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Not sure what to make of the Reading Cinema deal that has divided Wellington? Wondering what the deal even is? Georgina Campbell explains the case for and against the plan.
The deal is for Wellington City Council to buy the land beneath the cinema for $32 million. Reading woulduse that money to redevelop the building, which has been shut since 2019 because of its earthquake risk.
The intention is to incentivise Reading International to reopen the building sooner rather than later and stop it being an eyesore in the heart of the city.
The council would then lease the land to Reading under a perpetually renewable 21-year ground lease.
The plan has been described as fiscally neutral for ratepayers because Reading’s annual rent would be calculated to cover the council’s costs, including servicing debt and other fees.
When it comes to what else these “costs” could include, the council has some vague language in its commercial terms, presumably in case there are any surprises: “Plus, any other amount, or adjustment, to satisfy the council that the lease is fiscally neutral to it”.
The council is considering selling some of its existing ground leases to fund the $32m land purchase.
Those opposed to the deal are concerned this could result in a firesale of ground leases with no strategic thought given to the opportunity cost, not to mention the optics of selling council assets to bankroll a multinational company.
It has already been agreed that the proceeds of any sale would not be used to pay down debt or fund operating expenses. The money would instead be reinvested in a new perpetual investment fund.
New Plymouth District Council has one of these funds, which averaged a 7.9 per cent annual return over the past five years.
The question has been raised as to whether the Reading deal is fiscally neutral, since the council is giving up rental income from the ground leases it’s selling in favour of a ground lease with rental income that only covers the council’s costs.
But the number-crunching in the Reading deal is based on the council borrowing the $32m to pay for the land and the costs associated with servicing that debt.
If the council chooses to pay down that debt by selling other ground leases, it will no longer have those same costs but will still receive the same amount of rent from Reading, offsetting any lost income.
There could, however, be an opportunity cost from not putting the $32m straight into a perpetual investment fund with something like an 8 per cent return if that’s what the council decided to do with its other ground leases.
Why won’t the council make a capital gain on the cinema land?
There certainly is an opportunity cost when it comes to the eventual resale of the land.
That’s because, during the first 10 years of the lease, Reading can buy back the land from the council for the original purchase price of $32m.
That means the council makes no capital gain from land that will almost certainly have increased in value over that time. After 10 years, the council is free to sell the land for a higher price.
Those who support the plan make the point that the council is not a hedge fund.
They argue the council is concerned with civic outcomes in this case, like making Courtenay Place vibrant and bustling again, rather than financial ones.
It also incentivises Reading to invest and get the ball rolling because it knows it will capture all of the value uplift created by its development of the site.
Will the council get its money back if the deal flops?
The council’s $32m will be released in two tranches.
The first is a $6m deposit to be paid when a formal agreement is reached. It has been reported the deal is about 80 per cent done.
The project is essentially starting from scratch in terms of reimagining the future of the building.
So, the deposit is to be used for pre-construction works like the building design and obtaining the necessary consents within two years. Reading also needs to source money for its share of the cost within this timeframe.
The deposit is fully refundable should the formal agreement not go unconditional or be terminated. This will be supported by an on-demand bank guarantee from a major New Zealand bank approved by the council.
The old Molly Malone's pub is another Courtenay Place eyesore that has sat empty for years. Photo / Mark Mitchell
The council will need to be satisfied with a raft of conditions, essentially its bottom lines, before paying the remaining $26m.
These include agreement on key design outcomes and an indicative construction plan. The project will include internal pedestrian access through the building, active frontage and a ground floor facade on Courtenay Place, publicly accessible toilets on the ground floor, and a temporary laneway between Reading Courtenay and Wakefield St.
The $26m payment is accompanied by the lease agreement, which has clauses allowing the council to take legal action if Reading defaults on any of its obligations, as per standard commercial terms.
It’s hoped the building would reopen in 2027.
Why can’t Reading go it alone?
Council documents say this is a unique opportunity to revitalise the Courtenay Place precinct that does not set a precedent.
Reading could be considered a special case because the former cinema site is such a large building, once heavily used and in an area of town that’s floundering.
Some councillors see Reading as the first step in a wider programme to help other building owners and an example of the sort of public-private partnership Wellington needs.
Whether you like the deal or not, whether it makes sense or not, one question remains: why can’t Reading afford to do this project on its own?
The Herald asked this question of Reading International but did not receive a response.
Such is the reality of a multinational company that is not accountable to Wellington ratepayers in the same way the council is.
Georgina Campbell is a Wellington-based reporter who has a particular interest in local government, transport and seismic issues. She joined the Herald in 2019 after working as a broadcast journalist.
