AMABHUNGANE: LANDJACKED (PART THREE)
City of Johannesburg’s R280-million real estate deal ‘crime scene’: How CoJ kept consortium in business
In Part Three of the series, we look at how the City of Johannesburg (CoJ), under the ANC’s leadership, rolled over and allowed a politically connected consortium to hijack three hectares of prime city land.
In his final months as mayor in 2019, Herman Mashaba discovered a new political punching bag: erf 575, the three hectares of land above the Sandton Gautrain station.
What annoyed Mashaba was not what was there, but what was missing: in 2008, the city had decided to sell the land to a politically-connected consortium to build a multibillion-rand development, linking the Sandton Gautrain to Nelson Mandela Square and the heart of Sandton.
But 10 years had passed without any sign of construction. Worse, the city had transferred the land to the Regiments Kgoro Consortium without being paid the R280-million purchase price.
“This is not only absurd but highly suspect,” Mashaba fumed in one of his free-wheeling press releases.
Mashaba announced he was launching a full forensic investigation, but a month later, said the city had been advised that there was no way out of the deal.
“[T]he R280-million purchase price was … payable once the development of the land was complete. However, the development never got off the ground and the city has never been paid a cent. As such, the city essentially gifted the land to [the consortium],” he fumed.
What Mashaba did not know was that while the city sat empty-handed, a few connected people — including former mayor Parks Tau’s brother-in-law and a mysterious trust with connections to the ANC — had already made millions from the deal.
- If you missed it, catch up on Part Two of amaBhungane’s investigation here.
It is tempting to connect the dots and speculate that the presence of a connected elite explains why the disastrous deal stayed on life support. But the city insists its decision to keep the deal alive was purely commercial.
Contradicting that claim, amaBhungane’s investigation shows that the city had ample opportunity to cancel what was already a bad deal, as the consortium repeatedly missed payment deadlines and reneged on promises made during the bid.
The city could have walked away. Instead, it chose to hand over what has been described as the “most important piece of undeveloped real estate in South Africa” and hoped that it would one day be paid — and that day still seems a long way off.
Where’s our money?
The 2008 sale of erf 575 came with strings attached: the land will be transferred back to the city free of charge in 50 years’ time. But the R280-million purchase price was still low, and unlike most property deals, the purchase price would not be paid on transfer.
“In order to enhance the introduction of previously disadvantaged developers into the construction sector, the payment of the purchase price is structured on a vendor-financed basis,” Regiments, the majority shareholder, would later write.
Vendor financing is when a company gives a customer a loan to buy the company’s products. In this case, the city was giving the consortium a valuable piece of land, which it would leverage to raise funds, including the purchase price. The R280-million owed to the city would be secured through a mortgage bond but would rank second to mortgages registered by other lenders.
This was the part that Mashaba had found “absurd”.
Even leaving Mashaba’s gripe aside, the Regiments Kgoro Consortium failed to make good on key promises it had made during the bid.
During the evaluation of the bids, the consortium had received full marks for its willingness to pay — upfront — a facilitation fee to the Johannesburg Property Company (JPC).
A rival bidder, the Sandton Spirit Consortium, had proposed paying the fee in several tranches, which the bid evaluation committee found less appealing.
- Was the evaluation of the bids tainted by Regiments’ promise to bankroll a mining venture linked to one of the members of the bid evaluation committee? Read Part One of amaBhungane’s investigation here.
But when it came time for the Regiments Kgoro Consortium to deliver the promised R58-million fee, those assurances evaporated into thin air.
The facilitation fee was supposed to be paid in July 2009, when the agreement was signed. In August, JPC issued a letter of demand for the first R35-million. Instead, the Regiments Kgoro Consortium negotiated a one-year postponement.
But by June 2010, the consortium still did not have the money.
What we can see from internal emails is that Regiments approached various potential funders — including the Development Bank of South Africa and the Industrial Development Corporation — looking for R100-million in pre-development finance or other forms of investment, but none of them were interested.
One of the issues was that the Regiments Kgoro shareholders were not willing to provide any funding to the project, yet they had taken up all the shares, leaving no room for a bank or developer to take an equity stake in the project and share in the R1.8-billion in profit that was anticipated to flow to the shareholders.
