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Council Report Attachment:

1. Future Melbourne Committee, Agenda Item 5.15, 8 May 2012 1

C O U N C I L R E P O R T Agenda Item 5.7

Council

602 LITTLE BOURKE STREET 29 May 2012

Committee Future Melbourne (Finance and Governance Portfolio)

Presenter Cr Shanahan

Purpose

1. The purpose of this report is to provide Council with recommendations for the future use of 602 Little Bourke Street. 602 Little Bourke Street is a Council owned building of seven levels located in the western core of the central city area. The building currently houses archives managed by Business Information Services, the Art and Heritage Collection, managed by Arts and Culture and general storage, such as Christmas decorations and corporate brochures.

Consideration at Committee

2. Following consideration at Committee, the Future Melbourne Committee endorsed the recommendation below.

Recommendation

3. That Council:

3.1 provides in-principle approval for the conversion of the building at 602 Little Bourke Street, Melbourne (building) into a mixed use creative facility;

3.2 refers $150,000 to the 2012-13 budget process to commence initial planning, permit applications and preliminary briefs for conversion of the building;

3.3 investigates the viability of a multi-storied development on the top of the current structure; and

3.4 requests management provide a report to Council by March 2013.

Attachments: 1. Supporting Attachment 2. Summary Report 3. Business Feasibility of the Preferred Option - Final Report

F U T U R E M E L B O U R N E ( F I N A N C E A N D G O V E R N A N C E ) C O M M I T T E E R E P O R T

Agenda Item 5.15

602 LITTLE BOURKE STREET 8 May 2012

Presenter: Jane Crawley, Manager Arts and Culture Purpose and background

1. The purpose of this report is to provide Council with recommendations for the future use of 602 Little Bourke Street. 602 Little Bourke Street is a Council owned building of seven levels located in the western core of the central city area. The building currently houses archives managed by Business Information Services (BIS), the Art and Heritage Collection, managed by Arts and Culture and general storage, such as Christmas decorations and corporate brochures.

2. At its 24 June 2008 meeting, Council resolved “in principle support for the utilisation of 602 Little Bourke Street as a Housing the Arts project and request management to complete a feasibility study to look at its alternate uses, including its conversion for use as arts studios, performing arts and arts exhibition space, and commercial space appropriate to the above.”

3. Feasibility reports were conducted by SGS Economics (SGS) in 2009 and again in 2010 incorporating the proposed relocation of archives and the inclusion of space for emerging digital businesses. These studies analysed options for the building and recommended, as the preferred option, its conversion to a creative space with the Art and Heritage Collection retained. In 2011, SGS conducted a business study of this preferred option, consulting officers from Property Services, BIS, Arts and Culture and Business and International. The full SGS business study is contained in Attachment 2.

Key issues

4. Property Services has reviewed Council’s storage facilities and requirements and intends to report to Council shortly. Additionally, BIS has been investigating more efficient ways to manage Council’s archives and archival storage.

5. It is therefore proposed by management that concept plans, consistent with SGS’s recommendation be prepared, including relevant permits applications and preliminary briefs, for conversion of the building.

6. The cost of 602 Little Bourke Street’s conversion is estimated at $3.4 million including all design, labour, material and real estate costs. It is proposed that these funds are sought as part of Council’s 2013-14 capital budget process.

7. The annual return from tenancies is estimated at $458,710 excluding GST at affordable rates of approximately one third of commercial rates.

Recommendation from management

8. That the Future Melbourne Committee recommends that Council:

8.1. provides in-principle approval for the conversion of the building at 602 Little Bourke Street, Melbourne (building) into a mixed use creative facility;

8.2. refers $150,000 to the 2012-13 budget process to commence initial planning, permit applications and preliminary briefs for conversion of the building; and

8.3. requests management provide a report to Council by March 2013.

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SUPPORTING ATTACHMENT

Legal

1. The Council is the registered proprietor of 602 Little Bourke Street, Melbourne. There are no direct legal implications arising from the recommendation contained in this report.

Finance

2. The refurbishment and conversion of 602 Little Bourke Street will require a capital budget of $3.4 million. It is proposed that these funds are sought as part of Council’s 2013-2014 capital budget process.

3. This report recommends Council allocates $150,000 through the 2012-13 budget process for initial planning, permits applications and project briefs. If approved the funding will be reflected in the 2012-13 budget as part of the public submission process.

Conflict of interest

4. No member of Council staff, or other person engaged under a contract, involved in advising on or preparing this report has declared a direct or indirect interest in relation to the matter of the report.

Stakeholder consultation

5. Significant external consultation has occurred in the preparation of the initial Housing the Arts report and the 2009-11 feasibility studies. This has included:

The Creative Spaces Working Group and feedback from tenants of existing Creative Spaces facilities, all of whom strongly supported the conversion of 602 Little Bourke Street;

A waiting list of over 500 artists and organisations currently registered on the Creative Spaces website who are actively seeking accommodation;

Applicants to Council’s Small Business Grants program who expressed need for flexible work accommodation in the central business district;

External providers of archival and records storage including Grace Brothers, Iron Mountain and Recall who have provided quotes and information regarding alternative storage facilities; and

Local, national and international arts organisations, property developers, government bodies and individual artists who have expressed the need for affordable accommodation for artists and for activation of areas of the city through creative industries.

Relation to Council policy

6. The proposed conversion of 602 Little Bourke Street to a mixed use creative space reflects the following Council goals and objectives:

6.1. Future Melbourne, Creative Goal 2. Vibrant, creative community

"We must work together to ensure artists can afford to live and work in the municipality, as well as access space to create and exhibit" ;

6.2. Council Plan 2009-13 Creative City “Encourage creative organisations to move to or stay within the municipality” (Objective 2.1.1) “Increase affordable floor space for artists and creative enterprises” (Objective 2.1.4); and

6.3. Arts Strategy 2010-13 “Encourage orgs & creative industries to base themselves in the CoM" (Objective 1) “Increase access to affordable work spaces for artists and creative enterprises" (Objective 4).

Attachment 1Agenda Item 5.15

Future Melbourne Committee8 May 2012

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Environmental sustainability

7. The 602 Little Bourke Street project includes a number of environmentally sustainable concepts, particularly in the refurbishment of the building using sustainable and recycled material. Within its industrial aesthetic, the building offers scope to minimise capital and recurrent costs for thermal and physical comfort by maximising the passive, low energy potential within the current form e.g. natural cross ventilation and natural light are benefits that already exist.

8. Utilisation of low embodied energy and recycled material will assist in minimising the environmental impact during construction and the life cycle of the building.

9. An active street frontage will promote a dynamic social and business interface with Little Bourke Street and will also benefit social inclusion and access throughout the building.

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602 LITTLE BOURKE STREET

SUMMARY REPORT

1. BACKGROUND

At its 24 June 2008 meeting, Council endorsed “in principle support for the utilisation of 602 Little Bourke Street as a Housing the Arts project and request management to complete a feasibility study to look at its alternate uses, including conversion for use as arts studios, performing arts and arts exhibition space, and commercial space appropriate to the above.”

SGS Economics were subsequently engaged to deliver feasibility reports.

In 2010 a report was prepared into the feasibility of utilising 602 Little Bourke Street as a multi use creative facility. This report looked at:

options for the building;

the current functions of the building;

costs and benefits associated with moving from a Business As Usual Case to each of the identified options;

conclusions on the scale of net benefit associated with implementing each of the options.

A further report was delivered in 2012 that provided a business feasibility of the preferred option.

This summary report outlines the findings of all reports.

2. THE BUILDING

602 Little Bourke Street is a Council owned building of 4,557 sqm of floor space over seven levels. It is an industrial type building currently used to house Council’s archives, the art and heritage collection, and general storage. The structure is in good condition with significant recent investment in building services and maintenance, operating lift and open-plan heating/cooling.

Current usage consists of the following:

Basement - primarily archives.

Ground floor - general storage including corporate brochures and Christmas decorations.

Floors one to three - archives including confidential material with particular storage needs.

Floors four and five - the art and heritage collection which is managed separately due to special requirements such as security and temperature control.

Rooftop - predominantly open space with an enclosed storage area.

3. CURRENT USAGE OF 602 LITTLE BOURKE STREET

3.1 Archives

The City of Melbourne currently holds approximately 10km of records in the building. This usage is at capacity and Council’s Business Information Services (BIS) have sought Council approval to move these records to an external storage provider.

Relocation of the archives will free up the basement and floors one to three of 602 Little Bourke Street.

