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Quarterly Bulletin - November 2011

Firstly we apologise for the delay in the quarterly bulletin which we held back hoping to have some definitive news regarding our VAT Voluntary Disclosure Programme (VDP) to SARS and latest on the Land purchase, rates and leasehold rental issue. These points are covered under Annual General Meeting and land purchase points below.

Nevertheless the festive season is upon us and the Resort is racing against time and rain to complete the new upgraded deck and facilities on the old tennis court. Compliments continue to be received from guests and owners on the state of the Resort with our Guest Satisfaction Index rating running at 91% for the year.

Annual General Meeting

The Boards had requested at the March 2011 Board meetings that a full tax audit be carried out on the Companies to ensure that they are tax compliant. This would include all transactions between the Breakers Share Block Ltd (BSB) and Breakers Highrise Share Block Ltd (BHSB). Joint expenses are paid by BHSB and then recharged to BSB. Following Management consultation with tax consultants from PricewaterhouseCoopers (PWC) it was reported at the May 2011 Board meeting that the Companies did not fully comply with SARS VAT rulings.  The salaries are paid by BHSB and then a percentage is charged back to the BSB. BHSB has not charged VAT on the salaries and SARS would probably go back five years on the matter. The impact of the above to the Company was estimated at approximately R555K with penalties of 10% and interest at the official rate charged by SARS.

PWC recommended the Companies approach SARS in terms of the VDP. This would eliminate any penalties that would be incurred on top of the above amounts if successful. A VDP application is not limited to the salaries issue alone. The VDP application had to include any invoices (over R3000) that were not VAT compliant. This exercise was done for a full five-year period on both Companies, a vast amount of work.

The VDP applications for both BSB and BHSB were finally submitted in October 2011 after extensive checking on all invoices over the period. The Companies now await the SARS ruling. If this application is unsuccessful then the Companies must correct the invoices identified as non-compliant. The Companies have started with this process from oldest invoices to the most recent to limit its exposure.

This matter has delayed the finalisation of the Annual Financial Statements by PWC and consequently the Annual General Meeting.
       
Land Purchase

The last time the Land sub committee met eThekwini Municipality regarding the Land Purchase and lease was on the 18th October 2010. A summary of issues raised at the meeting was previously circulated to Owners.

A reply was received from eThekwini Municipalty Legal Service Unit on the 6th December 2010. It advised that the floor area of 12 079,10 that was calculated by Land Surveyor Kevin Baker was not done within the general Residential 1 zoning as provided for in Part 5.1 (b) (iii) of the Umhlanga Town Planning Scheme No 1. As Mr Baker was away on leave Mr Hume met with Mr Baker in the middle of January 2011. He confirmed that his work was carried out in accordance with the above and produced a copy of the relevant section given to him by Town Planning North.

Mr Hume attempted to contact Ms Janine Grieve from the Legal Service Unit by phone but received no reply. He noted he had communicated with Ms Grieve on 27 January 2011, via e-mail, to set up a meeting with regard to the dispute of the measurements of the buildings. Ms Grieve replied on 8th February requesting suitable dates from Mr Hume. Mr Hume reported that he replied immediately offering the 14th, 17th and 18th February. Subsequent to this, Ms Grieve has not replied, despite several attempts by Mr Hume to contact Ms Grieve.

After numerous attempts to set up a meeting with Ms Grieve from the Legal Service Unit a letter, dated 30th March, from Mr Navin Palayan senior Technical Planner was received. The letter confirmed that the calculations as undertaken by Mr Kevin Baker were correct. It noted that on closer scrutiny by themselves and reassessing the buildings on site they decided that it constitutes a Hotel, Timeshare and Permanent Residences and confirmed the actual floor area to be 15 594.34m2.

Mr Hume and Mr Baker met with Mr Navin Palayan  (Senior Technical Planner) on the 15th April to try and resolve the area issue. With a view to reconciling the area per Mr Kevin Baker’s calculation of 12 079.1 m2 and the 15 594.34m2 of the Council that had been used in the actual floor area in the leasehold rental calculation.

