Howard Smith Wharves – risks arising from the project

by Dave Reeve

Introduction

I posted the following piece to the ACAQ Facebook page as part of our investigation into the proposal by Brisbane City Council to grant a 99 year lease over the Howard Smith Wharves precinct to HSW Nominees Pty Ltd.

HSW – the project risks

We see from the submission tabled at the Council Meeting of the 21st October last year that the winning proposal was HSW Nominees Pty Ltd, ACN 166 209 874, trading as HSW Consortium, and that the development agreement was to be signed with this corporate entity. In earlier posts I have pointed to the fact that Council intends transferring the public space at HSW to the private control of this corporate entity, with the later committing to some sort of undertaking to keep “public space” as “public” as possible. I have already expressed grave doubts about such a proposal, and now will add more doubt by taking a look at the process involved in the development itself.

At the outset I want to make it very clear that I am not criticising Adam Flaskas and Elisha Bickle. On the contrary, I am in open admiration of anyone who can bring energy and creativity to such a project. My criticism, if any, is with Council who really need to go that extra yard and show due diligence before committing public land to the private estate.

Now, anyone is free take a look at what is on the public record with respect to HSW Nominees provided they are prepared to cross ASIC’s bureaucratic palm with silver, so, $47 and a few internet minutes later, we know that HSW Nominees Pty Ltd is a company owned by Elisha Bickle and Adam Flaskas and none others. Further we know that they own the company in equal share with a total of $1200 in capital issued, and that it has been sitting dormant since 10th October 2013.

I understand many of the climbing community will not be familiar with business practice 101, so I’ll spell out a few things that may not be obvious. Firstly, when the development is complete, the corporate entity, HSW Nominees, is the one that will be executing its right under the terms of the lease to allow/disallow public access. In practice, this means the directors of the entity, or any managers they appoint, will be the ones making the access decisions. Secondly, either or both of Elisha and or Adam are free to sell all or part of their interest in HSW Nominees, and, should they do so, the lease would stay in place for the benefit of their successors. When you consider that we are talking about a 99 year lease, you can see that such a successional event is sure to occur at some point.

Next we need to understand that a lease agreement is a commercial contract between two parties that is created in a spirit of equity. As time passes, and new actors move onto the stage, what was once equitable may become to be viewed otherwise. Thus, we can see that whilst Adam and Elisha might have a clear vision of untrammelled public access to the site, the same need not be the case for their successors, and depending upon the wording of the contract, and depending upon the will of their successors, public access could yield to commercial imperative.

I have been making the argument for some time now that access to public land should be about legislation, not land managers. If we are to put in place public policy that really is to offer value to future generations, we need to heed the structure of the stage, not those that would act upon it. We should value acts of legislation over acts of equity.

Whilst the directors of HSW Nominees will be the main actors on the stage, we need to be mindful that in the wings there will be the financiers of the project. If the play stays on the intended script, we will never see these guys emerge from the shadows. However, if at any point it looks like their investment is at risk, we will see them step forward, perhaps even to the point of causing the appointment of a new lead actor in the form of an administrator. They do this by exercising a right embedded in a charge over all the assets and undertakings of the HSW Nominees. We would see this charge registered with PPSR at the time the finance is put in place. There may be multiple financiers and multiple charges, in which case there will be an agreement which describes how one is to rank against the other in the event of default. At the present time there are no charges registered.

I should emphasise that there is nothing untoward about any of the above. This is all standard business practice aimed at ensuring the best outcome for the project. Our interest in this stuff narrows down to what it might mean for public access should the project run into trouble.

Recall that the intention is to have an equitable arrangement in place that aims at keeping the “public” space as public as possible. What happens to this if HSW Nominees goes into administration? The Administrator’s primary duty is to extract value out of the situation so as to minimise loss to all parties bar the shareholders. It is not his job to complete the project. However, we know that Council, as part of the development agreement will also hold a charge over the assets and undertakings of the company. Ideally, this should be the senior ranking charge so that Council can step in and take over the project itself should the need ever arise. This possibility is covered in the risk assessment presented in the agreement document, under “Contractor Insolvency” –

Project Agreement requires:
– A company charge in Council’s favour over all the assets and undertakings of the HSW Consortium. Initially this will be a first ranking charge. Council would cede priority to the senior financier
– A side deed with the builder allowing Council (or a party nominated by Council) to step in as principal under the building contract to complete the works
– Bank guarantee in amount of $800,000 to be provided by the developer as security
Note: In the event of developer insolvency, financiers will have sale rights. Removal of these rights would negatively impact the developer’s ability to obtain finance for the project

However, note that in the real world, there is no way a financier will step in without placing a charge that gives him the freedom to take whatever options necessary to recover his investment. Council’s charge would stand for naught. If we wish to maintain public access to the HSW parkland, then such a scenario would seem a sure way of losing it. I would like to hear from Council why they consider such a risk to be worthwhile. Even to know they have considered the possibility of what happens on default would be a comfort.