Attachment 2Agenda Item 5.15

Future Melbourne Committee8 May 2012

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3.2 Art and Heritage Collection

The collection comprises a variety of 7000+ works of art, textiles, photographs, objects, documents, monuments, sculptures and fountains and is part of a wider collection held at the Town Hall, CH2, CH1, other Council buildings such as The Hub and the public domain.

A high proportion of the collection is required to be on display or accessed at any time. Due to conservation considerations, the need to rotate displays, and the needs of researchers, the collection is “at work” whether it is located at Council buildings or 602 Little Bourke Street.

Significant investment has been made in climate control and security along with micro storage facilities associated with research, cataloguing and access to the collection.

Consultation with Museum Victoria and Grace Brothers indicates that the uniqueness of the collection and the specialist requirements for storage are such that it may be difficult to source a comparable “green fields” facility within greater Melbourne.

Costs of an alternative store of comparable size and of relocating the art and heritage collection are estimated to total $2,195,000.

3.3 General Storage

Corporate brochures and Christmas decorations are currently stored on the ground level of 602 Little Bourke Street.

Property Services has undertaken a review of Council’s storage facilities, which are at capacity, and intend to bring a report to Council in June regarding the consolidation of Council’s storage.

4. OPTIONS

The following options were examined by SGS Economics:

Business as Usual

Selling the Building

Commercial Letting

Commercial Letting (Art and Heritage Collection retained)

Creative Complex (full refurbishment)

Creative Complex (basic refurbishment)

Creative Complex (basic refurbishment with Art and Heritage Collection retained)

4.1 Economic Evaluation

In strict financial terms the best option is sale of the building. The most recent valuation of the property (Charter Keck Cramer Nov 2011) indicates a market value in the range $6.6 - 7.55 million.

However this option entails loss of a major Council owned asset and would also entail high costs in relocating the current art and heritage collection. SGS therefore sought to evaluate whether providing a non-commercial service was justified and whether improvements to community wellbeing as a whole were delivered by the various options.

These benefits included:

Growth in population and employment in the precinct will create opportunities for business growth across a range of sectors;

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A more vibrant and productive arts sector has flow-on benefits for the creative industry sector and hence adds value to the economy through multiplier effects;

By creating a more vibrant and liveable precinct within the city there is a productivity dividend through enhanced ability to attract and retain 'knowledge workers' and the city becomes more attractive as a tourist destination;

Artists will be more efficient and productive generating higher incomes and hence ability to pay rent;

Art consumers will benefit from greater choice and quality in art on offer.

The least costly of the non-commercial options is the conversion of the building to a creative space with the art and heritage collection retained. This option is moderate in cost and generates significant benefits in employment, population and business growth along with benefit to the city as a whole.

4.2 Social Cost Benefit Analysis

SGS also sought to measure the net gain in community welfare from the non-commercial option of converting the building to a creative space.

Benefits identified include:

Creation of intellectual capital, some of which will be of commercial value;

Creation of affordable and appropriate space for artists, arts organisations and emerging businesses to avoid displacement outside of the City of Melbourne;

Employment opportunities associated with space provision;

Skills development including enhanced leadership in the local community;

Additional volunteer engagement; and

Improved business and community confidence in the local area.

SGS observed that steady occupancy of buildings in otherwise unused spaces and locations builds confidence within the business and residential community of the region in its social and economic vitality.

602 Little Bourke Street was identified as being likely to bring an increase in activity and a renewed interest that could provide the stimulus for a broader change in business and community confidence, specifically through bringing new retail and wholesale creative services to other businesses in the area.

4.3 Environmental and Cultural Benefit Analysis

Benefits identified include:

Artists will have a better quality and healthier work environment;

Artists will enjoy an 'arts milieu' and be afforded opportunities for personal and professional development;

Art consumers will benefit from the quality of the gallery spaces;

Current and future residents of the precinct where the arts complex is located will benefit from greater vitality, more viable businesses and enhanced 'liveability';

All members of society benefit from the creation of an attractive precinct within the city;

Current and future residents will benefit from a safer, more liveable precinct and from opportunities for personal development and social interaction; and

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Greater exposure to the arts and expanded opportunities to participate benefit the wider society culturally.

5. FUTURE USAGE OF 602 LITTLE BOURKE STREET

The investigation by SGS concluded that the option which provided for basic refurbishment to allow artists and digital industry start-up businesses to lease the building along with retention of the art and heritage collection delivered superior outcomes.

Due to the quality and cultural value of the collection it is considered part of the offering of the project and its presence is wholly consistent with a re-configured 602 Little Bourke Street.

5.1 Artist Studios and Offices - Data

The Creative Spaces website currently has a waiting list of over 500 artists looking for affordable work and office space in the city. The program manages two facilities that house approximately 100 artists in 80 studios. One of the facilities, Boyd School Studios, is a temporary facility that is scheduled for demolition in the near future. Of the 23 studios currently in the building (1,090m²) only seven studios have been created in the new Boyd facility (225m²), a significant reduction in floor area.

Council also leases space to arts organisations and community agencies in its Commonwealth Bank Building (City Village occupies Levels 2 - 9). Of the 2,428.33m² leased area, only 521.55m² is leased to arts organisations. An artist-run gallery, Westspace, moved into the Level One of the building last year (360m²) bringing the total floor space for arts organisations to 981.55m².

602 Little Bourke St has the capacity to offer 2,119m² of floor space to the creative sector. This will not only accommodate all arts tenants from both Boyd temporary and City Village buildings but provide additional space to creative producers that will help activate the building and enliven the area.

602 Little Bourke St floor area m²

Total floor area over 7 levels 4,557

Refurbishment area 3,700

Leasable area 2,119

Art and Heritage collection 900

Kitchen and meeting rooms 131

Common areas, corridors & amenities 807

Open area of rooftop 600

Estimated number of artists and arts organisations capable of being housed

The leasable floor area of 2,119m² can house 142 tenants that will attract an estimated 9,000 visitors per year. These figures are based on existing studios and offices in Council-managed facilities and the number of people that they accommodate and attract. When the time comes to formally develop the facility, an ‘Expression of Interest’ process will determine the exact number of office and studios offered. The leasable floor area,

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however, is likely to remain the same. The following provides an indication of the break up of spaces:

Type of space Number of spaces

Visual arts studio 30

Art gallery 1

Digital desks 20

Café 1

Retail 8

Offices 9

Meeting rooms 3

Kitchens 4

Art and Heritage Collection 2

Total spaces 78

5.2 Public areas, retail and cafe

It is proposed that the following areas of 602 Little Bourke St be accessible to the public for the following usage:

The ground floor, basement and rooftop will provide opportunities for the general public to engage with the creative community and experience its work.

Levels 1-3 will be accessible during business hours only and the Art and Heritage Collection areas will have new viewing areas of the collection but not be accessible to the public at any time.

An art gallery in the basement will exhibit the work of local and international artists while the retail spaces on the ground level will sell the work of local Melbourne designers only. The café on the ground level will be the heart of the building that will allow artists and members of the public to share a coffee at the same table or use the free wireless internet in a casual setting.

The rooftop will serve as both a place to unwind and a place to experience an annual installation designed and constructed by a team of architects, artists and designers who will have a one year residency in the caretaker’s studio with the express purpose of designing and delivering the installation.

Partnerships with educational institutions such as RMIT, Monash and Melbourne Universities will be explored for the rooftop residency.

Preliminary conversations have already commenced on the nature of work that can be created there.

5.3 Digital Industry Start-Up Businesses

Council’s Business and International branch commissioned a feasibility study in 2008 regarding the development of an emerging enterprises centre to provide diverse, flexible and short term accommodation to support business formation, growth and expansion.

This feasibility study was in response to perceived failure in the rental/property market at the time to provide low cost, flexible work spaces for intellectual capital rich, but capital poor businesses to find cost effective spaces in the city during their start up phases.

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It was anticipated that the focus would be new digital businesses, new interstate and international small businesses relocating to Melbourne and temporary accommodation for start up businesses supported via the small business grant program.

Since the feasibility study, it appears that the market is beginning to respond to this phenomenon. In the August 2011 round of the Small Business Grants programs, two facilities catering for businesses in this space were approved indicating that this is increasingly being seen as a potentially profitable exercise.

Recent discussions with the gaming (computer) industry, sustainable industry sector and biotechnology sector have indicated that there is a need for such facilities. 602 Little Bourke Street provides an opportunity to provide short-term space for new businesses in the City of Melbourne and a “parking” area for Small Business Grants recipients while they establish their city base.

