We wouldn't know it only for the Paradise Papers leak that this week whipped the towel from the global rich and their creative finances, but the Jervis Shopping Centre has got to be one of the most attractive retail assets on the Isle of Man.
The Jervis centre is, of course, nowhere near the misty, craggy island and UK crown dependency that sits in the middle of the Irish Sea, resplendent in all its glory as the home of diminutive cats’ tails and even more diminutive tax bills. The shopping centre is as Dublin as can be, located smack bang in the commercial heart of our capital city, straddling the thoroughfare that gives it its name and the adjacent Mary Street.
Yet in 2013, as the massive document leak from offshore lawyers Appleby reveals, its owners Paddy McKillen and Padraig Drayne shifted control of the Jervis centre offshore to a building just off the promenade in Douglas. The Manx island's 130-year old jubilee clock sits right outside its front door.
McKillen and Drayne moved control of the shopping centre to the island to get an impending €140 million refinancing over the line with UK firm M&G Investments, which put up the cash to help them buy out its loans from the Irish Bank Resolution Corporation (IBRC). The new lenders only put up the cash on condition that the asset was relocated to a remote structure designed to push Irish tax authorities down the queue for repayment in the event that things went sour.
That loan was refinanced earlier this year by the majority State-owned bank AIB, although the asset was left sitting in its tax efficient structure in Douglas.
The Appleby leak opened up a seam of documents that throw light on the inner workings of the Jervis centre, and the affairs of the notoriously media-shy McKillen and his business partner.
Property sources this week speculated that Jervis might be nearing a €400 million valuation
Almost five years ago, the documents show, they were generating €19 million in rent from the asset and valued it at €230 million.
How much might Jervis be worth now, one blistering economic recovery and a renewed consumer boom later?
Property sources this week speculated that Jervis might be nearing a €400 million valuation. The AIB refinancing was for €155 million, implying that there is likely about €240 million of equity in the property. Half of that potential bounty – €120 million – belongs to the wily McKillen. No wonder he fought so hard to refinance it when IBRC put his loans out to market.
A quick trawl of the Isle of Man’s companies house shows that ownership of the Jervis centre now resides in a Douglas entity, JSC Properties, owned 50-50 by McKillen and Drayne. A mortgage document filed by JSC for the M&G refinancing completed in 2014 lists the rent paid by each and every tenant.
Fashion retailer Forever 21 signed a 20-year lease in 2010 at an annual rent of €2.75 million. Boots chemist was paying €1.6 million, on a 25-year lease signed when Jervis opened in 1996. DSG Ireland, which owns Currys PC World on the ground floor, was paying just over €1.14 million.
The Parfois handbag shop signed a 15-year lease in 2013 at a rent of €265,000. Ulster Bank pays €34,000 rent on its ATMs. Burger King was paying €275,000, Mothercare €559,000, while the Celtic football shop, owned by a company whose biggest investor is Dermot Desmond, was paying €195,000 annually for its unit.
If the JSC documents drill down to the granular detail of how the Jervis centre operates on the ground, the separate Paradise Papers leak gives us a helicopter view
Vodafone pays €6,349 for its mobile phone mast on the building's roof, while the company that owned mobile operator 02 (now owned by Three Ireland) was paying €18,000. The company that was providing the "kiddie rides" paid €31,500. Kiosks were paying between €35,000 and €50,000.
JSC’s documents also reveal that the Jervis centre, in 2014, was insured against acts of terrorism to the sum of €275 million and for €182 million for property damage, and €92.6 million for business interruption.
If the JSC documents drill down to the granular detail of how the Jervis centre operates on the ground, the separate Paradise Papers leak gives us a helicopter view.
McKillen and Drayne started planning for the refinancing towards the end of 2012 when Drayne, who runs the centre while McKillen remains hands off, compiled a detailed report on its operation.
On January 4th, 2013, Dublin tax adviser Kieran Twomey of Twomey Moran emailed Seán Dowling, the managing partner of Appleby: "Many thanks for making yourself and your colleagues available to meet with us on Monday 7th January at 12 o'clock in your offices to discuss a potential new matter."
Twomey enclosed a number of “background documents”, including Drayne’s report and detailed instructions on how its new structure was to be set up in order to get its refinancing over the line.
He continued: “It is a condition of providing this information to you that none of the information provided can be disclosed to any person outside of yourself and your immediate colleagues without written authorisation to do so from my clients . . . Padraig Drayne and Paddy McKillen.”
The Jervis centre was to be lumped into a parent company (Parentco) and subsidiary company (Subco) structure designed by Twomey, “to ensure Parentco and Subco are not regarded as UK tax resident or Irish tax resident”.
Twomey included an agenda. Item five was to discuss Appleby's experience of any "examination" of similar structures by UK or Irish tax authorities. Twomey was to be joined at the meeting by McKillen's long-time associate Liam Cunningham, and Oliver McAllister from Drayne's office.
The report prepared by Drayne outlined how McKillen and Drayne assembled the Jervis site in the lead up to the mid-1990s, buying up patches of land, buildings, rights of way and removing power lines.
