Delivering innovative solutions for a distressed property

‘KordaMentha was appointed Receivers and Managers in September 2008 to various entities associated with The Raptis Group’s three tower $700m Southport Central development on the Gold Coast.

Critically, KordaMentha was required to complete construction on the 39 level third tower which, at appointment, had only been constructed to level 30 and had an estimated cost to complete of $65m.  Upon completion, KordaMentha was then required to transact the substantial property assets of the tower which included 258 residential apartments, of which 96 were presold, 171 commercial strata units (17,500sqm) and 20 retail lots (1,500sqm).  In addition, KordaMentha was also required to transact residual stock in the completed 38 level second tower which included 83 residential apartments, 6 commercial strata units and 20 retail lots (1,400sqm).

Following KordaMentha’s appointment, a robust but flexible three phase plan was immediately implemented to protect, maximise and expedite returns to the client. This plan involved:

Given the large number of stakeholders involved and deteriorating support from onsite contractors, taking control of the development and clearly articulating the work out plan was crucial to restoring confidence in employees, subcontractors, union representatives and various government authorities while also regaining momentum on site.  Importantly, KordaMentha’s message was a balance between authoritative leadership to provide much needed strategic direction and empathy to facilitate the buy in of stakeholders.

While stakeholder management continued, preparations had already commenced to build out the development.  However prior to the recommencement of construction, a new builder and building license was required as the contracted builder, also the developer, did not meet regulatory requirements imposed by the state’s governing body.  To address this issue, a resourceful and creative solution was implemented which involved KordaMentha incorporating a special purpose vehicle to hold a new building license and comply with the regulatory requirements.  Although the licensing certification process can often take months, it was achieved within days, further confirming the buy in of key stakeholders.  In addition, KordaMentha used longstanding industry relationships to employ a trusted builder to recommence works and assist in the management of the development.

With the corporate structure for construction implemented, an exhaustive negotiation process then commenced with construction employees and subcontractors to novate their existing agreements to the new building entity.  Given an established and, in most cases, long standing relationship with the previous builder, initial negotiations were met with a degree of trepidation, threatening progress.  To overcome this, agreements with senior management were restructured to allow for performance incentives in line with the objectives of the receivership, and payment cycles to subcontractors were reduced from 30 days to 14 days.  These actions alone resulted in subcontractor site attendance steadily increasing from below 200 at appointment to a peak of around 400, and allowed the revision of completion targets in line with the client’s prior expectations.

Concurrently, a revised corporate structure was also implemented for the sales and marketing function, resulting in KordaMentha incorporating a further special purpose vehicle.  This vehicle held a full corporate real estate license enabling development leasing and the sale of new and resale property.
 

While the third tower remained under construction, there was a requirement to provide continuity and certainty to prospective buyers in the second tower.  As a result, KordaMentha swiftly implemented conveyance and contract management procedures to convert sales into settlements, resulting in 7 settlements within the first three weeks of the receivership.

Following the attainment of practical completion in March 2009, selling down the third tower could also commence.  The initial focus was to settle the 96 residential presale contracts with a total contract value exceeding $50m.  Despite significant legal structuring issues and a deteriorating property market due to the onset of the Global Financial Crisis, KordaMentha settled 80% of the residential presale contracts.

In addition to challenges faced settling the residential apartments, the Global Financial Crisis was impacting the amount and availability of finance for prospective buyers of commercial strata units.  This was limiting not only the funds for settlement but virtually eliminating the availability of finance for buyers to complete internal tenancy fit out works.  To overcome this, a structured sale campaign was devised offering prospective buyers the opportunity to buy now, take immediate possession and settle in 12 months.

This dynamic structure offered mutual benefits for both the prospective buyer and the client.  The buyer obtained early access and, upon payment of a 10% deposit, received a contribution towards their tenancy fit out, substantially reducing their cash flow obligation.  In return, by providing early access, buyers agreed to pay building outgoings, substantially reducing the holding costs of the client.  Overall, by increasing liquidity and providing settlement flexibility to buyers, KordaMentha was able to sell 146 of the 171 commercial strata units in a 4 month period.

 
The final component to the development was the retail lots.  Given substantial vacancy at appointment, a sales strategy was considered inappropriate as there was an expectation the assets would be significantly undervalued by the market.  As a result, a longer term value accretion strategy was adopted where KordaMentha ambitiously pursued an anchor tenant before commencing a public marketing campaign to fill the balance of the retail centre.  After almost two years of negotiating, a national supermarket tenant was secured in June 2011 for in excess of 800sqm, representing almost 30% of the available retail centre.

While the transaction management process continues, as a result of the structured processes, robust operating systems and diligent management implemented, KordaMentha has successfully achieved the following key outcomes for their client: