Väino Einola at Toronto Estonian House AGM in May 2017
Veiko Parming - President Estonian House Limited
Estonian Centre : Due Diligence Report May 2018
With the publication of the due diligence report on estoniancentre.ca I have finally had an opportunity to review and analyze the proposal to develop the Estonian Centre. Although many design aspects of the proposal have been talked about, there has been a reluctance to delve into and discuss the financing of the centre.
My analysis suggests that we should have a second look of our ability to proceed with the project as proposed.
I hope my comments in the attachment provide you with a different perspective and an opportunity to re-evaluate the direction in which we are going.
I look forward to your comments.
Sincerely,
Väino Einola
President, Estonian Businessmen's Club in Canada.
Veiko Parming, President Estonian House Ltd.
Financing for the Estonian Centre
The Report identifies that the net proceeds from the sale of Estonian House at 958 Broadview will net between $11.0 million and $ 15.0 million. The details for this are unclear. We are aware from previous information meetings that the sale of the property to Revera is subject to the zoning that Revera hopes to achieve for the property. You have also told us that the sale to Revera is for the combined properties of 958 Broadview as well as the properties owned by the Estonian Foundation of Canada at 954 and 956 Broadview Ave and 72 Chester Hill Road. Previously it was stated that to consummate the sale, Estonian House would acquire the properties from the Estonian Foundation prior to the sale of the combined property to Revera. The selling price of the EFC properties has not been specified in this transaction. We are aware that previously this led to a major misunderstanding between Estonian House and EFC.
We need clarification on two points:
1. What price has been agreed with the Estonian Foundation for the sale or transfer of its properties to Estonian House AND is the contracted price for the EFC properties proportional to the sale price that has been contracted with Revera.
2. Will the transfer or sale of the EFC properties occur as a straight transaction between Estonian House Ltd, or will the sale be as a re-assignment of the purchase agreement to Revera.
If the EFC properties are sold to Estonian House prior to the sale to Revera, then Estonian House will have to pay the land transfer tax which decreases our net monies available from the sale. If ownership of the EFC houses is held by an individual as opposed to directly by the EFC then the registered owners would have to pay the resulting capital gains tax. Does Estonian House have any obligation to reimburse EFC members for this tax liability?
We are also aware that a rezoning application on behalf Estonian House and the EFC properties was submitted on February 16, 2018 to the City of Toronto. The cost of the re-zoning application submitted on behalf of the owners of these properties was $55,706.80. It was not submitted by Revera. Was this then paid for by Estonian House from the advance deposit paid by Revera? The submission was incomplete and was turned down by the city. The submission was prepared by Bousfields Inc. consultants. What was the consulting fee and who paid for it? Is there an additional charge for resubmitting this application, and who is responsible for any additional costs?
The risk factor presented in the due diligence report states that” it is unlikely that Revera would not achieve its proposed zoning”. Given the rejection of the initial zoning application and the rejection of much lower densities by the city for properties east 958 Broadview Ave. approval for the zoning required by Revera is questionable. The city is adamant about maintaining the height restrictions developed for the Broadview corridor.
I think it would be prudent to show a detailed best-case cash flow from the expected sale, including the EFC houses that are part of the deal, as well as all the liabilities and costs that would be incurred by Estonian House to consummate the sale. These include but are not limited to the discharge of the HELOC liability with the Estonian Credit Union, as well as various other legal, consulting, and administrative charges.
Financial Shortfall
If net proceeds from the sale of Estonian House (net of the EFC Properties) and all other liabilities yields $12,.0 million toward the development and construction of the Estonian Centre we will still be short $13.0 million dollars.
You have identified that the three organizations will support the development with $5.0 million dollars. You state that this is in the form of “loans to be repaid upon certain events including should the new Estonian Centre be sold” This is a prudent business practice that protects their investment, but presumes a risk factor on their part.
There is, in my opinion, a high likelihood that the project will require additional capital before completion. Ironically the support given by the three organizations will be detrimental to securing further mortgage capital. The $5.0 million-dollar committed by the three organizations is technically a mortgage liability. Financial institution constraints may prevent them from increasing the mortgage liability should our cost over-runs require additional capital.
Capital Campaign
It is hoped that the capital campaign will raise the $8.0 million-dollar shortfall that remains. The lead donor has executed a non-binding agreement in return for naming rights to give a donation of $2.0 million dependent on matching funds from other donors.
Capital campaign funds will only be given if there are tax advantages to the donor in doing so. The recipient organization must have a “charitable” designation by Revenue Canada. This is especially desirable if the donations are in the form of investments that have accrued capital gains.
You have proposed establishing a not for profit charitable organization as a subsidiary of Estonian House Ltd in order to avoid paying capital gains on the sale of 958 Broadview Ave.
I sought clarification from Revenue Canada as to whether the capital gain we would derive from the sale of Estonian House would be subject to a capital gains tax. The opinion from the Audit Business Enquiries Senior Specialist was that “not for profits are exempt from income tax as long as they conform to their charter.” However, she referred me to the Income Tax Rulings Directorate for a corroborating opinion. The Income Tax Rulings Directorate has forwarded to me documentation which gives specific guidance on whether there will be capital gains tax payable on the sale of 958 Broadview Ave.
