INVESTIGATION It is a college for Sydney's future performing artists. But a property deal involving its founding family has led to a boardroom row, writes Linton Besser.
If it wasn't for The McDonald College, the Sydney Olympics might have opened without Nikki Webster. Sarah O'Hare might never have become a Murdoch.
A performing arts school for some of Sydney's most privileged children, it has launched the careers of acclaimed ballerinas and what looks like half the cast of Home and Away. But almost 30 years after it enrolled its first students, the not-for-profit college is in crisis.
In late 2010, police charged its head of classical ballet, Allan Cross, alleging he had sexually assaulted female students over 16 years. The shock news only worsened a downward trend of enrolments. In line with sagging financial markets, student numbers fell from 521 in 2004 to as few as 319 this year. The school had to initiate bankruptcy proceedings against parents late on fees.
In the end, though, it is a real estate deal promoted as the college's salvation that could be its undoing. It has sparked a bitter dispute in the school's boardroom and raised alarming revelations that college directors may have broken the law. The school's parents are beginning to ask questions.
The college, founded by the Markham family, had for several decades existed as a small, almost household affair. But since 1983, when it became a not-for-profit organisation that received government funding, there has sometimes been a tension between the way the family once ran the school and the new governance obligations on the board.
Now the Markhams have led a push to sell off a quarter of the college grounds to ease mounting financial pressure. The problem is not that the Markhams want to divest 5000 square metres of the leafy North Strathfield campus. It is that they plan to sell it to a Markham family company without going to tender.
The school land is not, it should be made clear, owned by the Markhams it is managed in trust on behalf of the school community. Despite this, the Markhams did not wish to test the market. After decades of devotion to the school, they saw nothing wrong with members of the family sitting on both sides of the transaction.
"Ask yourself, what material benefit will I get if Markham [Corporation] builds and sells the residential block on the development site?" the school's founding director, Margaret Markham, wrote to fellow board members in late January. "The answer is no benefit whatsoever except the pleasure of seeing my son assisting the college with a philanthropic deal."
It matters not that she, her daughter and her son have been variously chairman, principal, and board director of the school or its foundation. Nor that the college has received about $18 million from taxpayers over the past eight years and an unknown sum again from benefactors. Nor, Margaret has told the rest of the board, should anyone have any concerns that her husband, Geoffrey, "was a director of Markham [Corporation] and the college at the same time". This was "irrelevant", she said.
Three days before she sent this memo, the family had received confidential legal advice about the way it had handled the obvious conflict of interest involving Margaret Markham and her daughter. "There may have been breaches of the Corporations Act 2001," Gilbert and Tobin said. It offered them some reassurance, though - such breaches may have only been of a "technical nature".
The school is named after Margaret Markham's mother, Ann McDonald, who emigrated to Australia in 1912. To fund her studies at the Conservatorium, she taught to local children the dances she had brought with her from Falkirk, Scotland. The college uniform still carries the McDonald tartan.
After Margaret took over in the 1980s, The McDonald College proper emerged as a comprehensive private school that combined performing arts with serious academic achievement. She installed an uncompromising culture of excellence and poured herself - and sometimes her money - into the school. Over time, hundreds of students flocked there as its reputation grew. Their parents added millions to its coffers.
But over the past decade, student numbers have shrunk, and with them, so too have the school's finances. The college's management was forced to use the school's mortgage as an ATM. It drew down $500,000 first in 2003, then another half-a-million three years later. Last November, when it asked its lender for another $450,000, the mortgage bulged to $7.75 million.
But the problems with enrolments may only get worse. Next month, Allan Cross's committal hearing begins. Given police have laid 13 charges against him - including the alleged rape of three girls under his tuition over the very long period that he was in a senior role - the school can expect damaging evidence.
Its debts mounting and future uncertain, one director told her colleagues last year the school was "skating on thin ice". With few other options, the school began to contemplate liquidating part of its greatest asset.
In mid-2010, Margaret's son, James Markham, brought a proposal to the school. He would develop a corner of the college via his property development firm, Markham Corporation Pty Ltd, and fund the venture by pooling the money of investors. His company targets a return of 20 to 30 per cent a year for investors.
When James approached the college, his father, Geoffrey, was a fellow director of Markham Corporation and was on the board of the school (he later resigned). So too was James's mother, Margaret, and sister, Michelle Deaker. Margaret declared a conflict of interest when James presented a formal proposal the following January, and Deaker claims this also covered her. But both continued to play an active role and repeatedly voted on the matter.
The proposal, to build up to 156 units on the site, was promising. Markham Corporation would pay the school at least $4.15 million, including $500,000 up-front, and under a complex arrangement, potentially some of the profits. Deaker says "the opportunity to have somebody else completely carry the risk for the school ... [was] very positive".
The $4.15 million was based on a valuation of the entire college grounds by a firm called Landmark White. The calculation went like this: if the site was 24 per cent of the total, then its value must be roughly 24 per cent of that for the whole campus ($17.25 million). But in property circles, such a calculation is irregular.
It is so unusual that the NSW director of the same valuer, Landmark White, says any such exercise is flawed. "We would not normally do a percentage," Michael Clarke says. "If you adopt 25 per cent you don't take into account ... that it might be the best corner of the parcel, in which case it is worth a lot more than that. If I was a board member [of the organisation selling the land] I would say that is probably not the value that you could achieve in the marketplace."
But doubts about the price had already emerged last December, when Colliers International submitted an unsolicited bid to market the property. Although valuers say the prices it promised should be viewed with scepticism, its estimates of the site's value were significantly higher.
Markham insisted the land would yield $8.59 million if the council granted sufficient approvals under the same conditions, Colliers said the site was worth $15.75 million. One expert canvassed by The Sun-Herald says if the site had development approval - which it does not - it may be worth between $11 million and $13 million.
