The brief for the review under the heading 'Property Management' was to focus on:

• The rationale for continuing ownership of property by the Police and the potential for selling property and leasing.

• The location of Police premises relative to public safety risk and the scope for swapping prime sites for alternative locations. The potential financial gains from such an approach will be assessed.

Prior to the review commencing, we advised the Review Team that in order to meet the key requirement to identify opportunities for achieving efficiency savings as early as possible in the 1998/99 financial year without compromising front-line capabilities, we saw the review focusing on:

• capex programme;
• surplus property, both freehold and leasehold;
• capital release opportunities including sale and leaseback;
• resource reconfiguration; and
• opportunities for reducing property operating costs.

As the review progressed it became increasingly apparent that the brief as initially established was premature given a lack of information and reporting systems, no planned property strategy based on a firm understanding of the Police property needs and a decentralised property process with little in the way of performance or accountability measurement. It was our expressed view that the review document should focus on some of these issues rather than the specifics of property disposal overall and highlight some of the areas where there are obvious risks. The original review objectives still stand, but rather the review came from a different direction and has identified issues to be addressed quite specifically post review.

It is also very obvious that a number of projects have been initiated, reports obtained and much valuable information gathered covering many of the matters now traversed but little action has followed. Much of this work is of recent origin and we have not attempted to replicate it.

New Zealand Police own a total of 599 freehold properties with a book value of $312,600,000. The bulk of this property is comprised in 14 resource facilities, 2 regional headquarters, 13 district headquarters and 22 area headquarters, having a combined value of $206,000,000. A total of 250 police stations and patrol bases have a book value of $77,000,000. The balance of the owned portfolio comprises housing stock of which "hard to fill" and "market rental" houses total 184 having a book value of approximately $15,300,000.

In addition to the freehold owned portfolio, New Zealand Police lease a total of 166 other property facilities including 26 resource facilities, the Police National Headquarters, 6 regional headquarters, 10 district headquarters and 3 area headquarters. A total of 120 Police stations or operating bases are also leased. Total net rent (before property related operating expenses) is reported as $8,556,500 per annum.

The three most significant leases in terms of annual rental are Transport House in Kilmour Street, Christchurch, Police National Headquarters, Molesworth Street, Wellington and Transport House, Cuba Street, Wellington which have a combined net rental in excess of $3,325,000 with a proportionate share of building operating expenses payable in addition.

The lease for Transport House, Kilmour Street, Christchurch expires in September 1998. It is understood that Police intend to "walk away" from their lease leaving some residual make good requirements.

The main Molesworth Street, Wellington lease expires in the year 2000 along with that for Transport House, Wellington. The lease of one floor of Police National Headquarters extends to 2001. These lease expiries offer significant opportunity for rationalisation and cost reduction.

There are at least 16 other lease commitments with an annual base rental before property operating expenses exceeding $100,000.

The National Property Office located within Police National Headquarters reports to the Finance and Asset Manager. The position of National Property Manager is currently vacant with assistance being provided on an as required basis by a property consultant.

Whilst National Property Office is intended to have a controlling role in capital projects having a value in excess of $2,000,000, in reality the property functions have been devolved to regional level with National Property Office in practice having little more than an advisory role.

Regional control of property is to a large extent autonomous with 'ownership' of property assets vesting in the regional command.

As a result of the regional management structure there is no standard property management system or record that would facilitate rationale, consistent and nationally directed property decisions. In turn, this leads to a lack of performance measurement and benchmarking for property assets with no consistency of asset or service procurement.

There is no strategic plan for property. Property cannot be aligned with operations in a co-ordinated sense at a national level.

There are documented instances where property procurement processes and lack of adequate capital works evaluation have led to over capitalisation and poorly executed projects which reflect a short term needs assessment not tied into other Police initiatives such as 'Policing 2000' nor reflecting other initiatives and changes in policing such as the impact of INCIS.

Very little opportunity appears to have been taken to achieve global (national) efficiencies. National Property Office has no service level agreements with regions.

The lack of an adequate property management and information system was highlighted by the difficulties in obtaining co-ordinated property information for the purposes of this review.

Previous attempts to bring property records and property performance data together in a property management system have been frustrated by seeking to produce a fully integrated management information and financial accounting system for property. Currently, records are held at regional level in different formats and with no ability for management to take a view of performance of property assets and utilisation.

