ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c.

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1 Court File No. CV CL ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT OF HUSH HOMES INC., HUSH INC., ONTARIO INC. AND ONTARIO INC. AND ONTARIO INC. (COLLECTIVELY, THE APPLICANTS ) FOURTEENTH REPORT OF THE FULLER LANDAU GROUP INC. AS MONITOR OF THE APPLICANTS DECEMBER 17, 2018

2 TABLE OF CONTENTS INTRODUCTION... 1 TERMS OF REFERENCE... 3 STATUS OF THE PROJECTS... 4 FINANCING... 6 RECOMMENDATION... 8

3 INTRODUCTION 1. On December 12, 2014, Hush Homes Inc. ( Hush Homes or CoronationCo ), Hush Inc. ( Hush ), Ontario Inc. ( ThornyCo ), and Ontario Inc. ( SilverthornCo ) (collectively, the Applicants ) filed an application in the Ontario Superior Court of Justice (Commercial List) (the Court ) originally returnable December 19, 2014, seeking a stay of proceedings and other relief under the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the CCAA ). 2. On January 15, 2015, after multiple adjournments, the CCAA application was heard by Justice Penny and on January 19, 2015, an order was issued granting, among other relief, a stay of proceedings in respect of the Applicants until February 18, 2015 and appointing The Fuller Landau Group Inc. ( Fuller Landau ) as Monitor of the Applicants (the Initial Order ). A copy of the Initial Order is attached as Appendix A. 3. On April 24, 2015, the Court issued an Order adding Ontario Inc. ( MPCo ) as an applicant in the CCAA proceedings. 4. A partially consolidated Plan of Compromise and Arrangement dated November 12, 2015 (the Plan ) was filed with the Court by the Applicants. 5. On November 16, 2015, the Monitor filed its tenth report to Court (the Tenth Report ) and on November 18, 2015 the Court issued Orders inter alia: a) authorizing the filing of the Plan; b) authorizing and establishing the procedure for the Applicants to call, hold and conduct a meeting of Creditors to consider and vote on the Plan on December 8, 2015 (the Meeting ); and c) setting the date of the Applicants motion for an order sanctioning the Plan if the Plan is approved by the Required Majorities. 1

4 6. On November 27, 2015, in accordance with section 23(d.1) of the CCAA, the Monitor issued its report to the creditors on the Plan (the Monitor s Report on the Plan ). Attached as Appendix B is the Monitor s Report on the Plan. 7. The Plan contemplated the buildout of the Mont Palais development (the MP Project ) and the Thorny Brae development (the TB Project ) by Pace Developments Inc. pursuant to the TB Profit Participation Agreement and the MP Profit Participation Agreement with the Build-Out Value to be paid to the HUSH Distribution Fund and distributed to Plan Creditors. The Plan was sponsored by MarshallZehr Group Inc. ( MZ ) who provided the initial round of financing required to purchase, and service the MP Project and the TB Project. 8. Pursuant to the TB Profit Participation Agreement, the HUSH Distribution Fund will receive 70% of the Build-out Value of the Thorny Brae Project after repayment of the Land Costs, Build-Out Costs and Restructuring Costs and the First TB VTB. 9. Pursuant to the MP Profit Participation Agreement, the HUSH Distribution Fund will receive 70% of the Build-out Value of the Mont Palais Project after repayment of the Land Costs, Build-Out Costs and Restructuring Costs and the First MP VTB. 10. The Meeting was held on December 8, 2015 and the Plan was approved by the Applicants creditors in accordance with the CCAA. 11. On December 10, 2015, the Monitor filed it eleventh report to (the Eleventh Report ) and on December 14, 2015 the Court issued an Order, inter alia: a) sanctioning and approving the Applicants Plan; and b) authorizing and directing all steps and actions necessary or appropriate to implement the Plan. 12. Copies of the Monitor s reports, all Orders, and all other court materials filed in these proceedings can be found on the Monitor s website at 2

