Beaumont Quarter Leaseholders - Sucking On Lemons

[zealandlord]

Now why would anyone buy into a leasehold property? More grief for Blue Chip investors.

Ground rents hit the roof
By GREG NINNESS - Sunday Star Times | Sunday, 06 April 2008

People who bought apartments in one of the country's largest leasehold residential developments are facing hard choices as their ground rents increase by more than 400 per cent.
Apartment owners in the fashionable Beaumont Quarter complex opposite Victoria Park in central Auckland have been paying ground rent of between $1900 and $3900 a year.
But last week these were increased by more than 400 per cent, with the owners of the largest apartments now facing ground rent payments of about $18,000 a year.
Apartment owners who attended a packed meeting called by the Beaumont Quarter Residents Society heard there were no easy options, but decided to contribute $250 each towards the legal costs of challenging the increase.
Beaumont Quarter is a 258-unit complex developed between 2001 and 2007 by Melview Beaumont Quarter, part of the Melview group of companies owned by Auckland developer Nigel McKenna.
The leasehold titles on which the apartments were sold stipulate that the ground rent is to be set at 7% of the land's unimproved value, which is to be reviewed every seven years.
According to Melview, the original ground rents were set based on a value of $14.5 million, the price it paid for the site when it purchased it in 2000.
Last year, Melview sold the freehold land under the complex for $70m to a property syndicate put together by investment company Augusta Group, which commissioned Jones Lang LaSalle to revalue the land for the scheduled seven-yearly rent review.
This revalued the land at $63.7m, which this has pushed the ground rents up proportionally, and these figures have been confirmed in a separate review by Colliers International.
Faced with such unexpectedly high ground rent increases the Residents Society commissioned a report on its legal options by law firm Glaister Ennor.
The report said the lease allowed the owners to challenge the valuations used to set the ground rents but warned that the legal costs involved could run to between $300,000 and $500,000, which would have to be passed on to apartment owners.
Some are not well placed to bear such costs, especially when there is no certainty such a move would result in a significantly different valuation.
Many purchased their apartments through troubled property company Blue Chip and have already suffered large financial losses as a result.
By way of an olive branch, Augusta Group has offered to have the increased ground rents phased in over the next three years.
According to Augusta Group director Mark Francis, this would at least give residents some certainty about the situation "so they can just get on with their lives and either sell their house or stay in it and refinance or whatever. We know it's a big uplift in rent but it's been seven years since it was set and we all know what's happened to the property market since then."
The owners will reconsider their position at another meeting this week and Francis is hopeful they'll agree to the plan.

[tricky]

We talked about this last year:

http://www.propertytalk.com/forum/showthread.php?t=13626&highlight=Beaumont+Quarter

Fantastic investment for the owners of the land.
Not so good for the apartment owners.
Sad to see things get worse for those Blue Chip investors.

[Bob Da Builder]

Funny stuff

[Glenis]

We had a leasehold property but sold it a couple of years ago since I could see the rents getting out of control and well beyond our budget.

Any idea what happens if they can't pay the increased rents? If it's similar to our agreement, even if you walk away from the property you are still responsible for the lease until you can get someone to take it over. If the lease is too high there is a lot of property that is going to be unsaleable over the next few years.

Do you know when the docks come up for review - that will be interesting.

[muppet]

Ground rents hit the roof - Beaumont Quarter

Ground rents hit the roof
By GREG NINNESS - Sunday Star Times | Sunday, 06 April 2008

People who bought apartments in one of the country's largest leasehold residential developments are facing hard choices as their ground rents increase by more than 400 per cent.

Apartment owners in the fashionable Beaumont Quarter complex opposite Victoria Park in central Auckland have been paying ground rent of between $1900 and $3900 a year.

But last week these were increased by more than 400 per cent, with the owners of the largest apartments now facing ground rent payments of about $18,000 a year.

Apartment owners who attended a packed meeting called by the Beaumont Quarter Residents Society heard there were no easy options, but decided to contribute $250 each towards the legal costs of challenging the increase.

Beaumont Quarter is a 258-unit complex developed between 2001 and 2007 by Melview Beaumont Quarter, part of the Melview group of companies owned by Auckland developer Nigel McKenna.

The leasehold titles on which the apartments were sold stipulate that the ground rent is to be set at 7% of the land's unimproved value, which is to be reviewed every seven years.

According to Melview, the original ground rents were set based on a value of $14.5 million, the price it paid for the site when it purchased it in 2000.

Last year, Melview sold the freehold land under the complex for $70m to a property syndicate put together by investment company Augusta Group, which commissioned Jones Lang LaSalle to revalue the land for the scheduled seven-yearly rent review.

