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Case Study: Pukeroa Oruawhata Trust

Background

Pukeroa Oruawhata Trust (POT) was originally established in 1981 under section 438 of the Māori Affairs Act 1953. POT is currently established as an Ahu Whenua Trust under section 215 of Te Ture Whenua Māori Act 1993. POT was formed to administer the urban land of Ngāti Whakaue, an iwi of Te Arawa occupying land around the Southern shores of Lake Rotorua.

The principal role of POT is to look after the traditional lands of Ngāti Whakaue. In 1981 Ngāti Whakaue lands and associated leases were released from the control of the Māori Trustee and vested in POT as the Court appointed Trustee on behalf of the original owners. The descendants of the original owners of those lands are now the beneficiary shareholders in POT. In 2004 POT comprised just over 997 shares with 4,342 registered owners.

An issue for POT is keeping track of all the beneficial owners. In 2004 only 44.3% of registered owners had a known address with POT. Malcolm Short, Chairman of the Trust, says it has definitely improved. He can remember when the Trust first started out it was a chore to round up enough whānau to make the AGM quorum. Now he says there is a high attendance rate at meetings.

The Māori Land Court has jurisdiction over POT's activities and is responsible for approving the Trust Order, which established POT. While this jurisdiction has some limitations on POT's commercial aspirations, the current structure of POT has been a key contributor to its success. The current structure has POT as the sole shareholder in four separate companies:

• Pukeroa Oruawhata Holdings Ltd ("POHL");
• Pukeroa Lakefront Holding Ltd ("PLHL");
• Pukeroa Properties Ltd (No.1) ("PPL1"); and
• Pukeroa Properties Ltd (No.2) ("PPL2").

Structure Diagram

Business Environment

POT is principally a property developer, manager, leaser and landlord. Originally POT only held a small number of properties, transferred from the Māori Trustee in 1981. From 1981 to 1992, POT's assets comprised 55 commercial and residential leasehold properties. During this time POT had a debt to the Māori Trustee for development work and interest rates were as high as 21%. However, POT managed the properties and generated enough income to upgrade and build new buildings on vacant sections, becoming landlord as well as owner. Today POT's net assets are valued at $41.5 million. This figure includes the shares held in POHL and PLHL. In 2004 beneficial owners were paid a dividend of $100 per share.

POHL is the principal corporate subsidiary established to take advantage of the commercial opportunities available to POT. Accordingly, it is POT's largest asset. PLHL, PPL1 and PPL2 were established for specific projects. They have been used to receive properties that have been returned to Ngāti Whakaue namely the Queen Elizabeth Hospital and a former Telecom depot and workshop.

The principal property of POHL is a large retail complex called Rotorua Central. This was developed on the former Rotorua Railway Reserve, transferred back to Ngāti Whakaue and vested in the subsidiary in 1993. The land was transferred with no current leases operating except a few ground leases, with no immediate income, and a rates debt of $400,000. To pay the rates debt, which escalated to $800,000, POT negotiated the sale of a small strip of the land to the Rotorua District Council for beautification purposes. The rest of the land was developed as one large section to avoid the costs and restrictions of subdivision. By 1996, The Warehouse, Burger King, Shell Petrol Station, Sizzler Restaurant and other projects were completed.

It is understood that Rotorua Central is one of the largest single-site retail shopping complexes in New Zealand. It has the highest pedestrian count in Rotorua and is clearly the preferred first choice for new retail development. All profits from the development to date have been reinvested to give POHL greater equity and reduce exposure to high interest rates. Things have not always been easy: in the late 1990's demand for retail space diminished and due to high interest rates the cost of further development was unsustainable.

The commercial property market is very competitive. At times competition has forced POT to redesign deals to retain tenants. Many of the properties held by POT were under perpetual leases with fees set well below the market rate. For 15 years POT, in conjunction with other Māori land trusts and incorporations, negotiated for the right to charge market rents on leases under the Māori Reserved Land Act 1955. POT has recently negotiated a lease at market value with a lessee who had been enjoying the land for an annual fee of £10 a year. Finally in 1996 this lease expired and a new lease was renegotiated at market value. The property now returns $45,000 annually.

