Davis House’s £5m losses and council’s secret £1m loan

Croydon Council last year was forced to make a near-£1 million loan to a private operating company which it owns jointly with John Laing, to avoid an office building used by its own staff being repossessed by the banks.

In the four years since the company was established by the council, it has made losses of nearly £5 million. And our council leaders kept the £1 million loan secret, failing to report it at any Town Hall meetings.

Davis House, the unprepossessing block next to the new HQ, and part of a failing property strategy run by Croydon Council

Davis House, the unprepossessing block next to the new HQ, and part of a failing property strategy run by Croydon Council

Despite Croydon’s Conservative-run council making widespread cuts to services, claiming it lacks the cash to pay for them, they were able to find a near-seven-figure sum to cover-up a disastrous financial decision.

Details of the secret loan emerged last week, buried in the annual report of the Croydon Council Urban Regeneration Vehicle, or CCURV.

The £1 million loan only came to light because it related to Davis House, and was therefore included in documentation relating to a separate company established to oversee the business.

CCURV is a joint venture between John Laing and Croydon Council.

It was created four years ago, when the council leadership promised that it would unlock all the potential value of many of the borough’s publicly owned sites – land and buildings, especially in the town centre.

The project had the notable support of the council leader, Mike Fisher, and chief executive, Jon Rouse. According to Councillor Tim Pollard, Croydon Council’s deputy leader and apparently a “business guru”, it would all be worth it because John Laing was so much better than Croydon Council in doing developments, so giving away 50 per cent of the profits would be worthwhile.

But the terms and conditions of actual operations of CCURV remain the Conservative-run council’s most closely guarded secrets, and only painstaking questioning and careful reading of public documents has, slowly, allowed some of the true picture to emerge. At last week’s council cabinet meeting, there was lots of bullish talk and attacks on anyone who dared question any part of CCURV.

It seems that Croydon Council has lots to fear from questioning of its flawed and failing property speculation.

Davis House was bought for £19 million in 2008. We were told at the time it was “to facilitate” the building of the new council headquarters building, which we were also told would be delivered at nil cost for the people of Croydon, which always sounded too good to be true.

Last week, the leadership of the Conservative-run council was forced, finally, to admit that it was actually costing the borough £145 million to build a headquarters building that no one really wants or needs.

In 2008, we were told that buying Davis House was not going to cost the Council Tax-payer a penny either. In fact, our council was going to make a profit on it, apparently. It, too, all sounded almost too good to be true. And, of course, it was.

The council put down a 5 per cent deposit of £1 million in September 2008, handing the property over to Laing, and said it expected to be reimbursed by the CCURV once the scheme was agreed three months later. The council claimed that income from rent will cover the short-term debt.

The timing here is crucial. The collapse of global finance was already well established. Croydon Council was using public money to buy at the top of the market, with property values collapsing everywhere.

Tim Pollard: Croydon Council's "business guru". His decisions have cost Council Tax-payers millions

Tim Pollard: Croydon Council’s “business guru”. His decisions have cost Council Tax-payers millions

In an official press release issued by Croydon’s Ministry of Truth, the council claimed that even if the Davis House deal with Laing did not go ahead, the combined value of adjacent plots was greater than individual ones and so made sound financial sense.

Pollard was quoted by the council press release: “Quite simply, acquiring Davis House is vital for the council’s plans to redevelop its own land holding.

“To buy the building on favourable terms, without alerting competitors, is an excellent business approach that underpins the council’s determination to secure value for money in all it does.

“The outcome of this transaction means the council will own an income-generating asset immediately alongside its own offices and will therefore be in a much stronger position to influence a more sensitive redevelopment,” Pollard said at the time.

And then the press release added the following comment from Pollard that is well worth remembering: “And if the URV proceeds as expected then the financial exposure will be negligible.”

Unlike much of the CCURV, where the contractual details remain under lock and key, far away from any public scrutiny, Davis House was set up in a separate company so it is possible to see what is going on there. It does not look pretty.

According to the annual report, published last week, the balance sheet shows that by December 31 2011, Davis House had clocked up more than £5 million of losses since it was created, £4.3 million of this is because they have had to reduce the value of the building in the accounts because of the poor state of the commercial property market.

“The financial exposure will be negligible,” Tim Pollard said.

Now, we know that Croydon Council is strapped for cash. They tell us that every time they are asked why people cannot have the services they want or ask why capital cannot be spent on important community facilities.

So, it is interesting to see that, as at New Year’s Eve last year, Croydon Council had lent the Davis House company £4.3 million. What is more, the accounts reveal that in January 2012, Croydon Council had to make an emergency loan to Davis House of nearly £1 million to prevent the company being in breach of its bank agreement with RBS, the bank that lent £12.6 million for buying the building.

If this money had not gone in – along with an equal amount from John Laing – RBS may have been able to foreclose on the building. So, our council bailed out this company with £1 million of our money and did not bother to report it. Only a digging around the accounts has revealed this.

Is the Davis House company making an operating profit? It is: £1.2 million in 2011. And this even though income has fallen from £2.5 million to £2.0 million, as occupancy went down from 98 per cent to 88 per cent.

But, as ever with CCURV, things are not what they first seem. In 2010, Croydon Council accounted for about 20 per cent of Davis House’s rental income. In 2011, that had risen to 90 per cent. In other words, Croydon Council is now just about the only tenant in Davis House. Without the income from the council, the Davis House company would be making a big operating loss.

“The financial exposure will be negligible,” Tim Pollard promised.

It has to be asked why the council, with many of its own buildings empty or under-occupied as well as new buildings like Jeanette Arnold House coming on stream, needs to rent additional space. Or is it just a fig leaf to try to conceal the truth that is the scandal of Davis House?

The Davis House deal – like so much of Croydon Council’s dabbling in the property market – has gone pear-shaped, at substantial cost to Council Tax-payers, with contracts and details hidden from public scrutiny. And all assurances from the council’s leadership proving utterly worthless.

Read more on Croydon Council’s leadership, the cuts and a lack of public accountability:

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2 Responses to Davis House’s £5m losses and council’s secret £1m loan

  1. It is a scandal.
    This incompetent and bumbling lot must go.

  2. I’m gob-smacked. Not by what’s happened: it was always possible. My surprise is how quickly the chickens have come home to roost.
    Normally, a public body enters into negotiations with a developer and is convinced by sweet-talking, highly-paid experts that the authority – health, education or whatever – is getting something for nothing.
    The truth only dawns a decade or two later, when the detail of the contract reveals a devil or two.
    There is no such thing as a free building.
    The recent hoo-ha over the Public Finance Initiative (PFI) is a case in point: there is nothing intrinsically wrong with borrowing money to buy a building. Those of us who are home owners would not enjoy that dubious status if we hadn’t raised the cash in the form of a mortgage.
    The problem with PFI arises when a clever developer disguises the true capital cost by moving some of it – plus deferred interest, of course – into sky-high maintenance charges. Hence, a £100 bill to change a light bulb.
    By the time the whole sorry story comes out, the public servant responsible has usually long since moved on and the current incumbent can truthfully plead innocence. Never mind: its only tax-payers’ money and there’s always plenty more of that.
    In this case, those responsible for our ‘negligible exposure’ (beware, low-flying pigs!) are still in post. I’m really looking forward to Fisher v Paxman – surely, one of the Newsnight highlights of the New Year.

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