This revalued the land at $63.7m, which this has pushed the ground rents up proportionally, and these figures have been confirmed in a separate review by Colliers International.

Faced with such unexpectedly high ground rent increases the Residents Society commissioned a report on its legal options by law firm Glaister Ennor.

The report said the lease allowed the owners to challenge the valuations used to set the ground rents but warned that the legal costs involved could run to between $300,000 and $500,000, which would have to be passed on to apartment owners.

Some are not well placed to bear such costs, especially when there is no certainty such a move would result in a significantly different valuation.

Many purchased their apartments through troubled property company Blue Chip and have already suffered large financial losses as a result.

By way of an olive branch, Augusta Group has offered to have the increased ground rents phased in over the next three years.

According to Augusta Group director Mark Francis, this would at least give residents some certainty about the situation "so they can just get on with their lives and either sell their house or stay in it and refinance or whatever. We know it's a big uplift in rent but it's been seven years since it was set and we all know what's happened to the property market since then."

The owners will reconsider their position at another meeting this week and Francis is hopeful they'll agree to the plan.

"The last thing any of us want to see is mortgagee sales an

http://www.stuff.co.nz/4466544a13.html

[CJ]

Does anyone know what has happened in the viaduct. or Princess wharf. Those must have pretty valueable leaseholds aswell.

[tricky]

From one of those referenced posts:

For example, it is understood the ground rent on the Latitude 37 complex at Viaduct Harbour is increasing from $160,000 a year to $659,355 a year. This means that on average, each apartment's share of the ground rent would rise from $2000 a year to $8242 a year - a more than fourfold increase.

http://www.propertytalk.com/forum/showthread.php?p=105126&highlight=Beaumont+Quarter#post105126

What would this do to the value of Latitude 37 apartments?

[tricky]

Slightly different location but shows how the leasehold arrangement can bite - article in the Herald:

http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10353848

Grant Murray of Maungakiekie Ave said ground rent on his property rose 1817 per cent from $1800 annually to $34,500 in 2003 in one hit.

How much would you pay for a house that costs you $34k pa?

[CJ]

From one of those referenced posts:

http://www.propertytalk.com/forum/showthread.php?p=105126&highlight=Beaumont+Quarter#post105126

What would this do to the value of Latitude 37 apartments?

If you work out property prices based on yeild, work out the original yeild, then add in the new lease payment and adjust the property price to get the same yeild.

[muppet]

Apartment owners hit by $12,000 ground rent

Apartment owners hit by $12,000 ground rent

4:00AM Tuesday Jan 27, 2009
By Anne Gibson



The land owners of Beaumont Quarter site originally wanted $4.4 million a year in ground rent from apartment owners. Photo / Supplied

Ground rent at one of the country's largest high-density housing estates is rising 244 per cent from $900,000 to $3.1million annually.
Instead of paying an average $3400 for land under each of the 258 apartments at Auckland's Beaumont Quarter opposite Victoria Park, unit owners will now be up for an average $12,000 a year each.
A partial decision from arbitrator Sir Ian Barker, QC, over new ground rent has been issued and the full decision will be out later next month.
Owners desperate to avoid the dramatic ground rent increases were last year quitting places and said the new payments would make it unfeasible for investors to rent Beaumont Quarter townhouses.
But owners are claiming the $3.1 million ground rent settlement as a big win because the land owners actually wanted $4.4 million a year.
Beaumont Partners, managed by Augusta Funds Management which is connected to the listed Kermadec Property Fund, proposed last year to hike ground rents but the residents objected, initially gaining valuations that they should only pay $2.2 million.



So the land owners commissioned a valuation from property consultants Jones Lang LaSalle and the numbers were confirmed by Colliers International.
Neville Corbett, chairman of Beaumont Quarter Residents Society Inc, wrote to owners describing the $3.1 million settlement is a victory.
"Our ground rent will be approximately $1.3 million a year less than the $4,435,000 wanted by Beaumont Partners. That is a reduction in the ground rent of $9.1 million over the seven years rent period. This is a great result for the Beaumont Quarter apartment owners.
"The result of the rent reduction means that the lot value for the Beaumont Quarter will reduce from $64 million to approximately $45 million."
However, he emphasised that the final decision on the ground rent would not be out until February 27 and said it was hard for residents because it left them in limbo.
"This non-finality is not helpful to us," he said. "Unfortunately the partial award does not give a finite answer to what the new ground rent amount actually is and further consideration by both parties and calculations by the valuers are required for further submissions to the arbitrator for him to give his final award."
Corbett's letter said the residents had won a further victory, forced to pay a penalty interest rate on money in dispute lower than that the land owners originally sought.
"The arbitrator is not accepting the Beaumont Partners' penalty interest amount of 26.2 per cent and approving a penalty interest rate of 19.5 per cent," he wrote.
The new $3.1 million annual leasehold payment has been backdated to April 1 last year.
"We did lose two legal points regarding the interpretation of the ground lease document relating to how the market rent should be assessed and (residents' lawyer) John Carter has suggested we should consider appealing these two issues," Corbett wrote.
A special residents' meeting is planned soon.
Corbett said a small group of townhouse owners had failed to pay money due so legal action was being taken against them.
"An update on the legal moves on the 11 worst-case payment defaulters is that court cases against them have commenced this week," he wrote.
Mark Francis of Augusta was unavailable to comment on the issue.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10553695

