Government has announced updated guidance on when “strategic leasing” may be appropriate, to help agencies decide what financing, funding and delivery route may be most suitable for a property-type project.
The guidelines are designed to encourage agencies to consider leasing to a greater extent and for a wider range of assets. Set out below is some initial reaction based on our experience.
Infrastructure Burden
This guidance is part of a suite of initiatives introduced by government to help solve the infrastructure burden we have as a country. This includes calling for a National Infrastructure Plan by December 2025, adjusting financing and funding frameworks, establishing a new investment agency (Invest NZ) and issuing new guidance on the use of public private partnerships.
This is no surprise, with the NZ Infrastructure Commission, through its National Infrastructure Pipeline estimating the current value of infrastructure needed is ~$200bn across funded and non-funded projects. This pipeline is made up of projects across central government, local government and private sector infrastructure providers. While a lot of the infrastructure conversation typically focuses on roads and pipes the make-up of projects within the pipeline covers a wide spectrum of assets, facilities and initiatives (both new and the replacement obsolete assets) across:
- Waste
- Communications
- Industrial and commercial
- Education and research
- Community
- Energy
- Social
- Water
- Transport
Leasing Guidance
The guidelines set out when leasing of real estate/property/facilities, other than for office accommodation which remains unchanged via MBIE/Government Property Group, would be most applicable.
This includes leasing in all forms, whether it is a build-to-lease solution (as is most common), lease-to-own (with some option for the asset to transfer at an agreed point), a sale and leaseback (typically of an existing asset) or a co-location between agencies.
As per conventional wisdom, the guidelines favour leasing when:
- The needs are relativity short term or uncertain – with leasing allowing agencies to exit relatively easily compared to ownership
- Where the assets are less complex – with a higher chance of alternative use and less customisation/service integration requiring an additional return or specific reinstatement obligations
- Where the assets are often provided and utilised by the private sector – again increasing the potential for alternative use and often reducing the initial lease term period
- The solution is simply providing “bricks and mortar” and no public service delivery – with alternative arrangements like PPP’s being better suited to integrated service delivery solutions
While these guidelines are sensible, we have also seen leasing used in other circumstances.
Other Dynamics
In the real world, agencies (and private sector clients for that matter) often use leasing when:
- The land/site that is favoured (for co-location or other strategic reasons) is owned by a private sector party that will only enter into a lease solution – without compulsory acquisition often leasing is the route of less resistance – particularly with land being tightly held in many markets – developers landbank land to create competitive advantage whereas the Crown often only thinks about land for a specific project
- There is limited capability, experience and capacity in-house to stand-up and lead a significant project, which are often once in a generation initiatives – when the private sector developer/investor is much better placed to lead the project – transferring development risk to where it is best able to be managed and mitigated
- The scale of the project and Crown’s tenant covenant encourages private sector developers/investors to participate in a special-purpose solution as they can achieve acceptable long term returns even if there is some alternative use risk/terminal value risk – and often this risk can be partly mitigated through commercial arrangements and agile design solutions
Examples
By way of example, there are three (3) projects TwentyTwo have been involved with where leasing has been used in circumstances that don’t fully align with the guidelines, but made strategic and commercial sense (without disclosing any of the specific commercial details).
Heke Rua Archives
Due for completion in late 2025, the new archives facilities in central Wellington (to replace the existing Mulgrave Street building) involves a leasing arrangement between the Crown and a private sector partner. While this is a specialist environmentally-controlled building, an attractive leasing structure was able to be negotiated that demonstrated the cost over the life of the facility was better than the next best alternative Crown-led solution. The commercial arrangement transferred the design, construction and development risk to the partner in exchange for a long term lease with extensive performance obligations on the partner, and with the Crown having additional rights more typically seen when owning not leasing.
WelTec/Whitireia: Te Kāhui Auaha Campus
Completed in 2018, the Te Kāhui Auaha campus in Wellington was procured via a lease for a new purpose-designed building, to establish a CBD campus. The lease created a hybrid commercial structure where the developer/investor provided the building to the standard of a compliant base building shell and tenant took responsibility for the base building fitout, services and specialist tenant fitout. This arrangement limited the extent of the initial lease term (compared to what may otherwise be required by an investor for a special purpose facility) and reduced the ongoing rental cost by adjusting the conventional base building/fitout demarcation. A similar structure has also recently been used for a private sector tenant leasing a redeveloped solution in Hamilton.
NZ Police: College Hill & Porirua
We assisted Police re-purpose two properties as operational “police stations” using lease structures. The relatively new Auckland Central station, in College Hill, was a former office building. Through a well-developed strategy, the building was upgraded and re-purposed by the private sector investment fund in exchange for a conventional office-type lease with some refinements. This approach demonstrated, that without custody facilities onsite, these types of facilities are relatively similar to an office type use while they do have some customisation. This innovation allowed Police to exit the previous obsolete Auckland Central site (owned) and establish a new modern solution in a short time.
A similar strategy was used to re-purpose a former industrial building in Porirua to establish a new Porirua police station, allowing again Police to exit its obsolete owned facility that required significant reinvestment.
In both cases, using a strategic leasing approach and innovating away from the conventional approach allowed solutions to be put in place more quickly and at lower cost.
Summary
Strategic leasing provides agencies with a genuine opportunity to re-think how new assets are procured and delivered. While the new guidance is useful there are nuisances in how leasing can be used to achieve the best outcome. This requires, as ever, some real world experience and innovation beyond conventional application.
