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Eron Lenders
Project Name: #1146 - Ucluelet, 2nd mortgage
Borrower: Endeavour Developments Ltd.
Lender update
January 15, 1998
Eron Lenders
Further to our letter dated October 29, 1997 we are writing to update you on the status of the above noted mortgages.
Project Status - Schiel Group General
As indicated in our earlier letter, all of the Schiel group mortgages are in default. No payments have been made in approximately one year and in November, 1996 the Schiel group alleged that the loans from Eron Mortgage Corporation and related bare trustee companies (the "Mortgagees") were unenforceable on the basis the charges were in excess of those permitted under the Criminal Code and they are seeking injunctive relief to prevent the Mortgagees from taking any enforcement action.
We met with Mr. Adolph Schiel, president of the borrower and guarantor of the indebtedness of the borrower to determine whether progress could be made in respect of the numerous issues to be addressed without having to resort to the courts. It seems apparent that at this time Mr. Schiel will not resolve these issues until a Court orders him to do so and he has exhausted all appeals.
With our legal counsel, we have developed and are in the course of implementing a strategy to extricate control of the underlying securities involved in this project, and connected mortgages, from Mr. Schiel and his companies. Given the facts that the borrower is uncooperative, refuses to provide information and has filed the action described above, we must expect this process will be both time consuming and expensive. However, there is no other apparent option at this time.
Project Status - Ucluelet
This mortgage was for the development of a 48 acre site near Ucluelet on the west coast of Vancouver Island. The land was purchased by Golden Horizon Resort Ltd. from the Village of Ucluelet for approximately $4 million in December, 1995. The Village of Ucluelet took back a first mortgage of $3.69 million. They are presently attempting to foreclose and advise the debt due to them was $3,852,575 as at September 14, 1997.
The site has been cleared of timber and some roadways have been roughed in. No other improvements to the site are evident. We have had the property appraised considering the existing zoning which permitted the proposed development and considered three other comparable sales during the last 18 months of larger sites (26 to 65 acres) of oceanfront property on the west coast of Vancouver Island. One of the sales had development zoning in place.
The appraisal indicates that substantially all of the value of the Ucluelet property will be applied to prior encumbrances.
However, we are currently in receipt of an offer from the borrower to settle our 2nd mortgage which would allow for a recovery of approximately 50%. We are reviewing the offer with our counsel prior to our response to the borrower. We caution the lenders as to whether the borrower has the necessary access to funds to complete their offer.
We will also focus our efforts for the recovery of funds on the following areas:
pursuit of the guarantee and collateral mortgage supplied by Bear Creek Sales Ltd. We have received an opinion of value indicating the property may be worth $2.7 to $2.9 million. The first mortgage on the property is owed $1.441 million and an Eron group (Project 1133) is owed approximately $900,000 on a second mortgage. There may be $300,000 of equity available to this collateral mortgage. Efforts to extricate control of this site are underway as part of the overall Schiel group strategy.
All of the other guarantors, except Mr. Adolph Schiel have direct indebtedness to Eron related companies and are not expected to have any surplus assets. It may be prudent to pursue Mr. Adolph Schiel directly on his personal guarantee however we cannot estimate any possible recovery on this unsecured claim.
We also have identified that the bare trustee and/or its lenders may have claims against third parties. These potential claims will be reviewed by our counsel to determine the likelihood and costs of recovery.
Of the money raised by this syndication, from the December 5 and 13 fundings, $70,000 was paid to Caesars Palace in settlement of a judgement against Mr. Adolph Schiel, $12,000 was paid to EMC on account of past due interest on Paulson Road (a related project), and $160,000 was paid to EMC for renewal fees owed in respect of Emerald Estates (a related project). To our knowledge, none of these advances was to the benefit of the borrower nor within the contemplated purposes of the mortgage advances.
Price Waterhouse Limited ("PWL") Activities
In previous communications we have noted the incompleteness and deficiencies in Eron's mortgage and accounting records. During the past several weeks we have been sorting and analysing these records which are essential to the recovery and distribution of funds.