6. PROPOSED METHODOLOGY

An innovative method of design procurement is proposed to ensure the process of refurbishing the building is an integral part of its artistic program, and to strategically engage Melbourne’s diverse art and design community with the project.

Small architectural firms that have not previously had the opportunity to work with Council will be given the opportunity to design one of three floors dedicated to artist studios and offices. This will be done through a design competition overseen by the Creative Spaces Working Group.

The public works, including ground floor retail and entry spaces, basement gallery, rooftop works, building services, lift and regulatory compliance works will be coordinated by an established project architect who will also oversee the work of the three smaller architecture practices.

All parties will be held accountable to agreed timelines and budgets, with regular submissions of working design concepts reviewed jointly by the project manager and project architect to ensure budget accountability, regulatory compliance and overall project coherence.

7. COSTS

In order to keep the refurbishment costs of the building down, the architectural approach will be to work as much as possible with the qualities of the existing building and stripping the building back to its bare essentials.

7.1 Refurbishment

The estimated capital cost for the refurbishment is approximately $750/m² which is relatively low compared to other Council refurbishment projects. The capital cost for 602 Little Bourke St will total approximately $3.4million.

A significant cost of the project is the upgrade of the lift to allow disability access to the roof. This cost is conservatively estimated at $500,000. Detailed cost estimates from a quantity surveyor will be obtained as a next step should the proposal be endorsed by Council.

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7.2 Building Outgoings

Estimate of Annual costs

Service Contracts (lift, fire, air-conditioning $30,000

Water $9,000

Electricity $30,000

Cleaning $50,000

Maintenance $30,000

Insurance $2,000

Waste/recycling $15,000

Office consumables $20,000

Marketing $10,000

Emergency procedures $7,000

Real Estate Management $30,000

Total Operating Costs $233,000

7.3 Staff Costs

The Creative Spaces program will manage the facility. The table below shows that additional costs for increased hours of staff are $24,000 per annum.

Estimate of Annual costs

Building Supervisor (increase from 0.4EFT to 0.6 EFT) $12,000

Creative Spaces Administrator (increase from .08EFT to 1EFT $12,000

Total additional staff costs $24,000

8. REVENUE STREAMS

Estimates of rents are based on rates of approximately one third of commercial rates in the area. ‘Commercial’ spaces in the facility such as the café and retail spaces are based on a third of the area’s commercial rate too, in order to attract operators appropriate to and reflective of the creative culture of the building.

8.1 Commercial rents

Commercial Rent Item

$

rental/m² ex GST

Total area

# spaces

Rental per

week per unit ex GST

Rental per

annum ex GST

Rental per

annum inc GST

Ground Café $300 120 1 $300 $36,000 $39,000

Retail Spaces $250 230 8 $250 $57,500 $63,250

Total commercial

350 9 $93,000 $102,850

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8.2 Non-commercial Rents

Non Commercial Rent Item

$

rental/m² ex GST

Total area

# spaces

Rental per week per unit ex GST

Rental per annum ex GST

Rental per annum inc GST

Rooftop studio $190 50 1 $182 $9,500 $10,450

Artist studios $140 647 29 $1,742 $90,580 $99,638

Digital desks $80 125 20 $1,600 $83,200 $91,520

Gallery $200 200 1 $769 $40,000 $44,000

Arts org office $190 747 9 $2,729 $141,930 $156,123

Total non-commercial

1,769 60 $365,210 $401,731

Total revenue commercial and non-commercial rents = $504,581(inc GST)

Total operating costs including staff = $257,000

Surplus = $247,581 which will support the rooftop installation and development of new Creative Spaces projects.

9. CONCLUSION

The feasibility reports established as the preferred option, the conversion of 602 Little Bourke Street into a mixed use creative facility with the retention of the arts and heritage collection.

The feasibility business study of this preferred option provides details relating to the nature of the uses to be accommodated, both commercial and non commercial, costs, economic impact appraisal and cash flow forecasts.

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602 Little Bourke Street Business Feasibility of the Preferred Option

Melbourne City Council

Final Report

April 2012

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marsam

Text Box

Attachment 3 Agenda Item 5.15 Future Melbourne Committee 8 May 2012

This report has been prepared for:

Melbourne City Council

This report has been prepared by:

SGS Economics and Planning Pty Ltd

ACN 007 437 729

Level 5 171 Latrobe Street

MELBOURNE VIC 3000

P: + 61 3 8616 0331

F: + 61 3 8616 0332

E: [email protected]

W: www.sgsep.com.au

Offices in Brisbane, Canberra, Hobart, Melbourne and Sydney

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mailto:[email protected]

http://www.sgsep.com.au/

Table of Contents

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Executive Summary ................................ ................................ ... 1

1 Introduction................................ ................................ ....... 2

1.1 Background ................................................................................................................ 2

1.2 The Brief .................................................................................................................... 3

1.3 Report Structure ......................................................................................................... 3

2 Concept Design ................................ ................................ ... 4

2.1 Overall Approach ......................................................................................................... 4

2.2 Public Areas/ Base Building Works ................................................................................. 4

2.3 Fit-out of Individual Floors ............................................................................................ 5

2.4 Proposed methodology ................................................................................................. 9

3 Financial Analysis ................................ ............................. 10

3.1 Introduction .............................................................................................................. 10

3.2 Cost Items................................................................................................................ 10

3.3 Revenue Streams ...................................................................................................... 12

3.4 Results ..................................................................................................................... 13

3.5 Sensitivity Analysis .................................................................................................... 16

4 Economic Evaluation ................................ ......................... 17

4.1 Introduction .............................................................................................................. 17

4.2 Identified Costs ......................................................................................................... 17

4.2.1 Capital Costs ............................................................................................... 17 4.2.2 Recurrent Costs ........................................................................................... 18

4.3 Identified Benefits ..................................................................................................... 18

4.3.1 Direct Use Benefits ....................................................................................... 19

4.3.2 Indirect Use Benefits..................................................................................... 20

4.4 Techniques to Value and Monetise Benefits ................................................................... 21

4.4.1 Creation of New Jobs and Skills Development .................................................. 21

4.4.2 Additional Volunteer Engagement ................................................................... 22

4.4.3 Creation of Intellectual Capital ....................................................................... 22

4.4.4 Improved Business and Community Confidence................................................ 23 4.5 Estimated Results of the Cost Benefit Assessment ......................................................... 24

5 Conclusion ................................ ................................ ....... 26

6 Appendix ................................ ................................ ......... 27

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Table of Contents

Tables

Table 1 Estimated Costs and Benefits of the Arts Complex..................................................... 1

Table 2 Total Floorspace Allocation ..................................................................................... 5

Table 3 Building Outgoings .............................................................................................. 12

Table 4 Staff Costs ......................................................................................................... 12

Table 5 Commercial Rents ............................................................................................... 13

Table 6 Non Commercial Rents ........................................................................................ 13 Table 7 Summary Financial Analysis Results ...................................................................... 14

Table 8 Detailed Financial Analysis Results ........................................................................ 15

Table 9 Sensitivity Test of the Preferred Option .................................................................. 16

Table 10 Direct and Indirect Use Benefits of ‘Renew’ Projects ................................................ 19

Table 11 Potential Staff and Volunteers .............................................................................. 21

Table 12 Rental Estimates ................................................................................................. 24

Table 13 Estimated Costs and Benefits of the Arts Complex................................................... 25

Table 14 Detailed Breakdown of Revenues and Floorspace Allocation ...................................... 27

Figures

Figure 1 Basement and Ground Floor Space Plans ................................................................. 7

Figure 2 Level 1, 2 and 3 Floor Space Plans .......................................................................... 8

Figure 3 Level 4, 5 and Rooftop Floor Space Planss................................................................ 9

SGS Economics & Planning ©

All rights reserved; these materials are copyright. No part may be reproduced or copied in any way form or by any

means without prior permission. The proposals, ideas, concepts and methodology set out and described in this

document are and remain the property of SGS Economics & Planning and are provided to the strictest in confidence.

They may not be used or applied by the recipient or disclosed to any other person without the prior written consent of

SGS Economics & Planning.

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602 Little Bourke Street / Business Feasibility of Preferred Option

P. 1

Executive Summary

This report focuses on the preferred option of the 2010 ‘Housing the Arts’ Creative Space Feasibility

Study and provides a business feasibility study of its implementation.

