BankWest told family property company Doherty Hotels it would no longer provide finance to its Hobart development that was facing difficulties but demanded the group pay a $980,000 break fee if they moved the project to another financier, the banking royal commission has heard.

The company principal, Michael Doherty, had a long history in hospitality and in the mid 2000s sought to redevelop Hobart’s historic Hadley’s Hotel which has the oldest continuous liquor licence in Australia. i

Ultimately the project failed, was placed in liquidation by the bank and Mr Doherty went bankrupt and had to sell his home.

The development included a mixed-use retail and serviced apartment project on land next to Hadley’s in central Hobart.

The project was first financed by BankWest prior to it being taken over by the Commonwealth Bank in late 2008 at the height of the global financial crisis.

Micheal Doherty was forced into bankruptcy. Photo: AAP

The project was valued by CB Richard Ellis in August 2008 at $53.4 million on a single line (not taking into account the serviced apartment potential) and $64.5 million as a mixed use (including the serviced apartments).

Doherty Hotels had already spent considerable money renovating Hadley’s which Mr Doherty said had been upgraded “from 3.5 to 4.5 stars”. The BankWest loan at that point totalled $50.2 million.

On the valuation figures the loan to valuation ratios on the business stood at 68.3 per cent on the single line valuation and 59.3 per ccent on the mixed use basis. At that point the bank was comfortable with the deal.

Construction started in 2009 with the works being done by of a subsidiary of Tasmanian listed group Gunns, the only Tasmanian builder able to do high rise developments.

After CBA took over BankWest there were staff changes at the bank and different officers were assigned to the Doherty project. A new businesss manager found that Doherty was not travelling well and estimated the business had lost $5 million.

Mr Doherty told the commission there was actually a $3 million profit which he said was demonstrated to the bank after spending an unbudgeted $526,000 in accountants fees.

Loan interest rates were raised after the bank assessed the project as having “a credit issue”. By the end of 2010 the bank wanted a further valuation so Doherty engaged agents Knight Frank to carry it out.

Mr Doherty said the valuation came in at $67.75 million including revenue streams from car parking, serviced apartments and retail. However “the bank said it did not understand the valuation,” so another was commissioned.

That produced a valuation of $75.3 million but a few months on the bank commissioned yet another valuation.

That was done on a single line basis and although the bank did not show it to Mr Doherty it apparently had negative results. “We could see it was set for doom,” Mr Doherty said. Then the bank said it did not want to fund the project any more but demanded the $980,000 break fee if another funder was found.

In 2012 liquidators were called in and the project was sold in 2013.  The bank ultimately lost $38 million on the deal.

Commonwealth Bank chief credit officer Peter Clark told the commission the project had financial problems not related to the differing valuations on single line and mixed use bases.

“I’m not sure at the end of the day it was actually relevant to the outcome here,” he said.