Is There Redemption for Access Real Estate?Published Posted on | By TZTA News
For yet another year, external auditors, entrusted by shareholders of Access Real Estate SC to look into the books of their troubled company, came up with a damning report. This time around, their tone is far from the qualified opinion they made for the 2011/12 fiscal year.
They said that their findings were “too significant” and so they were compelled to put a “disclaimer” on opinion – audit jargon to say that guaranteeing shareholders that the company they established four years ago could continue was a growing concern. If the previous year’s audit report, conducted by Kokeb Moges & Co, was a predictor of the company’s upcoming troubles, the report for the fiscal 2011/12 year has come close to ringing its death knoll.“The company is [in] huge difficulty to continue in business,” pronounced the auditors, presenting their findings to shareholders at their fourth general assembly, held inside the Genet Hotel, Mozambique street, on June 16, 2013.
It is a shocking moment in the short lifespan of a company, originally formed by five shareholders, with a 50,000 Br registered capital. Ermias Amelga, its CEO and chairman of the board, brought onboard Access Capital Services SC, an aspiring private equity firm in Ethiopia, where he owns a major share. Three other associates joined him as founding shareholders, namely – Haileleul Tamiru, who fell from rank with him two years ago; Takle Alemneh, a person who was instrumental in forming Zemen Bank with Ermias, and Amsalle Bayu, his lawyer, elected to the board of directors at Access Real Estate.
Mobilising over 600 shareholders, who raised 31.8 million Br in equity, the company has grown quickly to have liabilities 39 times larger than its capital. Even before the firm started operations, Access Real Estate’s management spent 64.5 million Br in commission and other administrative expenses.
“It is striking,” said Abdulmena M. Hamza, accounts manager at the London-based Portobello Group, who examined the latest report on Access Real Estate. “Access didn’t have enough equity to cover pre-operational costs and investments in fixed assets.”
The auditors pronounced that those in charge of running the affairs of Access Real Estate have demonstrated gross financial mismanagement, for they have given out unsecured and unwarranted loans to associate companies, subsidiaries and individuals, while their corporate governance has been poor.
The huge chunk of this fund came from unsuspecting homebuyers, who advanced 941.25 million Br, in the belief that the company would deliver affordable housing within one year of singing contracts. Ironically, the company has invested 664.68 million Br in acquiring other properties, such as – the Imperial Hotel in Addis Abeba and Safari Lodge in Adama (Nazareth). A further 173.6 million Br was spent in buying shares in other real estate companies and 158.3 million Br was advanced to suppliers and contractors.
Among such contractors were Living Steel Construction Plc and YBEL Industrial Plc, which have been paid in advance a total of 260 million Br. These companies could only account for 23.3 million Br in delivery of work, the audit firm has established.
Shareholders of these companies, including Luchiano Framolin and Yonas Tadesse, established another real estate firm with Ermias, by the name of Michot Real Estate Plc. Although Luchiano and Yonas have left this company since then, Michot was among seven suppliers who was paid two million Birr, of the 5.1 million Br advanced to these companies.
Indeed, Luchiano was paid 10 million Br from the Access Real Estate account, without any “agreement or reason of payment.”
Nonetheless, Luchiano denies that the money was paid to him personally, but accepted that 10.8 million Br was paid to three companies he was involved with, including Michot He has supplied Fortune with photocopied receipts of advances issued by Amplifly General Trading Plc and Libero Trading Plc.
“I wasn’t approached by the auditing company,” Luchiano told Fortune. “I could have explained this to them and shown them these receipts.”
Managers at the audit firm were not available for comment.
In their report though, they said they could not obtain confirmation, from the state-owned Metal & Engineering Corporation (MetEC), regarding a balance of 26 million Br registered as receivable in Access Real Estate’s accounts.
The MetEC has acquired the Imperial Hotel from Access Real Estate, for 83 million Br, which was sold to the latter by the original owner, the Asefaw’s Family Plc, for 57 million Br. Access has yet to make outstanding payments to the Asefaw Family, which still holds the title deeds of the property.
Access, too, has granted close to 148 million Br in loans to subsidiary companies, under the umbrella of Access Capital Services SC, which is also its major shareholder. In fact, Access Capital and Access Real Estate have changed the roles they were established for, as the latter appears to have been used by Ermias as a holding company – a role the first was established for.
Ermias claims delays in construction, caused by regulatory intervention by the city administration, coupled with major devaluation of the Birr and the hyper inflation at the time, were reasons that led him to invest homebuyers’ money in subsidiary companies. Unfortunately, what shareholders contributed has constituted only 2.55pc of the liabilities Ermias has caused the company to sustain, up until today.
In retrospect, he accepts it was a decision made in “poor judgment.”
Ironically, the management of the real estate firm and its board of directors have failed their shareholders in not taking a recommendation auditors made the previous year, for the companies under the brand Access to consolidate an account of statement.
Ermias admits that this was a major error of judgment. In a letter he addressed to the general assembly, he confessed that not to pay attention to auditors remarks in areas relating to a lack of documentations and the necessity of conducting a consolidated account was “plain and simple incompetence and non-performance.”
“The fact that Access Real Estate’s subsidiary companies were again not audited this year is indefensible,” Ermias said in his address.
It was amazing that the auditors have managed to prepare balanced financial documents, based on the little information they had available, according to an audit expert that viewed the report.
Shareholders were not happy with such incomplete information.
“Such an audit report should not have been presented,” one shareholder complained. “They should further investigate the missing records.
