Cft shoots down loan for Duncan’s Justice ParkPOSTED: 04/24/13 10:31 AM
Proposal five times as expensive as necessary
St. Maarten – The Board for financial supervision Cft rejects Justice Minister Roland Duncan’s intention to enter into a loan-construction with developer Corporate Property Associates 17 (CPA:17) for the realization of the Justice Park because the loan is five times as expensive as necessary. It would push St. Maarten over the limit of the allowed interest burden standard for 2013 of 27.9 million guilders and cause the budget to no longer meet financial supervision standards.
In a concept letter of intent dated April 1, CPA:17 outlines a proposal whereby it will buy multiple land parcels for $34.4 million and budget “approximately $65.6 million” for renovations and lease enhancements. While CPA will put up the money, “the government of St. Maarten will bear the risk of the renovations and construction and shall have full recourse on the contractors for such.”
The government intends to lease back the property for 32 years; at the end of the lease contract the government becomes the owner of all facilities for a symbolic dollar.
The Cft reacted to the letter of intent in a letter it sent yesterday to Justice Minister Duncan, and Finance Minister Tuitt. The letter was also posted on the Cft-website.
Based on the letter of intent, the Cft has concluded that the draft agreement is in fact a loan. “The letter of intent shows several characteristics of a loan, like the purchase-option for a symbolic amount, the term of the agreement that is practically equal to the economic life cycle of the immovable assets and the unforeseen risks that come for the account of St. Maarten,” Cft chairman prof. Age Bakker wrote in the letter.
The Kingdom law on financial supervision states that when the country wants to contract a loan it has to give several financial institutions, next to the Netherlands, the opportunity to put in a bid. “If you are going to sign the letter of intent, the Cft would appreciate to receive next to the conditions linked to the letter of intent, also the loan-conditions from other parties,” Bakker wrote.
The Cft-chair notes that Duncan earlier indicated that he does not consider the intended agreement to be a loan. “If this difference of opinion persists, the Cft will report this to the Kingdom Council of Ministers.”
The Cft will review the proposes loan against the standard for the interest burden. The maximum interest St. Maarten is allowed to pay per year is 5 percent of the average state revenue over the past three years. Currently the interest ceiling stands at 27.9 million guilders; of this, the country has already used up 12.9 million so that there is space for at most 15 million guilders in new interest liabilities.
The Cft calculated that Duncan’s proposal to go into business with CPA:17 would break through the interest ceiling because it looks like the percentage the developer plans to charge hovers around 10 percent. “The letter of intent does not mention the interest percentage. The Cft derives from the information it received that this could be approximately 10 percent.”
Based on this assumption, the $100 million (or 180 million guilders) loans would cost the country 18 million guilders interest per year. “With this loan the interest burden norm would be exceeded and the budget would no longer meet the standards of the Kingdom law financial supervision,” the letter states.
The current interest rate for subscriptions to loans in the Netherlands is five times lower – just 2 percent. This would lower the interest burden on the loan to 3.6 million guilders and bring the scheme within the perimeters of the interest burden standard. “This way there remains enough space for loans to service other important investments St. Maarten wants to do, now and in the future,” the Cft wrote in a brief elucidation.
Based on all of the above, the Cft concludes that it cannot go along with the intention to contract a loan. “The Cft advises St. Maarten to postpone signing the letter of intent and to follow the procedure of article 16 of the Kingdom law financial supervision and to contract a loan under the most advantageous conditions.”