During the discussions the following points were made:

For information “Clause 6 (b)” of the lease with Council reads:

When the annual rental becomes due for revision same shall be computed at 7% of the valuation (which valuation shall be based on the current market price per square meter) of lot 1066 Umhlanga Rocks Township of an area of foreshore land which shall be equivalent to the floor are (calculated in accordance with the provisions of the Umhlanga Town Planning Scheme No 1 as it was at the date of signature hereof) of the buildings of the Lot.

For information “Clause 5.1(ii)(b)(ii) of the Umhlanga Town Planning Scheme No 1 reads:

In a residential building, the area of all public access corridors, public stairways and public entrances or hallways whether open or closed shall be excluded, provided that in the case of a block of flats the area of any portion of a public thoroughfare or public waiting space shall be included, and in the case of a hotel the total area of public entrances and hallways shall be included

After due consideration the Board agreed to appoint an attorney, Mr Dave Randles, to expedite the matter with North Local Council.   With regard to the incorrect area being used by Council it was noted that when Breakers first opened it was in fact a Hotel. This meant that the corridors and other common areas had been included in the area to be used for rental calculation purposes. In 1987 the usage changed to that of a Share Block Company, but Council was not advised of this change. 

Mr Dave Randles had a meeting with Mr Gerald Clark of North Entity, and took a copy of a letter addressed to Breakers Share Block from Dr Mike Sutcliffe stating that the Resort is rated residential. However Mr Gerald Clark stated, “ the Resort looks like a hotel, acts like a hotel, therefore it is a hotel” and that Mr Hume had confirmed this with him. Mr Hume denies this allegation. Mr Randles has drafted an affidavit for Mr Hume that has been submitted to the North Entity giving them all the facts.

Municipal Property Rates / Arrear Leasehold Rental

Mr Hume has been dealing with eThekwini Municipality in regard to the rates account as reported in Annual Report over the last several years. The reconciliation goes back to July 2001. At the end of June 2002 the rates collection function was moved from the North Council to eThekwini Municipality and due to computer program problems it was again reloaded onto a new system at the end of June 2003. Council has no records for the above two periods.

The Company has two leases with Council being Lease 1 and 4 and the properties were rated separately. The buildings were on Lease 1 and the land was split between lease 1 and 4. As the buildings were not shown (in terms of rates) on lease 4 it was incorrectly rated for year ended 2002 (and subsequently to 2006) as vacant land. There is a substantial rating difference between vacant land and that with a building on it (see below). The leasehold rental was charged on the rates account for lease 4 and the disputed arrear rental of R2 567 448.73 was charged in November 2001 on this account.

The concern was that the arrear leasehold rental would get entangled in the rates reconciliation. At the July 2002 year-end, on moving to eThekwini Municipality, the leasehold rental was separated from the Lease 4 rates account. Council allocated a rates payment of R265 032.79 to the leasehold rental, which was subsequently transferred to the new leasehold rental account, partly offsetting our arrear rental. This incorrect allocation, agreed to by eThekwini Municipality, has put the arrear rental on the table.

Adjustments to the rates account for prior periods, not on the current eThekwini Municipality system, and reloading of adjustments and incorrect opening balances has complicated the matter even further. Adjustments for incorrect rates on lease 4 raised for the periods to 2006 were all adjusted with the exception of year-end 2004. The rates raised for the year-end 2004 should have been R199 576.83 and not the R 1 120 012.79 actually charged. In trying to rectify incorrect rates for the year-end 2003 a incorrect credit of R 721 660.65 was posted onto the Company’s current rates account which should have been corrected on the old account. The net effect of the above is a credit of R198, 775.31 to the current rates account.

