24
Feb

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From Bankruptcy to Solvency in 45 days

 

Introduction

CAA has been appointed to manage a specific property portfolio, consisting of 44 properties on the 1st December 2016.

The case study below will indicate the risks, challenges, internal controls, and the various strategic partners mobilised to implement a turnaround strategy pertaining to this property portfolio.

This does not address at present the tenants, rentals, profitability, or increased income streams. It only addresses the Corporate Governance and liquidity of the property.

Inherent Risk Context

The property consists out of 44 properties, owned by 11 owners. The properties are a combination of commercial properties (butchery, liquor shop, supermarket, etc.) and residential properties (flats ranging from Bachelor to 3 bedroom flats).

The Inherent Risk at handover were:

Debt to the value of R600000.00 to the local Municipality;

Municipality Power cuts every week for 2-3 weeks (cost, reputation and interruption of business)

Interest on the outstanding balance, collection fees and cutting and reconnecting fees;

Owners initial debt to the value of R140000.00

No Maintenance, Repair, Replacement Plan (MRRP);

Electricity consumption of the total property are allocated to the Body Corporate (stealing of electricity)

Extra ordinary water account because of water seepage and leakage

Devaluation of owner’s property;

No sales of properties in three years, no clearance certificates from Local Municipality;

Poor Management of the Body Corporate;

Non-Payment and defaulting on payments created a hostile debtors book and approach by the Municipality;

Cash books system; and

No Cash flow and cannot service its debt.

All the above were contributing factors that the property was on the verge of bankruptcy and that the owners of the building had various choices:

Contribute proportionally to the debt

Declare business rescue

Internal Forensic Audit

CAA implemented the above strategy within 5 days after handing over and accessing the bank accounts.

From the Audit, it was indicative that the bank account was only used for certain owners and not for others. The actual Owners Debt was not limited to the R140000.00, but to the full amount stated in bullet 1, but it was not documented.

CAA implemented a communication strategy regarding the findings and raised the awareness of the Inherent status of the property.

An aggressive Owner Based Debt collection strategy was implemented on the 4th January 2017. By the 23rd January 2017, the outstanding debt were collected and payment was made to the Municipality.

The Managing Agent was changed and CAA has taken over this role.

At present, this property has a Positive bank balance and CAA started with the MRRP as from the 1st February 2017.

Importance of Strategic Partners

Strategic Partners are not always appreciated and valued.

In this instance, CAA called upon:

  • the CAA Audit team, for independence in the auditing process,
  • The CAA Legal team, for the implementation of the judicial process as per the letter of the law
  • The CAA appointed Property Management Agency, to coordinate the leases within the building. This also lead to the sole mandate of the Managing Agency regarding the rentals, the standardisation of rental fees asked per property and the subsequent continuous risk assessment of each separate property;
  • The mobilisation of the CAA endorsed Maintenance teams (plumbing, electricity, painters, builders, etc.) to conduct a Property Risk Assessment for the development of the MRRP;
  • The enhancement of our relationship with the Property Credit Bureau to ensure that each owner knows the consequences

The collective strategy, working in support of each other, created the conditions for change and the willingness to correct the mistakes.

Residual Risk

It took CAA only 45 days to collect the outstanding amount and make payment to the Local Municipality.

This was not at all easy, but when one is placed in a leadership position, to solve challenges and do the right thing with the specific objective in mind, drives success.

The relationship with the Local Municipality has been restored and they committed themselves to implement SMART meters for the property within 30 days of the payment. This project was finalised on the 9th February 2017.

The moratorium on selling the property has been lifted and clearance certificates can be obtained, placing the property in Good Standing.

Only one Owner debtor remains and the legal process will process to obtain a judgement against the owner to sell the property on an auction within the next 30 days.

The MRRP needs to be implemented as a matter of urgency to create the good standing for rental income and interest in prospective buyers.

Conclusion

CAA is a problem solver and we have over 500 years of collective knowledge, experience, and street wise wisdom within our ranks.

Choosing the right partner to manage your property is of the utmost importance.

In Part 2, end of March, CAA will demonstrate the improvements made, the MRRP, the improved cash flow and the improved owner, vendors, debtors and managing agent relationship.

For any enquiries, please contact Nico Snyman on nico@crestadvisoryafrica.com or 0764034307.