CROYDON IN CRISIS: The latest report from government-appointed inspectors assigned to check on the council finances reveals that a sweetheart deal to sell failed house-builders Brick by Brick to a Manchester developer could have cost the bankrupt borough another £45m.
By STEVEN DOWNES
Tony McArdle and his colleagues on the Whitehall-appointed improvement panel were clearly unimpressed by the suspiciously generous terms being considered earlier this year by Croydon Council for the sale of Brick by Brick.
According to the report, which was made public yesterday, the only bidders for the company, Urban Splash, had submitted an “unsolicited offer” which will have seen them take on the failing business with little, if any, up-front payments, and benefit from cost write-offs of up to £45million. Cushty!
The improvement panel’s latest report, which was submitted to government ministers back in August, devotes nearly one-quarter of its 12 pages to the travails of Brick by Brick and the efforts being made to extract as much value from the £200million in council loans that were lavished on the badly managed firm since it was formed in 2015.
McArdle’s report states that Urban Splash “made an unsolicited approach” to buy Brick by Brick, reinforcing the suspicion among Katharine Street sources that the Manchester-based firm had been encouraged to put in a low-ball offer by Colm Lacey, the hapless chief exec of Brick by Brick, whose first and only priority appeared to be saving his own job.
“An initial offer was made to acquire [Brick by Brick] but was rejected by the council,” the report says.
“A revised offer was then tabled but represented minimal improvement from the first offer and the validity of the valuation placed on [Brick by Brick] was then tested by both PricewaterhouseCoopers and Savills.
“Both organisations saw some merit in the council being minded to accept the offer, but neither provided a compelling financial argument to proceed with the sale.” Those are our italics. For emphasis.
“In broad terms, their view was that the offer was what would have been expected from a sole bidder and did not represent the most advantageous financial outcome for the council.” Ditto.
There is then some suggestion that senior council officials, who appeared to be very keen to get shot of Brick by Brick as speedily as possible, might not have been as forthcoming about the hard detail of the Urban Splash deal as they might have been.
The improvement panel’s report states, “To ensure members [councillors] had access to all the financial implications of the potential sale of [Brick by Brick] for the decision at the July cabinet meeting, the Panel issued its Advice Note 4 on 17 June 2021.
“This contained recommendations on the pros and cons of the sale to the third party or continuing with the build-out option and how any risks could be mitigated should they decide to proceed with that through the appointment of external support.”
It was when the improvement panel and estate agents Savills went digging into the detail of some of Brick by Brick’s property arrangements and the 29 sites which the failed builders were still working on at the start of 2021 that they discovered not everything was as it should be.
“During the Savills assessment of the sale to the third party and discussions with potential suppliers to support [Brick by Brick], the Panel became aware that six of the 29 sites (156 residential units) were no longer under contract due to redesign or land-related issues.
“Significant feasibility and design development costs had been incurred on these six sites but continuing through to completion would not have improved the overall financial outturn position and would have simply added to the risks the council faced.
“Consequently, the council revised its build-out decision on 12 July 2021 to only complete 23 sites (774 residential units) and to seek to recover cost expended on the remaining six sites through the sale of the land.”
According to the improvement panel’s report, 21 of the 23 remaining Brick by Brick developments, comprising 489 homes, “are currently forecast to be substantially complete by the end of October, one further site by May 2022 (128 residential units) with the final site (157 residential units) due for completion by February 2023”.
All told, that’s probably at least £200million-worth of housing that the council is about to place on the market.
The government inspectors, though, flag up the continuing financial risks to the council, in relation to covid and “the effect of the super inflation being experienced on many construction materials due to demand factors”.
As of July 2021, the panel report says that the remaining total of the council’s loans and interest due from Brick by Brick is £162million.
They estimate that there will need to be a write-off Brick by Brick debts of between £25.6million to £52.7million. Importantly, even the top end of this estimate is below the “forecast losses of £54million to £68.4million had the outright sale of [Brick by Brick] been accepted”.
Urban Splash will have landed a very sweet sweetheart deal indeed had it been allowed to go through.
But there were other snags with the Urban Splash deal, too.
“In addition, by continuing with the build-out, the council will generate significant levels of cash much sooner than the sale, as the offer contained no provision for any upfront payment, but recovery of the sale price over three years.” Those, again, are our italics.
Effectively, Urban Splash wanted Croydon to sell them Brick by Brick and its part-finished sites, and pay nothing for it. It would then flog off the homes as they were completed, bank the proceeds, and only then make any payments due to the council. Trebles all round!
Given the crassly incompetent Lacey’s part in the council’s financial collapse – the BxB CEO was operating a multi-millions-pound development company with no finance director for at least two years – and his potential part in the attempted sell-off to Urban Splash, many people will be asking how he has managed to escape being sacked.
Katharine Street sources suggest that, 12 months ago, when Lacey and fellow directors were removed from the Brick by Brick board, dismissing Lacey as CEO was given serious consideration. But cabinet members were advised by the council’s external advisers against this high-profile sacking “because it would have had a detrimental impact on the morale of the company’s staff”, according to a senior Katharine Street source.
“We were told that we needed Colm to continue the running of the company,” the source told Inside Croydon.
McArdle and the improvement panel were appointed three months later. They do not appear to share that view of the management of Brick by Brick.
The improvement panel is clearly distrustful of the manner in which the company has been run.
“The governance arrangements and relationship between the council and [Brick by Brick] have also been an issue in the past and remain a challenge,” they write, adding, as if it requires re-stating because it would otherwise be inconceivable, “even though [Brick by Brick] is 100 per cent owned by the council.
“This has resulted in slow decision-making (such as appointing external support to assist marketing and quality assurance) and delays in resolving outstanding planning issues.
“Further clarity of reporting lines is required to ensure that the interests of the council and [Brick by Brick] are fully aligned.”
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