A significant portion of the accounting and sorting of mortgage records will be completed by the end of December 1997. The final accounting and determination of accurate lender listings cannot be completed for the project until the accounting is completed for all projects due to the numerous inter-project transfers. We are using the information provided to us by lenders to cross check accounting records. We therefore request that you return to us the Lender Confirmation form enclosed with our October 6, 1997 letter, if you have not already done so.
We are minimising costs while seeking to maximise your recovery. In certain instances this goal is best served by using staff who are not PWL employees. Accordingly, we have retained the services of short term contract staff at rates significantly lower than PWL hourly rates to assist us as appropriate.
Price Waterhouse Fees and Disbursements
There are two components of PWL's fees and disbursements on each individual project, direct costs and an allocation of indirect costs. Direct costs will include costs specifically related to the project, such as, legal fees, time spent by the PWL/contract staff analysing the project and devising a strategy to maximise recovery and creating project accounting records. Indirect costs will include such items as general lender communications, analysis and creation of non project specific accounting records and all other costs which cannot be directly attributed to specific projects.
We are also incurring costs such as rent, utilities, insurance, appraisal fees and other costs. Certain of these costs will be direct costs to the project (e.g. appraisals) while others will be indirect (e.g. utilities). We have not discussed these costs in this letter.
At November 30, 1997 the direct fees incurred on this project totalled approximately $8,800 including billed legal fees of $1,600. We are unable to estimate the future direct costs for the project with any degree of certainty.
At November 30, 1997 the indirect fees totalled approximately $954,300 for the 81 projects. These indirect costs have been incurred as follows: 27% lender communications; 21% engagement planning management; 13% office, record and employee management; 9% general project matters; 9% preparation for and attendance at court; 6% banking and accounting matters; 2% meetings with regulators and 13% out of pocket legal costs.
Ongoing indirect costs will be significantly reduced as we now have a framework for the administration in place, can increasingly shift administrative tasks from PWL staff to less expensive contract staff and have established low cost methods of communicating with lenders, such as the web site and voice mail information system discussed below. Our goal is to reduce the indirect costs to a level of approximately 20% of the total costs of administering the projects by December 15, 1997.
The method of allocating the indirect costs has not yet been determined, however, an allocation method based on the project's direct costs is considered to be an equitable method. We will seek Court approval of the selected allocation method at a later date.
Lender Communications
To facilitate communications with lenders we have established a voice mail information system with separate voice messages for several projects or groups of projects where we believe these mailboxes will provide a cost effective, useful means of providing current information to lenders. Please note that this project will not have a specific mailbox and any enquiries with respect it should be directed to our general voice mail box by dialling (604) 669-5087 ext. 501. Should you wish to access any of the project mailboxes, you can do so by dialling one of the following three numbers (604) 878-4201, (604) 878-4244 or (604) 878-4248 and selecting a mailbox number. A list of mailbox numbers is attached to this letter.
We have also now established a web site at http://www.eron-pwl.com. On this site you will find project specific updates as well as related court orders.
During November, as you may be aware, the Eron Lenders' Committee ("ELC") held an election to select ELC representatives. Approximately 30% of the Lenders in the Eron projects voted in this election with the significant majority voting in favour of establishment of the ELC. The ELC has been instrumental in establishing individual project committees. We have now met with most of the individual project committees and we intend to maintain regular communication with them.
We will continue to communicate directly with all lenders. We urge you to take advantage of the voice mail information system and web site so that you can receive first hand current information from PWL in the most cost effective manner we have available.
We will issue another letter as soon as we have significant new information to report. In the meantime, if you have any specific questions or information concerning the project please contact us in writing at 500 - 1380 Burrard Street, Vancouver, BC, V6Z 2H3 or by fax at (604) 688 6128 marked to the attention of Rick Pallen - Project Lead.
Yours truly
Judicial Trustee
Eron Lenders
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