Business Opinion:The media and other members of the great unwashed have watched in awe over the last few years as individual property developers paid staggeringly large amounts of money for sites, writes John McManus
Now we have been afforded a rare insight into how these mega-deals are done, courtesy of an information memorandum circulated to prospective investors in the redevelopment of the Irish Glass & Bottle site in Ringsend led by Bernard McNamara.
If it goes ahead, the project will be one of the biggest developments yet seen in Dublin, running to some 3.25 million sq ft. There will be 2,166 apartments - mostly two-bedroom - and 826,000 sq ft of retail and commercial space. The developers expect to pull in something in the region of €1.76 billion when all the properties are sold. This, according to the memorandum, will net a profit of €296 million to be split amongst the principals: Bernard McNamara, the Dublin Docklands Development Agency and financier Derek Quinlan. The three principals are putting up €136 million in cash and the rest of the €1.46 billion cost of the project will be funded through debt provided by Anglo Irish Bank.
So far so ordinary. It is a lot of money but the ratio of debt to equity is within the norms for such deals, apparently. It's only when you start looking at how the equity has been provided and enter the world of mezzanine finance that it starts getting interesting.
McNamara, for example, has put in €57.5 million in return for a 41 per cent stake, but only €5 million of it is his own money. The other €52.25 million has been raised - with considerable ease apparently - by Davy from its well-heeled clients. They have subscribed for loan stock in the vehicle through which McNamara is investing and will be repaid at some stage in the next two to seven years. McNamara has guaranteed to repay the €52.25 million but not the promised return of 17 per cent a year.
This type of mezzanine finance is a very expensive way to borrow money, but the attractions for McNamara are obvious. Firstly, it means he does not have to come up with €52.25 million in cash, which even for a developer as successful as he is would be no mean feat.
Secondly, he limits his exposure to the deal to €57.5 million and gets the loan stock holders to shoulder a considerable portion of the early stage development risk. However, as the project proceeds and passes critical milestones - such as planning - the risk falls. A point will come presumably when the risk does not warrant running up a 17 per cent a year interest bill and McNamara will exercise his right to start paying down the loan stock.
The memorandum does not give any details of how the other principals sourced their share of the equity. Derek Quinlan has put in €46.3 million in his own right, rather than on behalf of a syndicate of his clients, according to his spokesman. But no doubt it's open to him to do so in the future and he may well have borrowed in some other fashion to fund his investment.
The Dublin Docklands Development Authority are in for €32.17 million in cash. Despite being a public body they refuse to say where they got the money or answer other questions. But given that the authority had only €24 million in cash on its balance sheet at the time of the last annual report - December 2005 - it's reasonable to assume they have borrowed all or some of their stake.
Putting all this together raises the prospect that the whole deal could be underpinned by as little as €15 to €20 million in cash. The rest of the €1.46 billion would be debt in one form or another. There may be nothing at all unusual about this as far as big-time property developers are concerned, but one can't help feeling the DDDA may have strayed a little bit out of their depth.
Is it really the business of a State development agency to be getting involved in such a massively leveraged project? Equally, should they be putting taxpayers' money in a venture which is so risky that Davy's clients want a 17 per cent per annum return with a capital guarantee attached before they risk their money?
The DDDA also faces all sorts of potential conflicts of interest. What it brings to the party is the statutory power to have the developments exempted from planning, which was granted to it by the Government in order to expedite its mandate to redevelop Dublin's docks.
A fair question is: what will happen if the project runs into difficulties and McNamara's solution is a material change to the current proposal, such as adding a few extra floors to the apartment blocks and scrapping the affordable housing? The DDDA will then find itself in the position of either waving goodbye to the taxpayers' €32.17 million or going along with something that is potentialy contrary to its own mandate.
It would be interesting to know how unanimous or not was the support for the project amongst the senior management at the DDDA. Maybe the Minister for the Environment or the Minister for Finance'should ask? They at least will presumably get an answer when inquiring about the use of taxpayers' money.
