Eron Lenders
Project Name: Emerald Estates
Borrower: Endeavour Developments Ltd.
Lender update

October 15, 2001

We are writing to investors in this project to advise of the current status of this project and recent developments.


Background

You will recall that Eron Mortgage Corporation syndicated five mortgages on the subject site (in 2nd to 6th positions) in the principal amounts of $550,000, $2,011,000, $500,000, $3,550,000, and $2,500,000. The mortgages were chronologically registered in 2nd to 6th positions respectively.

These mortgages all ranked after a first mortgage in favour of Pacific Playground Holdings Ltd. ("PPHL"), the party that sold the site to Endeavour Developments Ltd. The amount due to PPHL was $686,395.73 at September 23, 1997.

We had the site appraised in late 1997. Subject to several limitations, the appraiser believed the site was worth between $2 million and $2.5 million.

During the course of our work, we noted several facts that caused us to believe that the $2,011,000 mortgage ranked in priority to the $550,000 mortgage notwithstanding the order of registration on title. With the approval of the Court, we `resigned' as Judicial Trustee of the $550,000 mortgage in 1999 in order that the investors in that mortgage might argue the priority issue. At this time, that priority issue has not been resolved.


Current Status

After many adjournments, referrals to the Registrar to deal with accounting issues, and an appeal, we were granted Order Nisi, in respect of the $2,011,000 mortgage on February 28, 2001. The Court granted us with judgement in the amount of $4.6 million and immediate conduct of sale.

Unfortunately, the real estate market in the Comox-Strathcona Regional District has declined substantially since the late 1997 appraisal. Total single family residential and mobile home building permits issued, within Electoral District C (in which the Emerald Estates site is situate) declined from an average of 48 per year during 1995 to 1997, to an average of 10 per year during 1998 to 2000. This data also suggests there has been a more marked decline in demand for mobile homes/modular homes (for which Emerald Estates was being developed).

We contacted all parties who had previously expressed an interest in acquiring the site. Those parties were either no longer interested in the site or only interested at a price less than the amount due to the first mortgage holder.

We listed the property for sale with Royal Lepage in Courtenay, B.C., on an MLS basis, at an asking price of $1.6 million. To date, we have received no offers.

Presently, amounts due for outstanding property taxes and to PPHL total approximately $1 million (notwithstanding PPHL claims more than $1.5 million due to a default rate of interest that we believe is not enforceable against us). The first mortgage has been in default since September 1997 and PPHL has been attempting to foreclose since. That foreclosure process has been impeded by a counter claim of Endeavour Developments Ltd. claiming that PPHL, as vendor of the site, promised an adequate water supply to enable development of the site. Review of the sales documents indicate to us, and our legal counsel, that this claim is of questionable merit. Endeavour Developments Ltd. claims the vendor gave verbal representations beyond those contained in the written agreements. PPHL denies such verbal representations were made.

The direct costs of the Judicial Trustee to June 30, 2001 related to the Emerald Estates project total $300,578 (time charges and disbursements of PricewaterhouseCoopers Inc. total $155,607 and legal expenses total $144,971).

Given the market conditions surrounding development properties on Vancouver Island, the amount due to the 1st mortgage holder, and amount of direct costs to date on this project, we do not anticipate any significant distribution to investors in the Emerald Estates mortgages.

We have kept in communication with, and sought the input of, the Emerald Lenders Committee representative on issues as they have developed. When an offer is received for the property or other significant matters develop, we shall again seek the input of that representative. If this situation changes significantly, we will advise all Emerald lenders further.


Yours truly

PricewaterhouseCoopers Inc.
Judicial Trustee
Per:

Richard D. Pallen
Vice President





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