Kyiv left to foot the bill for Kyivmiskbud’s stalled development

Kyiv City has decided to help its largest real estate developer, Kyivmiskbud. Mykola Povoroznyk, the First Deputy Head of the Kyiv City State Administration (KMDA), said the city will buy housing for all those on the waiting list, including combatants, their family members, and internally displaced persons. In addition, the city will also purchase social infrastructure facilities, such as schools and kindergartens. This year alone, more than UAH 1 billion ($27.4 million) has been allocated in the city budget for these purposes, Povoroznyk noted.

Kyivmiskbud urgently needs additional funding, with 80% of its shares belonging to the Kyiv City Council. Kyivmiskbud problems began in late 2022 when all the company’s construction sites suspended work. In April, they were successfully resumed on just four sites, namely Urlivskyi-1, Urlivskyi-2, Mirax, and Abrykosovyi (Apricot) residential complexes. Some 40,000 early buyers are waiting for their apartments to be finished.

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Amid this controversy, journalists of the Bihus.Info investigative project discovered a French firm in the company owned by the wife of Kyivmiskbud CEO Ihor Kushnir, which owns a EUR 20 million villa in Cote d’Azur. The developer’s Supervisory Board suspended Kushnir and ordered three separate audits of Kyivmiskbud.

Who audited the company’s work, what did the auditors find and why are investors unhappy with their findings?

Construction has stopped, but without violations

Kyivmiskbud was building 29 residential complexes in Kyiv by February 2022. The list included not only the developer’s own complexes, but also those of the bankrupt state-owned construction company Ukrbud, which collapsed back in 2019. However, Kyivmiskbud also stopped work in late 2022, and about 40,000 investors are waiting for their housing.

Kushnir himself announced in mid-April the reasons why this happened.

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“What we have today in the real estate market is rising prices of building materials, a reduction in the number of qualified personnel, and almost complete absence of sales,” he wrote on Facebook.

The developer had used up a certain amount of its reserves during the first year of the war, Kushnir added. Therefore, he said that he hopes for the city’s help, which is supposed to buy real estate for UAH 300 million ($8.2 million) and recapitalize the company for UAH 1 billion ($27.4 million). “We are working closely with banks,” he said at the time.

However, Kushnir was already mired in controversy in the spring. In May, Bihus.Info released an investigation into the construction of cottages by Kyivmiskbud head’s associates on the territory of a recreation center in the village of Kozyn in the Obukhiv district outside Kyiv. This land plot has belonged to the Ekos company, a Kyivmiskbud subsidiary, since the early 2000s. In 2013, the recreation center was sold to the Lisorgbud company, whose founders included the aunt of Kushnir’s wife Oksana.

In July, Bihus.Info journalists found out that Oksana’s company purchased a French firm in 2019-2020, for which a villa with an area of 850 square meters in the town of Villefranche-sur-Mer outside Nice was registered. It has six bedrooms and private bathrooms, a wine cellar, a spacious kitchen, a swimming pool with panoramic sea views, a large garden, and a garage for eight cars. The house is estimated to be worth EUR 20 million.

After such investigations and protests by investors Kyivmiskbud projects, the company’s Supervisory Board decided to order an audit. In mid-November, a specially created control commission of the Kyiv City Council reviewed the findings and approved the interim report of the audit results, stating that no violations were found. The commission also recommended strengthening control over financial and economic activities, expanding the Supervisory Board to five people, as well as purchasing housing and social infrastructure objects from Kyivmiskbud. In its findings, the commission refers to the results of financial forecasting carried out by Ernst & Young, one of the largest international auditing companies.

“We supported the proposal on behalf of the Kyiv City Council to turn to the Cabinet of Ministers with a demand to compensate Kyivmiskbud for the total planned loss related to the completion of the Ukrbud projects worth UAH 2.28 billion ($62.5 million),” said Myroslava Smirnova, member of the Kyiv City Council and the interim commission’s head.

Smirnova did not respond to NV Business’ request for audit details.

What did the auditors find and who exactly wrote the report’s summary

The interim commission’s official notification does not mention an important detail that the company was audited by two other companies, namely Baker Tilly and NXD-AUDIT, in addition to Ernst & Young.

The first one, according to the YouControl online register, is owned by Oleksandr Pochkun and Serhiy Kesarev and is well known in Ukraine. In 2019, Baker Tilly won the auction for the audit of Ukroboronprom’s (state-owned defense contractor) consolidated statements. In 2021, it won the audit of the SE Market Operator’s financial statements, with service fees amounting to UAH 949,000 ($26,028).

