the transfer of an operational budget ($340,000) to RIC for 2014/15 so RIC could perform core duties. In addition Council transferred the 2014/15 sales revenue budget to RIC, as intended in the approved business case.
Clearly, RIC was getting ready for action – but well out of public view.
Leaked information – causing community alarm
It was not until June 2015, six months after its establishment, that the Council first made the community aware of the RIC’s existence.
In September 2015, a report by the Redland City Bulletin noted that 108 Old Cleveland Road had been sold months earlier by the RIC.
At the General Meeting on 7 October 2015, Council considered the RIC report for the period ending June 2015. Interestingly, this was discussed in public though the agenda listed it to be discussed confidentially, in closed session ( item 16.1 of the Minutes).
Motions for noting are usually straightforward but on this occasion there was robust debate among the councillors. The Mayor roundly criticized nameless others for leaking confidential lists and causing “alarm” in the community. The video record provides a fascinating insight into the operation of Redland City Council – see Item 16 Closed Session (starts at 28 minutes).
The only completed RIC “project” in the quarter was the sale of 108 Old Cleveland Road, Capalaba. According to Real Property Data, the sale was effected on 7 April 2015. Agent and newspaper records indicate that the Ray White Commercial offered the property for sale by tender following a couple of advertisements in the Redland City Bulletin. Other details of the process are unclear and the number of tenders received does not appear on the public record.
RIC makes a $million, sort of
The RIC’s quarterly financial update shows the property was sold for $2,120,000 (excluding GST) or $2, 332, 000 (including GST). RIC reported the “cost of goods sold” as $820,000. This seems to be the transfer price when Council passed the land across to RIC which reports a profit of $1,300,000 on the sale (before selling costs).
How the “cost of goods” was determined is unclear. The transfer from Council to RIC was an internal transaction, not at arms length. The approach seems to artificially and grossly inflate the “profit” booked by RIC, making it look like a real estate wiz.
There is no indication that RIC performed any activity that might have added value to the property prior to its sale. RIC merely arranged for its sale through a local real estate agent. The selling price would have been the same whether it was sold by RIC or the Council.
RIC will be “Developing land with or without partners” according to its Statement of Corporate Intent. Presumably, this may involve further dealings in public land transferred from the Council to RIC. The manner in which these transfer prices are determined should be explained clearly to the community, especially if a transfer price is way under market value.
How did RIC perform at selling real estate
A good comparison sale to 108 Old Cleveland Road is the sale (by Council) of 96 Old Cleveland Road, The two lots are adjacent and share many attributes. A summary of Site and Sale Details as per RP Data Records for 108 and 96 Old Cleveland Road are as follows:
|Property||108 Old Cleveland Road||96 Old Cleveland Road (KFC)|
|Area||3 573 sq m||3 031 sq m|
|Unimproved land value||$1,550,000 @ 30/06/15||$1,250,000 @ 30/6/2015|
|The sale price equates to||$653/ sq metre in 2015||$516/ sq metre in 2005|
|Vendor||Redland Investment Corporation||Redland City Council|
Sale of the KFC site in 2005 was managed directly by Council with the final decision to sell taken at a General Meeting of Council after consideration of the Officers Report (in which all seven tenders were tabled).
The price per sq metre received by RIC for 108 Old Clevelend Road represents an annual increase of only 2.3% over the price Council got for the adjacent property 10 years earlier. Hardly a stellar performance by RIC in realizing value from Council owned real estate.
More transparency please
There are good reasons why the Local Government Act is very prescriptive in its requirements for transparency and probity when local councils sell publicly owned land.
There may also be good reasons for a local council to set up and operate a property development company. But so far Redland City Council has failed to make a compelling case for its RIC.
It’s time for a clear and rational explanation, and a lot more transparency!