“ provided the Society is organized and operated as a non-profit organization it will not be subject to tax on the capital gain from the sale of real property that it owns in order to carry out its stated purposes”
In summary, Estonian House does not have to pay capital gains tax on the capital gain made on the sale of 958 Broadview Ave. The establishment of a not for profit charitable organization for this purpose is completely unnecessary.
Cash flow and Timing
The proposal to establish an NFP charitable organization is a major change to the Estonian House structure and organization. The amendment to the by-laws would have to be approved by the share holders by two thirds vote at either a special meeting called for that purpose or at the annual general meeting. Proceeding without the approval of the shareholders would be unlawful.
After the NFP has been established it needs to apply for a charitable status from Revenue Canada which may take up to one year. Under your proposal, the NFP was to assume the purchase obligations to acquire 9 Madison and ultimately acquire 11 Madison. This cannot be done until the NFP is established as a charitable organization. The transfer of monies from the sale of 958 Broadview and the legal transactions will not occur until the zoning is in place and sale of 958 Broadview closes.
Your timeline shows that you cannot close the deal on 9 Madison until all events have taken place. You have projected this to take place no earlier than January 2020.
Concurrent with the sale of Estonian House we must raise money through a capital campaign. To do this we need a charitable organization to be in place. You have suggested that this would not be in place before Jan. 2020. How will you run a successful capital campaign without the ability to issue tax receipts?
Alternative Strategy
The project can only be undertaken if we have the financial resources to do so. You have a financial shortfall that is untenable. The project manager has used the word “hopeful” too many times. Owners deal with reality. It is very simple …. No money … no project.
Now you have a 13.0 million-dollar shortfall. You cannot establish a not for profit charitable organization without the approval of the Estonian House Shareholders. Without the NFP charitable organization it becomes impossible to bank donations.
With an existing mortgage of $5.0 million it will be difficult to secure additional mortgage financing.
This leaves you with two alternatives:
1. Walk away from the project. Experienced developers do this when they recognize that the financing does not work.
2. Redefine the scope of the project to fit our financial limitations. You have already considered a version of this in your risk assessment. It would make even more sense to forego all development on 11 Madison Ave. You eliminate both the land cost $3.0 million and the development cost of 11 Madison ( both the restoration and the Annex). The ETCU as the owner of 11 Madison can develop it themselves or sell it.
Redefining the project due to financial constraints is not news in the development business. Experienced and successful developers do this all the time. It is far better to take this initiative while the project is on paper, than have it forced on you in the middle of construction.
Väino Einola
President : Estonian Businessmen’s Club in Canada
CC Eric Sehr, VP Estonian House
CC Linda Veltman, Director of Finance, Estonian House
CC Special Audit committee Estonian House Jaan Arro, Enno Agur, Lena Kõiv
CC Jaan Meri, President Tartu College
CC Eva Varangu, President Estonian Foundation of Canada
CC Anita Saar, President Estonian Credit Union
Reply to Väino Einola: Regarding letter entitled “Financing for the Estonian Centre”
The Board of Directors of Estonian House in Toronto Ltd. and the leaderships of the organizations involved with the Estonian Centre Project acknowledge receipt of Väino Einola’s letter, titled “Financing for the Estonian Centre”. We do not share his views.
The Board of Estonian House in Toronto Ltd., together with the Estonian (Toronto) Credit Union Ltd., the Estonian Foundation of Canada, and Tartu College, has proceeded with the Estonian Centre Project in accordance with the mandate provided by the special resolution passed by more than two-thirds of the votes cast by the shareholders of the Estonian House in Toronto Ltd., on April 25, 2017.
Progress with respect to the project has been communicated in detail and with transparency at numerous public meetings, through timely newspaper articles, and through information available on the Estonian Centre website, including a substantive due diligence report.
We have made decisions and acted in a manner consistent with both the vote of Estonian House shareholders as well as what we believe to be in the best interests of the Estonian community. We have acted responsibly and prudently, with the advice and guidance of consultants with impeccable, relevant and current day experience, which includes commercial property development, tax law, and finance.
This project is complicated, with many issues still to be considered and resolved. These kinds of uncertainties and risks are also a fact of life for anyone involved in the kind of property development which we are undertaking on behalf of the community. We have accomplished a great deal to bring the project to this stage. We have also been transparent in acknowledging that the project is not without risk, including financial risk.
Based on the best advice we have available, we believe these risks and uncertainties to be manageable and can be mitigated.
We believe that the Estonian Centre project is viable. We believe that the considerable issues remaining will be resolved and that a modern, vibrant and sustainable community centre serving the needs of the Estonian community for many years into the future will become our collective reality.
On behalf of the Estonian House in Toronto Ltd. Board of Directors and its partner organizations,
Veiko Parming
President, Estonian House in Toronto Ltd.
Ellen Valter
Chair, Estonian (Toronto) Credit Union Ltd.
Eva Varangu,
President, Estonian Foundation of Canada
Jaan Meri
President, Tartu College
