IC Fonds Kanada 6 W igamog , O ntario Annual Report - ic

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IC Fonds Kanada 6
Wigamog, Ontario
Annual Report
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REPORT OF THE GENERAL PARTNER 2006
CANADIAN ECONOMIC INDICATORS – ANNUAL AVERAGES
markets as the Canadian currency recently moved
up in tandem with the rising price of oil. After falling
16% between February 2002 and March 2005, the
Canadian dollar’s trade-weighted value hit a nearly
13-year high of 85.04 cents U.S. in November 2005.
Rising oil prices also resulted in greater regional
disparity between energy-producing provinces, such
as Alberta, and energy-consuming regions, such as
Ontario. Nowhere are the benefits of higher energy
prices to Canada’s economy more visible than in
Alberta, which by almost any measure remains at or
near the top of all Canada’s growth tables.
While the U.S. is on its way to registering another
year of above potential growth in 2005, the Canadian
economy appeared “energized” by year end 2005.
Canada currently enjoys its lowest unemployment
rate in about 30 years. Supported by low interest
rates and record profits, business spending grew
through the year while business inventory
accumulation slowed and the inventory-to-sales ratio
remained low by historical standards. Corporate
profits continued their rise and the currently strong
upward trend has raised their share of GDP to a
record 14.0%.
The Canadian economic climate is forecast to remain
positive in 2006, expected to be a year of both high
commodity prices and a currency consolidating
around current strong levels. As a result, resourcebased economies, primarily in the west, are expected
to do very well. Domestic demand is forecast to
remain strong, outperforming original expectations
and offsetting a weaker export environment brought
on by the appreciating dollar and higher energy
prices. As a result of the surprising resilience of the
Canadian economy to currency and energy market
turmoil plus lower borrowing costs for longer than
expected, along with a better trade performance in
2006, real GDP growth in Canada is expected to
settle in at 3.5 % by year-end.
Canadian exports increased through 2005, but
imports of automotive products inched low. After a
spectacular five-year run, Canada's housing boom
finally appears to be cresting. Non-residential
construction increased, with office towers, shopping
malls and engineering projects being major
contributors to growth. Core inflation remains well
behaved. With the economy operating at full
capacity and growth set to improve, the Bank of
Canada is expected to continue tightening its
monetary policy in 2006 and interest rates are
expected to rise gradually accordingly.
The growing weight of energy in Canada’s trade
surplus has not gone unnoticed in global currency
Socio-Economic Highlights
Canada
C 2004
2005
2006*
2007*
US 2004
2005
2006*
2007*
Real Gross Domestic Product
3.3 %
2.9 %
3.5 %
3.2 %
3.8 %
3.6 %
3.6 %
3.4 %
Core** CPI Inflation Rate (% year/year)
1.9 %
1.7 %
2.0 %
2.1 %
2.1 %
2.2 %
2.1 %
2.1 %
Consumer Spending (% year/year)
3.9 %
4.0 %
2.7 %
2.3 %
3.8 %
3.5 %
2.3 %
2.7 %
Unemployment Rate
7.1 %
6.7 %
6.3 %
6.4 %
5.4 %
5.1 %
4.9 %
4.9 %
* Year-end forecasts
** Excluding volatile items
Sources
BMO Financial Group, Economics Department, Canadian Provincial Outlook, December 29, 2005
BMO Financial Group, Economics Department, North American Outlook, January 2006
Canada Department of Finance, The Economy in Brief – September 2005
RBC Capital Markets, Economic Forecasts - Canada, January 2006
RBC Capital Markets, Economic Forecasts – U.S., January 2006
2
Socio-Economic Highlights
Ontario
O 2004
2005
2006*
2007*
C 2004
2005
2006*
2007*
Real Gross Domestic Product
2.6 %
2.2 %
2.6 %
3.2 %
3.3 %
2.9 %
3.5 %
3.2 %
CPI Inflation Rate** (% year / year)
1.9 %
2.3 %
2.1 %
1.5 %
1.8 %
2.3 %
2.2 %
1.7 %
Consumer Spending (% year / year)
3.2 %
3.2 %
2.9 %
2.9 %
3.9 %
4.0 %
2.7 %
2.3 %
Unemployment Rate
6.8 %
6.7 %
6.5 %
6.3 %
7.1 %
6.7 %
6.3 %
6.4 %
* Year-end forecasts
** Including volatile items
Representing 39% of Canada’s population, Ontario
remains Canada's business and financial centre,
generating some 40% of the country's GDP. It is
part of the North American manufacturing heartland
and is favourably located to serve major Canadian
and U.S. markets. Its manufacturing industries
produce over 50% of Canada's manufactured goods
and 80% of its manufactured exports. Automobiles
are Ontario's major manufacturing industry and
most important export, employing more than
140,000 people and providing over 25% of
Canada's total exports. The mining industry (gold,
nickel, copper, uranium and zinc) plays an important
role in Ontario's economy. Forestry also remains a
key Ontario industry with the provincial government
controlling over 85% of the forestland. Tourism is
the
province's
third-largest
industry.
