It has been confirmed that talks for an additional relocation loan of about 13 billion won fell through at the Cheongnyangni District 8 redevelopment site in Dongdaemun District, Seoul, where Lotte Construction is in charge of construction. The association claims the loan was blocked because Lotte Construction did not provide an additional guarantee, but Lotte Construction countered, saying, "There was no guarantee obligation under the construction contract." The association applied to the Seoul Metropolitan Government for relocation loan support, but the support amount came to 1.6 billion won. Some association members are having difficulty relocating because they cannot secure funds to move out tenants.
According to the maintenance industry on the 30th, the Cheongnyangni District 8 Housing Reconstruction and Redevelopment Association discussed an additional relocation loan of 13 billion won with financial institutions from Oct. last year to Mar. this year. The loan was premised on a guarantee from Lotte Construction, the builder. However, Lotte Construction refused to guarantee, and the additional relocation loan backed by the builder's guarantee did not go through.
Cheongnyangni District 8 is a project to redevelop 29,001 square meters around 435 Cheongnyangni-dong, Dongdaemun District. An apartment complex with up to 29 stories and 711 households is planned. The district was designated a maintenance zone in 2010, received the management and disposition approval last year, and began relocation early this year. The total number of association members is 234.
The problem is that some association members find it difficult to raise funds to move out tenants with only the existing relocation loan. The association saw a need for an additional relocation loan and held talks with financial firms, but the loan fell through as Lotte Construction's additional guarantee was blocked. A maintenance industry official said, "We understand Lotte Construction conveyed that it could not provide a guarantee due to exceeding its guarantee limit, among other reasons," adding, "From the association's perspective, it has become difficult to secure additional relocation funds."
In response, a Lotte Construction official said, "For the Cheongnyangni District 8 redevelopment project, at the time of the initial construction contract, Lotte Construction had no obligation to provide a guarantee for additional relocation loans at the business sites," adding, "Since there was no obligation to guarantee additional relocation loans, whether the guarantee limit was exceeded was not at issue."
The association shifted course to seek Seoul City loan support. On May 21, it submitted application documents for project cost and relocation loan support to the Seoul Metropolitan Government through the Dongdaemun District housing maintenance division. Seoul's project cost and relocation loan support is a system designed to help maintenance establishments that lack relocation funds. Seoul set aside 50 billion won from the Housing Promotion Fund this year as the related budget.
The support scale that Seoul notified the association was nine people, totaling 1.6 billion won. That is about an average of 177 million won per person. A Seoul City official said, "Last week we decided on a policy to support project cost loans and informed the association." An association official said, "Compared with when we discussed additional relocation loan negotiations with Lotte Construction, the situation has improved, so we applied to Seoul for a final 1.6 billion won in additional relocation loans and will receive that support," adding, "Relocation is currently about 90% complete."
In the maintenance industry, there is an interpretation that this case shows the funding risks at maintenance establishments stemming from reduced guarantee capacity at construction companies. In redevelopment and reconstruction projects, builder guarantees often back association members' relocation loans. If the builder cannot provide a guarantee, financial firms may be reluctant to lend, and in that case relocation, demolition, and groundbreaking schedules could be delayed one after another.
Lotte Construction has recently faced continued financial burdens. Last year, operating profit was 105.4 billion won, down 64.1 billion won, or 37.8%, from 169.5 billion won a year earlier. During the same period, net profit fell 45.3 billion won, or 79.8%, to 11.4 billion won from 56.7 billion won. Operating cash flow (OCF) also turned negative, with last year's deficit at 622 billion won. Operating cash flow is an indicator that shows how much cash actually came in and out during operations.
Its credit rating was also downgraded. In Jun. last year, Korea Ratings, and NICE Investors Service simultaneously lowered Lotte Construction's credit rating. The rating for unsecured bonds was adjusted from A+ negative to A stable, and the short-term credit rating was adjusted from A2+ to A2.
However, some indicators have improved this year. Lotte Construction posted consolidated operating profit of 50.4 billion won in the first quarter. As of the first quarter, the debt ratio was 168.2%, down 18.5 percentage points from the end of last year.