A User Guide for capital management was commissioned but to the extent that it has relevance to property, it is of little assistance given the absence of a strategic property plan that recognises and takes as its focus the needs of policing into the future. Much current property initiative seems to be driven by a short term needs assessment, not reflecting the changing face of policing and allowing for flexibility for those changes to be accommodated.

Outside of "tied" or station houses there is a large proportion of the housing stock designated "hard to fill" or "market rent". There are reported anomalies in the allocation of "hard to fill" houses where one officer in a location may occupy under this discounted ($50 per week) arrangement whilst a number of others in the same location do not. Housing provision is not an appropriate format with which to deal with relative remuneration if that is the intention in such circumstances. It is however accepted that houses in many locations are necessary to ensure staffing in those locations. Provision of Police housing is not based on a market rental charge regime.

Much of the housing stock is reported to be in poor to average condition.

Opus Consultants conducted a survey and have reported deferred maintenance on stations alone of $2,400,000.

Little is being spent on property maintenance given other priorities for capital funding (information and technology, etc.) and with expenditure earmarked for maintenance being diverted for operational requirements or maintenance expenditure simply under allocated in the first instance.

The current depreciation regime of a flat 1% for structure and 5% for fitout is allowing for depreciation funding at a rate of even less than that which would apply at Inland Revenue Department published depreciation rates.

It is imperative there be a national structure for provision of Police property services. Ownership of all property should vest in a Property Service Organisation reporting to the Finance & Asset Manager.

This organisation which would be the Police "landlord", providing property occupation and facilities management by way of service agreements with District Managers. A "capital charge" regime will apply to ensure that any notion of Police property being a "free good" is negated.

The Property Service Organisation will have as its initial priority the establishment of a national Police property strategy appropriate to the new organisation and directions of policing to be an integral part of the Police business plan. That strategy will be developed in consultation with the District Managers and signed off by the Commissioner as the basis for property decision making.

An evaluative framework for considering viability and priority of capital works must be developed and implemented to ensure that existing examples of monumental, extravagant and over specified projects are not repeated and project delivery is aligned with operational requirements in a rigorous needs assessment regime. The present Draft Capital Management User Guide does not meet the needs of Police in respect to property.

A property management and information system will be implemented that enables reporting of performance against agreed operating protocols including key performance indicators and appropriate benchmarks.

It is envisaged that the property service organisation will be headed by a Manager ideally possessing strong strategic property skills and being capable of producing and implementing property policy that aligns property outcomes with policing needs based on operational resources and within the overall property strategy. This position will have a strong focus on improving property performance and utilisation over time.

It is further envisaged that three additional Property Managers, each providing property services to an agreed portfolio of districts would be appointed. Whilst they would probably be located away from Police National Headquarters and within the geographic boundaries of their portfolio of districts, they would report to the Manager of the Property Service Organisation.

It may be appropriate for a further transitional position to be created, or contract let, to handle the disposal of surplus property assets not allocated under the process described below and to deal with the disposal of those parts of the existing Police portfolio determined to be no longer required to be held in Police ownership.

Police property assets will be initially allocated in terms of occupation and "capital charge" responsibility on a district by district basis. District Managers should have a transition period to determine those assets no longer required for district operations and these would be held in the Property Service Organisation for disposal by the Transitional Property Manager. Property allocation and occupation would reflect the intent of the adopted property strategy.

Disposal of a significant proportion of the "hard to fill" and "market rental" housing will generate significant funds. It is recommended that a review of the balance to be retained property be carried out from a maintenance perspective and all Police property stock brought up to at least a satisfactory condition including implementation of deferred maintenance recommendations made by Opus Consultants. Funding for the initial deferred maintenance and immediate maintenance programme should fall outside of normal operational budgets.

The Property Service Organisation would enter into service agreements with each district covering:

• occupation;
• maintenance;
• cleaning;
• compliance; and
• energy purchase.

The Property Service Organisation would be funded against an agreed annual maintenance programme and for planned preventative maintenance.

Capex funding would be made available only against rigorous needs assessment, viability and priority testing.

The Property Service Organisation should be expected to test traditional concepts of Police property and not simply adopting "a building on last time" approach.

