[Funding] Illeven Geon Extends 791 Billion KRW Loan for Yongsan UN Command Site with 'Loss of Benefit of Term'

Failure to Pay Remaining 58.3 Billion Won for Land Sale
Delay in Payment with Penalty Interest and Additional Collateral Conditions
Project Viability Worsened Due to Price Ceiling System

[Asia Economy Reporter Lim Jeong-su] Yongsan Eleven, which fell into a state of loss of benefit of term for failing to pay the balance of the purchase price for the Yongsan United Nations Command (UNC) site in Seoul, has extended a loan worth 791 billion KRW. Yongsan Eleven is a project developer established by Eleven Construction to develop the UNC site. The development project has been continuously delayed due to government real estate regulations such as the price ceiling system and disputes with local residents, resulting in significant losses.

◇ Loss of benefit of term due to failure to pay purchase price = According to the investment banking (IB) industry, Yongsan Eleven signed a contract to change the loan terms worth 791 billion KRW with Yongsan Project First Step on the 4th. This was to extend the maturity of the existing loan borrowed to pay the purchase price for the UNC site. KB Securities and Meritz Securities, the lead arrangers for funding, issued securitized bonds backed by the loan principal and interest to secure loan funds.

Eleven Construction signed a purchase contract with LH Corporation in July 2017 for the UNC site located at 1000-0 Itaewon-dong, Yongsan-gu, Seoul. Eleven Construction paid the deposit at that time and transferred the rights to the site to the project developer Yongsan Eleven in December of the same year. The obligations to pay the interim and final payments were also transferred. Yongsan Eleven was established with 100% equity investment from Eleven Construction.

Subsequently, Yongsan Eleven borrowed funds from Yongsan Project First Step and paid interim payments totaling 791.4 billion KRW and acquisition taxes in five installments from January 2018 to January last year. It also received a subordinated loan of 100 billion KRW from Eleven Construction and paid 100 billion KRW of the 158.3 billion KRW final payment. However, it failed to pay the remaining 58.3 billion KRW on the final payment date in July last year, falling into a state of loss of benefit of term. The balance remains unpaid to this day.

LH Corporation, which sold the land, notified Yongsan Eleven that the loss of benefit of term constitutes grounds for contract termination. According to the land sale contract, if the full balance is not paid by the 3rd of this month, six months after the payment due date, and LH Corporation sets a 14-day grace period for payment and the payment is still not made, the sales contract can be terminated.

◇ Loan extension after changing conditions such as penalty for delay = Yongsan Eleven, facing a situation where it must immediately repay a huge loan, is reported to have agreed with the lenders to extend the loan maturity.

The existing loan agreement stipulated that Yongsan Eleven must repay the loan principal and interest by a set deadline upon loss of benefit of term. However, as Yongsan Eleven failed to repay the loan, the loan terms were changed. Under the new terms, Yongsan Eleven will pay damages for delayed repayment to the lenders, and the major shareholder Eleven Construction will provide additional subordinated loans to Yongsan Eleven.

Additionally, Yongsan Eleven agreed to pay the remaining balance for the site purchase to LH Corporation by December 17 next year. If the balance is not paid by then, the sales contract will be terminated, and LH Corporation may request the return of payments made as interim payments and others to repay the loan. Furthermore, Yongsan Eleven’s deposit accounts and 100% of Yongsan Eleven’s shares held by Eleven Construction will be provided as collateral.

◇ Uncertain profitability... Will the winner's curse become reality? = The Yongsan UNC site was considered prime land attracting many companies’ interest when Eleven Construction purchased it. Eleven Construction was selected as the successful bidder by offering a whopping 1.0552 trillion KRW for the site. This corresponds to a price of 67 million KRW per pyeong (3.3㎡).

Eleven Construction plans to build five apartment buildings with 426 units ranging from seven basement floors to 20 above-ground floors, two officetel buildings with 1,053 units, a hotel, and one office building on the site. Approximately 2 trillion KRW or more, including the land cost, is expected to be invested in this project.

Originally, the plan was to sell the units, but due to the price ceiling system and other factors, profitability did not add up, so the sale has been indefinitely postponed. Considering the land purchase price and other costs, a high sale price of over 60 million KRW per pyeong would be necessary, but the Korea Housing & Urban Guarantee Corporation (HUG) does not allow high-priced sales, so the decision was made to proceed with construction first without sales.

With difficulty in setting a high sale price, options such as post-sale or long-term rental followed by sale conversion must be considered. An IB industry official said, "Although this is a project on a key site in Yongsan, the price ceiling system has made the project’s profitability ambiguous," expressing concern that "Eleven Construction may fall victim to the winner’s curse."

An Eleven Construction official said, "The Yongsan UNC site development project is currently going through the business permit stage," adding, "Once permits are obtained, we plan to start sales around the second half of the year."

This content was produced with the assistance of AI translation services.