We sat down with Abigail Schaeffer from Copa Retail right after Thursday’s Council Approval of the Skoda Palace Settlement and tried to better understand the reasoning behind the settlement and why it was worth 860 million CZK to them.
PL: Mayor Adriana Krnacova said the Skoda Palace case seemed to be a never-ending story. How does that feel considering you represent the owners of this building?
AS: I couldn’t help but agree with the Mayor. It was never-ending and in my view completely unnecessary and senseless. The problem was never the building, but a tug of war for political power. I only wish they had chosen a different building to battle over.
PL: What do you mean a political battle?
AS: Given the context of Prague municipal politics over the last 20 years, anything that is even slightly out of the ordinary is ammunition for politicians to try and prove their predecessors were wrong, and they are right. In our case however, those who brought the lawsuit forward were the ones who made the error. Both first and second court instances proved this. It’s a simple fact.
PL: But you admit the contract was out of the ordinary, otherwise why would you give a 860-million CZK discount?
AS: That’s a misleading question, but let me try and explain it. The contract was full of lease clauses that were highly unusual and restricted the normal rights of ownership. In fact, I’ve done deals worth over 2 billion euro, and I’ve never seen such unusual lease clauses. Unfortunately, those lease clauses created costs and risks to us and our partners resulting in a higher than necessary lease price. When you remove those risky and expensive passages and return to a market lease, you get a better price.
PL: A-860 million discount is almost a quarter of the entire lease; how much profit will your organization take from this deal?
AS: I assure you that neither I nor anyone else in this company will be pocketing 860 million CZK. Now that we’ve agreed to bring this contract to market standard, we will re-finance the building, make necessary corporate changes to the structure and look forward to a peaceful relationship with the City.
PL: Let’s move on. The biggest issue is the withdrawal of the purchase option. This was at the heart of the dispute, something that the former legal counsel said was the most valuable part of the contract.
AS: May I be so bold and offer the opinion that the City’s former legal counsel was simply wrong. His legal strategies led the City to 4 court losses and unnecessary expenses for both parties.
PL: I would like to come back to the purchase option. Why is it worth 860 million CZK?
AS: The purchase option only stated that the City could buy the building in the last 5 years of the lease for an uncertain price. It was a ticking time bomb and only guaranteed that down the road, there would be more litigation and uncertainty for both parties.
PL: How so?
AS: The lease lacked a method of how to calculate a price, so naturally, we would use market price, but valuations of such assets are tricky. The City would have the building valued from a reputable evaluator at 100 and I would bring a valuation from a reputable evaluator at 150. Which one is right? Which one is wrong? The City would naturally want to buy to building for 100, and I would naturally want to sell it for 150. We might agree to meet half way, but maybe not, and both sets of legal advisors (editor’s note: CCS for City and Dentons for Copa Retail) believe that the only solution had it gone that far would be through the courts.
So my only thesis to the city was this: you want a lease discount, we have a way of offering you that. It includes removing the purchase option, that for one, you admit you don’t know if you need and for two, is so poorly drafted, that even your own lawyers say you’ll end up in court again if you decide to use it. Is it worth it to you?
PL: But what about the exclusivity that the purchase option held for the City. This now gives you the chance to go and sell the building…
AS: This is a complete myth. The purchase option did not stop the owner from selling this property. It did not give the city any sort of exclusivity. At any point between the day we bought the building until today, I could have sold this to anyone, for any price I wanted, for any terms we agreed to. Mickey Mouse could have owned this building. There was nothing in the contract that prevented me from selling it, and the removal of the purchase option gives the parties two things, firstly, it leads to a significant discount and secondly, it has prevented likely litigation in the future.
PL: And this was worth 860 million CZK to you?
AS: There were a number of other non-standard lease clauses in the contract and the removal of all of them was the sum of the full discount. And may I add, we had never intended to give 33%, but the City negotiation team did a very good job.
PL: What were the other clauses?
AS: What was important for us were restrictions on lien and other hurdles for financing the property which is not usual in leases. The lease agreement included a provision that capped the owner’s leverage on the building. This forced us to keep a relatively complicated corporate structure that increased the cost of bank loans. Another provision, for instance, allowed the City to make arbitrary changes in the building and we would have had to pay for them at the end of the lease although they were of no use to us and we had no control over the measures taken or the sums of money involved. This provision is a complete reversal of the usual practice whereby the landlord pays for building changes only on a case by case agreed basis where costs can be defined in a give and take deal with the tenant, for example in exchange for an increase in rent or a lease extension. .
PL: And the other concessions?
AS: If you mean the 18-month lease extension, then that’s nothing more than me doing my job. I wanted a much longer extension, I got 18 months. And the change from EURO from CZK just makes my life easier when it comes to financing liabilities. Commercial leases in Prague are typically denominated in Euros so this again just brings the lease into line with the market.
PL: So what will you do with the building in 2028?
AS: I have been told by both City bureaucrats and politicians that they are quite happy in Skoda Palace. I would be more than happy to see how I can take away the risks from a massive public project such as building its own building and keep them at the same address. The Skoda Palace is a unique piece of European architectural heritage, one of the few large scale cubist buildings in Europe. It deserves to be and can be revamped to meet future long-term needs. We could certainly increase capacity the current building if this is needed and we hope that the City of Prague will continue to engage with us. Not only is the building fabulous in architectural terms, but it has the advantage of large scale in a fantastic location.PL: City opposition responded to the settlement saying that without them taking you to court, you would have never offered the discount.
AS: And I can only say that had they instead discussed this rationally and commercially with us 3 and a half years ago, they would have never had to take us to court. We would have had the same negotiation that we had with Mayor Krnacova’s team, and the tax payers could have been enjoying a significant discount for 3 years already. Instead, they pursued a destructive, irrational, politically driven strategy that harmed the Prague tax payer.
PL: Would this experience prevent you from investing in the Czech Republic again?
AS: We don’t currently have any other assets in the Czech Republic and aren’t pursuing anything new. This has undoubtedly been a unique experience, and something I would hope wouldn’t happen again if we had a property here.
PL: Will you avoid City administrations as clients in the future?
AS: City administrations across Europe are common and excellent clients. This dispute was not about the building. It was a political drama where we were caught in the middle.
PL: If this is passed in Assembly on June 16, will you open a bottle of champagne?
AS: Probably instead a bottle of Czech beer or Czech wine. One of the happier side effects of coming to Prague so often is that I’ve realized this is a beautiful and vibrant city.