Interest rate volatility in the marketplace cannot be predicted with certainty. At December 31, 2000, 75% of the Company’s third-party debt was charged interest at rates based on the bank’s prime rate, which may be subject to change at short notice. By December 31, 2001 this exposure had been reduced to 65% through the repayment of floating rate loans on sale of assets, and the refinancing of a facility from floating to fixed rate. Following the sale in 2005 of two-income producing properties and the repayment of related debt (all of which was at floating rates), the Company had 84% of its debt locked in at fixed rates at the end of the 2005. During 2006 the Company refinanced a fixed rate loan with a floating rate facility, such that approximately 58% of third-party debt is now at floating rates and 42% at fixed rates. Including debt to related parties, 57% (2005 – 25%) of all debt is subject to interest at floating rates. Increases in the bank’s prime rate would have a negative impact on the Company’s future operating results by virtue of higher interest expense.
The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued liabilities, long-term debt, due to related parties, capital lease obligation and long-term demand loans. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities and capital lease obligation approximate their fair values due to the short-term nature of these financial assets and liabilities.
The fair value of long-term debt and long-term demand loans is based on management estimates for mortgages which are determined by discounting cash flows required under the mortgages at the interest rate currently estimated to be available for loans with similar terms. Based on these estimates, the fair values of the Company’s long-term debt and long-term demand loans as at September 30, 2006 are not significantly different than their carrying values.
The fair value of the amount due to related parties has not been determined as the Company does not believe that it is practicable to determine such fair value with sufficient reliability due to the related party nature of the asset and the absence of a readily available secondary market for such financial instruments.