The balance on the rates account at 31 September 2011 is R 3 371 857.69. Interest and penalties of R3 013 356.45 were incorrectly raised on this account. Taking the above two adjustments into account (leasehold R265 032.79 and rates of R198 775.31) there would be a credit balance of R105 306.81 excluding interest and penalties on our rates account. A recalculation of interest, over the period after the above corrections, given that payments of rates were stopped for a period, is R88 771.78.

In meetings with Miss Gama of eThekwini Municipality Legal Collections to resolve the above rates issues Mr Hume noted that the Board would consider the payment of the arrear rental if the interest charges were reversed. At the last meeting Miss Gama agreed to correct the year-end 2004 rates and the interest calculation. It was requested that the leasehold rental proposal to Council be put in writing. After discussions with Mr Bosch and Ms Wright it was agreed that Mr Randles draft the proposal. He was unfortunately out of town and not available to draft the letter.

On the 19h October Miss Gama phoned Mr Hume and said that she had had discussions regarding the arrear leasehold rental and that if he could give her a letter by the morning, of the leasehold rental proposal, she believed it could be discussed and approved at the quarterly finance meeting that day. Mr Hume drafted and delivered the letter to her by 8:00am. Mr Peet Du Plessis who is the Head of Revenue Management for eThekwini Municipality confirmed its acceptance of the proposal. 

The balance on the leasehold rental account at the end of October 2011 is R5 184 506.89. The R265 032.79 (incorrect allocation) correction to our rates account makes the balance R5 449 539.68 excluding further interest charges on this amount. Our payment of the arrear leasehold rental of R2 567,448.73 would mean that eThekwini Municipality would write off R2 882 090.95 in interest charges. The arrear rental includes VAT and the net cost of R2 365 656.26 (after claiming back 64% of the VAT) would be for the Company’s account.

From the above on both accounts (rates & leasehold rental) eThekwini Municipality is looking at writing off R5,85 million in interest and penalties. As discussed at the last Board meeting the Company will write back over R4 million in rates. The most positive fact would be that this would clear the way for the much anticipated land purchase.

The Board resolved that the proposal be ratified and that a contract be drawn up between Council and the Company before any money is paid to Council on the arrear rental.

Occupancy

June and September are the only two months that have shown a drop in occupancy of 13% and 10% respectively. The 10 months to October shows a 43% occupancy, which is 1% up on last year (10 months to date) or 96 rooms better. The occupancy shows a 130 room night decrease in use by owners with a 226 room night increase in rentals.

  2011 2010
     
January 48% 47%
February 40% 35%
March 45% 44%
April 60% 50%
May 41% 41%
June 28% 41%
July 47% 41%
August 42% 41%
September 34% 44%
October 43% 39%
November   37%
December   68%
Year Occ % 43% 44%
Northern Promenade Properties (NPP)

There are 13 properties comprising the NPP, from Casa Blanca in the South to Breakers Resort in the North. This is now fully operational from the 1st March 2010.  No serious incidents have been reported in the NPP area to date. The NPP is set up as an independent managed area-contracting services from the same service providers as the Promenade UIP. Mr Ian Hume serves as Chairman of the NPP and as a Director for the Promenade (Central) precinct. The Breakers has also assisted in setting up an accounting function for Northern, Southern, Central and Village Properties, which is housed at the Resort.

Hawaan Forest & Northern Beaches

This area stretches from North of the Breakers to Peace Cottage on the Northern side of the Ohlanga River (lagoon). The Beachfront UIP has successfully completed its first year in operation and its success will see it continue into the future.  Its main function is to maintain safety levels and improve environmental management. Daily-guided hiking trails through the Hawaan Forest, which are booked and paid for through the Breakers Front Office have commenced and contribute to the financial sustainability of the initiative. The Resort has constructed a lecture area on the Northern Boundary, on Hawaan Forest land, to facilitate lectures to hikers by the trained guides (funded from this project). The bricks lifted during the relaying of the patios will be re-laid in the car park area next to Breakers.

Breakers Resort, Tongaat Hulett Developments, Cabana Beach, Umhlanga Sands, Beverly Hills and private contributors are funding this initiative.

