The botched ‘rip off’

There are two common practices in which property companies often function. One is a company directly having internal staff working for it with an operational structure delivering like Letlole La Rona. The other is a holding company with an asset manager under with a structure employing its own staff (manager). The holding company pays an asset manager for property management, investment reviews and more. An example of such a structure is PrimeTime whose assets are being driven through Time Projects and RDC Properties whose assets are managed by PAM. Letlole was initially set up like that with an asset manager in Stanlib, the equivalent of Time Projects. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="3" ] One of the things that Grit Real Estate Income Group reportedly wanted after a share swap with Botswana Development Corporation (BDC) was this kind of deal where it will be paid a fee per year by Letlole as an asset manager. According to the drafted agreement, Grit proposed to carry out property management duties and asset management duties for a period of 10 years, automatically renewed for another 10 years unless a written notice to terminate is given two years prior to the expiry of the agreement. Grit, in rendering these services and duties to Letlole, wanted to make use of the assets of Letlole. For asset management remuneration, Grit would invoice Letlole in respect of the asset management fee related to a specific property and the related percentage on a monthly basis. Operating expenses incurred by Grit were to be recharged to Letlole in accordance with the mechanism. In the event of any project, Grit proposed a Development Management Fee of 4 percent (plus VAT) of the total development cost for the applicable project. The Development Management Fee was to be payable as follows upon submission of an invoice by the Grit and on the following basis: 30 percent upon board approval and 70 percent in equal monthly instalments over the duration of the project. Letlole was liable to pay Grit a Property Management Fee, which would be 3.5 percent of the Gross Billable Monthly Collections (exclusive of VAT) for each property. Other fees payable to Grit included an acquisitions fee of 3.0 percent (plus VAT) of asset value of the acquisition, a disposals fee of 1.0 percent (plus VAT) of asset value of the disposal, and an equity raise fee of 2 percent (plus VAT) of any and all equity raised by Grit. Further, there was a debt raise fee of 1 percent (plus VAT) of any and all third-party debt secured by Grit and a refurbishment fee of 1 percent (plus VAT) of total refurbishment costs, excluding any work of a structural nature. Letlole was liable to pay Grit in respect of all Direct Employment Costs (plus VAT, if applicable) of the non-administrative staff placed on-site or at the respective properties. At the efffective date, it is recorded that this reimbursement applies to handymen, technicians and operations officers, guest relation officers, exhibition sales managers, marketing managers and any other person exclusively employed in respect of the property(ies), and approved by Letlole. In the event that it is necessary to terminate the employment of an employee, for any reason, Grit would be entitled to recover the severance pay payable to any such employee and Letlole would pay such severance pay to Grit on demand. In terms of leasing, if the negotiation with a new tenant is initiated by Grit but the lease is concluded by Letlole, the commission would be shared as between the Manager (Grit) – 75 percent and the Company (Letlole) – 25 percent respectively. If the negotiation with a new tenant is initiated by Letlole and Letlole requires the intervention of Grit to conclude the transaction, (being a portfolio/strategic leasing transaction), the commission would be shared equally between the two parties. If the negotiation with a new tenant is concluded as a result of the effective cause being an external leasing broker/consultant or any recognised agent, the commission would be payable in accordance with the agreed mandate concluded with the recognised agent only and an additional 5 percent of the commission would be payable to Grit as administration fees. Initially this agreement would have cost Letlole about P35 million annually, according to insiders. It was first shared with management early 2020, who had run financial models and a sensitivity analysis of its implications, calculating that it would cost Letlole nearly P300 million over a period of seven to 10 years. Grit reportedly dialed down the percentage fees when trying to sell it to the board, stripping out other costs including receiving a fee for ‘sourcing acquisitions & financing’. Looking at Letlole's portfolio as it stood, the figure was approximately P15 million. The P35 million was what Grit would charge if Letlole had made the acquisition/s they were looking at in 2020. At that time, the board hesitated taking up the deal. It was put before another board which also rejected the deal. After it was turned down, Grit wanted another P8 million deal for ‘consultancy’ supposedly to help Letlole with advisory. Both attempts were viewed as just rip-offs, especially given the fact that Letlole had an internal structure doing the same job that Grit wanted. Grit increased its stake in Letlole after acquiring 66 500 000 ordinary shares of Letlole La Rona held by BDC. BDC’s shareholding in Letlole thus declined from 65.8 percent to 42.0 percent while Grit’s stake increased from 6.25 percent to 30.0 percent. Although this was not a cash transaction, Grit’s share was at the time valued at P146.3 million based on Letlole’s then trading price of P2.20. In return for giving up about 24 percent of its stake, BDC received a 3 percent stake in Grit. The deal was earmarked to increase BDC’s revenue, create capital for local investment, jobs and offer Botswana further opportunities for trade linkages. [/ihc-hide-content]

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The botched ‘rip off’

Letlole rejected complicated shared management advances from Grit that it saw as a ‘rip-off’ but settled for the company’s increased shareholding in it that reduced the stake held by BDC while BDC in turn has secured a smidgen of shareholding in Grit.

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The botched ‘rip off’

Letlole rejected complicated shared management advances from Grit that it saw as a ‘rip-off’ but settled for the company’s increased shareholding in it that reduced the stake held by BDC while BDC in turn has secured a smidgen of shareholding in Grit.

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