Big developers' purchase of trophy assets is totally different second time around
Published 30/07/2015 | 02:30
The developers are back, it seems. It is like a rebirth or second coming for some of the high profile names of boom and bust. Headlines in recent weeks, saying that Nama's biggest clients are buying up and developing trophy property assets will add to the sense of anger many people feel.
However, it is an easy, and even tempting, narrative to portray the return of these former giants as some kind of "business as usual".
A closer look at the facts and the finances of big developers suggests that the return of businessmen like Joe O'Reilly or Johnny Ronan is anything but business as usual.
Joe O'Reilly, still in Nama, is reported to have bid over €155m for the Ballsbridge hotel sites previously owned by Sean Dunne. He has also sought planning permission for 166 housing units in Glasnevin.
Johnny Ronan, formerly of Treasury Holdings, is buying up a block of buildings that formed part of the old AIB Bankcentre head office, which were also owned by Sean Dunne. Ronan, who exited Nama after repaying his personal loan portfolio, is reported to be gearing up for a €200m redevelopment of the site.
When the crash came, just a handful of these really big developers owed several billion euro to banks. A sizeable chunk of that was owed to Irish banks and it was taken over by Nama with a potential loss to the taxpayer.
Joe O'Reilly told the Oireachtas banking inquiry he owed Nama around €2bn in personal and business loans, having paid back around €600m already. He said he aims to pay back every euro.
His bid for the Ballsbridge hotel sites isn't simply his bid. It isn't like the old days where he provided investment capital, held all of the equity and kept all of the profits. This bid is backed by the Abu Dhabi Investment Authority, which has billions to invest around the world.
Banks are now lending around 60pc of the money required to acquire or develop commercial property. A purchase price of €155m means somebody has to put up €62m if the rest is borrowed.
The Ballsbridge project, including new apartment blocks and a hotel, might cost around €300m to develop.
So that is another €120m that needs to be put in before basic bank borrowing.
Joe O'Reilly doesn't have €180m in his back pocket any more. His Abu Dhabi backers will put in the bulk of that, probably control the bulk of the project and receive the bulk of the profits.
O'Reilly will be in a position to make some money from the profits but it won't be his project in the way developments were in the past. He will make key decisions but it won't be the personal goldmine for him that similar developments were in the past. Profit he personally makes from this venture, may end up going towards clearing borrowings held with Nama.
O'Reilly clearly has a lot to bring to a project of this sort. Like other accomplished developers, he was good at putting deals together, making them happen and managing them afterwards. Otherwise, why would the Abu Dhabi fund need him at all?
Where big Irish developers fell down was not knowing when to stop. With these developer second comings, everything has changed.
The developers have lost their money. They have fewer assets, less cash to invest and they will have to hand over a lot of control and equity to international backers who do have the money. They aren't exactly starting from scratch again, but it is a bit like working for somebody else.
If it had been like this first time round, things might not have got so completely out of hand.
Take Johnny Ronan for example. His Treasury Holdings empire collapsed with debts of over €2bn. Nama ended up with around €1.1bn of that debt, for which it is believed to have paid around €500m. Now in receivership and liquidation, if Nama gets back what it paid, the hit to the taxpayer will be €600m. But Ronan did not give personal guarantees on that debt. He can just walk away. His personal borrowings, outside of Treasury, were believed to be close to €300m.
American investment fund Colony Capital backed Ronan by providing the finance to buy out those loans from Nama earlier this year. It got Ronan out of Nama and its restrictions.
Ronan doesn't suddenly own €300m worth of property assets debt free. He is not suddenly worth €300m again. His new backers will want to know everything about his business. Companies Office documents show that Colony has taken sweeping and wide-ranging charges as security over Ronan property companies as you would expect given they are backing him.
The mortgage documents refer to a development loan facility and mezzanine facilities. Ronan is far from debt free. He is back in business, but it is not the way it was before.
His purchase of the AIB Bankcentre buildings is backed by Cardinal Group, a finance and equity provider which in turn is backed by billionaire Wilbur Ross.
Ross and Cardinal are backing Ronan but they will expect to make a substantial profit for their money. They won't just be bankers saying here is a loan and pay us X% in interest. Wilbur Ross isn't AIB.
They take bigger risks than banks and often look for an equity shareholding in ventures or at the very least some kind of quasi-equity which will derive a handsome return.
If in the future you read that the former AIB Bankcentre buildings make millions in profit, don't assume it is all going to Johnny Ronan. Ronan and O'Reilly will never get back to the scale, profitability and net worth of the pre-crash years. They probably don't expect to either.
Long standing developers want to get back in the game even if the rules have changed dramatically.
Yes the crash has delivered up a second chance for some of them but only as long as they can remain bankable to foreign investors.
Developers like these firmly believe they are victims of the crash and not its architects.
Some of them stick to the notion that they borrowed responsibly at all times, even though taxpayers have in many cases had to pick up the tab.
They argue that they didn't borrow from the taxpayer and it wasn't their fault the taxpayer ended up footing the bill.
During the boom insufficient scrutiny of the facts meant developers debts were often underestimated by the public, politicians, the media and even bankers.
It would be wrong to jump to similar ill-informed conclusions second time round and believe these guys are simply back where they were.