By November 2010, the JPC told the consortium to take possession of erf 575 and pay what it owed. To show it was serious, JPC boss Helen Botes asked the city to withhold Regiments’ fees on other contracts until the full R58-million facilitation fee plus interest was paid.
The threat was enough to spook the consortium’s own shareholders.
Mxolisi Mbetse, a veteran of the public and private sectors who held an 8% stake in the consortium, wrote to Regiments voicing his “concerns” about “an increasingly uphill battle” to find someone to fund the project.
“[R]aising of the finance has now become a priority, and frankly urgent, given that we will soon start giving JPC and the City the undesirable impression that we are not in a position to develop this property, possibly resulting in it being re-tendered,” Mbetse wrote in one email.
The consortium’s lawyers were equally worried: JPC sounded like it was laying the groundwork to declare a breach and cancel the deal, they warned.
When Botes froze its fees, Regiments tried to negotiate a new deal with her boss, the city’s head of economic development Jason Ngobeni. When Botes refused to back down, Regiments turned to Geoff Makhubo for help.
In late 2010, Makhubo was the treasurer of the ANC’s Greater Johannesburg region. He also had a long-standing, compromising relationship with Regiments: in 2005, he had helped Regiments to secure the lucrative sinking fund contract from the city, and had received a 10% cut ever since.
It was these funds that Botes had now frozen.
“[T]he withholding of these funds is unlawful and needs to be released forthwith,” Regiments wrote in a “cheat sheet”, saved as “Geoff Makhubo briefing.docx” and described in internal Regiments emails as “the one pager that we gave to Geoff”.
Makhubo, who passed away earlier this year, previously denied that he had received these instructions or acted on them.
But by the end of 2010, the city had agreed to unfreeze most of the funds, and had offered the consortium generous new payment terms: the consortium would no longer be required to pay the R58-million facilitation fee upfront. Instead, Kgoro would start paying R5-million a month from May 2011, until the debt and added interest was paid.
Even today, after more than a decade has been wasted and the city is still defending the deal.
“We were bullish in terms of the negotiation and pressure we put on Regiments … but we had to keep our eye on the bigger development,” Botes told us in a recent written response.
“Like most of the development deals concluded by JPC, negotiations around this deal … would require a lot of haggling between the parties and a lot of pushback between the parties to negotiate and renegotiate until the development is concluded.”
This, she said, was “consistent” with how JPC deals with any developers.
“Our main goal is to ensure that development of the site happens… [W]e will not cancel a deal because of the delays in the payment of the facilitation fee,” she told us.
The city echoed these sentiments: “We thought it best to take that approach to amicably resolve the payment issue,” spokesperson Nthatisi Modingoane told us via email.
But the consortium’s 2008 promise, to pay R58-million as soon as the deal was signed, had been a key reason it had won the bid.
A consultant who had been asked to review the bids in 2008 had concluded that the Regiments Kgoro Consortium’s offer “brings significantly more certainty to the City (for both the [purchase price] and the facilitation fee to JPC)” and that “given the City’s liquidity and funding constraints”, this presented the best offer.
But by 2011, the city had three years’ experience with the recalcitrant consortium, and knew that there was a widening gap between what was promised and what was delivered.
In May 2011, the consortium — as per the new agreement — had started making payments of R5-million a month towards the outstanding facilitation fee.
But in October 2011, Regiments informed JPC that it was reducing the payments to R1-million a month.
Privately, the consortium’s lawyers warned that the decision to reduce the monthly payments constituted a breach and JPC could cancel the entire Kgoro deal at any moment.
JPC protested but never cancelled the deal.
The game of chicken
By 2012, the consortium’s payments to JPC had slowed to a trickle. With interest, the facilitation fee had grown to more than R90-million, and only half had been paid.
Reluctantly, JPC accepted the R1-million a month on the promise that the outstanding balance would be paid when erf 575 was transferred to the consortium.
But in a June 2012 meeting, Regiments director Niven Pillay made it clear that this would not happen: “[T]he consortium is made up of BEE players and … it was always understood that we would borrow money against the land… [T]he reality is, if we have to pay the facilitation fee in full on transfer, we will not be able to get Phase 1 of the development out of the ground,” he told JPC officials, according to minutes of the meeting.