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In 2016, Baker Tilly specialists worked with the Kyiv Terminal company, estimating its losses at $98.51 million due to the termination of the investment agreement with the KMDA’s Department of Economy and Investments for the reconstruction of Kharkiv Square. Kyiv Terminal did not carry out any work, while the contract was terminated due to the construction of a new interchange on Kharkiv Square. This case is currently being considered in Kyiv’s Northern Commercial Court of Appeal. According to YouControl, the Kyiv Terminal company is owned by Tamaz Somkhvishili, a citizen of Russia and the United Kingdom.

Somkhvishili talked about his Russian ties in an interview with Forbes Georgia. He owned the Druzhba cooperative in Russia’s city of Tyumen, which produced confectionery products, helped Lukoil [oil and gas company] open its branch in the region and became its co-owner, controlled 25% of the shares of the Tyumen airport and is personally acquainted with Vagit Alikperov, sanctioned Russian billionaire and Lukoil founder. Somkhvishili is associated with Georgia’s most influential businessman, Bidzina Ivanishvili, who is the main political opponent of former Georgian President Mikheil Saakashvili.

Regarding Kyivmiskbud financial assessment, Baker Tilly auditors reported the company’s gross profitability was 11% in 2021, 6% in 2022, and 1% as of June 30, 2023.

“The company is significantly dependent on borrowed funds and is able to finance only 8.7% of assets at the expense of its own funds as of the end of 2022, and 9% as of the end of H1 2023,” the report says. The findings also state that with a change in volume revenue by +/-5% in H2 2023, the company will receive either a profit of UAH 44 million ($1.2 million) or a loss of UAH 37 million ($1 million). Gross margin will grow by 4.7% or fall by 5.2% as revenue increases or decreases, respectively.

The little-known NXD-AUDIT firm owned by lawyer Yevhenia Vakulenko provided a key conclusion that no financial violations were recorded at Kyivmiskbud in 2020−2022 and in Q1 2023. Housing was not sold at below market prices, asset withdrawals and write-offs were not observed, while the cost of construction was not unreasonably inflated, according to this audit.

“A little-known firm without serious authority on the auditing market,” said Oleksandr Diadiuk, investor of the Urban Park residential complex, at a press conference on the Kyivmiskbud issue.

Ernst & Young, according to its findings, did not review the company’s historical performance and carried out all its calculations on the basis of data received from Kyivmiskbud representatives. According to a conservative estimate, which looks the most reasonable, the company needs $272.5 million in additional financing to cover the shortfall.

The city is in a hurry to help, but instead of apartments, it offers an ad hoc task force

Kyiv will take an active part in helping right the ship by purchasing subsidized housing, said Povoroznyk. According to him, this year the city budgeted more than UAH 1 billion for these purposes.

“The auditors established that Kyivmiskbud’s activity was disrupted due to external factors, such as COVID-19, the full-scale war, and the Ukrbud factor,” Povoroznyk said.

Kyiv’s Municipal Property Department told NV Business that the budget for 2024 does not provide funds to complete the company’s active development projects. The city will appeal to the Cabinet for additional financing of Ukrbud objects under construction worth UAH 2.28 billion ($62.5 million).

There is an interesting coincidence in the case with Ukrbud. It should be reminded that this company’s bankruptcy caused several controversies, which involved Ukrbud owner Maksym Mykytas and its former lawyer Oleh Tatarov, who is now the deputy head of the President’s Office.

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Almost two weeks before Povoroznyk named the Ukrbud factor as one of Kyivmiskbud financial problems, former Ukrbud Development CEO Oleh Maiboroda wrote an apologetic post on Facebook. He called Mykytas “the locomotive of the company’s development, adding that he had never claimed his business. And as for Tatarov, he said that “at a certain point, he was presented to me as an enemy, the main author of my problems and criminal cases.”

Tatarov did not respond to NV Business’ request for comment.

What does the future hold for Kyivmiskbud? Early apartment buyers say that Kyiv Mayor Vitaliy Klitschko has promised to establish a task force that they plan to join. They also demand to change the company’s management, discard the audit results, and to consider the situation for each residential complex separately, as well as establishing more open channels of communication.

“I sent a request to Kyivmiskbud a month ago and still haven’t received a response,” says Marharyta Yakuba, representative of the initiative group of investors in the Milos residential complex.

However, none of these proposals provide a clear path to resuming work at Kyivmiskbud construction sites.

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Read the original article on The New Voice of Ukraine