By the time Raphael Tuju signed for the Sh1.19 billion loan from the East African Development Bank (EADB) on April 10, 2015, everything had been done to ensure that the region’s pioneer senior resident gated estate worked like a well-oiled German machine.
Five years later, everything is in a shamble. The Karen Retirement Home is unfinished, the loan is unpaid and both parties are embroiled in a vicious fight for survival.
For EADB, with a mind-boggling compensation of Sh10 billion issued against it by a Tanzanian court still hanging over it like the Sword of Damocles, another defeat at the Court of Appeal where Tuju, the Jubilee Party secretary-general has moved, would be catastrophic. It could be the regional bank’s coup de grace.
A loss for Tuju, the self-made billionaire, might see him lose a substantial part of his estate.
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So the war rages on, with the weapon of choice for the best legal minds on both sides being wits and charms. They have fought fiercely in the court of public opinion and that of law.
But, if everything had gone to plan, Tuju would be Sh2.4 billion richer today and EADB’s balance sheet would have swelled by over half a billion.
Perhaps it is the vanity of human’s blind faith in the power of the scientific method in vanquishing the vagaries of nature that clouded both sides from reality that, sometimes, it only takes a hunch for all that was well-designed to come tumbling down.
Tuju is fighting to shoo off receiver managers from his Dari Coffee Garden and Restaurant (which took the loan) while also shaking off a bankruptcy suit brought against him and his three children. He plans to convince the court that EADB reneged on an agreement they made to advance Dari a total of Sh1.19 billion.
Instead, the lender only advanced him around Sh800 million for the acquisition of the 20-acres Tree Lane Property to expand his hospitality business at Dari in Karen Estate, Nairobi. The lender clammed up with the other Sh294 million for the development of 30 three-bedroomed senior resident units at Tree Lane and another eight five-bedroomed maisonettes at a nearby seven-acres land on Mwitu Road.
Both sides, says Tuju, agreed that proceeds from these units were critical for debt repayment.
Tuju says not only did the bank refuse to advance Dari the money, but it has also frustrated all his efforts to amicably bring this issue to a close.
But for EADB, which has won the first round of the case in a summary ruling in London, this is simply about Tuju’s refusal to honour his debt obligation.
EADB is demanding Sh1.6 billion – including the principal amount and accrued interest - from Tuju and his three children Yma Tuju, Alma Tuju and Mano Tuju, who are also directors at Dari. The four also personally guaranteed the loan.
But did EADB breach the agreement?
In making its decision, the court will mostly rely on the credit facility agreement. It reads in part: “The borrowed money shall be used to partly fund the acquisition of the Tree Lane Property and the balance shall be used for the development plan.”
Snuggled by a canopy of greenness in the lush Karen Estate in Nairobi, Dari is one of Tuju’s flagship projects.
Although the eco-friendly hospitality facility had broken even within the first three months of its inception in September 2013, there was a feeling that it could do even better by adding on accommodation facilities.
The expansion was not supposed to happen at the expense of the property’s natural flora and fauna. Fearing that further developments on the property would scare away the Impala, Dik-dik, Thompsons Gazelles, various wild birds, Crested Cranes and Peacocks that spiced up the property, Tuju identified a neighbouring 20-acre property with indigenous forests for the expansion. Tree Lane property had a boutique business with 14 accommodation units.
It was while shopping for funds to acquire this property that the managing director for EADB, Vivienne Apopo, approached him with an offer. Tuju’s initial idea, he told the court, was not to take a loan. Instead, he wanted to dispose of the hotel and use the proceeds to buy Tree Lane. But Apopo convinced him that EADB could arrange for him a befitting credit facility.
The credit facility would be disbursed in two phases. First, the bank would release around Sh965 million for the acquisition of Tree Lane property. On October 29, 2014, Tuju paid a deposit of Sh100 million for the acquisition of this property. For this, he says, he had to raid the escrow account where clients had been paying for the houses before they were built in what is known as off-plan selling.
Money for acquiring Tree Lane, which was supposed to be wired in December 2014, trickled into Dari’s account eight months later on July 31, 2015. And it was less the deposit paid by Tuju. It was Sh800 million.
Tuju was thus forced to scrape for money elsewhere, including from Dari, to return the clients’ money. This, the former journalist says, gutted the hotel’s cash flow.
However, the former MP for Rarieda was still optimistic of a turn-around. He would be back on track as soon as he received the second tranche of the loan from EADB.
Having successfully acquired the Tree Lane Property and presented the architects' certificates of works, Tuju waited for the Sh294 million to hit Dari’s account. He would then use the money for the renovation of existing units at Tree Lane and construction of new ones.
As shown in the project implementation schedule contained in the project paper that Apopo sent to the board of directors of EADB comprising finance ministers from the four EAC countries that own the bank (Uganda, Kenya, Rwanda and Tanzania), the money was supposed to be disbursed between January and June 2015. This would then trigger “commencement of renovations, construction and local, import procurements for Tree Lane & Mwitu Rd.” The money never came.
Yet, the proceeds from sale of these houses as well as incomes from the accommodation, spa and restaurant, both sides agreed, will be utilised in repaying the requested facilities from EADB.