For an initial investment of $3.4 million and ongoing building outgoings and staff costs of $257,000

in the first year (escalated by inflation thereafter) the project is expected to return a revenue

stream of approximately $516,200 per year (escalated by inflation). This equates to a net present

value of $1 million which is the value of the stream of net profit/loss in today's terms.

Further, Table 1 shows the results of the economic evaluation. The total discounted benefits of the

project are conservatively calculated to be $14 million with total discounted costs of $10 million.

This yields a Benefit Cost Ratio (BCR) of 1.5 and a net discounted benefit of $4.4 million. Any

project with a BCR of greater than one and with a positive net present value is considered to be

providing a positive net social and economic value to society. Thus, the preferred option for an arts

complex at 602 Little Bourke Street proves to be highly beneficial.

Table 1 Estimated Costs and Benefits of the Arts Complex

Benefits Estimate

TOTAL COSTS (Present Value @ 6%) $9,716,269

BENEFITS

Creation of Jobs and Skills Development

# of ppl working @ average wage approximate.

$237,796 p.a.

Volunteer Engagement $387,000 p.a.

Improved Business and Community Confidence $132,000 p.a.

TOTAL ANNUAL BENEFITS $756,796 p.a.

PERFORMANCE MEASURES

Net Benefit (Net Present Value @ 6%) $4,434,834

Benefit Cost Ratio 1.5

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P. 2

1 Introduction

1.1 Background

The City of Melbourne has identified an unmet need for affordable working spaces for artists, arts

organisations and creative producers. Specifically, the unmet need is for long term tenancies of

creative places which are inadequately accommodated in other venues. Longer term tenancies

have a range of benefits, including being able to attract more experienced and better known

artists, who have the potential to bring sustained re-activation to particular parts of the city.

Council has also identified the need for diverse, affordable and flexible accommodation for small

and emerging businesses working within the digital content industry. One and two person

businesses within the industry are often unable to afford costly commercial leases offered in the

CBD and often require flexible tenancy arrangements. A low-cost and flexible alternative positioned

in the CBD could bring these businesses closer to their main client base, increase their visibility to

investors and has the potential to offer a launching pad into new markets.

Accordingly, the City of Melbourne commissioned SGS Economics and Planning (SGS) to investigate

the feasibility of utilising 602 Little Bourke Street as a ‘Creative Spaces’ project including

conversion for use as arts studios, office space, retail and exhibition space. A wide range of options

were tested including commercial use and various configurations of the current uses of the

building.

SGS undertook the following key tasks:

Articulated the key roles and functions that 602 Little Bourke Street currently

performs;

Identified how these roles and functions will change and, in doing so, identified the

major costs and benefits associated with moving from the Business As Usual Case

to each of the identified options;

Drew conclusions on the scale of net benefit associated with implementing each of

the options.

The investigation concluded that the option which provided for basic refurbishment to allow artists

and digital industry start-up businesses to lease the building along with retention of the arts and

heritage collection delivered superior outcomes. Due to the quality and cultural value of the Art and

Heritage Collection it is considered part of the offering of the project and its presence is wholly

consistent with a re-configured 602 Little Bourke Street. This preferred option will be the focus of

this report.

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P. 3

1.2 The Brief

This report focuses on the preferred option of the 2010 ‘Housing the Arts’ Creative Space Feasibility

Study and provides a business feasibility study of its implementation. As foreshadowed in SGS’s

earlier report, a series of steps are required in completing a business feasibility study:

Preparation of a design brief identifying the nature of the uses to be accommodated, including

potential compatible commercial uses (galleries, restaurants and cafes, etc.). The concept will

include cost effective fit out with recycled materials and integrating artistic elements and

themes to create an exciting and dynamic working environment.

Commission the design and relevant technical inputs to the concept including quantity surveyor

costs.

Undertake an economic impact appraisal.

Prepare cash flow forecasts for the implementation phase and for ongoing operation of the

building (outgoings, maintenance, artist rents and commercial rents).

1.3 Report Structure

The report is structured as follows:

Section 2

Provides further detail on the design of the preferred option.

Section 3 Provides the financial analysis of the preferred option, including

anticipated costs and revenues.

Section 4

Section 5

Details the identified costs and benefits associated with the preferred

option and quantifies these to provide a cost benefit ratio.

Presents the main findings.

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2 Concept Design

The proposed development will re-use the robust existing structure of 602 Little Bourke St with

minimal structural intervention.

An innovative method of design procurement will make the process of refurbishing the building an

integral part of its artistic program, and be used as a method to strategically engage Melbourne’s

diverse art and design community with the project.

2.1 Overall Approach

The architectural approach will be to work as much as possible with the qualities of the existing

building, removing non-essential interior fittings, bulkheads, partitions and services, and stripping

the building back to its bare essentials. The intent is to leave this ‘raw’ quality apparent in the final

outcome, appropriate to its proposed use as workshop and production space. For example the

following approach will be taken:

floors to be sealed concrete or other hard surface;

services to be left exposed (unpainted), no bulkheads;

no suspended ceilings;

no cladding to structural columns;

walls left ‘as-is’ (eg. unpainted) except where necessary for practical reasons;

selective structural alterations to ground floor and basement to improve engagement with

street and internal exhibition potential;

minimal servicing requirements; and

basic regulatory upgrade/ compliance.

2.2 Public Areas/ Base Building Works

The public areas will be refurbished to increase their potential as public gathering, exhibition and

event spaces. This will contribute positively to the surrounding precinct. The ground floor will

consist of a cafe with street frontage and a series of small retail spaces, and the basement will

consist of an art gallery and desk space for emerging digital businesses. The existing rooftop will be

simply but effectively refurbished as an outdoor public space suitable for exhibitions, with the

caretaker’s residence acting as a possible architectural/design studio. A new lift (in the existing lift

shaft) will be extended to rooftop level, making the whole building accessible and doubling as a

goods lift with access from the side lane.

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P. 5

2.3 Fit-out of Individual Floors

A primary aim of the project is to engage a diverse and talented range of young, emerging

architects and designers from the outset of its delivery process. This will enrich the final outcome,

give it a wider audience, sense of ownership and relevance within the design and architecture

community, and demonstrably support the artistic practice of a range of emerging designers (in

addition to the artists and practitioners who will eventually be housed in the building). Different

authors will be given the opportunity to design the interior of each floor – giving each level a

distinct identity and allowing the building itself to function as a living exhibit.

A competitive process will be established for a jury-based selection of three emerging architects (or

teams of suitable practitioners) to each design a whole interior refurbishment of levels 1, 2 and 3.

This will be a significant and high profile commission for these practitioners – even if the budget is

modest – and their input will gain publicity for the overall project as well as for the individuals

concerned.

The total floorspace allocation is shown in Table 2 below and in the figures that follow.

Table 2 Total Floorspace Allocation

Basement Total Spaces Area per Space (sqm) Total Area (sqm)

Art Gallery 1 200 200

Digital Desks 20 6.25 125

Digital Studio 2 25 50

Meeting Room 1 25 25

Kitchen 1 25 25

Total Basement 425

Ground Floor

Cafe 1 120 120

Retail 1 – 5 5 25 125

Retail 6 – 8 3 35 105

Total Ground Floor 350

Level 1

Office 1 375 375

Office 1 37.5 37.5

Studio 1 22 22

Meeting Room 1 25 25

Kitchen 1 12.5 12.5

Total Level 1 472

Level 2

Office 1 32.50 32.5

Office 1 25 25

Office 1 125 125

Studio 4 12.5 50

Studio 2 25 50

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P. 6

Studio 2 37.5 75

Studio 1 50 50

Kitchen 1 12.5 12.5

Total Level 2 420

Level 3

Office 2 50 100

Office 1 25 25

Office 1 27 27

Studio 1 31.25 31.25

Studio 4 18.75 75

Studio 1 37.5 37.5

Studio 4 25 100

Meeting Room 1 18.75 18.75

Kitchen 1 12.50 12.5

Total Level 3 427

Level 4

Art and Heritage

Collection

1 425 425

Studio 1 25 25

Studio 2 12.5 25

Total Level 4 475

Level 5

Art and Heritage

Collection

1 425 425

Studio 1 18.75 18.75

Studio 3 12.5 37.5

Total Level 5 481.25

Rooftop

Studio 1 50 50

Open Public and

Exhibition Space

1 400 400

Total Rooftop 450

Total Space Allocation 3500.25

Source: City of Melbourne

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Figure 1 Basement and Ground Floor Space Plans


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Figure 2 Level 1, 2 and 3 Floor Space Plans


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Figure 3 Level 4, 5 and Rooftop Floor Space Planss


2.4 Proposed methodology

The public area works, including Ground Floor retail and entry spaces, Basement gallery, Rooftop

works, building services, lift and regulatory compliance works will be co-ordinated by an

established project architect who will also co-ordinate the input of additional designers as described

above. Importantly, these two aspects of the building’s design process (public areas and individual

floor design) will happen simultaneously, with feedback and critique sessions built into the process,

allowing them to respond to and work off each other.

