Real estate developers say government Porto Franco loan illegal state aid

Real estate developers have hit out at the government's decision to loan, via state agency KredEx, €39.4 million towards the Porto Franco project in Tallinn's harbor area, urging the coalition to rethink the move and deeming it illegal state aid in terms of European Union rules.

Some of the country's largest developers, together with the Association of Real Estate Companies (Kinnisvarafirmade Liit) have written to the government as well as KredEx, saying the loan creates a dangerous precedent and is a misuse of the coronavirus state aid package outlined in a supplementary budget the government issued in the wake of the pandemic.

"The purpose of state aid measures in the context of COVID-19 is to help companies whose economic activities have been affected by the circumstances caused by the virus outbreak," the companies write in a memo to the government.

"As a result, the purpose of the working capital loan provided by SA KredEx is to finance the working capital needed to overcome the temporary difficulties at a company due to the coronavirus outbreak.

Reform Party MPs have already written to Prime Minister Jüri Ratas (Center), asking for an explanation of how the developers of the 150,000-square meter plot near Tallinn harbor qualify for KredEx loans. The company had already received a joint loan of over €100 million from the European Bank for Reconstruction and Development (EBRD) and Estonian bank Luminor, though says that the pandemic has caused its creditors to change the terms of the loan since then.

The firms writing to the government note that Porto Franco OÜ, the company behind the development, cannot qualify along these lines since it is not a fully operating company yet, with a project only at its early development stages.

"Porto Franco OÜ is a company that does not have any cash flow from economic activities today, as it is still in the early stages of real estate development. Moreover, Porto Franco's construction activities were already in place before the COVID-19 crisis broke, so the needs of Porto Franco OÜ resulting from coronavirus do not have any connection with the objectives of the crisis measures, and the principles of the temporary framework for state aid, nor does the economic content of the planned support constitute working capital financing," the letter went on.

KredEx had previously ruled out loans for incomplete construction projects

The companies also point out that, given the 2 percent per annum, 12-month Euribor interest rate, the loan would provide the state with €3.2 million in interest payments per year, or about €20 million over six years-

The situation is worsened since KredEx had previously ruled out subsidies for real estate developments, the letter reads, adding other developments are in the same boat.

"However, in the case of Porto Franco OÜ, the state has decided surprisingly, to support one of the many development projects, which is in no way worse off than other similar projects."

Construction activities can be temporarily suspended, the developers add, whereas those completed projects which are up and running have no such option.

The state support also distorts competition, they said, regardless of who applied for KredEx support first.

"There is no way to accept as legitimate a situation where only the first developers who apply first are allowed to receive support. This is a clear unequal treatment of companies by the state," the statement continues, adding that if there are additional reasons why Porto Franco merits special treatment which have not been made clear yet, this changes nothing with regard to the coronavirus state aid package.

The letter adds that since the loan almost certainly constitutes illegal state aid, which the European Commission will come down on and which would require the state to return millions in interest payments.

The address has been signed by the Estonian Association of Real Estate Companies together with developers Eften Capital, Kawe, East Capital Real Estate, Capital Mill, Metro Capital, Arco Vara and Hepsor.

The loan would be secured by second-rate mortgages on real estate located in Tallinn at Laeva T6, Laeva 1, Kuunari 1 and Kai 4, in Tallinn's ferry harbor district.

Porto Franco development already dogged by delays

The Porto Franco development has been delayed for many reasons. 

The company's CEO Rauno Teder said last week that no construction work is currently taking place on the site, with the loan, which has yet to be signed off on by KredEx's supervisory board, being the precondition for the work to re-start.

Porto Franco signed a € 102 million loan agreement with the European Bank for Reconstruction and Development (EBRD) and Estonian bank Luminor in late February, a few weeks before the government imposed its emergency situation, due to the spread of the coronavirus.

The EBRD's share is €63 million and Luminor's is €39 million.

Porto Franco announced in early July, however, that the EBRD had made additional demands, to mitigate the risks of the economic downturn, whereby it wants Porto Franco shareholders to contribute more money than previously agreed in the early stages of construction, and to set up a guarantee account in 2022 of almost € 10 million to service bank payments.

The government opted to support strategically important companies with crisis aid of €300 million via KredEx, with one third of this going to shipping line Tallink, which was able to prove its case as both being of strategic importance and unable to obtain the required loan from elsewhere.

€37 million went to Alexela fuel company group's Kiviõli chemicals subsidiary, in early July.

The large-scale Porto Franco development plans to encompass residential and business space, using high-tech environmental protection and paying attention to energy consumption requirements, developers say.

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Editor: Andrew Whyte

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