Jeff Colbourne
Northern News Services

NNSL (Nov 06/98) - The purchase of Lahm Ridge Tower by Roland Bailey and Mike Mrdjenovich, friends of Premier Don Morin, is being called a great deal by a certified real estate appraiser.

Guy Bourgeois of St. Albert, called to the stand Wednesday, said at the end of the eight year lease, in 2005, Bailey and Mrdjenovich will have paid off a $4-million mortgage on a 20-year-old, 42,000 square-foot building and will be up $1 million.

"From the perspective of the purchaser, I believe that the property is worth somewhere in the area of $5.1 million and I think they got a great deal," said Bourgeois, responding to questions by commission counsel.

Bailey and Mrdjenovich, after they negotiated a lease extension with the GNWT, bought Lahm Ridge Tower from Al Marceau. Marceau, fearing bankruptcy, could not get the lease himself after going month-to-month for two years.

In earlier testimony, two public works and services employees, Mike Oram and Chris Morgan, claimed they were told by regional superintendent of public works, Vince Dixon, that the "Big Guy, Donnie" wanted the lease extended to his friends even though the GNWT was considering pulling out of the building. Uncertainties in government because of downsizing and division made them hesitant to sign a lease with Marceau.

The premier's lawyer, John Hustwick, disagreed with Bourgeois' take on the tower deal. He suggested Bailey and Mrdjenovich will not make $1 million after eight years, but will have to put more money in to keep the building up and running. Income tax paid to the federal government, he added, would also take a chunk of the revenues generated.

"In the real world, the net return to these investors would be a deficit," said Hustwick. Bourgeois laughed and said it would not be a deficit situation.

"What you're going to end up with at the end of the day here, in December 2005, is a fully paid out building. The mortgage will be paid, the income tax will be paid. The rent will pay all of that," he said.

Charles McGee, Bailey's lawyer, argued, as well, that taxes and upkeep would reduce the amount of money made from the building.

But Bourgeois pointed out again, if revenues are generated, taxes have to be paid. "Taxes are a fact of life," he said.

Morin's house not so lucrative

Bourgeois told the inquiry Wednesday that Morin's residence in Yellowknife was not a good investment for the contractor, Nova Construction, owned by Mrdjenovich. Nova may not recoup the money it put in.

Davidson told Bourgeois to assume a number of things about the property and, from that information, make a conclusion about the investment.

Bourgeois was told the contractor entered into a three-year rental agreement with the premier at the rate of $2,800 per month -- the maximum rent for a cabinet minister is $2,917 monthly, or $35,000 annually.

He was told Nova financed the construction by a $300,000 mortgage with monthly payments of $2,009.47 commencing Jan. 1, 1997, but the mortgage was later amended -- increasing the mortgage to $320,000, but reducing the monthly payment to $1,897, commencing May 1, 1997.

During the course of construction, commission counsel pointed out that the contractor ran short of money and borrowed $50,000 from another person. This deal, said Davidson, was during uncertain and declining market conditions in the city.

Bourgeois responded, "On the basis of all those assumptions, I concluded that the rate of return to the contractor is approximately 4.5 per cent, including the cash flow, the revenue, the mortgage pay down and the build up in equity.

"Considering the amount of cash in, considering that this is a very large property in a small market, in a declining marketplace where there are very few prospects for sale or rental, I would consider that to be a lower return, that what is typically acceptable."

Bourgeois noted that a more prudent investment for Nova would be to build three or four smaller rental properties instead and get rents of $1,200 to $1,400 and it would cost the same. There would be higher gross revenue and higher cash flow with that type of investment.

"If the property cost $559,000 and has a market value of $475,000 today, it has already lost a ton of value, not likely to be recouped in a declining market," said Bourgeois.

Bourgeois said he was surprised, looking at the land title, that the mortgage was also amortized over 40 years.

"That's very unusual. This is a $320,000 mortgage with $1,897 monthly payments. That's very unusual for any single-family residence, particularly something of this magnitude in a declining market," said Bourgeois.

Hustwick suggested Morin's home has plenty of intrinsic value. Bourgeois agreed and said the home has much greater value to the owner than it does the investor.