The overall process will involve many inputs and will be curated and carefully managed jointly by

the project manager and project architect. All parties will be held accountable to agreed timelines

and budgets, and regular submissions of working design concepts reviewed by this curatorial team

to ensure budget accountability, regulatory compliance and overall project coherence.

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3 Financial Analysis

3.1 Introduction

The financial analysis models estimated cash flows associated with the preferred option. The

spreadsheet-based model enters values for key variables over a 15 year period. Where cash flows

extend beyond this time horizon their ‘year 15 present value’ is calculated in perpetuity at the

relevant discount rate, this is shown by the higher figure in year 15 on the table of results.

Values are escalated by inflation factors to present them in nominal terms. This enables different

inflation factors to be applied to different variables:

All costs 3% p.a.

Rent income 4% p.a.

All other revenue 3% p.a.

The basis for rent being above the estimated CPI rate of 3% is the expected real escalation in

property value in this part of the CBD. Development of the adjacent power station site will be a key

factor in this.

A nominal discount rate of 8% pa is adopted to reflect the inflationary and real components of price

escalation.

3.2 Cost Items

Capital Cost of Arts Complex

Capital cost estimates were initially prepared by Donald Cant Watts Corke (Quantity Surveyors) in

August 2008. In the previous SGS study, these estimates were used along with the assumption

that escalation factors were 4.00% to tender (12 months), and 2.26% during construction (12

months).

Since then, the City of Melbourne has provided updated capital cost estimates so as to account for

additional investment in the top floor lift services. These are used in the financial modelling with

the assumption that a delivery date of two years from today is possible. These are based on a

general capital estimate of $740 per square metre. At approximately 4,557 square metres

(including non-leasable space) this equates to a capital cost of approximately $3.4 million.

Relocation of Archives

The Business Information Services (BIS) branch of the City of Melbourne advises that the cost of

relocating the archives from the building would be in the order of $250,000. This would be to an

‘outsourced’ service which would incur a recurrent cost in the order of $250,000 p.a. BIS is

presently conducting a tender process to identify a suitable external service provider to manage

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P. 11

the archives. It is anticipated that the archives will be relocated in the next financial year freeing

up three levels of the building by early 2013.

Currently the City of Melbourne employs three full time equivalent staff members to maintain the

archives at an annual cost of approximately $300,000. Therefore, if the archives were to be

relocated there will be an annual savings of $50,000 due to the avoided staff costs.

The City of Melbourne has advised that the relocation of the archives will occur regardless of

whether the arts complex were to be delivered and that the relocation of the archives from the

building is a result of an internal decision to move to a more efficient model of archive maintenance

and storage. Therefore the costs and revenues resulting from the relocation of the archives are not

specific to the arts complex and will not be included in the financial analysis.

The Art and Heritage Collection

The Art and Heritage Collection will be retained at its current size. The rationale for the retention of

the Art and Heritage Collection as part of the re-development of 602 is based on financial and

social amenity reasons.

Investment by Council in 2001 in collection storage infrastructure for levels four and five (including

security, fire and climate-control systems) brought it to state museum standards. Advice has been

obtained from Museum Victoria for the purpose of this report about the cost of re-housing

the collection at another site. There is no storage available of a comparable quality in greater

Melbourne. The cost of a 'green fields' collection store of comparable size is estimated at

$2,075,000. A loading dock plus lifts would be extra. Transfer of the collection would cost $90-

$120,000.

In terms of amenity, the collection store provides a complementary activity to a re-developed 602

Little Bourke Street. It can provide part of the cultural offer of the building as a site for

researchers, artists-in-residence and visitors on guided tours. The store can be re-arranged so

that each floor has an open display system where artworks and artefacts are semi-curated.

It is acknowledged that there will be some investment in terms of additional shelving and other

equipment used to service the Collection. These costs have not been included in the analysis as

they are assumed to be incurred as part of the normal ongoing maintenance, storage and

improvement of the Collection.

Building Outgoings and Staff Costs

The Melbourne City Council has provided the total operating costs for the building which include

rates, insurances, maintenance, security, etc. Table 3 shows that the total operating costs of the

building amount to $203,000 per annum.

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Table 3 Building Outgoings

Estimate of annual

costs

Service contracts (lift, fire, air-conditioning) $30,000

Water $9,000

Electricity $30,000

Cleaning $50,000

Maintenance $30,000

Insurance $2,000

Waste/recycling $15,000

Office consumables $20,000

Real Estate Management $30,000

Marketing $10,000

Emergency procedures $7,000

Total operating costs $233,000

The Melbourne City Council also provided the annual staffing costs in terms of the additional staff

required to manage and facilitate the arts complex. Table 3 shows that total additional staff costs

amount to $24,000 per annum.

Table 4 Staff Costs

Estimate of

annual costs

Building Supervisor (increase from 0.4 EFT to 0.6EFT) $12,000

Creative Spaces Administrator (increase from 0.8EFT to 1EFT) $12,000

Total additional staff costs $24,000

3.3 Revenue Streams

Rent

The City of Melbourne has made estimates of rents for the various components of the arts

complex, with commercial and non-commercial rents specified. Commercial rent items include the

proposed cafe and retail spaces. Non-commercial rent areas include artists’ studios, digital desks,

rooftop studio, gallery, and other areas, as summarised in the tables below. A detailed breakdown

of revenues and floorspace allocation is given in the Appendix.

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Table 5 Commercial Rents

Commercial Rent Item

$ rental

rate/m2

ex GST

Total

area

m2

#

spaces

rental

per week

per unit

ex GST

rental per

annum ex

GST

rental per

annum inc

GST

Ground café $300 120 1 $300 $36,000 $39,600

Retail spaces $250 230 8 $250 $57,500 $63,250

Total commercial

350 9

$93,500 $102,850

Source: City of Melbourne estimates

Table 6 Non Commercial Rents

Non Commercial Rent Item

$ rental

rate/m2

ex GST

Total

area

m2

#

spaces

rental

per week

ex GST

rental per

annum ex

GST

rental per

annum inc

GST

Rooftop studio $190 50 1 $182 $9,500 $10,450

Artist studios $140 647 29 $1,742 $90,580 $99,638

Digital desks $80 125 20 $1,600 $83,200 $91,520

Gallery (ground floor) $200 200 1 $769 $40,000 $44,000

Arts org office $190 747 9 $2,729 $141,930 $156,123

Total non-commercial

1,769 60

$365,210 $401,731

Source: City of Melbourne estimates

3.4 Results

A discounted cash flow of the preferred option shows a net present value of approximately $1M.

Summary results are presented in Table 7. As shown, a positive cumulative net position is reached

in year twelve. As noted earlier, year 15 represents the revenue beyond year 15, which is

calculated in perpetuity at the relevant discount rate.

Revenue is shown as nil in year one, assuming that the refurbishment will take 12 months to

complete before it is ready for leasing. In second year, 50% of the assumed revenue from rent is

used, to account for a let up period whilst tenants are being secured. Throughout the remaining

years, a vacancy factor of 4% and an allowance of 2% for bad debts are also used to reduce

overall revenue.

Detailed results of the financial analysis are shown in Table 8.

