Case Studies in Aboriginal Business

Case Studies in Aboriginal Business Financing the Membertou Professional Centre Stephanie Slaman

The Purdy Crawford Chair in Aboriginal Business Studies was established at Cape Breton University in 2010 in response to Aboriginal community leaders expression of the need for entrepreneurship, business investment, and corporate skills training for the purpose of creating a model of self-reliance. Purdy Crawford Chair in Aboriginal Business Studies Shannon School of Business Cape Breton University 1250 Grand Lake Rd, Box 5300 Sydney, NS B1P 6L2 2016 www.cbu.ca/crawford Named in honour of Canadian lawyer and corporate boardroom leader, the late Mr. Purdy Crawford, the Chair aims to promote interest among Canada s Aboriginal people in the study of business at the post-secondary level. The Purdy Crawford Chair in Aboriginal Business Studies focuses its work in four areas: Research on what drives success in Aboriginal Business National student recruitment in the area of post-secondary Aboriginal business education Enhancement of the post-secondary Aboriginal business curriculum Mentorship at high school and post-secondary levels Meaningful self-government and economic self-sufficiency provide the cornerstone of sustainable communities. My wish is to enhance First Nations post-secondary education and research to allow for the promotion and development of national Aboriginal business practices and enterprises. Purdy Crawford, C. C. (1931-2014)

FINANCING THE MEMBERTOU PROFESSIONAL CENTRE Based on the success of the Membertou Business Centre, which was at 95% capacity, Membertou was planning to construct a second commercial rental property. In 2012, having won a contract to provide space for an important anchor tenant requiring space within eight months, Mike McIntyre, the chief financial officer, was under pressure to find a way to finance the project. MEMBERTOU The Mi kmaw community of Membertou (sometimes referred to as Membertou First Nation) is located within the Cape Breton Regional Municipality (CBRM) on Cape Breton Island, Nova Scotia. The urban reserve, located on Alexandra Street in Sydney, spans 103.6 hectares; however, Membertou also has three other reserves totalling 885.7 hectares. The community has a population of 1440, with 871 residing on-reserve. From the late 1870s until the mid-1920s, Membertou was located on waterfront land and referred to as the Kings Road Reserve. While the community likely used the full shoreline for their benefit, the Kings Road Reserve was surveyed as being 3 acres. It was crowded, but in a prime location, resulting in employment opportunities. Increasingly, there was interest in the land and Indian Affairs wanted to relocate the Mi kmaq from the Kings Road Reserve to other parcels of less desirable land. The Mi kmaq would have preferred relocation to Coxheath or Westmount, where they would have access to waterways, fertile land, and traditional hunting areas; however, they were instead forced to move inland to their current location in 1926. In the decades that followed, members of the community dealt with inadequate housing, high unemployment rates, and limited access to services, such as garbage collection or sewer. All the while, the land of the former Kings Road Reserve was leased as park land to Sydney by Indian Affairs, with the revenue from the lease going into a trust for the community. In the 1960s, there was further interest in the waterfront land of the Kings Road Reserve and the federal government wanted Membertou to surrender their interest in the land so that it could be sold. The community understood that a doctor was going to open a community medical clinic that Mi kmaq could access. Despite this potentially beneficial use, the community was divided as to whether the land should be surrendered and sold, since some members recognized its present and future commercial value. Because reserve land cannot be surrendered without a referendum, multiple votes were held in Membertou and the sale was eventually approved. There was significant suspicion in the community, however, around whether the votes had been conducted appropriately and were valid. Nevertheless, the government proceeded with the sale of the land for less than fair market value and a three-story Financing the Membertou Professional Centre by Stephanie Slaman 1