[eri]

wow, $12,000pa is $250 a week rent for the ground that your flat sits on

no wonder the market for leasehold apartments in auckland has been gutted

some of the developers were so greedy they had ratchet clauses that mean that while they could charge higher ground rents if land values increased they didn't have to drop the ground rent if land values decreased, as they look to do over the next few years...

[captaincrab]

All that legal cost, expense for advisors, time spent and fear and uncertainty and they settled in the middle........

Not sure why Mrs Gibson persists in calling the BQ residents 'owners". All they "own" is a Leasehold Interest and an asset which depreciates heavily between Rent reviews.

Mr Corbett proves himself to be a contender for the "Comical Ali PR Spin of the Year" Award saying a 244% increase in rent, back paying the Rent from last year and Penalty Interest on the rent for that year of 19.5% (!) is a "victory".

[CJ]

Makes you wonder how they support the valuation. It is only that valuable becuase the suckers have to pay the ground rent. Would they get the same gound rent if something else was on the land (ie, if it was commercial). I also assume there are restrictions on teh site so you cant say "well they could put a 30 story apartment complex there."

[muppet]

Anxious wait for Auckland city developer

By GREG NINNESS - Sunday Star Times | Sunday, 01 March 2009


RESOLUTION OF the long-running dispute over ground rent at the upmarket Beaumont Quarter complex may have as much impact on its developer, Nigel McKenna, as it does on owners of units in the central Auckland development.
The case will be a landmark in disputes over ground rent payments on leasehold properties and a final decision was expected on Friday. Owners of the 258 leasehold units in the complex had wanted ground rent set at $2.2 million a year when it came up for review, but Beaumont Partners, the property syndicate which owns the land the complex is built on, had wanted $4.4m.
It is understood the arbitrator is likely to settle on a figure around $3.1m a year, but the final decision has been delayed to consider related matters such as costs.
The final decision will have important implications for both sides.
It will give unit owners certainty about their financial situation and allow the market to establish a resale value for the units.
But it could also affect McKenna, who appears to remain the major shareholder in Beaumont Partners, which was set up by property syndication company Augusta Funds Management to acquire the freehold title to the land from McKenna for $70m.
Although units in the syndicate were heavily promoted to investors by Bayleys, they do not appear to have sold very well. McKenna underwrote the scheme, and said last April that all units in the syndicate had been sold, but settlement had been delayed until June last year.
However Companies Office records show he still owns 89% of the shares.
The transfer of the land from McKenna to Beaumont Partners (possibly 89% owned by McKenna) was settled in February last year.
It was to have been financed by an interest-only $43m loan from ASB, with interest fixed at about 8.9% for seven years. Interest payments on that would be around $3.82m a year.
If the ground rent had been set at $4.4m a year, that would have more than covered the interest payments. But if it is set at $3.1m there could be a shortfall of $720,000 which Beaumont Partners shareholders would have to meet, as well as Augusta's management fee.
Surprisingly, there is also a second mortgage over the property, to Martyn Reesby's Structured Finance, securing up to $7m plus two years' interest and costs, although it is not known how much of that may have been advanced, or how much is actually owed.
When the final decision on ground rent is released, Beaumont Partners could decide to sell out, but a property providing $3.1m in rental income is likely to fetch a lot less than one returning $4.4m. So the decision is unlikely to bring much joy to any of the parties to this dispute.
McKenna said he had not made a decision about what to do with his investment in Beaumont Partners.

http://www.stuff.co.nz/4863864a13.html

[captaincrab]

Interesting problem. I think the fixed loan was to be taken up when all the investors settled ( rent review term matches fixed rate term) but the investors were never going to settle until the new Lease terms were agreed and signed.
If thats the case then 43 + 7 = $50 million at 5.5% (which is achieveable) is only $2,750,000 so hes cash flow positive.

$3.1 million capitalised at 8% = $39 odd million, well short of $50 mio for the Banks (but I suspect Structured's charge/debt could be collateral) or the $70 mio value for investors. Still expectation of yield may have dropped, the cashflow would be bullet proof... and 258 Freehold titles on the city fringe are worth?
I'd love to see a valuation.