How a developer got a $37.8m bailout from the Government

Kāinga Ora paid up against Treasury advice, for fear of “reputational damages” the debacle could cause the KiwiBuild programme.

The Government has paid a major developer $37.8 million in a land deal, after it threatened to openly flout its legal obligations and sell scores of KiwiBuild homes out from underneath anxious buyers.

Documents released to Stuff under the Official Information Act show that developers The Neighbourhood Ormiston told Kāinga Ora (KO) they were on the brink of receivership and would need assistance.

Cabinet ministers allowed the housing agency to pay up against the advice of the Treasury, after being warned of “reputational damages” the debacle could cause to the KiwiBuild programme.

Stuff previously reported on buyers of stage one of the development who could see their homes were finished but had been denied settlement because the developer’s engineer wouldn’t sign off on practical completion. Meanwhile, their sunset clauses were looming.

“Without some form of intervention, the likelihood is that the developer would either cancel the sale and purchase agreements at the sunset date, and resell the homes on the open market to achieve additional sales revenue, or put the development into receivership,” government staff told ministers.

Ormiston gave the Government a deadline of October 6. This would have breached its contracts with KiwiBuild, but KO was under the impression it would do it anyway.

“The developer has indicated they will ignore their contractual obligations to the Crown... We believe the developer will breach the [agreement] knowingly, as they no longer see any value in the benefits.”

The market value of 56 outstanding homes under threat was estimated to be $770,000 to $830,000 each, compared with the contracted KiwiBuild purchase price of $650,000.

KO explored various options, including releasing Ormiston from price caps on future stages, but the developer wasn’t having it. “The developer has indicated this would not be enough to restore financial viability to the development – land acquisition must be part of any agreement.”

Ormiston wanted the Government to pay $46m to purchase stage three of the development to give it a needed cash injection. KO negotiated that down, saying there was “no evidence to justify that amount”.

Meanwhile, the Treasury opposed the deal, advising ministers that it could set a precedent. “If ministers agree to this land acquisition to support a developer facing financial constraints, other KiwiBuild developers may form expectations of additional financial support.”

KO investigated this and found there were 373 KiwiBuild properties with an unconditional contract that had likely been purchased at a price cap that was now lower than market value.

The Treasury also expressed concern with plans to raid the coffers of the KiwiBuild underwrite programme to pay for the deal. “This would increase fiscal risk to the Crown if underwrites are triggered,” it said. “The benefits to the 56 KiwiBuild buyers and the value of the land are heavily outweighed by the $40m cost of the land and other risks associated with this transaction.”

To enable a speedy purchase, the Cabinet needed to sign off on appropriation of the funds. Chris Hipkins, Carmel Sepuloni, Grant Robertson, Megan Woods and Kelvin Davis were each named on a document seeking approval.

Kāinga Ora did consider that it could have enforced the contract by requiring an encumbrance or placing caveats on the land, but it believed this would have the effect of nudging the developer into receivership, if lenders lost confidence.

It advised ministers that if that happened, then any appointed receiver’s first duty would be to the lenders as creditors, not KiwiBuild buyers, and they may simply sell the homes on the open market anyway.

Records show that Ormiston had advised KO that it had incurred cost increases of around $77.1m which had caused its financial difficulties, although the housing agency was doubtful of this account.

“Kāinga Ora has had difficulty in establishing the financial position of the developer due to inconsistent and changing information being received throughout the discussions... Despite multiple requests, there has been no hard evidence provided on the extent of the financial issues they face.”

But, if the government hadn’t stepped in, the 56 buyers would have been left without a home they had been waiting two to three years for.

Stuff spoke to the Maher family, who had a child in anticipation of moving into their new home and were terrified they would have to start over again on the open market if their sunset clause was invoked.

They were days away from the sunset deadline with no word from either the developer or KiwiBuild.

KO was also tight-lipped when approached a multitude of times by a reporter about the situation.

It would not initially acknowledge a deal had been made, and only released limited details when pressed.

Communications now released under the Official Information Act show its public relations team ran at least one of its statements by a director of Ormiston, Todd Strathdee of Todd Capital, before releasing it.

Looking to the future, KO intends to seek approval from ministers for a “scheme of development” of at least 171 dwellings on the land it has purchased in the deal.

It will be a decision for the new government.