office building not the anticipated community medical clinic was built on the former Kings Road Reserve land. The outcome fractured the community and, ever since, the surrender of any land has been rejected. In the mid-1990s, under the leadership of Chief Terry Paul, Membertou began engaging in economic development, both on the Membertou reserve and in the international market, with a corporate office in Halifax, Nova Scotia. Membertou also received ISO 9000: 2001 certification, which had a significant impact on how they were perceived as a business partner. Membertou was committed to accountability and transparency, and ISO enhanced their credibility. As a result of these initiatives, the community has become one of the most economically sound Aboriginal communities in Canada. In 2001, the Membertou Market opened, providing access to grocery items and gasoline on-reserve. The following year, the Membertou Gaming Commission (MGC) opened five pavilions, employing more than 50 individuals. The Membertou Trade and Convention Centre (MTCC) opened in 2004, followed by the Membertou Entertainment Centre (MEC) in 2007. Membertou s overall development strategy was to create a marketable cluster of businesses and attractions within a 4km radius. MIKE MCINTYRE A Membertou band member, Mike McIntyre grew up off reserve, but had close ties to the Membertou community. Following high school, Mike completed a Bachelor of Business Administration degree and Cape Breton University and became a chartered accountant. Early in his career, he worked for Aboriginal Business Canada, Revenue Canada, and Eskasoni First Nation. Mike was hired by Membertou in April 2001 to support the community s economic development initiatives. The following year, he took on additional finance duties and, as Membertou s economic development initiatives expanded, his position evolved into one of chief financial officer (CFO). As CFO, Mike is responsible for building partnerships and leading major projects in the community. Mike works as part of the Membertou Business Development Committee (BDC) to pursue economic development projects and achieve business goals. Since the establishment of the Membertou BDC, successful partnerships have been formed in the sectors of engineering, mining, energy, construction, geographic information system (GIS), information technology (IT), business management, consulting services, insurance, commercial fisheries, and real estate. The BDC consists of the band chief, the chief executive officer, a senior advisor, the chief operating officer, the chief financial officer, the special projects coordinator, the two senior business development officers of Membertou Corporate Division, and the director of marketing and information technology. From time to time, additional staff in senior management 2 Purdy Crawford Chair in Aboriginal Business Studies

positions may be included in the committee to help achieve strategic priorities. In the development of the Membertou Business Centre, Mike had worked closely with Bill Bonnar, the Real Estate and Special Projects Coordinator for Membertou Corporate Division. Bill was responsible for tenant relations, which included attracting tenants and completing the leasing process with them. MEMBERTOU BUSINESS CENTRE In 2009, Membertou First Nation had strong business and revenue options, but was looking for ways to diversify, expand, and grow. Real estate was regarded as a low-risk strategic investment opportunity that would generate revenue. The existing competitive business space in the surrounding communities was aging and there was a need for modern rental options for businesses looking to move to or expand in the Sydney area. The idea for a commercial business space in Membertou emerged and the Membertou Business Development Committee was tasked with developing this business opportunity. Mike prepared a business plan for the proposed facility, which would feature 33,000 square feet of single story drive-up rental space similar to a strip mall. Following review and analysis, a piece of reserve land along Churchill Drive a main artery being extended to connect King s Road through the reserve to the Cape Breton Regional Hospital was proposed for the Business Centre. Membertou had $200,000 equity in the form of the land for the development, as well as clearing of the land and provision of site services. Enterprise Cape Breton Corporation (ECBC), a federal Crown corporation that promoted and assisted with the financing and development of Cape Breton Island projects, provided a $1 million nonrepayable grant from an economic stimulus program. In addition, Mike and Bill had already approached a number of potential tenants and had letters of intent from two significant anchor businesses, Pharmasave and Stantec (a professional engineering firm). Mike approached the band s account manager at the Sydney branch of the Royal Bank of Canada (RBC) to finance the remainder of the capital required for the proposed plan. Membertou had financed a number of other large business projects with RBC, so they had an established business relationship with a strong repayment history. Despite this, however, they often were subject to short amortization terms (3, 5, or 7 years) which caused significant pressure on cash flow. While the project was low risk for Membertou, RBC scrutinized the project and evaluated Membertou as it would other businesses. Consequently, the location of the new development on reserve land was problematic. Reserve land is owned by the federal government and cannot be used to securitize a bank loan because the land cannot be seized in the event of non-repayment. RBC asked whether Membertou had Financing the Membertou Professional Centre by Stephanie Slaman 3

