SMP (Services), a private company controlled by Freddie's brother Bruce, receives rent of pounds l50,000 a year to store New- castle United merchandise, including replica team strips, in a warehouse which he acquired for just pounds l75,000 in 1997.
The warehouse was purchased from Shepherd Offshore, a company of which Freddie and Bruce are both directors and shareholders, just prior to the April 1997 Stock Exchange debut of the beleaguered football club.
But there seems to be some confusion about the valuation and price paid for it. A Newcastle United spokesman said: "Because the companies are affiliated, the price of pounds 175,000 was more favourable than if they had not been."
In the filed accounts of SNP, however, the company states that the price paid was the "market value at the date of purchase".
Newcastle United might therefore have purchased the warehouse at pounds l75,000, but it was never offered to the club, which instead now pays annual rent of pounds 150,000 to the brother of one of its largest shareholders, and more than pounds l0,000 a year in rates.
The return for Bruce Shepherd is phenomenal. For an initial pounds l75,000 investment he will receive pounds l50,000 back in the first year with a guaranteed income of pounds 2.5 million over a 17-year period. But, because the lease on the premises was changed just before the flotation of the football club, the arrangement did not have to be declared to shareholders in the annual report.
The contract between Bruce Shepherd and NUFC is for 17 years, is index- linked, and will net him a minimum pounds 2,550,000. Until just before the flotation, Freddie Shepherd was also a director and 50 per cent shareholder in SMP. But a club spokesman defended the deal and said that "Newcastle is not in the business of owning properties."
Nor, it would seem, is SMP. The latest accounts describe the company business as "recruitment and management consultants and provision of finance for motor vehicles".
The arrangement was not mentioned in the club's last report and accounts and was only mentioned in a footnote in the original offer document when it was floated last year.
The original deal was between Shepherd Offshore and Newcastle United which meant that under Financial Reporting Standards the arrangement would have had to be disclosed to shareholders in the annual report and accounts. But in the run-up to the April 1997 flotation the ownership of the warehouse and the lease between the club and Shepherd Offshore was transferred to a company controlled by Bruce Shepherd, SMR (Services), in which Freddie Shepherd had until shortly before held a 50 per cent interest.
All the Shepherd brothers' business arrangements are 50-50 apart from this particular deal.
Although potential investors in the club were told about the pounds 150,000 arrangement between Newcastle United and Bruce Shepherd, they were not told that SMP (Services) had purchased a long lease for pounds 175,000.
Why Newcastle United did not itself purchase the warehouse remains unclear. According to a spokesman for the club: "The building was never offered to us but the company is happy with the rent it pays."
A further question, however, arises from the amount of rent that the club pays. The warehouse is believed to be no more than 15,000 square feet and the going rental rate in the area is around pounds 4 per square foot - in other words, the rental would be pounds 60,000.
The Newcastle United spokesman said that the amount of rent per square foot paid would not be disclosed as it was "commercially sensitive", but added that the building had a "high level of security, five closed-circuit video cameras and is ram-raid-proof".
According to the local council, the rateable value of the warehouse is pounds 24,500 and the rates paid are pounds 10,300. The bill is settled by the football club.
Since its flotation on the Stock Exchange, the shares in the club have been in freefall. Sold to the public at 135p per share, the price at close of the market on Friday was down to 78p.
It is not clear whether Newcastle United directors apart from Freddie Shepherd knew about the intended sale of the warehouse lease. The lucrative rental contract runs from February 1995 to February 2011 and is for the use of the warehouse, on Station Road, Walker, on the outskirts of the city.
As a director of the Stock Exchange-listed company, Freddie Shepherd would have been required to publish details of all "related party transactions" between himself and the club until his forced resignation from the board after lurid details of his private life were published in a Sunday newspaper.
Freddie Shepherd is a friend of Nick Brown, the Government chief whip, and has hosted Labour fund-raising functions.
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