BUSINESS

The collapse of Kona

A $30-million loss shocks Winnipeg Mennonites

BRENDA DALGLISH February 25 1991
BUSINESS

The collapse of Kona

A $30-million loss shocks Winnipeg Mennonites

BRENDA DALGLISH February 25 1991

The collapse of Kona

A $30-million loss shocks Winnipeg Mennonites

It was one more indication that even the most prudent investors can fall victim to unpredictable swings in the real estate market during a recession. In Winnipeg last week, members of the tightly knit Mennonite community were still reeling from the collapse of Kona Enterprises, a real estate investment company that may have losses totalling as

much as $30 million. Most of the estimated 300 people who invested money in Kona were Mennonites, members of a Protestant sect widely known for its emphasis on frugality and hard work. Kona’s president, David Epp, was also a lay minister in the Mennonite church. In a letter to investors, Epp announced that the firm was insolvent and accepted responsibility for its failure. He added: “I want to assure you that no dollar has been hidden or used for personal gain by any of the family members.” Epp’s statement followed more than a year of closely guarded speculation within the Mennonite community about Kona’s health. And last week, Manitoba Securities Commission spokesman David Cheop told Maclean ’s that his officials are investigating the firm’s activities. Added Cheop: “Our policy is not to comment on investigations, but we have received complaints about Kona.” The company had interests in 41 properties, mostly in Winnipeg, including strip mails, apartment buildings and shopping centres. Kona also managed the Courtyard Building, an old apartment block

renovated more than 15 years ago and filled with restaurants and shops. It began showing signs of serious financial trouble in 1989, when it stopped paying dividends to investors. Then, in 1990, higher interest rates and a weakening real estate market further undermined the company’s position.

At the same time, Kona’s failure has created

more problems for the already struggling Standard Trust. The Toronto-based trust company, which is owed about $12.5 million by Kona, is currently under scrutiny by federal and provincial regulators for its lending practices. The Ontario Securities Commission has also begun an investigation into trading in the shares of the trust company’s parent company, Standard Trustco Ltd. An audit released last year revealed that the 37-branch company, Canada’s ninth-largest trust firm, was carrying $230 million in nonperforming loans—including the money owed by Kona.

Some real estate analysts in Winnipeg say that Kona may have encountered difficulties because it paid too much for some of the properties it purchased. Said Bruce Harvey, a salesman for the Regional Group, a commercial real estate broker: “This city has a slow and steady real estate market. It does not fluctuate much and it does not grow very fast. You basically have to make sure that your cash flow will cover your costs from Day 1.” According to the Winnipeg Free Press, Kona purchased

one property in 1984 for $1.9 million with $900,000 in cash. The property was mortgaged for $1.4 million initially. In 1988 and 1989, two additional mortgages, totalling $1.2 million, were registered against the building. After foreclosure, the mortgage company found that buyers were willing to pay only around $500,000 for the property.

Harry Behr, a real estate appraiser with 30 years’ experience in Winnipeg, questioned Epp’s judgment. Behr said that Epp impressed him as “a very opinionated man.” He added: “I don’t think that he would have accepted very much outside advice.” Juri Koor, who took over as president and chief executive officer of Standard Trust last month, says that he has visited 10 of the 12 Kona properties on which Standard has mortgages. But he added that he has not examined the appraisals on those properties. “I’ve been looking at how we can solve the problems,” said Koor, “not at what happened in the past.”

He added that the current decline in interest rates should increase the amount of activity in the Winnipeg property market and improve Standard’s chances of recovering most of its loans. Added Koor: “Who knows whether the appraisals were done correctly two or three years ago when the loans were put on the books?”

According to the Free Press, two of Kona’s investors have launched lawsuits against the company in an effort to recover their invest& ments. But analysts say that z most of the Mennonites who 5 entrusted the company with their money will likely avoid court action because of a traditional reluctance to turn against a member of their own community. Rev. Albert Durkson, minister of the North Kildonan Mennonite Church, where Epp served as a lay minister, told Maclean ’s that the failure has shaken his congregation. Declared Durkson: “Mr. Epp has lost everything himself, and he bears the responsibility of what has happened to so many others.” Stül, he added that only “a few” members of Epp’s own North Küdonan congregation lost money in the collapse because Epp chose to avoid using his position as lay minister there to influence members’ investment decisions. Epp, described by the minister as a “warm and caring man,” has three sons who worked for the company, Durkson said.

Epp, in his statement to investors, said that he is preparing for personal bankruptcy. He added: “Because I knew so many of you personaUy, it makes it so much harder to admit to faüure resulting in losses for many concerned.”

BRENDA DALGLISH

DON MACGILLIVRAY