Council snap up Debenhams and debt repayment rises by 184% on £60 million of commercial investments
So as our public face predicted in April 2019 the Council have bought the former Debenhams building for a mark up of 2,482% and increased its debt repayments for it’s £60 million property and land portfolio by a whooping 184%.
The Debenhams building was purchased in 2010 for £79,400 by Discovery (Folkestone) Ltd (DFL), using a mortgage from both Nat West and Santander. The mortgage with Nat West was satisfied in 2013, leaving Santander as the sole chargeholder over the property.
The tenant of the property, Debenhams Retail Limited, experienced financial difficulties in late April 2019; and entered into a Company Voluntary Arrangement (“CVA”) with its creditors on 9 May 2019. As a result, Discovery (Folkestone) Ltd experienced a reduction in their rental income coupled with a decrease in value of the Property. The shortfall of the value of the security against the outstanding debt left the Company in an insolvent position and as such Santander appointed Insolvency administrators officially on 24/10/20 in order to protect its position.
Prior to being appointed officially, Moorfields were engaged as Santander’s Insolvency practioneer advisors on a pre-appointment period. Moorfields acted in accordance with the Insolvency Code of Ethics.
During Moorfields pre-appointment period they considered various alternative insolvency processes with Santander. Between August 2019 and Oct 23rd 2019, advice was received from CBRE, the largest real estate company in the world regarding the valuation of Debenhams building and the strategy to maximise realisations for creditors. Administration was judged the best route to enable the Administrators to enter into discussions with Folkestone and Hythe District Council (“the Council”) regarding the alternative use of the Property to maximise its value.
CBRE provided a valuation of the Property using vacant property pricing, which reflected the position of Debenhams vacating the store in January 2020. CBRE requested that the valuation not be disclosed as this will compromise the marketing of the property. Moorfields believed the value reflected the retail use of the property. It did not take into account the value potentially attributable to alternative use opportunities. Moorfields and CBRE were now liaising with the Council in order to explore potential uses for the Property.
On 24 October 2019, as Joint Administrators Moorfields took over from the Board, the responsibility for the management of the affairs, business and property of the company.
On March 12th 2020, the council announced it had successfully agreed terms to purchase the former Debenhams store.
On the 15th May Folkestone & Hythe District Council announced it had successfully completed its purchase of the former Debenhams store for £2,050,000.
The Land Registry title makes clear a sale has begun as the title was suspended at 10:16:46 yesterday (15th May).
This brings the council’s total property acquisition to £60 million to date.
Now when you buy an asset like a building or a piece of land through borrowing, you have to pay the money you’ve borrowed back, to whoever you borrowed it from. In council speak, this is called the Minimum Revenue Provision (MRP). In 2019/20 the amount was £373,370.
MRP represents the minimum amount that must be charged to the council’s revenue account each year for financing of capital expenditure, which will have initially been funded by borrowing. The MRP ensures the council can pay off the debts it has from buying capital assets, such as building or land.
On the 11th Feb 2020, the Cabinet voted unanimously on Report Number C-19-66 to increase the MRP from £373, 370 to £874,000. That’s an increase of 184% in a single year.
According to Cradick Retail, High Street retail rents for Folkestone in 2019 was £300 per m². We strongly suspect the price per metre² will fall in Folkestone & elsewhere throughout the coming year and into next, if high streets are to survive thus must adapt or die.
Nick Dunbar, a senior consultant for Vedanta Hedging, which provides financial advice for local authorities, has said the Covid-19 crisis had caused a “massive plunge” in the value of the sort of commercial property councils had invested in.
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“Anything to do with bringing in rents is getting hammered, because people can’t go into offices and shops.”
What residents and council tax payers need to know is how the Council plans to maximise the value of its various property investments.
If high street retail space suffers a permanent diminution in value as a result of reduced footfall and increased online shopping then we need to know what alternative uses are being considered?
The Council also needs to be cognisant of the fact that empty prime retail space will reduce its business rates revenue.