By Alex Tarrant
Wellington City Council is eyeing up a number of ways to help building owners find funding for earthquake strengthening work.
While two of the three options canvassed to interest.co.nz appear relatively straight forward, the third raises a number of questions that will need to be addressed before the council approaches the government for a law change as it talks to the major trading banks about ways to help building owners secure lending.
Councils, banks, building owners and their insurers all around the country are looking at the implications and possible costs stemming from the fallout of the Christchurch earthquakes. Commercial tenants are demanding owners with buildings below 67% of the 'New Building Standards' (NBS) code - considered potentially earthquake prone - strengthen them or risk losing their tenancy. See our earlier story on the potential for billions of dollars of costs to strengthen and rebuild outside of Christchurch.
Even those with buildings above 67% NBS have tenants demanding these buildings be strengthened to anywhere up to, and above, 100% of the 2004 building code. The Royal Commission of Inquiry into the Christchurch earthquakes may also recommend considerably tighter earthquake codes for buildings, which may be passed into law once it reports back to the government later this year.
Wellington City Council is concerned about earthquake-prone buildings, and has been looking at a number of options to help building owners pay for millions of dollars of upgrade costs. A very high profile example is that of the city's tallest building, the Majestic Centre, which is undergoing a NZ$35 million upgrade after a structural engineering report found it was below 67% NBS.
Insurers are tightening standards and hiking premiums by as much as 200%. Banks won't lend on buildings unable to get insurance, forcing refits of an as-yet unknown number of commercial buildings in the city.
So the council is busy looking at on a number of initiatives that may be of help to building owners looking to secure finance for strengthening work. Two of the three possible initiatives outlined to interest.co.nz may impose costs on local or central government by reducing revenue, while a third may all but guarantee bank loans made for strengthening work.
The two simple options
The first is that Council might waive rates payments on buildings which have to be emptied as they undergo earthquake strengthening work. This would take one cost pressure off a building owner as they look for funding for the strengthening work.
The second possible plan of attack would entail the council asking the government to allow costs of earthquake strengthening work to be tax deductible.
It's the third option that raises a number of questions, and which the council accepts needs some working through.
This option would require the government to amend the Local Government Act to allow the council to place targeted rates on buildings for the repayment of a bank loan for strengthening work. The Act as it currently stands does not allow this to be done.
With this option, a bank loan for earthquake strengthening work would be repaid by the building owner via their rates bill to the council. That means on top of their regular rate payments to the council, the building owner would also pay the regular loan principal and interest installments for the strengthening loan, which would be passed on to the bank.
That is instead of the regular method of repaying a bank loan, which is straight from the owner to the bank. Loans could be repaid over timeframes in the region of 20 years.
The idea behind the 'targeted rate' scheme is that if a building was sold before the strengthening loan was repaid, the new owner of the building would have to carry on paying the targeted rate.
BNZ has been the front-runner among the banks in discussions, and the council had only had minor discussions with the other major trading banks. It believes they will all get behind the plan. BNZ was not immediately available for comment.
However, the plan throws up a number of issues which are still to be worked through between the council and banks. One is why the banks would be so keen on this proposal when there are already processes in place to extend funding for strengthening work by extending an original mortgage on the building or writing a new mortgage on a building.
Another issue is whether banks would be more sure of getting their money as they would effectively be using the council's power to collect rates.
Under the current rates regime, the council can demand that any missed rates payments on the building be repaid by the holder of the mortgage, who then would add that cost to the principal of the mortgage.
Effectively, banks that lend for earthquake strengthening via this new targeted rates mechanism could be propelling themselves above the original lender on the building. But in many cases that would be themselves, as they are the owner's banker.
Any targeted rates scheme would need to deal with the risk that a building owner who took out a strengthening loan with a different bank may in effect leapfrog that new bank above their original bank in the order of repayment priority when rates are not paid. If rates were unpaid the new bank could demand rates repayment from the old bank.
A council official noted this was one technicality which needed to be worked through. It may see the original mortgage having to be transferred to the second bank - the one making the strengthening loan.
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