5 13. The purpose of this fourteenth report (the Fourteenth Report ) is to provide: a) an update on the build-out of the MP Project and TB Project including the projected amount and timing of payment of the MP Profit Participation and the TB Profit Participation to the HUSH Distribution Fund; b) the status of the Coronation Project and Silverthorn Project; c) details of the AH Financing Commitment (as defined in the Motion Record of MZ); d) the Monitor s recommendation that the AH Financing Commitment be approved by the Court. TERMS OF REFERENCE 14. In preparing this Report, the Monitor has relied on unaudited financial information provided by MZ and Pace (collectively, the Parties ) relating to the MP Project and TB Project including the records, financial statements, forecasts, budgets and discussions with the management and employees. While the Monitor reviewed various documents provided by the Parties and believes that the information therein provides a fair summary of the transactions as reflected in the documents, such work does not constitute an audit or verification of such information for accuracy, completeness or compliance with Accounting Standards for Private Enterprises ( ASPE ) or International Financial Reporting Standards ( IFRS ). Accordingly, the Monitor expresses no opinion or other form of assurance pursuant to ASPE or IFRS with respect to such information. 15. The Monitor cautions readers that the estimated proceeds of the Build-out Values payable to the HUSH Distribution Fund set out in this Fourteenth Report are based on several assumptions, best estimates and judgments, as well as information available and known at the time of their development, giving all of the foregoing due consideration as to materiality. The estimates reflect current 3

6 general economic, housing market and construction market (i.e. labour and materials) conditions. The estimates also assume a continuation of current municipal government planning policies and priorities, as they are highly dependent on the nature and timing of municipal land use approvals. At the time of preparation of these estimates by the Parties, they are believed to be reasonable. However, as with all such assumptions, there is a measure of uncertainty surrounding them. Actual results are almost certain to vary from such estimates and the variances may be material. This uncertainty increases as the forecast horizon of the projection extends over several years. 16. All references to dollars are in Canadian currency unless otherwise stated. 17. Capitalized terms not defined in this Report have the meanings ascribed to them in the Plan and MZ s Motion Record originally returnable on November 6, STATUS OF THE PROJECTS MP Project and TB Project 18. As reported in the Monitor s Report on the Plan, based on the build-out budgets as at November 11, 2015, the estimated proceeds of the Build-out Value of the Projects (70% of Build-out Value) payable to the HUSH Distribution Fund for distribution to Plan Creditors and payment of the Monitor s expenses were as follows: Conservative Estimated Realizations Optimistic Estimated Realizations $ Silverthorn Project - - Coronation Project - - MP Project 1,918,547 2,925,035 TB Project 3,140,789 5,045,966 5,059,336 7,971,002 * Refer to disclaimer in paragraph 15 of this Report 4

7 19. Since Plan Implementation, MZ and Pace has faced numerous challenges as detailed in the paragraph 33 of the Affidavit of Cecil Hayes sworn October 24, 2018 (the Hayes Affidavit ). These challenges have resulted in significant delays with respect to the completion of the MP Project and the TB Project which are estimated to increase the development and sales timeframe by an additional 30 to 36 months compared to the original 3-year timeframe to complete the projects. 20. The Monitor has reviewed the revised build out budgets as at October 1, 2018 (the Revised Build-Out Budgets ) for reasonableness which included a detailed review of the budgets, cost consultants reports, and meetings and telephone calls with MZ. 21. Based on the Revised Build-Out Budgets, the estimated proceeds of the Build-out Value of the Projects (70% of Build-out Value) payable to the HUSH Distribution Fund for distribution to Plan Creditors and payment of the Monitor s expenses is now projected to be as follows: Conservative Estimated Realizations Optimistic Estimated Realizations $ Silverthorn Project - - Coronation Project - - MP Project - (2,412,900) TB Project - 5,583,861 (87,475)** 3,170,961 * Refer to disclaimer in paragraph 15 of this Report ** MZ and PACE prepared its conservative budget on a combined basis and prepared optimistic budgets on an individual project basis. Included in the conservative budget is a $2.3 million contingency and in the optimistic budget is a $1.12 million contingency for unknown costs. Silverthorn Project and Coronation Project 22. With respect to the Silverthorn Project, five homes are currently under construction of which three are subject to agreements of purchase and sale and two homes are being marketed for sale. 5

