I have already noted that the City of Ottawa is a wonderful landlord in its arrangement with OSEG. No rent is expected from the tenant until all of the tenant's other obligations have been addressed -- that is the nature of the City's "deemed equity" in the Lansdowne Partnership Plan: wait and get nothing until your partner is taken care of.
But it gets even better! City Council has just agreed to give the Ottawa 67's hockey club a cool $500 thousand per year for two years in which the 67's are to play at Scotiabank Place rather than at Lansdowne. The hockey team is being asked to move out so that the construction work at Lansdowne (including the long overdue repair of the leaking roof over the arena) can go ahead.
Nowhere in the staff report presented to Council is it suggested that the City is obliged to make any payment to the 67's. There is no mention of a lease that is being broken. Apparently the practice is simply that the City grants half a million dollars whenever it feels like it.
But the staff report is quite enlightening in what it does say about the relationship with its hockey team tenant. Because the 67's will be elsewhere, the City will not be receiving $150,000 in rent per year from the 67's organization. This is the first time I have seen a figure quoted; I have often wondered why Councillors have not asked how much the 67's are paying to use the Civic Centre.
The $150,000 figure is interesting because when the 67's are to return to Lansdowne, their annual rent will drop to $100,000 per year. (Want to check these figures? For the 150k, look in the staff report dated Feb. 8, 2012 called LPP implementation status update. For the 100k, go back to the Price Waterhouse "Business Plan for Transformation" dated Sept. 1, 2009.)
So when the City of Ottawa is your landlord, after spending millions fixing up the arena, the tenant is given a 33% discount on the rent. Isn't that wonderful?
And it gets even better. Where does the rent go? Here it is very difficult to know since so many details are hidden away, but in all likelihood the rent goes into the infamous waterfall -- an arrangement under which nothing trickles back to the City until all the financial dreams of OSEG are fulfilled. In other words, until the City starts getting any money, the rent from the hockey club is going to OSEG, which owns the hockey club.
Do I know that the rent goes into the waterfall? No, this is a guess. But the guess is probably right because of the way the rest of the deal is structured. The Feb. 8 staff report makes it clear that all the revenue from the naming rights for the stadium and arena is to go into the waterfall. This is unusual. Normally the naming rights money would go to the owner of the building -- not in this case. Thanks to the clever negotiating skills of the City, the owner of the building who pays 100% of the renovation costs, the revenue from the naming rights will go to OSEG for years and years before a penny comes to the City.
Yes, if you're the right tenant, the City of Ottawa is truly a splendid landlord.
Showing posts with label waterfall. Show all posts
Showing posts with label waterfall. Show all posts
Saturday, February 25, 2012
Sunday, July 3, 2011
A great landlord
Sitting in Court for seven days provides an opportunity to learn much. One thing I learned is that the City of Ottawa is a very generous landlord.
The Friends of Lansdowne (FoL) are challenging the City's arrangement with Ottawa Sports and Entertainment Group (OSEG) known as the Lansdowne Partnership plan. FoL indicates that the City is providing an illegal "bonus" to OSEG by providing the land for the development of the shopping complex at a mere one dollar per year for a term of thirty years. According to the explanation given to the Court by the City's lawyer, the City is not conferring a "bonus" in its $1 leasing arrangement because there is provision for a payment to the City.
It is in examining that payment that we learn how generous and understanding a landlord the City is.
According to the argument presented to the Court, a calculation of the value of the land was undertaken by the City and the market rent was ascertained. It was then discovered that if the City were granted "deemed equity", and a return to the City on that "deemed equity" were established, a revenue stream equivalent to rent could be projected by using the financial model created under the Lansdowne Partnership plan. No doubt the City's lawyer would say that it is a mere matter of semantics whether such return in considered "rent" or "return on deemed equity".
But there is a bit of a problem with the City's argument. The return on "deemed equity" is only payable at the fifth level of the "waterfall" -- the series of prioritized payouts from the "net cash flow" of the entire Lansdowne Partnership. What this means is that every other financial obligation is to be satisfied prior to the City of Ottawa receiving any return whatever on its "deemed equity".
Payments are made to OSEG not only to provide a return on its investment but also to repay what OSEG has invested (including any payments for cost over-runs on the stadium) before any money is available for the City as a return on its "deemed equity".
So all of this makes the City of Ottawa a remarkable landlord.
Normal landlords don't care about your other financial obligations. If you don't pay your rent in full and on time, you are out on the street. A normal landlord would not allow you to defer rent payment to allow you to pay your bar bills or keep up your car payments.
By contrast, the City of Ottawa is an ideal landlord. The City is happy to permit its tenant to give priority to every other imaginable demand before expecting that any payment equivalent to rent be effected.
May we all be so lucky as to have as splendid a landlord as the City of Ottawa!
