Child welfare agency signed $10M untendered lease with company partly owned by Peter Ginakes: audit

A company partly owned by Winnipeg businessman Peter Ginakes secured a 20-year, untendered contract to lease space to an agency funded by the provincial government, according to an audit report obtained by CBC News.

Auditors Grant Thornton LLP were hired to look into a long-term property deal between the Southern First Nations Network of Care, also known as the Southern Authority, and a numbered company owned by Ginakes and two partners. The authority oversees 10 First Nations child and family services agencies and gets its funding from the province.

The company, 5185603 Manitoba Ltd., bought a building near Arlington and Notre Damein Winnipeg in 2007 so the authority could house up to 10 kids there and keep them from being placed in hotels. In return, the authority drafted a 20-year, multimillion-dollar lease agreement that was sent to the province for approval.

But once provincial government lawyers examined the proposed lease, red flags were raised, according to the February 25, 2016,audit. A briefing note at the time said the lease cost was "up to twice the Winnipeg market rate" which "may raise questions of good judgment and prudent use of limited resources within child welfare."

The following comments were also made in the audit briefing note: "the total financial return to the landlord may be $12 million for an investment of approximately $800,000.00 plus up to $2.4 million in renovations."

The province managed to negotiate the lease down from $12 million over 20 years to about $10 million, but approved the project even though it was never put out for tender. Auditors also identified another concern that the authority paid the numbered company a year's worth of rent before the deal was even sealed.

Corporations Branch documents show that Peter Ginakes and Bob Harris each own 45 shares of 5185603 Manitoba Ltd., while Kenneth Cranwill owns 10 shares.

Earlier this year,ManitobaInfrastructure and Transportation Minister SteveAshtoncame under fire for another sole-sourceddeal witha company represented by Ginakes.

An ombudsman's report found the province "lacked sufficient justification" to buy $5 million in flood-fighting tubes known as Tiger Dams. The investigation was launched after a whistleblower allegedAshtonwas in a conflict of interest when his department awarded the contract to a company represented byGinakes, who is a friend of Ashton's, and in the past has contributed to both Ashton's and the NDP's election campaigns.

There is no indication Ashton had any involvement in the Southern Authority lease negotiations.

'It was a bad lease,' says board chair

"It was a bad lease. I don't know how anybody would pay so much money," said Allan Courchene, chairman of the board of directors for the Southern Authority.

According to the payment schedule described in the audit, at the end of 20 years,Ginakesand his partners are projected to receive about $10 million in lease payments after spending less than $2.5 million to buy and renovate the building.

The Southern Authority was under the province's control from Nov. 23, 2012, toJan. 12, 2016, after which it was handed over to a newly created board of directors.Courchene said its first order of business was to deal with the lease at the building.

"We just got a brief financial report and looking at the financial report, the deficit that we incur over the year is due to the lease obligations," said Courchene."Why would you give us this burden of continuing to go in deficit by paying this huge lease?"

Gord Mackintosh, then minister of family services and housing,said it took the province 10 months of negotiating with the landlord to get the terms of the lease agreement to an acceptable level.

"The original deal was not good, and it was not acceptable to the province. The original draft terms of the lease were simply too rich and not acceptable," Mackintosh said.

According to the audit, which was commissioned by the Southern Authority's former CEO Bobbi Pompana, discussions withGinakesand his business partner began in 2006 after the province announced a strategy to reduce hotel use for CFS kids. The following year, the authority came up with a 20-year contract to rent out the 18,000-square-foot building that was converted into an emergency placement for children in care.

More than $2 million was spent renovating the building, $1.5 million of which was paid byGinakes and his partners. The Ahsanook Centre, which means safe place on our journey, opened in 2009 and was designed to "provide a 10-bed unit for short-term placements, co-ordinate the access to placement beds for all four authorities and provide assessment and clinical services," according to a March 26, 2009, government media release.

Termination clause removed

A last-minute change to the lease eliminated a clause that would have allowed the authority to terminate the lease with six months notice. The numbered company said such a termination clause would be "a deal breaker,"according to the audit.

Peter Ginakes didn't want to comment.Bob Harris said "Peter Ginakes is the one that deals with it. I don't know anything about it. So deal with him, it's his deal."

Ken Cranwill said the deal wasn't done in a day and went through the proper steps over a number of months.

"We had our lawyers look over everything, and everything is done properly, so we would expect that they would honour the terms of the agreement," said Cranwill.

The Southern Authority is fully funded by the government of Manitoba, and the audit says the province's involvement in negotiations appears to have occurred around the same time as the start of talks with the numbered company. The audit cites several departments that were involved, including Child and Family Services and Leasing and Accommodation, Infrastructure and Transportation and the Treasury Board.

The Southern Authority initially signed anuntenderedagreement withthe numbered company to lease 100 Villa Maria Place and put down a deposit of $98,527 for two months rent on April 30, 2007. That deal fell through but discussions withthe companycontinued, said the report.

On June 18, 2007, it signed an addendum "to lease a property that both parties feel is mutually satisfying,"nearly three months beforeGinakes and his partnerspurchased the building. The lease did not specifically mention the building.It wasn't mentioned until a July 30, 2007, lease agreement, according to the audit.

According to the provincial Land Titles database,the numbered companybought the property on Sept. 5, 2007. That same month the Southern Authority gavethe companysix postdated checks of $47,375each for rent from October 2007 to March 2008, well before renovations were startedor a move-in date was determined, and a year before a final lease was actually signed, the report said.

Mackintosh said the Southern Authority continued to deal with Ginakes and his partners because of a legal obligation.

Obligation to deal with landlord

"That legal obligation was in place, and I think that may have hampered some of the negotiation strength later on," he said.

"So when the landlord said, 'Hey, you know we have dibs on another facility,' I think that was a way of continuing to move to get a facility on an urgent basisat the same time not get into a legal fight with the landlord," said Mackintosh.

"Within the department a concern was expressed prior to the signing of the lease that there was a possible legal obligation to the landlord if the landlord had purchased (the building) in the belief that the authority would lease it," the report said.

The auditors said that concern, "valid or otherwise would have influenced the lease negotiations if one party believed that they could not walk away,"said the report.

"The authority paid $573,466.50 (11 months' rent plus final month deposit) to the landlord before the lease was signed and renovations commenced," the audit found.

"We don't want to be stuck paying this multimillion-dollar lease. If you look at it, we could have purchased the building for the amount of money that we're leasing the facility," said Courchene.

He said the board of directors wants the province to take over the lease and free the Southern Authority from the financial burden.

According to the audit, "as of Jan. 7, 2008, the need 'to go out to tender' as well as concern about the authority paying rent in advance of Treasury Board approval were discussed. It appears that neither problem was rectified," the report said.

The audit says it understands there is no requirement on the authority's part to tender projects, but "in our view it would have been appropriate to use such a tendering process to find the most suitable facility at the best price."

In a Dec. 20, 2007, briefing note, several serious concerns were brought forward in a meeting. "The advice received from Civil Legal Services and Leasing and Accommodation is that, on both legal and business grounds, the lease as currently written is unacceptable to Manitoba," said the audit report.

The final lease agreement was signed on Oct. 8, 2008.

The province is now looking at renegotiating the lease.

"I think to make it a good deal, that lease has to be looked at again, and the lawyersare doing that, and if the lease can't be renegotiated or changed in any way, that facility has got to provide full value to Manitoba taxpayers, and that's clearlythe message from both the audit report and what the officials are recognizing as an issue," said Mackintosh.