8 23. With respect to the Coronation Project, all homes have been sold and four of the homes are currently under construction. 24. As reported on in the Monitor s Report on the Plan, there are no estimated proceeds payable to the HUSH Distribution Fund from the Silverthorn Project and Coronation Project. FINANCING 25. The original MP Financing Commitment was funded by MZ and was in the amount of $11.2 million. Its purpose was to purchase, service and develop the land and to fund costs related to marketing, administration and financing. In consideration for providing the financing, MZ earned a $500,000 restructuring fee and a broker fee of $271,650. Other than $95,000, these amounts have not been paid and have been deferred until project completion. 26. The original TB Financing Commitment was funded by MZ and was in the amount of $11.3 million. Its purpose was to purchase, service and develop the land and to fund financing cost and repay the then existing DIP Financing with respect to that project. In consideration for providing the financing, MZ earned a $500,000 restructuring fee and a broker fee of $295,500. Other than $50,000, these amounts have not been paid and have been deferred until project completion. 27. The financing contemplated by the original MP Financing Commitment and the original TB Financing Commitment have been fully advanced and new financing is required in order to complete the development and construction of both projects. 28. As a result of the current projected MP Project loss, in order to obtain financing for the MP project and complete the development of both projects, MZ has issued one combined commitment letter for both projects now referred to as the Archways Hazel Project. The AH Financing Commitment is for $70,882,610 and comprises the following: 6

9 a) Service and construction financing loan of $38 million ( Facility 1 ); b) Mezzanine loan of $14.7 million ( Facility 2 ); c) Conditional Hazel loan (formally the Mont Palais Project) of $16 million ( Facility 3 ); and d) Deferred financing and restructuring fee of $2.2 million ( Facility 4 ). 29. A part of the proceeds of the AH Financing Commitment will be utilized to repay all the indebtedness under the existing MP Financing Commitment and existing TB Financing Commitment. 30. Interest rates in the AH Financing Commitment are set out below: a) Facility 1 Prime +4.00% (Floor rate: 7.70%) b) Facility % per annum c) Facility 3 - Prime +4.00% (Floor rate: 7.70%) d) Facility 4: 0.00% per annum. 31. Interest rates under the MP Financing Commitment and TB Financing Commitment ranged from 6% to 14% for the various facilities within the commitment letters. Since the original commitment letters the Canadian bank prime rate has increased by 1.1%. 32. The AH Financing Commitment includes a lender fee and an origination fee totaling $1.83 million which represents approximately 2.6% of the total loan amount and is reasonable in the circumstances. 33. The amounts advanced under the AH Financing Commitment are to be secured against each of the Archways Portion and Hazel Portion of the Archways Hazel Project in the amount of $75 million. 7

10 RECOMMENDATION 34. In the Monitor s view it is in the interest of the stakeholders that the AH Financing Commitment be approved to allow for the completing of the development and construction of the projects for the following reasons: a) Based on the current as-is market value appraisal for the TB Project, obtained by MZ from a recognized appraiser, if this development were liquidated today there would likely be no funds available for the HUSH Distribution Fund; b) Based on the current as-is market value appraisal for the MP Project, obtained by MZ from a recognized appraiser, if this development were liquidated today there would be no funds available for the HUSH Distribution Fund; c) The Revised Build-Out Budget projects a payment to the HUSH Distribution Fund of approximately $3.2 million which would be available for the unsecured creditors; and d) The interest rates and financing fees in the AH Financing Commitment are similar to the interest rates and financing fees in the TB Financing Commitment and the MP Financing Commitment previously approved by the Court. All of which is respectfully submitted this 17 th day of December, 2018 The Fuller Landau Group Inc. in its capacity as Monitor of Hush Homes Inc., Hush Inc., Ontario Inc., Ontario Inc. and Ontario Inc. Per: Gary Abrahamson, CPA, CA, CIRP Adam Erlich, CPA, CA, CIRP 8