Review of debt
funding
proposal
relating to Spring Street and
Elizabeth Street carparks
Summary of findings (FINAL)
KPMG
10 Customhouse Quay
PO Box 996
Wellington 6140
New Zealand
Paul Davidson
GM: Corporate Services
Tauranga City Council
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Elizabeth and Spring Street carpark buildings – review of
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borrowing proposal
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assumptions behind the report on Long Term Plan Deliberations – Car
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Parking Buildings by Simon Collett.
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Introduction
Background
• The $46m would be borrowed from LGFA within TCC’s wider borrowing programme and
wil not be secured against the cashflow from the Carparks, or the assets themselves.
TCC is considering funding options for its Te Manawataki o Te Papa civic centre development
(TMOTP). Divestment of the Spring Street and Elizabeth Street carparking buildings (the
• TCC proposes to ringfence cashflows from the operation of the Carparks to repay the
Carparks) is one of the options that TCC has investigated, however public consultation
$46m over a period of 40 years (the life of the underlying asset), and has assumed 2.5%
showed preference for TCC retaining ownership of these assets.
p.a. principal repayment, 5.25% interest rate to 2030 and a long-term interest rate of
4.75%.
Accordingly, TCC has investigated the option of retaining ownership of the Carparks and
raising debt that could be used to fund TMOTP and repaid using the projected cash surpluses
• If revenue from the Carparks is insufficient to cover expenses plus principal and interest
from the parking management activity. TCC’s analysis and recommendations on this debt
repayments, these payments wil either be capitalised for payment in years of surplus, or
funding option are set out in the report on Long Term Plan Deliberations – Car Parking
the cashflow deficit wil be funded through other non-ratepayer sources (e.g. asset sales).
Buildings prepared by Simon Collett for inclusion in the agenda for the Tauranga City Council
Summary of KPMG findings
(TCC) council meeting on 4 March 2024 (the “LTP Carparks Report”).
1. Based on the projections, TCC has sufficient overall debt capacity to take on the proposed
TCC requested that KPMG review the LTP Carparks Report and provide an opinion on the
borrowing. However raising a loan of this size would require borrowing against TCC’s
reasonableness of the assumptions that underpin its recommendations.
broader debt capacity, and not just the capacity generated by the Carparks in earlier
years.
This report sets out our analysis of:
2. TCC’s revenue and cost forecasts appear plausible, based on historical costs and
a) TCC’s proposed loan structure
comparative parking income in other major centres. Representative historical demand
data, which could provide more robust support for the projections, is limited given recent
b) Key assumptions behind the cashflow projections prepared by TCC
disruptions caused by Covid and construction works. The projections rely on a commercial
pricing approach and increasing demand driven by successful regeneration initiatives.
c) The affordability of the proposed borrowing in the context of cashflows from the Carparks,
and the goal that the loan is not “ratepayer funded”.
3. Our analysis suggests that servicing and repaying the loan from car parking cashflows
appears affordable over the long term under the sensitivities we have considered.
Summary of TCC’s proposed borrowing
However TCC should ensure that negative car parking cashflows projected in the earlier
years are not funded by increasing rates.
Based on valuation work undertaken by Preston Rowe Paterson TCC determined that it may
be able to raise up to $46M in debt to fund the TMOTP programme, which could be serviced
The following pages provide further commentary on points 1-3 above.
and repaid from Carpark cashflows. Key aspects of this borrowing are as follows:
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The loan structure
1) Based on the projections, TCC has sufficient overal debt capacity to take on the proposed borrowing. However raising a loan of this size would
require borrowing against TCC’s broader debt capacity, and not just the capacity generated by the Carparks in earlier years.
TCC’s debt capacity
Principal and interest repayments
The $46m loan is included in TCC’s draft LTP financial projections to 2034. The projections
TCC has assumed an interest rate of 5.25% to 3030, and 4.75% thereafter. We consider this
show that TCC would remain under its 280% debt to total revenue limit on borrowing through
assumption optimistic over the long term, given Treasury’s forecast risk-free forward rates
the ten year period, therefore TCC has capacity to borrow this amount within its available
average 4.9% over the 40 year period from 2025 (similar to the 5 year forward swap rate on NZ
LGFA debt headroom.
government bonds over that period). We have undertaken sensitivity analysis (refer page 7) to
Nevertheless, borrowing $46m may limit debt capacity available to other TCC projects where
il ustrate the impact of a higher average interest rate in the long term. We consider that the 6%
TCC is pushing close to LGFA limits, with debt to revenue ratio peaking at 275% in 2030.
interest rate sensitivity reflects an appropriate long term assumption (being roughly equivalent
to the Treasury risk free rate projection plus a 100 basis points risk premium).