While Ontario's general economic outlook is solid, a
number of external risks - including higher oil prices,
the strong Canadian dollar, higher interest rates and
a downturn in the U.S. economy and a potentially
ensuing sluggish manufacturing activity - could
affect the Ontario growth in future years. Overall,
an economy that produces over $500 billion in
goods and services should be sufficiently
A modest economic performance in 2005 was
confirmed on all counts for the challenged Ontario
economy. Growth in 2005 has indeed been slightly
stronger than in 2004. The engine of Ontario’s
economy however was hit in 2005 after a solid
performance in 2004. The main reasons for this
decline were motor vehicles and parts sales, which
were down 5.3%. Retail sales growth was healthy
through 2005 and significantly stronger than in
2004. There was a sharp drop in new home
construction and building permits, and only modest
growth in manufacturing shipments. Along with
many other regions in the country, the commercial,
office and industrial construction marketplace was a
bright spot in the economy.
diversified to help weather expected further
weakening in the auto sector industry. Also, a
stronger trade performance and the ongoing
strength in consumer spending should maintain if
not boost near-term economic growth in Ontario.
Both stabilization and growth are forecast in 2006.
Sources BMO Financial Group, Economics Department, Canadian Provincial Outlook, December 29, 2005
Ontario Ministry of Finance, 2005 Ontario Economic Outlook and Fiscal Review
Ontario Ministry of Finance, Economic and Revenue Forecasting and Analysis Branch, Office of
Economic Policy, January 2006
Ontario Ministry of Finance, Ontario Fact Sheet, December 2005
RBC Financial Group, Provincial Current Trends, December 2005
HALIBURTON COUNTY
Haliburton is a county of Ontario known as a tourist
and cottage industry area for its scenery and for its
resident artists. Minden is the County seat. The
current permanent population of Haliburton counts
approximately 15,500 people, while the seasonal
residences, an increase of 5,000 to 6,000 more
permanent residents within the next five years is
anticipated. The projected growth rate over the next
population is estimated to have increased to almost
40,000. Haliburton County has, on a per capita
basis, the largest population of 65+ residents in
Ontario. As seasonal residents age, boomers retire
and convert seasonal cottages into permanent
fifteen years could result in doubling the population.
The largest portion of this group is forecast to be
55+ with higher levels of education than the general
3
The influx of an increased 55+ population could
favour employment opportunities in the future.
population and will consist primarily of teachers,
accountants, lawyers, doctors and senior level
managers. The last significant population growth
occurred in 1991 (21%).
Located 200 kilometres north and east of Toronto,
Haliburton is connected by a well-developed road
network to major metropolitan centers and
international border crossings. This infrastructure is
quite necessary to deserve the area’s backbone of
the local tourism industry, that is the rubber tire
traffic and its constant flow of tourists which begins
in May and continuing throughout the winter
months.
The service sector continues to be the largest
employer of the County with approximately 35%
working in the hospitality industry and the hospitality
sector is indeed one of the key sectors in the local
economy, contributing substantially to employment,
wage and economic activity. Haliburton County
counts over 100 resorts, lodges, country inns,
housekeeping cottage resorts and bed & breakfasts.
On the industrial side, the local forestry industry,
once in decline, is now competing with tourism as
the County’s primary industry.
Due to a job market depending primarily on
seasonally driven business in both the tourism and
forestry sectors, the County’s unemployment rate at
14.9% is one of the highest in Ontario. It has been
projected that unemployment can reach 30% to
35% between December and the end of February.