The Friends of Lansdowne (FoL) are challenging the City's arrangement with Ottawa Sports and Entertainment Group (OSEG) known as the Lansdowne Partnership plan. FoL indicates that the City is providing an illegal "bonus" to OSEG by providing the land for the development of the shopping complex at a mere one dollar per year for a term of thirty years. According to the explanation given to the Court by the City's lawyer, the City is not conferring a "bonus" in its $1 leasing arrangement because there is provision for a payment to the City.
It is in examining that payment that we learn how generous and understanding a landlord the City is.
According to the argument presented to the Court, a calculation of the value of the land was undertaken by the City and the market rent was ascertained. It was then discovered that if the City were granted "deemed equity", and a return to the City on that "deemed equity" were established, a revenue stream equivalent to rent could be projected by using the financial model created under the Lansdowne Partnership plan. No doubt the City's lawyer would say that it is a mere matter of semantics whether such return in considered "rent" or "return on deemed equity".
But there is a bit of a problem with the City's argument. The return on "deemed equity" is only payable at the fifth level of the "waterfall" -- the series of prioritized payouts from the "net cash flow" of the entire Lansdowne Partnership. What this means is that every other financial obligation is to be satisfied prior to the City of Ottawa receiving any return whatever on its "deemed equity".
Payments are made to OSEG not only to provide a return on its investment but also to repay what OSEG has invested (including any payments for cost over-runs on the stadium) before any money is available for the City as a return on its "deemed equity".
So all of this makes the City of Ottawa a remarkable landlord.
Normal landlords don't care about your other financial obligations. If you don't pay your rent in full and on time, you are out on the street. A normal landlord would not allow you to defer rent payment to allow you to pay your bar bills or keep up your car payments.
By contrast, the City of Ottawa is an ideal landlord. The City is happy to permit its tenant to give priority to every other imaginable demand before expecting that any payment equivalent to rent be effected.
May we all be so lucky as to have as splendid a landlord as the City of Ottawa!
Sunday, November 15, 2009
Press the reset button!
On Nov. 12 I appeared before the Committee of the Whole and delivered the following speech.
Quote
In my view, the appropriate decision is to "press the reset button". I urge you to end this process now and stop wasting resources on a faulty approach. I am not challenging the assertion that you have been acting legally. I expect you to avoid illegality; I hope that you seek to make wise decisions.
So I have written my remarks with the objective of contributing to your debate. Feel free to steal any ideas you like.
Back on April 22, Council authorized negotiations with Ottawa Sports and Entertainment Group. You provided an impossibly weak negotiating position to the City team involved in the process.
As far as I can see, Council’s instructions were – come back with a deal, any kind of deal. You did not put the City negotiating team in a position in which they could walk away from the table. Such negotiations result in one-sided arrangements.
And now that the outcome of the negotiations is before you, here are some pointed questions I urge you to address in your debate.
Why should taxpayers stump up $110 million for upgrading the stadium and arena? The correspondence from the Canadian Football League does not call for luxury. The documentation before you does call for some work on the facilities. It notes that strengthening of the raker beam is required to end temporary loading restrictions, but with those restrictions the stadium can be used. It calls for cleaning and painting the stadium roof and addressing the problem of water infiltration. The documents do not specify the need for comfy new seats or crystal chandeliers in the VIP boxes. And it is not just a question of inflating the cost of the upgrades, this also delays until 2013 the possibility of having a football (or soccer) team on the field generating revenue.
Why should taxpayers provide $19.3 million for parking? None of this parking is for the stadium or civic centre. Those parking requirements are fully grandfathered – what ever that is supposed to mean. No, the parking paid for by the city is for the customers coming to the shopping centre and cinema. I expect that small business owners who are forced to satisfy the zoning by-law’s onerous demands for parking might question why their competitors receive this kind assistance.
And if the parking requirements for the stadium and civic centre can be grandfathered because those facilities exist today, why could the same not be done for the trade and consumer show industry?
Consider the fundamentals. In a risky business venture, a prudent businessman will attempt to limit his financial exposure by minimizing the investment up front. In the Lansdowne Partnership, the investment in upgrading the stadium is the most risky part of the project. That is paid 100% by the taxpayers but we have seen no real analysis to reduce this up-front investment.
Now some people consider that the project at Lansdowne is "revenue neutral" and will not cost a penny. I submit more of our citizens believe in the tooth fairy than in the fiction of "revenue neutrality".
For decades Council has consistently failed to adequately provide for upkeep at Lansdowne but now your solemn pledge to do so in the future is bankable? Not at my bank!
Moreover you are contemplating a new policy in which property taxes can be designated to support specific city undertakings. Please do not take this path. If you truly believe that taxpayers’ money should go into rehabilitating Lansdowne, say so. Do not hide behind this Enron-style accounting sleight-of -hand.