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Table 7 Summary Financial Analysis Results

Year Total

Costs

Total

Revenue Profit/Loss

Opening

Balance

Interest

Paid

Interest

Earned Closing

Balance

8% 6%

1 $3,629,180 $0 -$3,629,180 -$3,629,180 -$290,334 $0 -$3,919,514

2 $264,700 $260,400 -$4,300 -$3,659,114 -$290,678 $0 -$3,949,793

3 $272,700 $516,200 $243,500 -$3,433,593 -$271,198 $0 -$3,704,791

4 $280,800 $532,900 $252,100 -$3,171,891 -$251,030 $0 -$3,422,922

5 $289,200 $550,000 $260,800 -$2,872,922 -$230,166 $0 -$3,103,088

6 $297,900 $567,900 $270,000 -$2,535,188 -$208,566 $0 -$2,743,754

7 $306,900 $586,100 $279,200 -$2,157,654 -$186,230 $0 -$2,343,885

8 $316,100 $605,000 $288,900 -$1,738,885 -$163,118 $0 -$1,902,003

9 $325,600 $624,700 $299,100 -$1,277,303 -$139,190 $0 -$1,416,494

10 $335,300 $644,900 $309,600 -$771,594 -$114,422 $0 -$886,016

11 $345,400 $665,800 $320,400 -$220,216 -$88,790 $0 -$309,006

12 $355,700 $687,400 $331,700 $378,394 $0 $22,704 $401,097

13 $366,400 $709,800 $343,400 $1,110,897 $0 $66,654 $1,177,551

14 $377,400 $732,700 $355,300 $1,910,251 $0 $114,615 $2,024,866

15 $7,548,300 $15,265,200 $7,716,900 $17,290,066 $0 $1,037,404 $18,327,470

Net Present Value $997,148

Internal Rate of Return 10.5%

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Table 8 Detailed Financial Analysis Results

Project Uses

Year Capital Costs

Total

Operating

Costs

Total

Additional

Staff Costs Total Costs

Rooftop

Studio

Office Ground Cafe

Retail

Spaces

Artist

Studios

Digital

Desks Gallery

Arts org

office

Total

Revenue Profit/Loss

Escalat io n 3.00% 3.00% 4.00% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00%

1 $3,372,180 $233,000 $24,000 $3,629,180 $0 -$3,629,180

2 $0 $240,000 $24,700 $264,700 $5,400 $20,600 $32,900 $51,300 $47,100 $22,700 $80,400 $260,400 -$4,300

3 $0 $247,200 $25,500 $272,700 $10,900 $41,100 $65,700 $101,500 $93,200 $44,800 $159,000 $516,200 $243,500

4 $0 $254,600 $26,200 $280,800 $11,300 $42,800 $68,300 $104,500 $96,000 $46,200 $163,800 $532,900 $252,100

5 $0 $262,200 $27,000 $289,200 $11,700 $44,500 $71,000 $107,700 $98,900 $47,500 $168,700 $550,000 $260,800

6 $0 $270,100 $27,800 $297,900 $12,200 $46,300 $73,900 $110,900 $101,900 $49,000 $173,700 $567,900 $270,000

7 $0 $278,200 $28,700 $306,900 $12,700 $48,100 $76,800 $114,200 $104,900 $50,400 $179,000 $586,100 $279,200

8 $0 $286,600 $29,500 $316,100 $13,200 $50,000 $79,900 $117,600 $108,100 $51,900 $184,300 $605,000 $288,900

9 $0 $295,200 $30,400 $325,600 $13,700 $52,000 $83,100 $121,200 $111,300 $53,500 $189,900 $624,700 $299,100

10 $0 $304,000 $31,300 $335,300 $14,300 $54,100 $86,400 $124,800 $114,600 $55,100 $195,600 $644,900 $309,600

11 $0 $313,100 $32,300 $345,400 $14,800 $56,300 $89,900 $128,500 $118,100 $56,800 $201,400 $665,800 $320,400

12 $0 $322,500 $33,200 $355,700 $15,400 $58,500 $93,500 $132,400 $121,600 $58,500 $207,500 $687,400 $331,700

13 $0 $332,200 $34,200 $366,400 $16,100 $60,900 $97,200 $136,400 $125,300 $60,200 $213,700 $709,800 $343,400

14 $0 $342,200 $35,200 $377,400 $16,700 $63,300 $101,100 $140,500 $129,000 $62,000 $220,100 $732,700 $355,300

15 $0 $6,843,400 $704,900 $7,548,300 $334,000 $1,266,000 $2,022,000 $2,810,000 $2,580,000 $1,240,000 $4,402,000 $15,265,200 $7,716,900

$8,634,493 Present Value $9,631,641

Net Present Value $997,148

Internal Rate of Return 10.46%

Present Value

COSTS REVENUES

Commercial Non-commercial

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3.5 Sensitivity Analysis

A sensitivity analysis was undertaken on the preferred art complex option to measure the effect

that proportional changes in the estimated costs and rents would have on the net present value of

the development option. This is particularly important given detailed quantity surveyor estimates

have not been commissioned.

The net present values of the art complex options were calculated for the following scenarios:

Costs are decreased by 10% while all other factors remain unchanged.

Costs are increased by 10% while all other factors remain unchanged.

Revenues are decreased by 10% while all other factors remain unchanged.

Revenues are increased by 10% while all other factors remain unchanged.

For the purpose of the sensitivity analysis the ‘Costs’ include the refurb ishment costs, outgoings

and management costs and exclude costs associated with the outsourcing of archives. ‘Revenues’

include revenues associated with the gallery, art studios, digital desks and art organisation offices

and exclude the revenues received from commercial letting.

The results of the sensitivity testing are shown in Table 9:

Table 9 Sensitivity Test of the Preferred Option

Costs (-10%) Costs (+10%) Revenues

(-10%)

Revenues

(+10%)

Net Present

Value $1.7M $-74,392 $-153,297 $1.7M

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4 Economic Evaluation

4.1 Introduction

This section provides an economic evaluation of the preferred option. At the outset, it is worth

highlighting that there are two common interpretations of ‘economic evaluation’ in public policy.

The first concerns the estimation of direct and indirect employment and income effects of some

stimulatory initiative on the part of government. This involves the use of an input output model and

associated multipliers.

SGS routinely provides this kind of economic evaluation. However, it is not particularly well suited

to the 602 Little Bourke Street project’s requirements. These stimulus modelling exercises are

always open to the criticism that governments could have achieved similar or better multipliers by

pursuing some other program. Moreover, there is the criticism that such simulations do not account

for crowding out effects, that is, the economic activity displaced by stimulating a particular sector.

The second type of economic evaluation is a social cost benefit analysis. This seeks to measure the

net gain in community welfare from a particular program or initiative. Treasuries around Australia

generally require a rigorous social cost benefit analysis to accompany new program or project

proposals.

Such an analysis distinguishes between ‘net welfare’ and ‘transfer’ effects. That is, it looks to

measure improvements to community wellbeing as a whole, and sets aside those aspects of a

program which merely shift economic activity from one location to another.

This section proceeds with a social cost benefit assessment, with an emphasis on economic benefits

associated with the project.

4.2 Identified Costs

Costs associated with implementation of the preferred option are limited to capital and operational

costs, that is, no social or environmental costs have been identified.

4.2.1 Capital Costs

The City of Melbourne has estimated that the capital cost of implementing the preferred option is

approximately $740 per square metre of refurbished space (4,557 sqm), equating to around

$3.4M.

In the absence of detailed cost estimates from a quantity surveyor, there is a risk that estimated

capital costs may indeed exceed, or more critically, fall short of actual costs. The estimate provided

should be viewed as an allowance which provides the budget for the improvement works. The

project will need to be managed carefully to ensure the allowance is not exceeded.

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4.2.2 Recurrent Costs

Annual, recurring operating costs associated with the preferred option include:

Service contracts (lift, fire, air conditioning);

Utilities;

Staffing costs;

Maintenance; and

Other operating costs.

It is estimated that total recurrent costs will amount to $227,000 annually (see Tables 1 and 2).

4.3 Identified Benefits

Through previous assessment of case studies and other renewal projects involving artists, SGS has

identified a number of potential benefits associated with the preferred option. These include:

Creation of intellectual capital, some of which will be of commercial value;

Creation of appropriate space (and therefore job opportunities) for artists to avoid

displacement outside of the City of Melbourne;

Skills development, including enhanced leadership in the local community and opportunities

for volunteer engagement; and

Improved business and community confidence in local area (community cohesion).

These benefits can be broadly grouped into two categories; direct user benefits and indirect

benefits as shown overleaf in Table 10.

Direct use benefits are those enjoyed by the users of the facility or space. In the case of the

preferred option, users would include participating artists and digital industry businesses, along

with any other tenants and users of the building. Direct benefits broadly include employment, skills

development, and the creation of a sellable service or good.

Indirect benefits are the result of the flow-on benefits to the wider community, such as business

and community confidence and any (public) cost savings.

These benefits (and identified costs) are discussed in further detail overleaf.

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Table 10 Direct and Indirect Use Benefits of ‘Renew’ Projects

TYPES OF BENEFITS

DIRECT

Creation of intellectual capital, some of which will be of commercial

value.

Creation of affordable and appropriate space (and therefore job

opportunities) for artists to avoid displacement outside of the City

of Melbourne.

