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Saturday, 9 March 2013

Municipality of Almere loses €3.3 million in Eurocommerce bankruptcy

At, I always try to bring the interesting and ‘great’ news on the Dutch and European economy and politics. Sometimes, however, I am tempted by the local news coming from where I live; especially when it has a national context. Today is one of those days.

Last year, I wrote on the bankruptcy of the real estate management company Eurocommerce, a company with real estate that was not exactly top of the bill: generally, Eurocommerce had the wrong kind of buildings at the wrong locations.

Eurocommerce was one of those real estate companies, that turned considerable parts of The Netherlands into graveyards for structurally vacant and not-so-beautiful real estate. Real estate, which turned obsolete and unnegotiable during the last ten years, ultimately waiting for either the 'demolition man' or a very expensive refurbishing operation. And for whom it had been built initially?! Nobody knows…

On 20 November 2012, I wrote the following lines about the Eurocommerce bankruptcy:

The real reason is that project developers, cities and communities, the banks, pension funds and insurance companies combinedly financed a zillion crappy buildings in The Netherlands. Ugly and/or badly designed and built commercial buildings at Z-locations that nobody wanted to buy or rent.

The whole Dutch CRE-market currently suffers from a structural vacancy of about 15% and a forecasted non-structural vacancy of 25% within a few years. […] this has very little to do with the credit crisis, but a lot with excess supply in a buyer’s market which already started in 2006. While the best, most beautiful and modern buildings at the best locations still can be sold or rented, this is virtually impossible for buildings in the Eurocommerce / Uni-invest categories.

Many communities overplayed their hand in the (recent) past and already suffered considerable losses on their real estate and ground sales portfolios during the last eight years.  In my opinion, larger losses will be imminent for the real estate portfolios of many other communities.

Yesterday, the local ‘Daily Comet’ of Almere, the city where I live, printed an interesting story on a contract gone awry between Eurocommerce and the municipality of Almere. Probably, this story is exemplary for the way that other communities became intertwined with real estate management companies, as a consequence of their unsatiable appetite for income from real estate taxes and ground sales.

Here are the pertinent snips from the “Almere Vandaag” (i.e. Almere Today) newspaper.

The community of Almere might suffer a €3.3 million loss, due to the bankruptcy of real estate company Eurocommerce. Almere supplied Eurocommerce with a debt of €7.5 million,  when it sold a large piece of terrain near Almere Central Station [for the development of two office skyscrapers – EL].

In exchange, the real estate company pawned two objects as collateral: a school building in Deventer and a few acres of terrain at another location in Almere.

At the time, the value of this collateral had been estimated at €9 million, but the current appraisal value is not more than €4.2 million, according to PVV-alderman Toon van Dijk. “At a total debt of €7.5 million, this appraisal value means a loss of €3.3 million for Almere”.

According to Van Dijk, the municipality wants to wait with selling the collateral, until the value of the school building in Deventer and the terrain in Almere increases again. Van Dijk has doubts about the sensibility of this plan: “In these trying times, the desired increase in value might take a while before happening. On top of that, the trustee of Eurocommerce might intervene at any given moment. The damage has been done already. As real estate taxes will be added to the total debt, the total amount of debt may rise even more”.

When this story is indeed true (I presume it is) and when the facts mentioned in this article are represented correctly, this is a shocking story of blatant ignorance (perhaps even stupidity) and short-sightedness by the responsible representatives of Almere. And although the rightwing, populist PVV-party of Geert Wilders is not exactly my ‘cup-o-tea’, generally speaking, there is not a single unjustified syllable in this statement by Toon van Dijk:
  • The bill of this debt will indeed rise in the future, due to all kinds of local expenses that will not be returned by Eurocommerce anymore;
  • Besides that, the chances that the terrain in Almere and the school in Deventer will rise 80% in fair value, in order to pay the whole Eurocommerce debt in full, are extremely dim. Hence, doing nothing is not an option;
  • So, if nothing happens here, the community (which means I and the other 195,000 inhabitants of Almere) will suffer a loss of at least €3.3 million and this might become even more for the future;

And there are two other circumstances bothering me:

First, when these skyscrapers were developed by Eurocommerce, the commercial real estate (CRE) market was already in a steep downturn. I wrote about exactly these buildings almost two years ago:

And the future for CRE itself? Even as we speak, building companies are busy surrendering new real estate on top of the heap. Ordered in an overly optimistic time and probably built for future vacancy. Just like in a bubble.…

From my home town Almere, I show you some pictures of new CRE that will be surrendered very shortly by the building companies (click the aforementioned link for the pictures).

And Almere is only a relatively small city […], compared to Amsterdam and Rotterdam. This is to show you that the madness in CRE is still not over yet.

I didn’t and still don’t understand why the Almere municipality approved of these two landmark buildings. Was it because the mayor and her aldermen wanted ‘a visible monument for their achievements’?! Did their combined vanity need CRE of ‘epic proportions’?! Who knows, but knowing the mayor of Almere, Annemarie Jorritsma, I wouldn’t be surprised.

Second, why did the community of Almere accept a school building and a few lousy acres of terrain in Almere as a collateral for their €7.5 mln loan, knowing that (semi) government and community buildings are notoriously hard to sell for a good price?!

Why did Almere enable this strange kind of horse-trade, instead of asking a bank to supply Eurocommerce with a loan, based on this collateral?! Is it perhaps, because the banks DIDN’T want to supply this loan, based on the aforementioned collateral or due to the awkward financial situation of Eurocommerce?!

And why this collateral had been put in the books for €9 mln, while only a few years later the fair value of it is less than half of the original amount?! These are exactly the kinds of issues that cause people to lose their confidence in local government representatives.

Often these local city-planners and developers seem like a monkey with a gun: not knowing what it is carrying, but with the power to inflict enormous damage to itself and to others.

PVV-representative Toon van Dijk has leaked/published this information after a non-public meeting of the Almere city-council. I truly thank him for that.

Unfortunately, I’m certain that the mayor of Almere and the aldermen responsible for this presumed blunder, will walk without any consequences. As they mostly do… The poor citizens of Almere are the ones that must foot the bill for this exuberance.

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