The Markham contract's profit-share scheme presents a possibility the school could receive a cut greater than the values proposed by Colliers. But the question remains: could a competitive tender have extracted a better offer? And this is why Colliers' bid, and other letters of interest the school received, should have been good news. The school's then chairman, Rick Watkins, told the board he believed "there is significant interest in the property, indicating a substantial value over and above the proposal currently before the council".
But Margaret Markham and her daughter were less enthusiastic. "Colliers is simply a statement spruiking for business," Deaker wrote. "I seriously doubt our property valuer could have been far off the mark."
In another letter: "I should also point out that there is only so much goodwill a person can show and taking off my family hat (and pointing out I have no interest in Markham Group), I think James has ... been extremely patient with the board."
Margaret didn't want her son to even know the school had fielded competing offers. She wrote to fellow directors that Colliers' minimum sale price was "extremely optimistic" and voted to ignore such competing bids. Deaker points out to The Sun-Herald that the board had voted unanimously several weeks before the Colliers proposal arrived to adopt the Markham deal. (One director was absent.)
But Margaret might have been disappointed the Colliers bid ever surfaced. Several months earlier, she gave specific instructions to the school principal, Maxine Kohler, about how to handle such things.
Kohler reminded the board of these instructions at a highly charged meeting in late December.
"Maxine advised the meeting that she had been directed by Margaret Markham not to seek alternative expressions of interest prior to the signing of the letter," the official minutes say. "Margaret denied such a conversation and Rick [Watkins] reminded her that he was present at that conversation and confirmed that the conversation took place."
On January 23, without warning, those directors loyal to the Markhams moved a vote of no confidence against Watkins. He was ousted as chairman and resigned from the board.
What is unclear about the current imbroglio is why it took so long to ferment. While some directors actively supported the proposal, others appear to have become so accustomed to the Markhams' influence at the school that this simply became the latest episode in a long-running family drama. Deaker says the family has "spent their life doing things for the school" she recalls being younger and helping to clean the campus one day. There is little doubt about her family's commitment.
But it is also not the first time The McDonald College has sold off land in unorthodox circumstances. In September 1999, it sold an apartment building to the rear of its old campus. It accepted an offer of $1 million for the property and again did not go to a public tender. The buyer appears to have done well out of the deal. She reinstated some of the internal walls and bathrooms the school had removed, and restored the building to eight separate units. Five months after buying the property, she on-sold it for $1.95 million.
The buyer was Denise Reid, a barrister, and her then husband. Reid was a close associate of the Markhams and had been a director of McDonald College for six years until 18 months before the transaction, when she stepped down. Five months after on-selling the property, she rejoined the board. While there is no suggestion of improper conduct by Ms Reid or her husband, the circumstances again highlight a failure to put out to tender property owned by the school.
Reid tells The Sun-Herald that she and her husband paid a premium above a price that had been nominated by the school's real estate agent, because they wanted "to do something good for the school".
There were other examples where the line between the school and the Markham family may have been blurred. Few on the board batted an eyelid in April last year when Margaret announced "she had commissioned Christina Markham ... to prepare draft plans" for a new boarding house - a project that is linked to the wider property development.
Christina, Margaret's other daughter and Michelle's twin sister, is an architect. Margaret and Michelle both openly encouraged the board to pay Christina's $30,000 fee neither felt the need to absent themselves from the discussions and no other architects were approached. Deaker says Christina did this work "on spec" and "on the basis the school would apply for a grant for the boarding house and if the school didn't get the grant, she wouldn't be paid". The school did receive the grant, she says.
At one point in the board discussions, Deaker suggested James should liaise directly with Christina over the project, as the boarding house overlaps with James's much bigger project. That is, her brother and sister should chat between themselves. It was not until a fiery meeting on December 28, after Margaret Markham and Deaker urged the board to disregard the competing proposal from Colliers, that resistance emerged from an unlikely corner. John Lutman, a long-time friend, board member and co-founder of the school, erupted in anger, arguing Margaret should not even be attending the discussion.
"Any public perception of failure to deal with conflict of interest properly by The McDonald College board could endanger future funding and invite the possibility of legal action and the payment out of school funds of a judgment against us," he wrote several days later.
What prompted the revolt is unclear. But it may have taken some time to digest clause six of the agreement signed with Markham Corporation. Not only was the school selling the development site to a Markham company without tender, it was also granting it "a first and last right of refusal to purchase and develop the balance of the college's land".
Finally, on January 19, Watkins, as chairman, wrote to James Markham, seeking revisions to the agreement. Clause six was an issue, he said, and there was another problem to be dealt with. The college, he wrote, needed "to formally comply with the related party transaction provisions of the Corporations Act" before it signed anything more binding.
He was deposed four days later in a putsch that horrified the school principal, Maxine Kohler, and Lutman. Once he had left, and an acting chairman was installed, the board voted to ratify its past decisions on the deal - this time with Margaret and Michelle absent. The Markhams' lawyers had drafted these resolutions such that they purported to retrospectively fix the conflict-of-interest problem. Kohler and Lutman were outvoted in each vote, and a letter was sent to James to reassure him he had the green light.
Surely this would be the end of the ructions, and the school could get on with the business at hand: reviving enrolments and building flats. "I am very proud of the work that my family have done for the school over their entire life," Deaker says. "It has really been a life[time] working commitment."
There is one more hurdle to leap, however. The parents. The donors. But even these issues appear to be in hand. James Markham is to appoint a new public relations team for both his company and the school to manage any adverse publicity. Margaret came perilously close to losing control of her mother's legacy, reduced though it is. At 76, now she can contemplate retirement, hopeful that her son and daughters will carry the torch.