Prague is to get a 860-million discount. The city administration’s landlord will achieve better terms with banks.
“I am happy we are meeting here today. The Skoda Palace case seemed to be a never-ending story.” This is how Prague Mayor Adriana Krnáčová welcomed reporters in her residence on Wednesday. Prague leased the palace in 2006 during former Mayor Pavel Bém’s term in office for 20 years for approximately 4.5 billion CZK. Back then, media pointed out the non-standard deal that seemed favourable only for the owner of the property – well-known real property tycoon Sebastian Pawlowski. It appeared as such also to succeeding political leaders who tried to normalise the relationship with the landlord to the benefit of the City.
Mayor Krnáčová has now announced that after several years of dispute and unsuccessful litigation, Prague eventually agreed with the owner of the palace, Copa Retail, on a reduction of the rent. The City will newly pay 33% less for the lease of the building in Jungmannovo Square, which represents a saving of approximately 860 million CZK by 2028. In exchange, Prague gave up on a purchase option for the palace that it could have exercised as of 2021. The Euro weekly talked to Abigail Schaeffer, a member of the Board of Directors of Guyana Holding, the owner of Copa Retail, about the Skoda Palace owner’s perception of the agreement and the more than three-year dispute with the City Hall.
Have you achieved what you wanted?
What we wanted was to normalise our relationship with the tenant. If the City Council and Assembly approve the agreement, we will have achieved our objectives.
Why has it taken so long? You have been offering the City Hall basically the same deal as you have now agreed upon.
The City achieved better terms than what we had originally offered. Only the current City leadership was reasonable enough to sit down at the negotiating table.
To what extent is the agreement more favourable for Prague?
The initial offer was for a 20% discount. The final agreement is a 33% discount. The City negotiating team worked really hard to achieve this deal.
The City is supposed to save some 860 million by 2028. Are you ready to trade 860 million for peaceful relations with your tenant? That does not sound like a good deal.
That’s not how it is. I’ve done real estate deals for over 2 billion Euro throughout Europe and I’ve never seen a contract with such non-standard lease clauses like the Skoda Palace lease agreement. It was these clauses that caused the City to pay a higher rent than usual. We are providing the discount because we are removing the elements from the agreement that increased the cost and risks for us and our financial partners. The rent had to be higher because of those provisions.
Are you talking about the purchase option for the palace as of 2021?
Not just that. There were other such provisions.
What were the other provisions?
What was important for us were restrictions on financing the property. The lease agreement included a provision that capped the owner’s debt on the building. This forced us to keep a relatively complicated corporate structure that increased the price of financing. Another provision, for instance, allowed the City to make arbitrary changes in the building and we would have had to accept it without proof and accept lower rent. We must say the City has never abused this right. Another provision, for instance, prohibited banks to collect the rent directly from the City.
Now, that the City abandoned the purchase option, you can sell the building. Are you going to do that?
We could have sold the building at any point. The building changed hands several times in the past. Look, the option meant nothing else than that as of 2021, the City could ask us to sell the building to them. The lease agreement did not stipulate any method of calculating the price, so it is likely that if Prague had decided to purchase the building, we would have ended up in court again in five years because of the price. The city can purchase the building at any time. They don’t need the purchase option for that.
The Skoda Palace is burdened with loans amounting to roughly three billion crowns, correct? If you are not selling it, are you going to refinance the loans? Otherwise, the whole agreement on your part does not make sense to me.
I can’t tell the exact amount of debt but yes, after the amendment to the lease contract, we will achieve much better credit terms. We are not planning to sell but to refinance.
So, you really did not exchange 860 million for peace … that was hard to believe.
Indeed. It was very important for us that City leaders negotiated commercially.
How exceptional of an experience has it been, to keep trying for three years to convince various political leaders to reach an agreement?
Very exceptional. We could not understand why our partners were reluctant to take what they wanted and what we were trying to provide.
Why did you want to extend the contract by 1.5 years?
That’s how it works in my business. I wanted a 20-year extension, but the city declined.