ADLS Council Update: Chancery Chambers

As outlined in the President’s Report, ADLS is again considering the question of ownership of Chancery Chambers.

The Council recognises that Chancery Chambers is a beautiful heritage building that, despite being owned for only 30 years of ADLS’ 141 year history, has endeared itself to the hearts of some ADLS members, and for some is an iconic symbol of the organisation.

While this emotional connection is felt by the Council too, the Council is tasked with governance and what is best for the organisation, both for the period of its tenure and into the future, and must ensure that it is acting in the most prudent and fiscally responsible way.

When this matter was raised with members in 2018, the Council at the time outlined the reasons behind the recommendation to sell the building. To summarise and recap these were:

Financial

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The financial implications of continued ownership. The requirements of an old, heritage building mean that there will need to be considerable investment in the building on an ongoing basis. While planning is key to managing this, the age of the building means that unforeseen issues requiring remediation continually arise, and are often financially significant, particularly for an organisation with the financial resources of ADLS. Past experience has shown that despite rigorous forecasting processes, the cost of building maintenance and repairs invariably exceeds that budgeted.

Š Increased building costs may result in limited funds being available elsewhere, potentially leading to an erosion of our core services and a reduction or cessation in investment in market leading innovations for the advancement of the profession. ADLS wants to continue to thrive and grow and be able to invest in innovations of the type it has delivered in recent years – CPD live streaming and On Demand products, and WebForms and Digital Signing.

None of these reasons have changed, however, more information has since arisen which again brings into question the value and benefits of ownership.

This report is intended to provide members with summary information on the new information and the financial implications of retaining ownership of Chancery Chambers into the medium and long term.

Earthquake Strengthening

A seismic report commissioned by the ADLS Council in the later months of 2019 indicates that Chancery Chambers is rated as 18% of New Building Standard (NBS). The structural engineers’ report makes clear that there is no immediate safety risk to occupants. ADLS will get this engineering report peer reviewed, due to the importance of this issue and consistent with best practise in this area. The Building Act gives ADLS, or any subsequent owner of Chancery Chambers, up to 35 years to undertake the necessary strengthening work.

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Concentration of financial risk in one asset class.

Services to Members

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The building largely benefits Auckland members. When the building was purchased the organisation’s remit was members in the greater Auckland and Northern regions; it now has a national focus.

To date engineers have been reluctant to provide a cost estimate in advance of work as their experience when working on old buildings is that the requirement for further work is invariably discovered during the building process, significantly increasing the costs of the initial quote.

Scale of Planned Building Maintenance and Repair Works

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The opportunity cost of ownership – a focus on activities relating to the building to the detriment of other more added value activities to benefit members and the profession.

After a process of working through building maintenance and repair requirements, Council agreed that building works in the order of $2.4 million would take place in 2020. In addition, ADLS has recently discovered a new issue that may be found in other buildings of similar age and construction, known as concrete carbonation. This is currently being investigated to establish the extent of the issue and potential financial impact. Estimates, without a full engineering assessment being completed, indicate that the remediation of this issue would be at least $4m. Detailed financial analysis, verified independently by Deloitte, shows that the costs of the 2020 maintenance work in addition to the cost of remediation of the carbonation issue (based on the initial conservative estimate) is beyond the financial resources of the organisation. Any earthquake strengthening work required would also be an additional cost.

ADLS is waiting until all significant building issues are further investigated before commencing with the 2020 planned maintenance works.

Work on the remedial issues is likely to be significant in scale and disruptive in nature, and therefore would likely require the building to be vacated for a period of time. If this was the case, tenants – including ADLS – may have to find temporary alternative accommodation. This would add further cost and risks to this process.

The Insurance Position

The practice of ADLS has been to fully insure Chancery Chambers for replacement value.

As a direct result of the seismic report, however, ADLS has not been able to achieve replacement insurance cover going forward. Due to the seismic rating being below 20%, indemnity cover of $10.35 million was the only level of insurance able to be achieved for the building as a whole. There is indemnity only cover both in the event of an incident affecting the whole building, or where damage occurs to only a portion of the building. This means that there is only partial replacement cover for the building and from now on insurance proceeds alone will not cover the full costs of building repair.

Council is disappointed that this is the best cover that could be achieved, but that is the reality of the situation ADLS (and any other organisation with a building under 20% of NBS) finds itself in the context of the current challenging domestic and international insurance market.

Council’s Assessment of the Overall Situation

The issue of continued ownership of the Chancery Chambers building is one that three successive Councils have been discussing at length, and grappling with, since 2016. Indeed, this was noted in the President’s Report in the Annual Report for the year ending September 2016.

This Council, like the two before it, believes ADLS faces significant risks in retaining ownership of Chancery Chambers into the medium term. To summarise, the key risks are:

1. With significant construction works to be undertaken, including carbonation remediation and earthquake strengthening works, ADLS will be under greater financial pressure than in previous years and this will require us to consider initiatives on both the cost and revenue fronts to manage and subsequently reduce debt over time;

2. Strongly negative cashflow implications if it is determined that Chancery Chambers will need to be vacated for a period (estimated to likely be greater than two years for works of this scale) once the building work gets underway. If the building needed to be closed for longer than this time, that would create an additional financial burden;

3. A challenging insurance position, with the move from full replacement to indemnity cover placing ADLS at greater risk in the event of a major incident, such as fire;

4. While any potential closure of the building would only be temporary, the risk of losing tenants longer term due to the disruption and uncertainty cannot be ruled out;

5. The opportunity cost of significant Council and management time needing to be spent on managing Chancery Chambers issues may result in less than optimal focus on other member related matters, and reduce or halt the investment in market leading innovations and thought leadership that have characterised ADLS’ recent history.

Given a combination of the recently discovered building issues and the consequent move to indemnity rather than replacement insurance noted above, the Council considers achieving bank loans of the scale required to fund potential works would be a challenge. Further, Council does not consider it to be in the organisation’s interests to take on a large level of debt.

Chancery Chambers is a magnificent character building in a great location. It has been a great asset for ADLS since its purchase in 1989. There is no doubt that the building continues to have enormous potential, but as we begin a new decade, there is a real question as to whether ADLS is the right owner of Chancery Chambers for the medium and long term, or whether it would be more appropriately owned by an organisation better equipped to undertake the necessary work to maintain Chancery Chambers for the future.

Next Steps

We will be consulting with members on this issue in the coming months, and are keen to hear your views.