How To Utterly Get Wrong Owning A 70K SF Prime Office Block
How hard is it to get wrong the multimillion-purchase of a prime 70K SF office block, complete with tenants and a good, generous medium-term income stream?
Sandwell Council, the local authority responsible for West Bromwich in the Birmingham hinterland, managed just that. It managed to turn a potential £23.6M asset into a long-term liability of £22.5M and will still be paying the bills in 2055.
A stinging auditor's report has resulted in an equally stinging rebuke from the government, and the council now faces the imposition of government-appointed commissioners to take charge of big decisions.
The property deal — the roots of which lie a decade ago, but where key decisions were as recent as last year — revolves around the 70K SF Providence Place office building in West Bromwich. The block was hailed as one of the most favoured, and most securely income-producing, in the area.
This is how it all went wrong.
In 2007 the council signed a 15-year deal with BT for the provision of various support services. As part of it, BT agreed a pre-let from respected Midlands developer Stoford, the long-leaseholders of the soon-to-be-vacant 70K SF Providence Place office scheme in West Bromwich. The rent was £1.2M a year.
When the BT partnership ended, the council took the floorspace on assignment, and sublet part of it back to BT, earning it £605K a year, with annual uplifts, and providing it with some nice efficient modern offices.
By July 2014, with the BT partnership over but BT still tenant, the council’s cabinet agreed to buy the entire long leasehold from Stoford for £23.6M. The price was supported by an open-market valuation by DTZ reflecting the rental income of £605K from BT.
So far so good, although auditor Grant Thornton warned that, with hindsight, the council looked a bit like a soft touch.
“We considered that … greater challenge should have been applied to the original purchase price, especially as the price paid appears to reflect a long leasehold period but break clauses existed in the leases,” the auditor's report said.
By 2019 the English Department for Education was keen to buy the office block with vacant possession for a £17M school conversion. The school was due to open in 2023.
This is where things begin to go very wrong.
BT held the lease until 2026 and there was no obvious reason for it to move on. To get BT to surrender its lease the council paid a premium of £446K, equivalent to one year’s rent and waived the dilapidation payments. This was agreed in summer 2021.
The council agreed a sale of the building for £8.46M, the price reflecting the vacant possession and lack of income stream.
The trouble was the council was still committed to making the loan and interest payments related to the purchase back in 2014. According to Grant Thornton, the total remaining loan and interest due until 2055, when it matures, is £31.7M.
The report pointed out the council could have got its money back if it had sold Providence Place with a tenant.
“In effect the total loss to the Council is c£22.5M," the report said. "This is a significant loss. We note that the Council has received rents from BT totalling £5.4M and it has also had beneficial occupation of part ground, second and third floors since 2014. However, it would also have incurred maintenance and running costs for the building.”
The council’s original reason for buying was to save money, by putting a smaller workforce into more efficient modern floorspace. That’s why it made sense to buy. But the sudden about-turn when a school was proposed, meaning a decision that Providence Place was surplus to requirements, “significantly undermined the original basis on which it was purchased”.
That is unfortunate, but maybe it made good local sense? Perhaps the school was a brilliant idea, and very necessary? The auditors aren’t so sure.
Not only did the council not consider selling Providence Place on the open market, it did not consider whether the school might have flourished somewhere else. And if the council really didn’t need the office block for offices, it probably did need the income generated by Providence Place as an investment.
“The council’s post-pandemic workplace vision and strategy supported the council’s decision that it no longer had a use for Providence Place for office accommodation. Providence Place would then become solely a commercial property investment, and it is not clear how the decision taken to dispose of Providence Place formed part of the council’s property strategy including an asset disposal strategy,” the auditor noted.
The report ends with the judgment that “viewed separately the [council’s] actions do not appear unreasonable ... However, when viewed together it is clear that the council made a significant loss on the basis of these decisions.”
The auditor concluded with the suggestion that everyone involved tries to understand the risks, and that it might be a bright idea if the council only bought and sold property to support “relevant council property related strategies".
The government’s response said the council showed poor grip, poor behaviour and is run with a lack of trust.
And that, in short, is how to get wrong owning a prime office block.