Whilst some work has already been undertaken in this area the current depreciation regime should be critically re-examined to ensure that depreciation funding reflects appropriate levels having regard to actual property component life spans.

The Property Service Organisation will be responsible for maintaining the Property Management and information system and providing performance measurement reports to District Managers and to the Commission in respect of individual property, by district and nationally as well as developing benchmarks to identify performance improvement opportunities as the portfolio evolves under the new Police structure. Under performing property asset reporting will feature in needs assessment for new capex projects.

The review is required to consider the rationale for continuing Police ownership and the prospects for capital release from sale of property assets

Approximately 25% of Police premises are already leased with a relatively small amount of space apparently under utilised. However it is a general expectation that benchmarking of space utilisation may well lead to a view of excessive space to personnel ratios in some locations.

The general concepts of leasing versus ownership have been canvassed in prior reports to Police. Whilst flexibility can be built into leases, inherent in ownership is the right to modify, amend, extend or replace as needs dictate (subject to governing authority consent). Lack of control of ultimate ownership could represent a problem for Police.

If capital release is a primary consideration, non specialised property leased back to Police would represent saleable investments.

The financial benefits of sale and leaseback can be viewed in the short term as the difference between the capital charge plus depreciation and the initial investment yield sought by the intended owner.

Short term cash flow gains achieved from sale and leaseback can be eroded over time by the rent review process.

Individual sale and leaseback propositions need to be examined on a discounted cash flow basis over a medium term horizon reflecting the likely cash realisation against book value in a market-driven rental / yield environment. An initial analysis of the Victoria Street Wellington property for example indicates a likely probability of a write down in value on sale. Nevertheless a sale would represent a significant release of capital (approximately $20 million).

The ability to generate higher returns on released capital does not reflect the reality of Central Government finance as it may for the private sector.

Whilst to external landlords the Crown would remain lessee, the Property Service Organisation would become the "Police lessor" under all leases for Police occupied property and would be responsible for lease administration tied back to service agreements with districts.

It is anticipated that many of the facilities management functions of the Property Service Organisation could be outsourced. The scope of such outsourced contracts will need careful consideration to ensure manageability, service levels and effectiveness whilst ensuring greatest advantage is taken of Police purchasing power on a national basis.

Whilst undertaking the review a number of issues stood out as material property matters requiring attention or which offer an opportunity to rationalise at least part of the portfolio. This is by no means an exhaustive list of such matters.

Under the revised structure it is likely that Police National Headquarters could be housed in an area of approximately 3,000 square metres with a current total occupancy cost (i.e. rent and operating expenses) of $750,000 per annum for accommodation of at the very least the same quality as the present accommodation which has a total occupancy cost of $2,400,000.

Renewal of the existing lease which expires on 8 April 2000 would result in a considerable surplus of accommodation and an occupation cost in today's terms of around $1,600,000 given the "soft ratchet" rental provision on renewal.

The building requires considerable upgrading of services and it is our understanding that the owner is reluctant to undertake any significant capital expenditure. The ownership structure of the building along with securitisation of the income stream leads to further difficulties associated with possible upgrading.

Imperative in relation to this lease is to establish the accommodation requirement for the new Police National Headquarters and seek out in the market place alternatives which meet that requirement within a sufficient time frame to enable a withdrawal and relocation from the Molesworth Street property (or re-negotiated lease for the same) in a timely manner.

Previous reports have dealt with possible alternatives, albeit prior to the current review and possible space downsizing which may result.

Some expenditure may be required under the make good provisions of the lease on withdrawal.

The 15th floor lease continues until 30 September 2001. This single floor lease should not represent a reason for non-withdrawal from the total building.

This head lease expires on 30 September 2000. One right of renewal for six years is available, however the rental at renewal is set at a minimum by operation of a ratchet clause which would perpetuate the current over market rental level.

Discussion should be initiated with the lessor on an immediate basis to restructure the lease arrangement in respect of only that space which Police require but to allow sufficient time for viable alternatives to be considered if this became appropriate.

184 "hard to fill" and "market rental" houses have a total book value of approximately $15,300,000. It would appear that many of the houses do not qualify as "hard to fill" and accordingly it is strongly recommended that a total review of all of this housing stock be undertaken with a view to dispose of those properties which are not genuinely required to satisfy "hard to fill" policing requirements.