“The senior resident community estate units will be sold on lease sale basis and will serve as captive clientele for the shared facilities, thereby enabling revenue maximisation of the project development,” said audit firm KPMG in an independent business review commissioned by Apopo to determine the viability of the project.
Dari needed “to sell at least two units in Mwitu Lane and three retirement homes for the company to have positive cash flows in the first year” and thus pay its interest when the first payments fell due in 2016, according to the confidential KPMG report.
But Tuju only had an already cash-strapped Dari as the only source of revenue to repay the loan. According to revenue projection by KPMG, the hotel could only earn Sh63,959,000 in 2016 when Tuju was expected to make the first debt repayment.
EADB’s response on claims by Tuju that it walked away from its promise to wire the additional Sh294 million has been varied. EADB at some point outrightly denied there being such an agreement by saying that it was not mandatory. They also say the funds were supposed to be given on certain conditions, which Dari did not meet.
One such condition was for Tuju to hand over another of his property in Upper Hill as security. But Tuju says the land is charged to the Bank of Africa. Moreover, handing over the title, says Tuju who also accuses EADB of predatory lending, would be in violation of the signed contract, which stated that the value of the loan and security would be on the ratio of 1 to 1.5. The three properties -- Tree Lane, Dari and Mwitu -- were valued at Sh1.87 billion against a debt liability of Sh1.5 billion.
The bank also argues that Dari’s lawyers and Tuju in September and October 2015 wrote to EADB saying they were not interested in the Sh294 million loan.
According to Tuju, he had found a Dubai-based private equity investor who was willing to pump in the money on condition that he signs a settlement agreement. However, after lawyers from both sides had agreed on the settlement, he was informed that the bank’s board refused to approve it.
EADB also thwarted another attempt to have the loan restructured by KCB, giving Tuju more breathing space in the repayment of the loan.
Dari was thus hurtling towards defaulting. And default it did. Not once, not twice.
How did a project that was given a clean bill of health by a respectable audit firm as KPMG come to flounder?
KPMG’s verdict was that the project was viable; that “Dari would be able to meet the interest and princip obligations to EADB.”
Who is to blame: Tuju, EADB or fate?
One of KPMG’s exhortations to EADB was for the lender to “monitor the business over time to ensure that it maintains positive cash flows over the seven-year period to meet its obligations.”
KPMG found that by the time the first interest payments fell due in 2016, Dari should be able to sell a unit of maisonettes at Mwitu Road at Sh70 million. Dari’s estimate, one that was preferred by EADB, was that they would sell a unit at Sh90 million.
Nonetheless, this revenue would be augmented with an income of Sh63,959,000 from the hotel. This would be enough to offset the renovation and construction expenses valued at Sh46,754,000 at Tree Lane.
This surplus revenue would be enough to pay interest, management and arrangement fees to EADB valued at Sh86,072,000.
This impeccable performance was projected to continue throughout the seven-year period that Dari would be servicing the loan with the revenues from the business rising with time.
However, as Apopo herself in the final project paper told the Board of Directors of EADB, “the realisation of sales, especially off-plan, in the rhythm and amounts forecasted is critical to debt service”.
Thus, the two sides did everything to ensure that the houses would not only be built but that they would also be sold. At least on paper.
Pam Golding Property Group (PGP), a Southern Africa’s leading independent real estate group which has won numerous international property and consecutive “superbrand” awards, was chosen to coordinate the sales and marketing activities.
The local and international marketing by PGP as well as off-plan sales mobilisation would continue for under two years from September 2014 to January 2016.
“The company offers a full spectrum of property services, including a division that deals exclusively in the ‘senior resident’ category being contemplated for Tree Lane.
They have a network of more than 300 offices in Africa as well as international offices in the UK, Germany, Mauritius, Seychelles and France,” Apopo told the board while recommending for the grant of the loan.
PGP would ensure that factors that may impede sales uptake such as uncompetitive selling prices, unattractive location or substandard finishes were nipped in the bud.
And just in case the residential units at Mwitu Properties did not fetch better prices, there were plans to offset this loss with additional two units bringing the tally to 10.
After the 24-month moratorium during which construction and expansion of business operations will occur, Apopo told the directors, the project is able to generate sufficient cash to meet its obligations and service the bank’s debt.
“Key to the performance of the projections is the revenues anticipated from the sale of properties at Mwitu Road and Tree Lane amounting to Sh2.28 billion, against the proposed borrowing from the bank of Sh 1,119 billion,” said Apopo.
Compared to KPMG, Apopo was more optimistic about the prospects of the project. She projected that the eight five-bedroom maisonettes at Mwitu Road would earn Dari a total of Sh720 million while the 30 units of three-bedroom maisonettes at Tree Lane would earn Tuju’s business Sh1.56 billion, taking the total earnings from the two projects to Sh2.28 billion.
This, said Apopo, represented an internal return of 11 per cent over a period of 10 years, “which is higher than the cost of loan funds at 10 per cent”.
And if for some reason, revenues from the project slumped by half of the projected estimates and there was an increase of project costs by 50 per cent over the 10-year period, the project would still be profitable.
“The project would still be able to return 11 per cent internal rate of return,” said Apopo.
For EADB, the project would potentially earn it $5.6 million (Sh500 million) in fees and interest income.
But all those were just nice plans on paper. On the ground, things were different.