considered designation of the reserve land on which the commercial space was to be built. Designated lands are reserve lands that a First Nation has agreed to lease for commercial, agricultural, recreational, or other purposes as voted on by the members of that First Nation according to the rules of the Indian Referendum Regulations. 1 When lands are designated, Indigenous and Northern Affairs Canada (INAC) approves, monitors, and enforces the leases. Designation and direct involvement by INAC is seen by bank financing departments to reduce lending risk, as the terms of the leases would be enforceable by INAC. Without designation, leases would be considered buckshee and Membertou or its stakeholders would have limited recourse if lease conditions were not followed. Mike explored this option and in speaking with other First Nations found that the referendum process for designation could take up to a year and may not achieve the desired result if the community did not vote to support it. In fact, in the Membertou context, designation generally was not looked upon favorably and the chance of the referendum failing was high. Mike also learned that INAC might take up to 18 months to approve a single lease, significantly slowing business transactions. This did not seem like a feasible solution if only because it would not allow Membertou to move at the speed of business. Mike decided designation was not an option. Although reluctant, RBC approved a $2.5 million loan with an amortization term of 10 years and a floating interest rate of prime + 2 % without the land designation, but stated that any new financing projects with Membertou would require that the designation process be followed. It was made very clear to Mike that regardless of their established business relationship and Membertou s strong repayment record with other significant financing projects, RBC still classified Membertou as a high-risk entity. With the loan approved, construction was ready to start and Mike arranged for contractors. On-reserve tenders have a 50% local hiring policy, so at the construction stage Membertou community members were already benefiting from the project directly through employment. Despite significant work by the local account manager in Sydney, RBC headquarters in Toronto put in place additional requirements to offset the risk of financing the project without designation of the land. RBC specified that signed leases from tenants were required before the loan could be accessed. In this way, the bank was able securitize the loan with the rental revenues from the Business Centre. The process resulted in an 8-month delay in accessing the loan due to the additional requirements from the RBC. During this delay, cash flow became a significant problem, as Mike had financial commitments to the contracting company that required payment every 30 days. Despite the challenges of arranging and accessing financing, on June 23, 2010 the Membertou Business Centre opened. Mike and Bill worked to attract companies with a high investment in the business locations they choose and already the Membertou Business Centre featured a Pharmasave, a Tim Hortons, Stantec Engineering, and a variety of other vendors. Once the facility opened, many business people in the local 4 Purdy Crawford Chair in Aboriginal Business Studies

surrounding area began to take an interest in the development on the reserve. The Membertou Business Centre also won an award for the design of the building and its unique construction due to the architectural additions that were made to the preengineered building base of the Centre. More importantly, Membertou band members were benefiting through additional employment opportunities, youth internships at professional firms, and increased recognition of Membertou s economic enterprises. Strong relationship building and excellent client service had made the Membertou Business Centre a success. MEMBERTOU PROFESSIONAL CENTRE By 2012, only 2 years after opening, the Membertou Business Centre was 95% full, largely as a result of Bill s experience and expertise in real estate. Membertou announced it would expand with more spaces for commercial development. The proposed Membertou Professional Centre would be 20,000 square feet of additional commercial real estate space, similar to the Membertou Business Centre. The proposed project would cost $3 million to complete, but Membertou had already secured a $500,000 non-repayable grant and a $500,000 repayable grant from Enterprise Cape Breton Corporation. In fall 2012, the Regional Hospital Foundation put forth an open request for tenders for 4,000 square feet of rental space that would house a new wellness centre and clinic. The new Professional Centre would be an ideal location, given its proximity to the hospital. Membertou placed a bid and won the contract, but that meant Mike had to ensure the bid commitment of having the rental space available in the short timeline of eight months was met. To secure the remaining capital required for the Professional Centre, Mike began investigating financing options at local banks. His first inclination was to go with RBC, but the local bank manger had changed and Mike would be working directly with headquarters to negotiate the financing terms. Further, as had become apparent in the earlier project, RBC would only consider another loan if the land on which the Professional Centre would be built was designated. With the success of the first commercial real estate location, Toronto Dominion Bank (TD) indicated that they were interested in financing the second project; however, the terms of the loan were similar to those of RBC. TD Bank required 25% equity from Membertou and offered to finance the remainder of the build at prime + 2% interest over 10 years. TD stated that until the building was 75% leased, Membertou could not draw down on the financing and they also required an INAC land designation. While Mike was evaluating these options, he met a representative of Peace Hills Trust, a First Nation community trust based in Hobbema, Alberta. The representative, who was in Sydney for an economic development conference, was impressed with the visible success of the Membertou Business Centre and was very interested in Financing the Membertou Professional Centre by Stephanie Slaman 5

providing financing for the second location. Peace Hills Trust could provide financing for $3 million with an amortization term of 15 years and a fixed interest rate of 4.25%. Financing from Peace Hills Trust would not require an INAC land designation, because they were willing to accept the buckshee leases as security. They would only finance the project, however, if Membertou also refinanced the first Membertou Business Centre through them. At the time, the balance at RBC from the Business Centre was approximately $1.9 million. CONCLUSION With the Membertou Business Centre at 95% capacity and increasing interest from the surrounding community, Membertou saw an opportunity to construct a second commercial rental property. In 2012, having won a contract to provide an important anchor tenant with rental space in eight months, Mike McIntyre, the chief financial officer, was under pressure to find a way to finance the project. 6 Purdy Crawford Chair in Aboriginal Business Studies

1 Indigenous and Northern Affairs Canada. (2016). Frequently Asked Questions Amendments to the Land Designations and other related regulations. Retrieved from https://www.aadncaandc.gc.ca/eng/1362412700200/1362413357652. Financing the Membertou Professional Centre by Stephanie Slaman 7