While forestry and tourism remain the key factors of
the local economy, local players recognize that the
new economy and the advances occurring constantly
within the telecommunications industry, and look
now to knowledge based industry and light
manufacturing as being targets of development.
Five largest non-manufacturing employers of Haliburton County
Employer
Trillium Lakes District School Baord
Municipal and County Government
Wigamog Inn *
The Pinestone Resort *
ValueMart
# of Employees
355
200 +
108
100
90
* high season
Sources Haliburton Highlands Chamber of Commerce, February 2006
Ontario Investment Service, Haliburton County, February 2006
Ontario’s tourism industry is very diverse. Its
businesses are mostly small to medium-sized.
While Ontario had Canada’s largest tourism industry
in 2004 (42% of total visitors and 33% of total
tourism revenues for Canada), it is Ontario which
lost a greater portion of the U.S. market over the
past four years. This decline does not affect NorthEast Ontario, which derives its visitors mainly from
domestic, intra-provincial travels.
Tourists visiting Central Ontario spend in majority
their journey in private homes or cottages (68%),
while 16% opt for commercial lodgings such as
hotels, motels, resorts, B & B’s and commercial
cottages. The main reason for travelling in the area
remains pleasure, followed by personal visits to
friends and relatives. Corporate purposes remain
marginal.
Activities of visitors generally fit the
activities taking place at the Wigamog Inn Resort.
The average visitor age stands at 37.
Haliburton County is 30% comprised of hundreds of
square miles of Crown, county, and municipally
owned land, with a number of small towns
interspersed throughout. A 2003 feasibility study
considered the four-season destination resort
concept, including golf, conference, spa resort and
ecolodge, as the best fit for the area. The local
hospitality business currently counts more than 140
resort vacation properties, offering in excess of
3,877 accommodation units.
4
The distribution of tourism businesses within
Haliburton’s market suggests the presence of three
identifiable tourism zones: the northern zone offering
primarily outdoor linked to the local natural heritage
resources, the central zone of rural character
offering a mix of tourism based on natural and
cultural heritage, and the most heavily populated,
southern zone (south of Highway 401), with primarily
cultural heritage based tourism. A concentration of
lodges, resorts campgrounds and housekeeping
cottages is found in the first zone, while the central
and southern zones have a predominance of hotels,
motels, inns and B&Bs.
The sport of ATVing (ATV standing for “All Terrain
Vehicle”) has been growing at a phenomenal rate in
Ontario and Haliburton has become one of the most
popular ATV trail destinations in the province. With
the implementation starting June 2004 of Bill 11
(enacted in the province of Ontario July 2003)
opening up all the county roads in Haliburton County
to ATVs, the County has a comprehensive and
seamless ATV trail system (riders can now
circumvent any private property, allowing seamless
riding through the County), which for local observers
represent a potentially considerable tourism product,
and riders can now circumvent any private property,
allowing seamless riding through the County. Prior
to the implementation of Bill 11, ATVs already
outsold snowmobiles in Ontario. Now that the
groundwork is in place in Ontario to facilitate this
sport, Haliburton County is experiencing a nonsummer growth in its tourism industry unparalleled
since the organizing of snowmobilers during the
seventies. Since ATVing is a nine month sport, ATV
tourism dollars is expected to generate additional
revenues exceeding the 1 billion dollars that
snowmobiling annually pumps by itself into the
Ontario economy.
Since 2005, Haliburton County officials are
improving and increasing the County’s exposure in
the Ontario tourism marketplace via attendance to
trade shows and conferences, County registration on
relevant web sites as well as written documentation
destined to various media and information centers.
Sources Haliburton Highlands, Haliburton Connects, Volume 1, Issue 1, September 2005
Ontario Ministry of Tourism and recreation, Travel Intentions Study Report, June 29, 2005
5
ACQUISITION
On September 7, 2005, IC Kanada 6 Wigamog Inn,
L.P. (the “Partnership”) acquired a beneficial interest
in the resort “Wigamog Inn” located at 1701
Wigamog Road, Haliburton, Ontario for an amount of
$8,000,000. The Partnership also incurred third
party acquisition related costs and fees of $261,429,
an amount substantially above budget due to
additional work by the Partnership’s solicitor in
unresolved issues such as outstanding property
arrears, non-compliance issues with the Township,
discharge of old encumbrances and the restructuring
of the mortgage.