Not much discussion was held on June 16th over the contents of the audit findings, as shareholders were eager to move on to the extraordinary meeting and discuss how to get the company out of its current turmoil. It has become clear that the bold and confident way the company started its business, in 2008, is a far cry away from the reality now. Ermias, known as a pioneering entrepreneur from his previous ventures, Apex Bottling Company and Zemen Bank, promoted the company by promising to deliver affordable homes built on prime locations pokies online fun in the city. He had managed to persuade over 2,000 people to invest, pledging to pay a monthly fine of 5,000 Br in house rent for late delivery and a full return of money with 15pc interest for those who wanted to terminate the contract.
The too-good-to-be-true offers were made in the hope that an alleged new technology to Ethiopia – building homes using steel structure and magnesium boards, introduced by YBEL Industrial – would do the trick of cutting construction costs in half and reduce the build period to just six months.
But, five years after the company’s formation and three years after it started operations, it has yet to deliver a single unit from any of the 19 sites it claims to have been developing. Despite customers trust, which was above reproach, and their unabated patience, such serious trouble came to a head in February of 2013, following the arrest of Ermias over a bounced cheque and his subsequent departure abroad – an act that was followed by angry homeowners flooding the offices of Access Real Estate, demanding their money back.
The real estate firm, which paid a lot more attention to its public profile and on promoting itself, rather than focussing on resources for its operation, suddenly found itself in a bank run situation.
“Success has been close, but elusive,” Ermias admitted, in his address to shareholders. “At the end of the day, somebody has to take responsibility and I do.”
Ermias, who remains in self-exile, blames the flood of buyers demanding a refund, based on an Amharic weekly report on his company’s poor performance and his subsequent, but unceremonious, departure to the United States.
Managing Access Real Estate with a remote control from his temporary base in Dubai, he is trying hard to regain the confidence of homebuyers, who have organised themselves into 20 committees – one for each of the 19 sites and a US homebuyers committee – as well as an overall steering committee, in a bid to come up with options to save their investments with a company whose illiquidity is beyond certainty now.
However, whether there will be any redemption for Access Real Estate is a matter of sharp contention among the various group involved in the committees and elsewhere. In stark contradiction to what the auditors have come to conclude, Ermias believes Access Real Estate is a fixable crisis, which is still solvent as a result of assets owned. He hopes to raise close to three billion Birr, of which 700 million Br he says is receivable from homebuyers who have now lost confidence in him. He also envisages collecting two billion Birr from selling new units to the market, and an additional 200 million Br from third parties and related companies where it has invested.
“It’s entirely possible for Access Real Estate to become a very profitable ongoing operation,” Ermias said in his address.
However, in the absence of huge funding, the survival of Access Real Estate is questionable, Abdulmena, who assessing the audit report, stated.
Homebuyers, particularly those who reside in the US, are racing against time to find an alternative to the likelihood of managers of the real estate firm from declaring bankruptcy, which Abdulmena believes could be inevitable, due to the dangerous leverages they have made over the past three years.
They have declared their intention not to settle the crises in a court of law, for fear of driving Access Real Estate managers to file for bankruptcy. But, they have developed a roadmap that would urge the government to bailout the company, in the same way the US government has done in rescuing ‘too big to fail’ companies.
“The government has a moral and legal obligation to work for the general welfare of the public,” said Samuel Alemu, member of the homebuyers committee in the US, in his emailed response to Fortune. “The Ethiopian government’s role in mitigating the harm resulting from Access Real Estate’s financial problem would help boost confidence and encourage future investments.”
They also foresee the possibility of turning advances homebuyers made into equity in the company, which will not only make them shareholders in Access Real Estate, but also give them leverage to control the board and change the management. They also have plans to offer equity to the public, in order to raise the paid up capital of the company.
Such proposals may prove difficult in light of the current audit report. There was only 6.34 million Br in cash in the company’s bank account, the audit report revealed. With such small cash holdings, Access Real Estate would find it extremely difficult to run its daily activities, according to Abdulmena.
Indeed, Shewakena Aytenfsu, the current manager of Access, disclosed to shareholders during the meeting that there is no fund to pay rent or cover salaries for the remaining employees of Access. The monthly expenses of Access, he said, amounted to one million Birr.
But, using equity contributions was also not an option, as it is too small when compared to the liabilities incurred by Access Real Estate.
But, still, even with such assessments, the homebuyers committee insist that restructuring the company is the best move forward.
“The Access Real Estate US Homebuyer Committee’s Restructuring Plan remains viable following the most recent audit, as the plan already carefully considered Access Real Estate’s weak financial position,” said Samuel. “While the ARE’s financial situation is bleak, it is not impossible.”
This sentiment is shared by existing shareholders, who seem to agree with the restructuring. They have agreed, during the meeting, to contribute 5,000 Br each as an additional equity, in order to raise funds for the daily activities of the firm.
Far from the daily trepidations of the company he founded, managed and still controls a majority share in, Ermias is urging for sympathy.
“My regret and sorrow at what has transpired is beyond description,” he said, in his statement to the general assembly. “But, what is done is done and can’t be undone.”
Despite the hopes they have of reviving Access Real Estate, neither shareholders nor homebuyers were forgiving towards him. Shareholders present at the general assembly (representing 28pc voting rights) have removed Ermias from his position as board chairman and barred him from representing the company’s activities. Four additional board members have also been added to oversee the company, along with the four that presented a board of directors’ report at the meeting.
Out of the original four members, Tigist Shitaye has also stepped down due to personal reasons.
Separately from the meeting, committee members have written both to the Prime Minister and to the Federal Police, urging the government to bring Ermias back to Ethiopia to walk his talk of “I accept responsibility and accountability for what has transpired.”
BY ELLENI ARAYA
FORTUNE STAFF WRITER
PUBLISHED ON JUNE 23, 2013 [ VOL 14 ,NO 686]