Back to archive
28.9.2016 | News

VVO sold more than 8,000 apartments to Y-Foundation in compliance with the law – where is the transaction executer’s legal protection?

In 2015, VVO Group made the strategic decision to divest its non-profit “ara” housing stock that is subject to long-term restrictions and to focus on market-based operations. Turned into a limited company already in the 1990s, VVO Group plc has never been a non-profit corporation although the Group has also had significant non-profit operations in designated subsidiaries.

Strategic focus on market-based operations required regulated sales of “ara” housing

With regard to a regulated housing sales transaction, ARA has two tasks determined by law: the confirmation of the maximum transfer price and the buyer designation. The transfer price, or the sales price, of non-profit housing stock is regulated by law and ARA’s guidelines. The maximum transfer price comprises own assets that have been invested by the owners in building or repairing the properties, with index adjustment. Approved own assets form the basis both of revenue recognition according to the non-profitability legislation and of the sales price in connection with a sales transaction. ARA has confirmed property-specific own assets in connection with the confirmation of the acquisition value of the properties, in addition to which ARA has annually confirmed the amount of own assets to be used as the calculation basis of the non-profit VVO Asunnot Oy’s regulated revenue recognition. As the sales price was regulated, the only goal in executing the transaction was to find a suitable and responsible buyer. Y-Foundation was chosen as the buyer–it already had a non-profit status and was known to aim at operating in a manner that is good for tenants and to be a fit buyer considering ARA’s designation decision.

On the morning of 14 December 2015, VVO and Y-Foundation signed a letter of intent with regard to executing the sales transaction. An invitation to the same meeting, immediately after the signing, was also submitted to ARA’s Chief Director Hannu Rossilahti, who was informed of the transaction in its entirety, the target schedule and the planned execution mechanism. Later on, ARA has claimed that it was not aware of the execution of the transaction. These claims are wrong.

The housing stock sold was owned by VVO Group’s non-profit subsidiary VVO Asunnot Oy. The execution of the sales transaction through the sales of VVO Asunnot Oy’s share capital was not possible, as VVO Asunnot Oy was formed through a division after VVO Group allocated the ownership of its housing stock into separate owning subsidiaries according to valid restrictions. Before the division, the so-called old VVO Asunnot Oy had, due to historical reasons, also owned approximately 2,000 completely deregulated rental apartments for years. Over the years, these deregulated apartments had generated a significant amount of profit from rental operations, falling outside non-profit operations, for VVO Asunnot Oy. As a result of the division, there were receivables and debt relationships between the Group’s subsidiaries, and the sales of such a subsidiary outside the Group was not possible.

The transaction execution model that would have been best for the tenants could not be used

As the best alternative for the tenants, VVO’s and Y-Foundation’s joint plan was to transfer the entire housing stock to be sold and its business operations in a business transfer to a new company and then to sell the entire share capital of this company to Y-Foundation. This was told to ARA’s Chief Director on 14 December 2015 and ARA had designated this newly founded company as a non-profit corporation on 27 November 2015.

As the buyer, Y-Foundation sought the approval of both the Municipality Finance Plc and ARA for the transfer of the interest subsidy loans of the properties to be sold, due to the change of ownership. With its decision of 29 December 2015, ARA, aware of the business transfer to the new company, approved the transfer of these loans and a new loan margin due to the change of ownership (see Appendices). However, later ARA has claimed that it was not aware of the arrangement.

In January 2016, ARA suddenly announced in the negotiations that with regard to the new company, it will not apply the transfer price calculation method that is determined by law. ARA’s new interpretation of the transfer price for the housing stock consisting of 8,600 apartments would have been the share capital of the new company, EUR 50,000. On the other hand, ARA made a conflicting announcement that when selling VVO Asunnot Oy’s share capital, the index-adjusted amount of property-specific own assets as determined by law would be used as the transfer price. This intentionally-wrong interpretation of the transfer price by ARA led to a situation in which it was decided that the planned sales transaction will be executed as a property transaction. As such, a property transaction has, for decades, been the established method for selling “ara” properties in Finland. The transfer price determined by law is always calculated in the same manner, whether it is a single property or an entity consisting of thousands of apartments, regardless of the technical execution of the sales transaction. However, the execution of the sales transaction as a property transaction incurred additional costs of EUR 18,000,000 to the buyer, which will fall payable by the tenants in the coming years.

No unclear issues with regard to repair funds

The media has implied that VVO would have held on to repair funds accumulated for the housing stock sold. This is not true. ARA conducts annual supervision of cost principle rent determination and of funds collected and used for repairs. VVO has never been reprimanded for its rent determination. With regard to the housing stock sold, in 2005–2015 VVO has collected, as part of rents, a total of EUR 66,343,743 for repairs and used a total of EUR 65,972,322 for investment repairs. During these ten years, the surplus of funds collected for repairs was EUR 371,421. Due to claims made by the media, VVO, on its own initiative, also provided Hannu Rossilahti in February 2016 with an account of the euro amounts collected, as part of rents, for repairs and used for repairs during the past ten years. ARA has not expressed any remarks or dissenting opinions with regard to the account provided. VVO considers the publicly-made claims of misuse of repair funds incomprehensible and comparable to libel.

In connection with the transactions executed, VVO has transferred EUR 3 million in cash to the buyer along with company-form properties, a sum that is eight times more than the cumulative provision accumulated for repairs. The reasons for this transfer amount are both the coverage of the repair provisions and the compensation for additional transaction costs caused by ARA’s interpretations to Y-Foundation.

VVO calls for decisions compliant with the law

“We have acted in compliance with the law all the time and have sought open co-operation with the authority,” notes CEO Jani Nieminen. “Unfortunately, it seems that the criticism expressed during the past few years towards ARA’s existence, political pressure and the media publicity related to the termination of our non-profit operations have had an influence on the actions of the supervising authority in this process,” he goes on to say.

We would consider it advisable that ARA’s actions are looked into. In the process, we have encountered, for instance, a situation in which the supervising authority has notified in writing that it has lost documents that are essential for the transfer price and that should have been stored indefinitely, thus complicating the processing of the case. However, these documents were later found when VVO referred to the record number and its own archives. We have also had to appeal both of ARA’s maximum transfer price decisions that have been clearly wrong. For the first part of the transaction, ARA has already made a new, revised decision. We do not use the revised decision to increase the sales price; instead, the objective of our appeal was to get a correct decision. We also expect that in the near future, we will receive a decision that is correct and compliant with the law for the second part of the transaction. Unfortunately, the situation seems to be that the aim of the process is to make the transaction executer look bad by providing incorrect information.

In our opinion, it is unreasonable that, in order to be treated fairly, the transaction executer has to be prepared to use resources to appeal the authority’s clearly-wrong decisions and in addition to be prepared for proceedings at an administrative court. On the other hand, throughout the entire process, we have acted in compliance with the law and have required this also from the supervising authority and, if necessary, we will proceed with the processing of the case by any means necessary.

14 September 2016

VVO Group plc

Further information: Jani Nieminen, CEO, VVO Group plc, tel. +358 20 508 3201

VVO Group plc offers rental apartments and housing services in Finnish growth centres. The vision of the housing investment company is to be a pioneer in housing and the customer’s number-one choice.