It is worth taking a step back here: the Regiments Kgoro Consortium had promised the city that it would have no problem paying JPC’s R58-million facilitation fee as soon as the deal was signed. That was in 2008 and the consortium had, in part, won the tender based on that promise.
After four years and many promises this was the new reality: the consortium could only pay JPC’s facilitation fee if it used erf 575 – “arguably the most important single piece of undeveloped real estate in South Africa” — as collateral.
The last concession
By 2013, Regiments had finally found a funder.
Vantage Capital, a Johannesburg-based lender, had agreed to loan R150-million to the consortium. Although the terms of the Vantage loan were considered “nasty”, it would finally give the Regiments Kgoro Consortium the pre-development finance it needed to kickstart the development of erf 575.
Vantage would only grant the loan once erf 575 had been transferred to the consortium. But the money would not be used to pay for the land.
Instead, almost R50-million would go to Regiments to repay loans it extended to the consortium at a whopping 30% interest rate. The rest would be spent on marketing, legal fees and kitting out the street-level shops surrounding the Sandton Gautrain.
The consortium would continue drip-feeding JPC R1-million a month, but this meant it would take another three years to pay the facilitation fee in full.
Meanwhile, the agreement the city signed in 2009 meant that it would only be paid the R280-million purchase price once the sectional title scheme was registered.
The purchase price would attract interest of 10% per year, but, crucially, interest only started being charged from the date of transfer, which had now been delayed by four years.
According to JPC’s legal adviser, the delay in transferring the property was costing the city R2.5-million a month in lost interest. If 10% had been charged from day one the purchase payment would have risen to R450-million by 2013, meaning the city had already lost roughly R170-million on the deal.
Today the city is eager to blame itself as much as the consortium: “There were many delays in the transaction. Those delays could not be placed squarely at the door of the [consortium] … Both parties committed acts, which delayed the transactions,” Botes told us.
But the city should have walked away. The deal was a bad one and by now there was ample evidence that the Regiments Kgoro Consortium could not be relied on to meet its financial commitments.
Instead, the city agreed to give the consortium yet another chance: on 13 June 2013, erf 575 was officially transferred to Cedar Park Properties 39, the consortium’s special-purpose vehicle.
It had taken four years just to transfer the land.
What the city did not realise is that this is as far as the development would go. For the next eight years, erf 575 would stand empty, waiting for construction equipment that would never come.
The story of Regiments’ fall is a familiar one by now.
By 2015, Regiments had become one of the most successful financial services firms in the public sector, thanks largely to consulting contracts alongside McKinsey. But the contracts required Regiments to pay up to 60% of its income to front companies controlled by the Guptas.
This financial squeeze led to a falling out between the partners; Gupta acolyte Eric Wood left Regiments and took the lucrative consulting contracts with him. Without the Guptas’ Midas touch, the firm’s fortunes faltered. Then, as the extent of State Capture was exposed, Regiments was faced with a series of lawsuits. In the process, its servers were seized and assets frozen.
As the authorities closed in, so too did Vantage Capital.
In 2018, Vantage applied to the courts to put Cedar Park Properties 39 into liquidation over its failure to repay the R150-million loan granted to the consortium that, with interest, had grown to more than R300-million.
In a last-minute bid to keep its deal alive, Regiments presented a R1.25-billion offer from property developer Michael Georgiou. But the offer arrived after the deadline and the liquidation was granted.
The city’s choices
Currently, Cedar Parks is still in liquidation. The liquidator appointed to dispose of Cedar Parks’ only asset — erf 575 and its development rights — has publicly estimated it is worth R1.5-billion.
If erf 575 is sold, the land can finally be developed and the city should finally get paid the purchase price — with interest currently more than R600-million. But the liquidation could take years, leaving erf 575 trapped in limbo.
The city remains bullish: “Our main goal is to ensure that development of the site happens,” Modingoane told us, adding: “All commercial developments take more than 10 years to get off the ground.”
We asked the city about the fate of the forensic investigation instituted under Mashaba, but it failed to provide any response.
Recently, it was reported that the city filed a claim against Regiments, in a bid to claw back fees from the firm’s management of the sinking fund — demonstrating, perhaps, that Regiments’ reign in the city is over.
But Regiments spent years cultivating officials in the city and in the ANC. When it comes to the City of Johannesburg, Regiments literally has the receipts. DM