General Partner of the Partnership was granted an
option to purchase 1000 common shares of
Wigamog Inn Development Corporation for $1 in
accordance with the Phase 1 option agreement.
Pursuant to this agreement, the General partner is
entitled to exercise the option at any time after
January 11, 2011 and the option expires on
September 7, 2025. The principal asset of Wigamog
Inn Development Corporation at the time of the
exercise of the option will be the land adjacent to the
resort and encumbered by time-share rights for
Villas located on this adjacent land.
The Agreement of Purchase and Sale had previously
been concluded on March 24, 2005 with an initial
target closing date in late Spring. Several vendor
deliveries were late, including the land survey which
led to the due diligence period ending in July. Later,
several closing conditions remained outstanding and
the closing date was rescheduled in order to allow
the seller to complete his undertakings. Two matters
remained unresolved at closing; the parties agreed
to a $50,000 holdback based on the seller’s
undertaking to address these matters with the
Township within 3 months after closing. As of this
date, the Partnership continues to be in possession
of the holdback.
The Partnership has granted an option to purchase a
portion of its land for an amount of $1,800,000 to
MPNC Holdings Ltd. The land purchase option may
be exercised only if MPNC Holdings Ltd and the
Limited Partnership have determined not to proceed
jointly with the development of the Phase 2 of the
Wigamog Villas. The option covers land necessary
to accommodate 60 Villas of approximately 1100
square feet. The option can be exercised fully or
partly prior to July 31, 2006 for the first exercise
date, July 31, 2010 for the second exercise date and
July 31, 2014 for the third exercise date. Each of the
first and the second exercise shall be with respect to
a portion of the option lands with a minimum
aggregate of not less than 24 Villa Units and 16 Villa
Units
respectively.
In connection with the acquisition of the resort,
Wigamog IC Inc., acting in its capacity as the
FINANCING
The Purchase and Sale Agreement contemplated the
assumption of the existing mortgage with an
outstanding principal amount of about $3,500,000.
The lender, Meridian, refused the assumption but
agreed to a new term loan of $3,360,506 negotiated
by the GP on behalf of the Partnership culminating in
a Credit Facility Letter dated September 1, 2005.
calculated at an interest rate of 6.839%, maturing
st
November 1 2008.
The annual debt service
amounts to $315,240, payable in monthly payments
of $26,270.
The Vendor-Take-Back Loan, effective September 7,
2005 and calculated at an interest rate of 7.0%,
th
maturing September 7
2015, generates an
additional interest charge of $70,000 per annum.
As of January 1st 2006, the outstanding balance of
the term loan with Meridian is of $3,326,231,
LEASING
The Partnership has leased the property to Wigamog
Inn Ltd, as Tenant, for a term of twenty (20) years
th
commencing September 7 , 2005. The Lease is an
absolutely and completely carefree net lease for the
Partnership; it is not responsible for any costs
whatsoever relating to the Property, its contents, nor
realty taxes and insurance. If not in default, the
Tenant may extend the term of the Lease for 2
consecutive 5 year periods. The Tenant has the
obligation to deposit annually an amount equal to
3.5% of Gross Revenues in a Capital Replacement
Reserve less the amount actually spent on furniture,
furnishings, equipment and capital expenditures
during the year.
The minimum rent scheduled for 2006 was
calculated in accordance with paragraph 1.01 (e) (iii)
of the Lease as follows:
6
2005 annualized rent:
Rental Inflator:
$800,000
1
2
1 + (129.1 / 126.6 -1) X 0.8 = 1.015798
1
: CPI Ontario for November 2005
2
: CPI Ontario for November 2004
2006 inflated rent:
$800,000 X 1.015798 = $812,640
Based on the occupancy rates forecast by Wigamog Inn for calendar year 2006, we expect additional rent
payable will not exceed the foregoing minimum rent.
GENERAL PARTNER
IC Kanada 6 Wigamog Inn, L.P. is an Ontario limited partnership formed on March 9, 2005. Wigamog IC Inc., a
nominee company, is the General Partner of the Partnership since September 7, 2005, the date the Lease with
Wigamog Inn Ltd was signed and rental income started.