Murray Patchell, POT's secretary, considers POT a passive property developer rather than an aggressive one, based on POT being only interested in developing properties which it owns and cannot sell. Murray Patchell also points out that POT prefer to develop their own backyard first, and the success of this strategy may propel the Trust to look into buying properties in other regions in the future.

Governance

POT, and its other subsidiaries all follow principles and guidelines for best practice corporate governance defined in "A Handbook for Directors, Executives and Advisors" produced by the Securities Commission. A policy on the appointment of director's to POHL is in place. The trustees of POT hold monthly Board meetings as well as numerous subcommittee meetings. Additional meetings are held to ensure that timely opinions are received from the shareholders where necessary. POT holds an annual hui which provides for consultation with the owners and also keeps them informed through three monthly information newsletters.

The directors of POHL are not required to be involved with the day-to-day management of the company's business, but are required to assist with monitoring the company operations, decision-making and analysing or approving all major transactions. Investment and other issues relevant to the subsidiaries are reported to the meetings of the Trust Board monthly by a project team.

When looking at development opportunities POHL markets the property and requests that potential lessees register their interest. Once these have been received, POHL looks at each potential lessee and investigates what the lessee's requirements may be. The Board makes a decision after looking at a financial feasibility report in the context of the lessee's requirements. Negotiations with a potential lessees are external, usually with the retail consultants coming back to the Board with the detail and the Board approving the final terms of the lease.

Conflicts of interest are not a huge issue for the Board and the actual shareholders tend to stand back from the business. If there are any potential conflicts these are declared in the minutes and any payments are fully disclosed in the annual accounts.

The Board does not currently undergo performance reviews but this is a matter that is currently being discussed and something that POT intends to formalise in the near future. With respect to performance, the financial results achieved speak for themselves.

POT and POHL have given thought to succession planning. It is recognised that appointments to POT are administered within the jurisdiction of the Māori Land Court. POHL has looked into associate directorships as a means of implementing succession planning now. Although a rotation system of appointments has been mooted as a possibility for inclusion within the Māori Land Court processes, this may be some time away.

POT has a number of cultural, customary and environmental objectives to meet. A joint charitable trust with the Ngāti Whakaue Tribal LandsIncorporation has been formed to manage community grants from the two organisations. Additionally the success of POT has enabled it to contribute widely to Ngāti Whakaue hapū and iwi regional development. POT's Annual Report shows that it is a benefactor of, among others, the Rotorua Lakes High School Kapa Haka group, Whakaue Marae, St Faith's Anglican Church, Te Kahui Hauora Trust and Waikite Rugby Club.

POT also performs in an environmentally considerate manner both aesthetically and practically. For example, on the larger commercial properties there are always areas of the land which are landscaped. POT also tries to recycle as much of the infrastructure that is removed once a lease has expired. An example of this is rubble extracted from POT's commercial properties that is recycled for beautifying and landscaping the side of a stream that runs through an area of land owned by Ngāti Whakaue at the entrance of Rotorua. POT plays a part in providing iwi consent for any proposed development in the city of Rotorua. It also plays a role on behalf of Ngāti Whakaue in ensuring that cultural conditions are met when there are any development requests in this area.

Strategic Thinking

POT undertakes strategic planning and formalises this in strategic plans and annual business plans. The 2002 strategic plan of POT and POHL sets out the vision, mission, principles, objectives and strategies of the entity. All plans created are reviewed and updated annually in respect to the progress the entity has made. The principal strategy of POT is risk isolation, which in effect is keeping the risk associated with its commercial endeavours away from the Ngāti Whakaue lands. Structures are implemented to meet this strategic requirement.