Further, borrowing of this size would utilise greater debt capacity than the capacity generated
by just the Carparks in earlier years. This is il ustrated in the charts below that compare the
TCC has assumed principal repayments at a rate of 2.5% per year. In reality, we understand
outstanding borrowing against debt capacity from the Carparks based on LGFA revenue and
from TCC, the borrowing wil take place via shorter term loans of five to 10 years that wil be
interest cover limits. While the borrowing can be serviced and repaid over 40 years from
refinanced at maturity. TCC’s finance team has noted that the 2.5% principal repayments
carparking income, it needs to be supported by a wider income base.
assumption is replicable through the terms available from LGFA and refinancing.
Loan availability
Figure 2: Interest expense capacity
Neither the Carparks nor their future cashflows are proposed to be used as security for the
Figure 1: Debt capacity enabled by Carpark
enabled by Carpark revenue*
revenue
borrowing – rather it is TCC’s wider debt capacity that allows it to borrow the $46m from LGFA.
8
To raise this level of debt in the private market against the Carparks alone, it is likely that TCC
120
6
n
would need to guarantee repayment in some form. A further challenge to standalone external
100
n
illio 4
borrowing would be that the NPV of the cumulative cashflows from the carparks less debt
80
illio 60
$ m
servicing is not positive until 2049.
2
$ m 40
-
Refer to page 7 for analysis of the affordability of the loan against carparking cashflows over the
20
2028
2038
2048
2058
long-term.
- 2028
2038
2048
2058
Interest expense capacity enabled by Carpark
revenue
Debt capacity enabled by Carpark revenue
Proposed interest expense
Proposed debt
*Excludes interest cost on existing borrowing
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Key assumptions behind TCC’s cashflow projections
2) TCC’s revenue and cost forecasts appear plausible, based on historical costs and comparative parking income in other major centres.
Representative historical demand data is limited. The projections rely on a commercial pricing approach and increasing demand driven by
successful regeneration initiatives.
Revenue assumptions
The step up in 2028 forecast revenue relies on the assumption of a move to paid parking on
TCC has forecast total revenue of $2.4m from the Carparks in FY25. This appears reasonable,
Saturdays in that year, while increasing average casual parking occupancy to 85%. We
although not without risk, based on historical actuals and forecast assumptions. Pre-pandemic,
consider there is material uncertainty around the assumptions that underpin the revenue step
the car parks generated $2m revenue in FY19, implying 3% annual growth to FY25. Revenue
up in 2028, but over time higher occupancy could be achievable based on increased demand
in FY22 (the last full year of data available to us) was $1.8m. The revenue increase from FY22
for travel into the city centre following the completion of the regeneration initiatives.
to FY25 is expected to be driven in part by the availability of an additional 150 car parks (which
Price
accounts for around half of the extra revenue). TCC’s ability to achieve the forecast wil also
TCC has estimated the blended rate for leased and casual parking as the average revenue per
rely on a move to more commercial pricing, and occupancy growth.
park per day (as shown in the table on left). We have not seen more granular price and usage
The revenue forecasts are based on the following formula:
analysis, however TCC has noted that they consider the estimates conservative given the
actual full day lease at $15.22 ex GST exceeds the assumed $11 per day in 2025.
𝐴𝐴𝐴𝐴. 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑟𝑟𝑙𝑙𝑟𝑟𝑙𝑙 𝑝𝑝𝑙𝑙𝑟𝑟 𝑑𝑑𝑙𝑙𝑑𝑑 × 𝑑𝑑𝑙𝑙𝑑𝑑𝑙𝑙 𝑝𝑝𝑙𝑙𝑟𝑟 𝑑𝑑𝑙𝑙𝑙𝑙𝑟𝑟 × 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑝𝑝𝑙𝑙𝑜𝑜𝑜𝑜𝑑𝑑 𝑟𝑟𝑙𝑙𝑟𝑟𝑙𝑙 × 𝑜𝑜𝑜𝑜. 𝑜𝑜𝑜𝑜 𝑜𝑜𝑙𝑙𝑟𝑟𝑝𝑝𝑙𝑙𝑟𝑟𝑐𝑐𝑙𝑙
TCC’s assumptions on price and occupancy through to 2030 are set out in Table 1 below.
TCC has assumed 4% annual growth of the average daily on average until 2034. Generally
this assumption appears reasonable given the lower starting cost compared with parking in
Tab
Car le 1:
park P
inf roice
rm an
atio d
n occupancy assu
2025 mption
2026 s 2027
2028
2029
2030
other main centres in New Zealand, the predicted increase in visitors to the city centre and
Average lease rate per day
11
12
13
14
14
16
reduction in on-street parks due to TMOTP. In the base case modelling (see page 7) we have
Average casual rate per day
11
12
13
14
14
16
Days per week
5
5
5
6
6
6
assumed 2% increase in average lease rate per day from 2034, in line with inflation
Days per year
260
260
260
312
312
312
expectations.