The six-floor, 33,445sq m (360,000sq ft) of retail space scheme was then the biggest building project in Dublin. Drayne’s report said it took just 18 months to build, but because of the speed of construction they spent “the next five years finishing” it.
At the end of 2012, the report said, it had footfall of 12 million, which today has risen to 14.1 million, according to property agency Savills.
At the time, the retail economy was in some difficulty, and Drayne described the level of negotiations around rent reductions and the churn of tenants in difficulty. Nevertheless, over the previous three years, they had secured 27 new tenants generating €7.2 million.
The report said McKillen and Drayne spent €1.8 million reconfiguring units to attract Forever 21 and New Look, which opened its first store in Europe there. Total rent roll was €19 million and the total revenue of the company that then owned the Jervis centre was €23 million, including cash for service charges, etc.
The company employed 54 staff, including 21 security personnel and 19 cleaners. Drayne was the hands-on man, overseeing the whole operation.
Another background report attached set out the proposed ownership structure. It said it was a condition of the refinancing that the Jervis centre be “held in a bankruptcy remove vehicle”. This was so that “Irish capital gains tax is not a priority to the refinancing debt” in the event that the refinancing bank calls in its security. Everything to follow was designed to facilitate this.
It said Tyrone-based Drayne was UK tax resident, but that McKillen “is not tax resident in either Ireland or the UK”.
Parencto would then flip it on the same day to Subco, which would borrow the €130 million for the refinancing
He is known to still use a Dublin address on official company documents but McKillen has homes all over the world and hasn’t based himself in Ireland for years.
The “assumed current market value” of the Jervis centre at the beginning of 2013 was €230 million with IBRC debt of €130 million (the M&G refinancing was ultimately completed a year later for a figure €10 million higher).
The incredibly complex transaction Twomey proposed is best distilled as follows: An Isle of Man parent company – Parentco – is incorporated, owned 50-50 by McKillen and Drayne. It would then set up a Manx subsidiary company – Subco. The two men would flip the asset to Parentco for €230 million, paid for by a share issue.
Parencto would then flip it on the same day to Subco, which would borrow the €130 million for the refinancing. This, along with an intercompany balance of €100 million, would settle that transaction. Parentco would lend the cash interest free to McKillen and Drayne, who would then use it to pay off IBRC.
McKillen (but not Drayne) would become a director of the Isle of Man company, along with a couple of Appleby nominees. All company records had to be kept on the island, and not in Dublin.
Under the plan, Drayne’s Apamore Services company was to continue providing management services to the Jervis centre. The documents said Apamore manages several shopping centres on both sides of the Border with a total rent roll of £50 million (€56 million).
McKillen was to attend monthly meetings of the Isle of Man company, although some of these could be over the phone. It was directed that the Manx company would appoint a Jim Byrne as "property adviser". The documents said Byrne had 18 years experience dealing with the Jervis centre.
Following the January meeting, Appleby replied with a proposed schedule of fees for maintaining the exotic structure proposed by Twomey. This included set up fees of £13,500, legal fees of £10,000 and annual fees of £50,500. This did not include 15 hours a month to be billed by the Appleby partners to be appointed as directors of the new Jervis entities. Two legal opinions of the structure were to cost £5,000.
The Jervis centre is probably worth up to 16 or 17 times its income
Twomey explained he was meeting three possible administration companies on his January trip to the island. Ultimately, the gig appears to have gone not to Appleby, but to a rival Isle of Man-based professional services firm called Equiom.
Since its domicile was shifted from Ireland to the Isle of Man, the Jervis centre has thrived along with the Irish economy. One property source said it is the “ground zero” for Dublin retail.
“It now has the Luas. It has the car parks. It was the first of its kind in Ireland and it hasn’t dated,” said the source.
They said McKillen and Drayne would be unlikely to “let it go” but a valuation would be hard to calculate anyway without knowing the tightly-held metric of walt (weighted average lease term) and adding a yield.
Another source said that, under a rule of thumb, the Jervis centre is probably worth up to 16 or 17 times its income. Including full revenues of €23 million (and not just rent roll), this implies a valuation of over €390 million.
Other sources said a €400 million valuation would be considered reasonable, on the basis of other retail transactions. Given how the commercial property industry has rebounded to near frothy levels in the last five years, from when the Jervis centre was valued at €230 million, it must surely be nearing this quantum now.
Property agency Savills, which acts for Drayne and McKillen at the Jervis centre, would not be drawn on the operation of the centre, or its value. The firm, however, confirmed the footfall and said it is “near full occupancy”.
There are rumours in the industry that the owners are nearing a deal for the last remaining unit, with international retailers interested in a 1,115sq m (12,000sq ft) unit that was once part of Topshop.
McKillen would not comment on the Jervis centre or the Isle of Man transaction. But in fairness to him, why should he? Given how successfully it has worked out for him, he may as well just sit back and smile: the Manx cat who has got the cream.