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Social enterprises, real-estate deals put PHS in precarious financial state

March 25th, 2014 · 34 Comments

A lot of different octopus legs to follow on this PHS story. Here’s mine for today, a look at what got the province interested in examining the PHS books more closely — deficits caused, in part, by subsidies to the organization’s many social enterprises and its real-estate ventures, which were aimed at acquiring bits of land in order to build future social housing.

Housing Minister Rich Coleman reminded me (as did Mark Townsend of PHS), by the way, that many non-profit housing organizations look like real-estate barons on paper, because the way the province organizes social housing is that it gets the non-profits to take out mortgages on the properties they are running and then it provides them with the money to make the mortgage payments.

So PHS has mortgages on the Portland Hotel building, Tellier Place, the Pennsylvania Hotel and Woodwards on its financial statement. But those are social-housing operations it runs on behalf of the province. (It doesn’t have mortgages for many of the other operations it also runs, like the Regal, the Sunrise, the Washington, and Station Street.)

In addition, it had bought The Only at 20 East Hastings on its own and was paying a mortgage of $10,877 a month — a heavy load for a place generating no income. As my story notes, Mark Townsend had bought the building with a plan to redevelop it and the New Stanley together with social housing, offices and perhaps market condos. But the city froze all development applications in the area, forcing PHS to pay holding costs for that property for the last two years while waiting for the thaw.

Also, I had the information on this Sunday but there wasn’t room in today’s story for it:

The four managers who left PHS will be getting eight weeks’ severance — far less than the 18 months that would be more the norm for people with 20 years’ experience, but likely more than some people think they should get.

PHS set up many of the businesses to provide employment for residents of the 1,000 units of housing it manages in the Downtown Eastside, many of whom have addictions and mental-health problems.

PHS director Mark Townsend always said the ventures lost money, but his organization thought it was important to provide residents with meaningful but flexible work.

But Mr. Coleman said that was wrong.

“You can’t be robbing from the services they were paid to provide. Any cross-subsidization would be contrary to the operating agreement,” he said.

A new board, headed by former Vancouver Foundation CEO Faye Wightman, and operations managers brought in by BC Housing and Vancouver Coastal Health – the two main sources of financing for PHS – will make the decisions about all of the operations, Mr. Coleman said.

“They’re going to run this thing for some time. We’re not going to allow this to morph back to what it was.”

Mr. Coleman said PHS seemed to be doing well up to the 2010-2011 fiscal year. In spite of a special audit done in 2002, when the society’s bookkeeper died in the middle of the year and the books became a mess, he said there was no sign of problems after that.

But when deficits started creeping up, the province took a longer look.

It discovered the society, and especially four managers, were spending some of the money designated as an administration fee – about $2.5-million a year or nine per cent of its budget – on things that raised questions with the auditors, such as vacations for staff, trips by managers to international drug-policy conferences with stays at high-end hotels in London, New York, Vienna and elsewhere, restaurant meals and limousines.

But those expenses did not appear to be driving the deficit, Mr. Coleman said.

The financial statement that PHS’s auditors, EPR in Coquitlam, prepared for the March 31 year-end in 2013 was changed after a first filing showed an operational deficit of $2-million.

A complex real-estate transaction made that into an apparent surplus of $4-million after the statement was revised.

Essentially, the society exercised a 10-year-old option to buy the New Stanley building on Cordova, currently a shelter, for about $2-million from the City of Vancouver.

Mr. Townsend said the city demanded PHS exercise its option just before the March 31 deadline, which had the society scrambling. In the end, it got the $2-million from developer Ian Gillespie, with whom PHS had plans to develop the New Stanley and another property it had acquired, the site of the historic Only Café. Since the New Stanley property was actually worth $9.5-million on paper, that made it appear that the society had gained money – thereby converting a deficit to a surplus.

But the society was incurring debt from holding onto the Only Café site, because the city had suspended all development applications in the area while it worked on an overall plan for the Downtown Eastside.

Mr. Coleman said no one is suggesting police should investigate anyone at PHS. “We have not come to any conclusion there was fraud. There was bad spending, irresponsible spending, but it isn’t criminal to be stupid.”

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