Skills development, including enhanced leadership in the local

community.

Additional Volunteer Engagement.

INDIRECT Improved business and community confidence in the local area.

4.3.1 Direct Use Benefits

Creation of New Jobs

In providing arts studios and office space at a nominal rate, the Creative Spaces Complex will

encourage and support artists, cultural projects and community groups to undertake commercial

ventures and community projects. Without these initiatives, these supported initiatives may not

have occurred, as the associated start-up costs and risk(s) may be considered excessive. In this

sense, such projects act as catalyst for independent economic activity by enabling people to

engage in more commercial economic activity which they might not otherwise be doing.

Additionally, should projects succeed, there are long-term employment benefits, not only for

project participants themselves, but also for any future staff that they may employ.

Ski lls Development

For the artist, cultural projects and community groups that occupy the venues, the opportunity to

run a small business grants exposure to a wide range of business management and leadership

skills. These could include, but are not limited to:

Creative and technical skills;

General business management skills;

Sales and accountancy skills;

Human resource management and coordination.

This ‘on the job’ training presents savings if compared with formalised skill training sessions,

representing a benefit to project participants.

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Additional Volunteer Engagement

Participating in group projects fosters networks that create social capital. Community inclusion by

volunteers and workers strengthens community resilience, cultural capital, communication, and the

mental health of both volunteers and participants. Volunteer opportunities contribute significant

community cohesion by building resilient communities and social capital. An increase in

productivity could occur due to engagement in the workforce for adults (volunteers) who would

otherwise be permanently disengaged.

The facility has the capacity to house all but one of the arts organisations presently situated in the

City Village initiative as well as the remaining 30 artists on the temporary Boyd facility in

Southbank. The City Village project brings together wide range community organisations which

operate from the assistance of a significant number of volunteers. These volunteer opportunities

enhance the overall social capital of the location/ suburb and may provide stimulation, enjoyment

and fulfilment for individual volunteers.

In addition, volunteer engagement generates resource savings for projects and society as

volunteers’ work enhances the productive capacity of the location/ project without any financial

outgoings. For instance, volunteers may physically repair and improve the condition of public and

private spaces in the precinct. These are costs that society would have otherwise incurred had it

not been for the volunteers.

Importantly, these are separable benefits, i.e. creation of social capital and the opportunities

arising thereof flow to the volunteers themselves, whereas resources savings because of volunteers

flow to the society/ employing organisation, and therefore, the society at large.

Creation of Intellectual Capital

Providing space for artists, cultural projects and community groups to engage in commercial

activities presents an opportunity for the creation of intellectual capital, some of which may have a

commercial value. In addition the Arts and Heritage Collection offers a superbly complementary

activity to a re-developed 602 Little Bourke Street with artist’s spaces. There is potential for guided

tours of the collection to be offered to interested visitors to the complex.

The creation of intellectual capital could manifest itself in the greater choice and quality of art and

cultural products available to customers. The economic and environmental benefits to these

consumers are tied up in the social/ cultural benefits, the monetary value of which is reflected in

willingness to pay for the products purchased, i.e. the market price.

4.3.2 Indirect Use Benefits

Improved Business and Community Conf idence

Steady occupancy of buildings in otherwise unused spaces and locations builds confidence within

the business and residential community of the region in its social and economic vitality.

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The 602 Little Bourke Street project will likely bring an increase in activity and a renewed interest

that could provide the stimulus for a broader change in business and community confidence.

Business confidence may also be improved throughout the precinct as these projects provides

spaces to a whole suite of services, including, retail and wholesale creative services, to other

businesses in the region.

Additionally community projects are, in some cases co-located and sharing facilities. In these

incidences, there are additional benefits derived from locating amongst similar or complementary

projects. These co-located projects benefit as they can share and pool resources and costs with

neighbours, and can learn from one another and are, as a collective, attracting more customers.

Indeed, customers also benefit from the co-location of projects as it allows them to access more

projects via a single trip and exposes them to a number of additional projects that may be of

interest and, more importantly, of value to them.

4.4 Techniques to Value and Monetise Benefits

A summary of the potential staff and volunteers expected to result from the development of the

arts complex is shown in the table below. The table excludes staff and volunteers associated with

the Art Gallery, Arts and Heritage Collection, Cafe, Retail Units and Digital Desks and focuses on

the Artist Studios and Arts Organisation Offices. A detailed breakdown, by individual floor is given

in the Appendix. These estimates have been sourced from the City of Melbourne and are used to

monetise the benefits described previously.

Table 11 Potential Staff and Volunteers

Staff/ tenant Volunteers

Artist Studios 40 2

Arts Org Office 53 79

Digital Desks 20

Source: Melbourne City Council

4.4.1 Creation of New Jobs and Skil ls Development

When monetising, it is difficult to disentangle the benefits of creation of new job opportunities and

uplift in skills of existing employees. Consequently, the two benefits have been aggregated

together and monetised.

It is estimated that there will be approximately 93 full time equivalent jobs resulting from the

operation of the arts complex (this excludes the jobs arising from retail activity, the Arts and

Heritage Collection, the Cafe and the Art Gallery). The majority of artists will be transferring from

other studios currently run by Creative Spaces and many of the tenants of the City of Melbourne’s

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City Village initiative may be accommodated in the office spaces provided if the need arises.

Indeed, in all likelihood, new job opportunities will be created for those previously unemployed, but

for the sake of conservatism and without access to any data, it was assumed that the net effect on

jobs creation will be negligible.

Significant skills upliftment opportunities as well as an increase in lifetime earnings of artists is

expected at the new site because of the co-location/ agglomeration of artists at this one proposed

location rather than dispersed throughout the municipality. Importantly, artists are likely to receive

more exposure at the new site via display of works at the Arts Gallery and attraction of visitors due

to provision of a cafe on site. Consequently, so as to be conservative, monetisation of this benefit

will be based on assuming a 5% increase in artist’s income and estimated average earnings. In the

absence of any data on current earnings of employees at the Creative Village Precinct, It was

estimated at $51,139 p.a. using the average wage of a worker employed in the creative industries

(The Australia Council Arts Survey 2001 estimates that the average practicing professional artist’s

income is $37,200 p.a. This was indexed to 2012 levels to $51,139 p.a. using inflation growth over

the period).

4.4.2 Additional Volunteer Engagement

The value or utility to volunteers from participating in such activities can be measured by applying

an opportunity cost of time to volunteers, staff and participants involved or likely to be involved in

the project. Given that volunteers could have otherwise used their time towards other uses,

including working for a wage, the opportunity cost of their time reflects foregone earnings, which

would equate to approximately $28 an hour. Nonetheless, assuming that available employment

opportunities in the field are limited, the opportunity cost of volunteers could be approximated not

using foregone earnings, but rather using foregone leisure time, the value of which has been

placed at $12.3 per hour, by established Australian research.1

The data provided to us by the City of Melbourne revealed that a total of 86 Volunteers (excluding

those from the Art and Heritage Collection) are affiliated with the arts complex. For the purposes of

this report, only opportunity cost of worker’s leisure time was used to monetise the benefit. Further

it is assumed that each volunteer works the equivalent of two days a week for half a year.

4.4.3 Creation of Intellectual Capital

Any (new) intellectual capital created/ generated from the art complex would become manifest

either in:

the greater choice and quality of art and cultural products available to customers, reflected in

the market price of that product, or

the ‘Creative Spaces’ idea itself, which could be franchised in other locations,

1 Australian Transport Council (2006). National guidelines for Transport System Management in Australia, Commonwealth of Australia, Canberra.

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It is acknowledged that the greater choice of art and cultural products in itself represents higher

value for society. However, without proper access to consumer surveys to ascertain the utility due

to consumers primarily borne out of increased choice, it will be difficult to estimate the benefit.

Monetizing and valuing the intellectual capital of ideas would require estimation of the intellectual

property created by the promoters, which would not be easy to establish.

Thus, creation of intellectual capital, whilst being acknowledged as a benefit, is not quantified by

this analysis.

4.4.4 Improved Business and Community Confidence

Growth in population and employment in the respective precincts as a result of the arts complex is

likely to create opportunities for business growth across a range of sectors. Current and future

workers and residents of the local region where the arts projects are located will benefit from a

safer, more livable precincts and the increased viability of businesses.

Improved business and community confidence become manifest in people’s willingness to pay to

live and work in an area, i.e. prevailing property prices.