Occupancy % casual
76.0%
80.0%
80.0%
85.0%
85.0%
85.0%
Long term forecasts
Occupancy
It is difficult to predict long-term parking trends due to potential technological disruption,
We understand that the occupancy percentage is an estimate of the average occupancy of the
transport policy, parking supply and consumer behaviour changes. In extending TCC’s
Carparks at the peak point during the day. The data available is not sufficiently detailed to
projections beyond 2034, we assumed that demand and pricing wil be supported by steady
allow us to test these occupancy assumptions against historical actuals. However, TCC has
population growth (over 5% CAGR per the Tauranga City Population and Dwelling Projection
confirmed that they see the occupancy assumptions as conservative based firstly on the
Review), continued vehicle usage, balanced parking supply/demand and inflationary price
relatively low pricing in the short term, and on the anticipated increased demand from 2028
increases. We have undertaken sensitivity and breakeven analysis (see page 7) to assess
assuming the successful completion of TMOTP attracts more visitors to the city centre.
how long these conditions need to prevail in order for the proposed loan to remain affordable.
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Key assumptions behind TCC’s cashflow projections (continued)
Expense assumptions
TCC has provided a breakdown of budgeted expenses for FY24 onwards, and actual costs
incurred for FY23 and 7 months of FY24. We consider TCC’s expense projections compared
to FY23 and FY24 actuals to be conservative - total expenses for FY25 are projected to be
$1.2m, 19% higher than the 2024 budget (which TCC is tracking favourably against) and 54%
higher than total expenses for FY23. Key drivers of the increase are:
• higher projected repairs and maintenance cost (expenditure was unusually low in FY23 and
due to the large program of capital works undertaken on the buildings but TCC is
forecasting this to increase), and
• higher property management fees (the management fee paid by TCC is currently below
market rates and TCC has assumed a significant increase (~250%) on renewal).
The big ticket items in the projections are depreciation, interest on an existing loan against the
Carparks, property management, and repairs and maintenance. TCC has assumed 2.7%
expense inflation on average from 2025 to 2034. We see this as a reasonable assumption, in
line with the higher end of RBNZ’s target inflation range. Beyond TCC’s forecast period, we
have assumed 2% inflation per year in the base case (mirroring the assumed price inflation).
Insurance cost has been omitted from TCC’s projected expenses. In the last financial year
insurance costs were less than 3% of total Carpark expenses. We note that insurance prices
are generally increasing at a higher rate than CPI. Our sensitivity analysis on page 7 sets out
a scenario of 5% higher expenses per annum than TCC’s base case, which would incorporate
the impact of this omission.
Straight line depreciation is assumed, with zero salvage value at the end of the 40 year useful
life of the Carparks, which appears reasonable.
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Loan affordability
3) Our analysis suggests that servicing and repaying the loan from car parking cashflows appears affordable over the long term under the
sensitivities we have considered. However TCC should ensure that negative car parking cashflows projected in the earlier years are not
funded by increasing rates.
Net present value (NPV) and sensitivity analysis
Table 2: Sensitivity analysis
We have analysed the NPV of the revenue and expenses from the
NPV and break-even summary (sensitivity test)
Carparks and principal and interest payments on the $46m loan over
different time periods and with different sensitivities applied, as set out
$'000
NPV
Breakeven
10 years 20 years 30 years 40 years
Year
in Table 2.
Base case (Interest = 4.75%)
(11,215)
(2,452)
17,384
41,742
2049
Al these sensitivities show a positive NPV over a 40 year loan term,
Base case - 5% decrease in revenue
(13,214)
(6,432)
11,535
34,130
2052
suggesting that TCC’s approach is sustainable over the long term.
Base case - 10% decrease in revenue
(15,214) (10,413)
5,685
26,517
2054
Base case - 5% increase in expenses
(12,472)
(4,592)
14,693
38,656
2050
The NPV of cashflows is negative over the first 20 years for all
Base case - 10% increase in expenses
(13,729)
(6,732)
12,003
35,570
2052
scenarios including TCC’s base case. Under the base case the NPV
Interest = 6.0%
(13,830)
(6,982)
12,115
36,301
2052
becomes positive for the first time in 2049. It is arguable that this
Interest = 7.5%
(16,968) (12,419)
5,792
29,771
2055
implies an element of ratepayer funding in the early years of the loan,
however TCC intends to address this through capitalising these
amounts to be paid from Carpark surpluses ring-fenced for this
purpose in later years, and funding cashflow deficit through other non-
ratepayer sources (e.g. asset sales). Provided that the cashflow
shortfalls in early years are not funded directly or indirectly by
increasing rates, it is reasonable for TCC to consider the loan a “non-
ratepayer” funding source.
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