It has been confirmed that an additional relocation loan of about 13 billion won fell through at the Cheongnyangni District 8 redevelopment business 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 that it had "no guarantee obligation under the construction contract." The association applied to the Seoul city government for relocation loan support, but the support amounted to only 1.6 billion won. Some association members are facing delays in relocation because they could not secure funds to move out tenants.
According to the maintenance industry on the 30th, the Cheongnyangni District 8 housing redevelopment maintenance project association discussed an additional relocation loan of 13 billion won with financial firms from Oct. last year to Mar. this year. The loan assumed 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 materialize.
Cheongnyangni District 8 is a project to redevelop 29,001 square meters around 435 Cheongnyangni-dong, Dongdaemun District. Apartments with up to 29 floors and 711 households are planned. The district was designated a maintenance zone in 2010, received management and disposal approval last year, and began relocation early this year. There are 234 association members in total.
The problem is that some association members find it difficult to raise funds to move out tenants with only the existing relocation loans. The association judged that additional relocation loans were necessary and consulted with financial firms, but the loan fell through as Lotte Construction's additional guarantee was blocked. A maintenance industry official said, "I understand Lotte Construction conveyed that it could not provide a guarantee due to reasons such as exceeding the guarantee limit," adding, "From the association's standpoint, it has become difficult to obtain additional relocation funds."
In response, a Lotte Construction official said, "The Cheongnyangni District 8 redevelopment project was a business site where Lotte Construction had no obligation to provide a guarantee for additional relocation loans at the time of the initial construction contract," and "Since there was no obligation to guarantee additional relocation loans, it was not even a matter of determining whether the guarantee limit was exceeded."
The association shifted course to Seoul city loan support. On May 21, it submitted application documents for project cost and relocation loan support to the Seoul city government through the Dongdaemun District housing maintenance division. Seoul's project cost and relocation loan support is a system to help maintenance business sites short on relocation funds. Seoul allocated 50 billion won from the housing promotion fund this year for the related budget.
The support scale that Seoul notified the association was for nine people, totaling 1.6 billion won. That is about 177 million won per person on average. A Seoul city official said, "We decided last week to provide project cost loan support and notified the association." An association official said, "Conditions improved compared with when we discussed additional relocation funding with Lotte Construction, 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, some say this case shows the funding risk for maintenance business sites stemming from reduced guarantee capacity at construction companies. In redevelopment and reconstruction projects, association members' relocation loans often come with a builder's guarantee. 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 pushed back one after another.
Lotte Construction has recently faced continued financial burdens. Last year's operating profit was 105.4 billion won, down 64.1 billion won, or 37.8%, from 169.5 billion won the previous year. Over 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 totaling 622 billion won. Operating cash flow is an indicator showing how much cash actually came in and went out during operations.
Its credit rating was also downgraded. In Jun. last year, Korea Ratings and NICE Investors Service downgraded Lotte Construction's credit rating across the board. The rating on unsecured bonds was adjusted from A+ with negative outlook to A with stable outlook, and the short-term credit rating was lowered from A2+ to A2.
However, some indicators have improved this year. Lotte Construction posted 50.4 billion won in consolidated operating profit in the first quarter. Its first-quarter debt ratio was 168.2%, down 18.5 percentage points from the end of last year.