The vision of POT is to enhance the status of the entity and the descendants of Ngāti Whakaue iwi. In doing so its mission is to manage and enhance the land and assets it holds for the advantage of all the beneficial owners. POT does not sell its land. An example of POT's vision and mission in practice is the mall development. The purpose of this was to grow and develop the land asset. The short-term goal was to generate enough revenue to build on the site and the long-term goal was to develop an asset that can deliver a benefit for the shareholders with the key objective of holding 100% ownership of all land and buildings. A consequence of this policy is that an extensive dividend is not paid out to shareholders. However, they do benefit through the development's capital growth.

The principles guiding the organisation are the welfare of the beneficial owners, recognition of their tribal ownership and Ngāti Whakaue rangātiratanga, the full utilisation of every resource available, protection of the commercial and ecological environment and good old fashioned honesty, integrity, teamwork, skill, expertise and acumen.

Risk Management

The current structure of POT reflects its principal strategy of risk isolation. For example, the Māori Land Court affirmed the establishment of POHL for the purpose of taking full advantage of commercial opportunities. The liabilities and risks of POT, incurred through the commercial activities of POHL, are isolated from Ngāti Whakaue through the limited liability of the corporate subsidiary. POT undertakes a financial feasibility report before making lease decisions. The minimum requirement is that the property must return a 12% annual yield. It is important for POT to keep up-to-date on rating liabilities, including rates on currently undeveloped land.

Insurance policies are prepared and renewed by independent brokers in order to have competitively priced polices. POT has a number of health and safety policies which meet the legal requirements. Careful trusteeship and compliance with accepted principles of corporate governance, policies that focus on increasing POT's capital growth, isolating risks to traditional Ngāti Whakaue land, reducing unnecessary expenses and making timely investments, have contributed to the risk management and success of POT.

Operations

POT has no direct employees other than the Chairman's Personal Assistant, so it engages independent consultants and advisors on all matters. This keeps the organisation "lean and mean", increases efficiency, reduces overheads and avoids the difficulties and obligations associated with employee/employer relations.

Property managers are contracted for the day-to-day lease business, accountants deal with all the financial requirements, and external consultants are brought in to identify the opportunities new projects present. All legal, retail, architectural, survey, engineering, resource consent and construction advice is contracted out.

Murray Patchell, Secretary to POT also provides a quasi CEO/financial advisory role. Murray is the main link between management and governance. He facilitates contracting the right people to action requests made by POT or POHL. The bank is a key relationship for the Trust to maintain. It is the Trust's policy to keep the bank informed on all major developments.

The Joint Venture

There have been a number of opportunities for POT to enter into a joint venture but to date none have been initiated. In the Trust's experience it has been other organisations initiating opportunities, which have involved an agreement to utilise the potential partner's skills and expertise for access to land in the trusteeship of POT.

One such project was a casino development, which provided an opportunity to benefit from the Rotorua tourist market. The potential partners were Native North American interests who had extensive experience in casino management. POT came into contact with the Native American Indians through an indigenous partnership programme.

The project was investigated over a three year period, with POT spending $200,000 consulting with the people of Ngāti Whakaue and Rotorua. POT had reported back to its owners frequently and had 249 votes for the project and one against.

The whole project was brought to a halt by a government moratorium which introduced new gambling laws preventing any further casino licenses from being granted. Despite the moratorium three casino developments were allowed to go ahead in Queenstown, Hamilton and Dunedin.

POT was aware through an external analysis, including an investigation into the political risks of the project, of the possibility of new gambling laws being imposed. Despite this awareness, POT could not effectively insulate the project against the risk of the moratorium. If POT could have done anything better in respect to this project it would change the project process it implemented – applying for the casino licence first and then consulting with the community.

If POT were to enter any joint venture it would do so through POHL. POT is currently in the process of due diligence with another potential joint venture partner, until this process has been completed both parties are bound by a confidentiality agreement. Again, the Trust was approached because of the land it had to offer with the partner's offering their intellectual property expertise and management skills to the project.

Financial Summary - Pukeroa Oruawhata Trust