Please advise your guests and agents that care must be taken when proceeding beyond the lagoon as this area in not guarded.

Marketing & Service levels
 
Name change / Cleaning and Maintenance of Units: It was noted that guests are confused by the varying standards in products and service levels between the timeshare units as apposed to certain of the whole owner units. It was resolved after much discussion that the units in the whole owner section will in future be known as Breakers Resort Private Residences, and will trade as such.

The impact of the Consumer Protection Bill when implemented will be communicated to owners and will include compliance information with regard to disclaimers for guests checking into the Resort.

Service Levels:  It was resolved that individual owners and agents were free to decide on whether to clean units on public holidays and Sundays. The Resort will confirm this with guests on arrival to ensure they are fully aware of the cleaning service level to be provided. It was further resolved that where an agent cannot be contacted to rectify a major maintenance issue, the Resort be given the authority to rectify the problem and charge the owner accordingly.

Noise Levels: It was resolved that any alterations within the Whole owner section may only be carried out between the months of August and October. The meeting resolved that the owners must give prior notice to Management and the building committee of any intended alterations (with plans) for approval. Management will then notify all owners and agents, which units will be carrying out alterations and the anticipated duration times.

Budget 2012.

The Budgeted Levy increase for 2012 is 6%. The Board has applied the following assumptions when projecting the Budget for 2012.

Water 12.5%
Rates/Refuse/Sewerage 21.6%
Electricity 26.0%
Salaries & Wages 8.0%
Cleaning & Security 12.0%
Expenses 6.0%

The leasehold rental remains unchanged for the new budget. The increase in electricity, water and rates, would again push up the increase to 8.7%. The Board has however reduced the transfer to replacement reserve in order to contain the levy increase as it is satisfied with the general state of the Resort and replacement reserve level. Thus it is able to increase the levies by only 6%.

Resort Update

The following improvements and changes are in the process of being made or will be made at the Resort to enhance the overall product. Whilst they are being implemented your further cooperation and understanding will be appreciated.
 
Tennis Court area upgrade

The tennis court had become a white elephant with limited use. The Board of BHSB has approved the upgrade of this area at a cost of R2.7m. The upgrade, scheduled for completion by 10th Dec 2011, will incorporate the following additional facilities:

Paving/Awnings

The repaving of the patios and removal of the awnings in the horseshoe area on the same basis as the A Block is completed with the exception of one unit, which does not have Council approval. The gardens have been upgraded and new beds inserted and the lawn completely reshaped and re-laid.

Greenleaf Environmental Programme

The Board has approved the appointment of Greenleaf to provide and implement an environmental programme for the Resort. The programme covers all environmental issues from energy conservation to all forms of purchases to minimise the impact the Resort has on the environment. The initial studies are completed and implementation and training has started in the various departments.

Painting of building

The building has been repainted using nominated Applicators of the Plascon Paints product “Wall & All”’. The results are very pleasing and the cleaning of the building will be included in the 2012 budget.

Future improvement plans

The reception area, waterproofing of top car park and rearrangement of gym, playroom and kiddies activity centre have been budgeted for in 2012.

Check In

To ensure that an accurate record of all residents at the Resort is available at all times, in the event of an emergency such as fire, all owners and or renters and guests in the low-rise apartments are required to check into the Resort. No access will be given to the car parks or units unless this requirement has been complied with. We understand that this can be an inconvenience to some owners but the control is essential in terms of the Health & Safety Act.

Feed Back

Feedback on your stay or comments about the general state of the Resort is most welcome. The feedback can be given to the Resort Management Staff or contact one of the undersigned by phone or E-Mail.

We look forward to welcoming you back to the Resort for the festive season and are sure you will be pleased with the ongoing improvements. To those who may not be coming down may we take this opportunity to wish you and your families all the best over the festive season and a prosperous 2012.

Nicky Luyckx: 011 463 9093
nluyckx@icon.co.za

Ian Hume: 082 566 4277
ianh@breakersresort.co.za