As such, monetising this benefit requires estimation of the number of retail lots that are likely to

receive an uplift in value due to the operation of the arts project as well as the anticipated level of

the uplift itself.

Assuming that yields incorporated in rental values approximate land values, The City of Melbourne

has provided details of rent for retail space in Little Bourke Street around the area of 602 Little

Bourke Street and for busier areas of Little Bourke Street near Swanston Street and Elizabeth

Street. These are provided in the table below.

Table 12 shows that the current rental yields in terms of retail (~$250 per sqm) are three times

less than prevailing rents in the area (between $700 and $1,000 per sqm) and therefore it can be

assumed that the underlying land values could rise substantially. To approximate this uplift in land

values it is assumed that the value of the 602 Little Bourke Street building, as estimated by

Charter Keck Cramer, will increase by 2% as a result of the future mix of activities which will take

place in the building. It should be noted that this represents a very conservative estimate of

improved business and community confidence resulting from the arts complex.

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Table 12 Rental Estimates

Size Range 602 Little Bourke Street

(immediate area)

602 Little Bourke Street

(near Swanston Street and

Elizabeth Street)

100sqm $700 to $1000 $1,500 to $2,200

100sqm to 200sqm $350 to $450 $700 to $1,200

200sqm and greater $200sqm $350sqm

4.5 Estimated Results of the Cost Benefit

Assessment

Table 13 overleaf shows the resulting benefits. The total discounted benefits of the project are

conservatively calculated to be $14 million with total discounted costs of $10 million. This yields a

Benefit Cost Ratio (BCR) of 1.5 and a net benefit of $4.4 million.

Any project with a BCR of greater than one and with a positive net present value is considered to

be providing a positive net social and economic value to society. Thus, the arts complex project

proves to be highly beneficial.

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Table 13 Estimated Costs and Benefits of the Arts Complex

Benefits Estimate

TOTAL COSTS (Present Value @ 6%) $9,716,269

BENEFITS

Creation of Jobs and Skills Development

# of ppl working @ average wage approximate.

$237,796 p.a.

Volunteer Engagement $387,000 p.a.

Improved Business and Community Confidence $132,000 p.a.

TOTAL ANNUAL BENEFITS $756,796 p.a.

PERFORMANCE MEASURES

Net Benefit (Net Present Value @ 6%) $4,434,834

Benefit Cost Ratio 1.5

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5 Conclusion

This report has focused on the preferred option of the 2010 ‘Housing the Arts’ Creative Space

Feasibility Study and provides a business feasibility study of its implementation. The financial and

economic analysis completed in this report has been quite conservative in nature. The City of

Melbourne advised SGS that the project description provided represents a base model of the

potential Creative Spaces complex. The addition of a commercial anchor tenant has been excluded

from the analysis and rents have been kept low as shown in the previous sections. Also possible

additional funding from Property Services and Business International has not been factored into the

analysis. Despite the conservative nature of the analysis the project shows real value.

For an initial investment of $3.4 million and ongoing building outgoings and staff costs of $257,000

in the first year (escalated by inflation thereafter) the project is expected to return a revenue

stream of approximately $516,200 per year (escalated by inflation). This equates to a net present

value of $1 million which is the value of the stream of net profit/loss in today's terms.

Further, the total discounted benefits of the project are conservatively calculated to be $14 million

with total discounted costs of $10 million. This yields a Benefit Cost Ratio (BCR) of 1.5 and a net

discounted benefit of $4.4 million. Any project with a BCR of greater than one and with a positive

net present value is considered to be providing a positive net social and economic value to society.

Thus, the preferred option for an arts complex at 602 Little Bourke Street proves to be highly

beneficial.

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6 Appendix

Table 14 Detailed Breakdown of Revenues and Floorspace Allocation

Income $ rental rate/m2 ex GST

Total area m2 # spaces rental per week ex GST

rental per annum ex

GST

rental per annum inc

GST

Staff/tenant Volunteers Visitors/wk

BASEMENT

Art gallery $200.00 200 1 $769.23 $40,000.00 $44,000.00 2 5 150

Digital desks $80.00 125 20 $1,600.00 $83,200.00 $91,520.00 21 10

Digital studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 3 3

Digital studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 3 3

Meeting room 25 1

Kitchen 25 1

Total Basement 425 25 $2,503.85 $130,200.00 $143,220.00

GROUND FLOOR

Café $300.00 120 1 $692.31 $36,000.00 $39,600.00 5 1800

Retail 1 $250.00 25 1 $120.19 $6,250.00 $6,875.00 2 900

Retail 2 $250.00 25 1 $120.19 $6,250.00 $6,875.00 2 900

Retail 3 $250.00 25 1 $120.19 $6,250.00 $6,875.00 2 900

Retail 4 $250.00 25 1 $120.19 $6,250.00 $6,875.00 2 900

Retail 5 $250.00 25 1 $120.19 $6,250.00 $6,875.00 2 900

Retail 6 $250.00 35 1 $168.27 $8,750.00 $9,625.00 2 900

Retail 7 $250.00 35 1 $168.27 $8,750.00 $9,625.00 2 900

Retail 8 $250.00 35 1 $168.27 $8,750.00 $9,625.00 2 900

Total Ground Floor 350 9 $1,798.08 $93,500.00 $102,850.00

LEVEL 1

Office $190.00 375 1 $1,370.19 $71,250.00 $78,375.00 6 25 20

Office $190.00 37.5 1 $137.02 $7,125.00 $7,837.50 4 10

Studio $140.00 22 1 $59.23 $3,080.00 $3,388.00 1 5

Meeting room 25 1

Kitchen 12.5 1

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Total Level 1 472 5 $1,566.44 $81,455.00 $89,600.50

LEVEL 2

Office $190.00 32.50 1 $118.75 $6,175.00 $6,792.50 6 3

Office $190.00 25.00 1 $91.35 $4,750.00 $5,225.00 4 3 12

Office $190.00 125.00 1 $456.73 $23,750.00 $26,125.00 6 20 40

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 1 5

Studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 1 5

Studio $140.00 37.5 1 $100.96 $5,250.00 $5,775.00 1 5

Studio $140.00 37.5 1 $100.96 $5,250.00 $5,775.00 1 5

Studio $140.00 50 1 $134.62 $7,000.00 $7,700.00 2 5

Kitchen 12.5 1

Total Level 2 420 13 $1,272.60 $66,175.00 $72,792.50

LEVEL 3

Office $190.00 50.00 1 $182.69 $9,500.00 $10,450.00 8 3 10

Office $190.00 50.00 1 $182.69 $9,500.00 $10,450.00 10 20 20

Office $190.00 25.00 1 $91.35 $4,750.00 $5,225.00 5 5 10

Office $190.00 27.00 1 $98.65 $5,130.00 $5,643.00 4 10

Studio $140.00 31.25 1 $84.13 $4,375.00 $4,812.50 1 3

Studio $140.00 18.75 1 $50.48 $2,625.00 $2,887.50 1 3

Studio $140.00 18.75 1 $50.48 $2,625.00 $2,887.50 1 3

Studio $140.00 18.75 1 $50.48 $2,625.00 $2,887.50 1 3

Studio $140.00 18.75 1 $50.48 $2,625.00 $2,887.50 1 3

Studio $140.00 37.5 1 $100.96 $5,250.00 $5,775.00 1 3

Studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 1 3

Studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 1 3

Studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 1 3

Studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 1 3

Meeting Room 18.75 1

Kitchen 12.50 1

Total Level 3 427.00 16 1211.63 $63,005.00 $69,305.50

LEVEL 4

Art and Heritage collection 425 1 $0.00 $0.00 $0.00 2 2 5

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Studio $140.00 25 1 $67.31 $3,500.00 $3,850.00 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Total Level 3 475.00 4 $134.62 $7,000.00 $7,700.00

LEVEL 5

Art and Heritage collection 425 1 3 2 5

Studio $140.00 18.75 1 $50.48 $2,625.00 $2,887.50 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Studio $140.00 12.5 1 $33.65 $1,750.00 $1,925.00 1 3

Total Level 3 481.25 5 $151.44 $7,875.00 $8,662.50

ROOFTOP

Studio $190.00 50 1 $182.69 $9,500.00 $10,450.00 6 2 10

Open Public and Exhibition space 600 1

Total Rooftop 650 2 $182.69 $9,500.00 $10,450.00

Total rent and space allocation 3700.25 78 $8,821.35 $458,710.00 $504,581.00 142 92 9413

Source: Melbourne City Council

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