The directors of the General Partner are:
Mr. Gilbert Bard
Mrs. Lina Roti
Mrs. Jacinthe Parent
Prognosis 2006
According to the Ontario Ministry of Tourism reports released in November 2005, resort operations in Ontario
are reported to generate average total revenues (including room, food & beverage, and recreation) of $400 per
occupied unit per night, the ensuing average income per unit being $200. Average annual occupancy rate in
the Ontario resort industry stands in the 50% range. For 2006, Wigamog Inn forecasts an average occupancy
of 42% and has projected an average income per unit of only $157.
Although we did not receive additional rent in 2005, the Tenant paid the complete minimum rent owed in
advance. The General Partner will address the above results with Wigamog Inn representatives and discuss
the Tenant’s marketing plan in order to address the quality of amenities, services provided to guests as well as
how best to bring about rental growth.
A strategy plan in the form outlined in the Lease will hopefully assist the local manager of the Wigamog Inn to
address the overall performance of the subject property and insure the investment meets short and long term
objectives.
For the current year, the budget anticipates sufficient profits to satisfy the preferred allocation to Class A and
GP. Class B may receive an allocation, but below 9%.
ANNUAL PLAN HIGHLIGHTS 2006
Resort Average Occupancy
Leasing Income
Corporate Expenses
Fund Cash Flow After Debt
42.1 %
$ 812,638
$ 55,632
$ 372,696
7
FINANCIAL STATEMENTS AS AT DECEMBER 31, 2005
A translation of the extracts of the audited financial statements for the year ended December 31, 2005 are
included in this annual report. Also attached is a copy of the audited financial statements.
BALANCE SHEET AS AT DECEMBER 31, 2005
31.12.2005
Assets
$
Income producing property
8,378,205
362,592
Cash and cash equivalent
Accounts receivable
41,288
Receivable from Class A Limited Partners
12,340
21,873
Deferred costs
$
8,816,298
Mortgage payable
$
3,326,231
Vender take back loan
$
1,000,000
Liabilities
63,477
Accounts payable and accrued liabilities
214,000
Deferred income
$
4,603,708
4,212,590
Partners' capital
$
8,816,298
INCOME AND EXPENSES FOR THE PERIOD MARCH 9, 2005 – DECEMBER 31, 2005
12.31.2005
Revenue
$
Rental
250,411
17,632
Interest
$
Total revenue
268,043
Operating Expenses
$
Corporate management fees
12,521
Professional fees
12,857
Interest on mortgage
64,639
Interest on loan to Class B Limted Partner
22,246
1,808
Interest and bank fees
52
Miscellaneous
Total operating expenses
$
114,123
Net earnings before amortization
$
153,920
Amortization on rental property
89,874
Amortization on deferred costs
1,456
Net earnings
$
8
62,590
CASH FLOW AND RESERVE AS AT DECEMBER 31, 2005
Gross Proceeds from the Acquisition of the Property
Loan assumed from the Vendor
VTB
Equity - Class A
Equity - Class B
Equity - GP
$
3,360,506.00
1,000,000.00
3,557,700.00
1,000,000.00
40,000.00
$
less unpaid balance
8,958,206.00
(8,602.65)
$
8,949,603.35
$
8,939,107.99
Acquisition costs associated to the transaction
Agio fees - paid to IC
Cost associated to the acquisition
Outside professional fees
Land Transfer tax
Cost of the Building
Good will
Financing costs
$
97,700.00
500,000.00
238,109.98
79,969.01
8,000,000.00
10.00
23,319.00
$
Cash reserve
Cash net income
153,920.00
less capital
(34,275.00)
Cash flow for the year
10,495.36
119,645.00
Cash position before 2005 distribution
Distribution of 2005
Actual cash reserve
130,140.36
(102,452.00)
$ 27,688.36
In light of the year-end cash reserve level of $27,688, the General Partner has decided to carry out a 9%
distribution prorated from the date of payment for the period from September to December of 2005, totalling
$102,452 on the nominal capital for the Class A Limited Partners.
I C I m m o b i l i e n Co n s u l t i n g - u n d A n l a g e g e s e l l s c h a f t m b H
V e r m ö g e n s a n l a g e n a u s g u t e m H a u s e
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