Finally, the only financial return to the city from this partnership comes from net cash flow dribbling down through the famous "waterfall". Note that the Auditor-General has pointed out that there is no definition of "net cash flow". It is whatever is left over after OSEG has been fully reimbursed for its management, coordination and other services (of which I am sure there will be many).
In conclusion, it is time to abandon the Lansdowne Live detour. We have wasted eighteen months on this fruitless exercise. Get back on track by making decisions about what is to be done and how it will be funded. Take more than a passing interest in the financial impact on the taxpayer. Put to rest ideas of inventing new ways of cooking the books. Secure good value for the tax dollar. Press the reset button!
Unquote
I guess my delivery (by which I managed to fit all this into five minutes -- not easy -- try reading it outloud with a stopwatch) was a bit vigorous. At any rate, Dave Reevely, writing in his blog "Greater Ottawa" described it as "virulent". Well I probably should be happy that he saved "violent", "vituperative", "vitriolic", "voluble", "virus-spreading" and "vulgarizing" for another day. However I wouldn't have minded "vulpine".....
Quote
In my view, the appropriate decision is to "press the reset button". I urge you to end this process now and stop wasting resources on a faulty approach. I am not challenging the assertion that you have been acting legally. I expect you to avoid illegality; I hope that you seek to make wise decisions.
So I have written my remarks with the objective of contributing to your debate. Feel free to steal any ideas you like.
Back on April 22, Council authorized negotiations with Ottawa Sports and Entertainment Group. You provided an impossibly weak negotiating position to the City team involved in the process.
As far as I can see, Council’s instructions were – come back with a deal, any kind of deal. You did not put the City negotiating team in a position in which they could walk away from the table. Such negotiations result in one-sided arrangements.
And now that the outcome of the negotiations is before you, here are some pointed questions I urge you to address in your debate.
Why should taxpayers stump up $110 million for upgrading the stadium and arena? The correspondence from the Canadian Football League does not call for luxury. The documentation before you does call for some work on the facilities. It notes that strengthening of the raker beam is required to end temporary loading restrictions, but with those restrictions the stadium can be used. It calls for cleaning and painting the stadium roof and addressing the problem of water infiltration. The documents do not specify the need for comfy new seats or crystal chandeliers in the VIP boxes. And it is not just a question of inflating the cost of the upgrades, this also delays until 2013 the possibility of having a football (or soccer) team on the field generating revenue.
Why should taxpayers provide $19.3 million for parking? None of this parking is for the stadium or civic centre. Those parking requirements are fully grandfathered – what ever that is supposed to mean. No, the parking paid for by the city is for the customers coming to the shopping centre and cinema. I expect that small business owners who are forced to satisfy the zoning by-law’s onerous demands for parking might question why their competitors receive this kind assistance.
And if the parking requirements for the stadium and civic centre can be grandfathered because those facilities exist today, why could the same not be done for the trade and consumer show industry?
Consider the fundamentals. In a risky business venture, a prudent businessman will attempt to limit his financial exposure by minimizing the investment up front. In the Lansdowne Partnership, the investment in upgrading the stadium is the most risky part of the project. That is paid 100% by the taxpayers but we have seen no real analysis to reduce this up-front investment.
Now some people consider that the project at Lansdowne is "revenue neutral" and will not cost a penny. I submit more of our citizens believe in the tooth fairy than in the fiction of "revenue neutrality".
For decades Council has consistently failed to adequately provide for upkeep at Lansdowne but now your solemn pledge to do so in the future is bankable? Not at my bank!
Moreover you are contemplating a new policy in which property taxes can be designated to support specific city undertakings. Please do not take this path. If you truly believe that taxpayers’ money should go into rehabilitating Lansdowne, say so. Do not hide behind this Enron-style accounting sleight-of -hand.
Finally, the only financial return to the city from this partnership comes from net cash flow dribbling down through the famous "waterfall". Note that the Auditor-General has pointed out that there is no definition of "net cash flow". It is whatever is left over after OSEG has been fully reimbursed for its management, coordination and other services (of which I am sure there will be many).
In conclusion, it is time to abandon the Lansdowne Live detour. We have wasted eighteen months on this fruitless exercise. Get back on track by making decisions about what is to be done and how it will be funded. Take more than a passing interest in the financial impact on the taxpayer. Put to rest ideas of inventing new ways of cooking the books. Secure good value for the tax dollar. Press the reset button!
Unquote
I guess my delivery (by which I managed to fit all this into five minutes -- not easy -- try reading it outloud with a stopwatch) was a bit vigorous. At any rate, Dave Reevely, writing in his blog "Greater Ottawa" described it as "virulent". Well I probably should be happy that he saved "violent", "vituperative", "vitriolic", "voluble", "virus-spreading" and "vulgarizing" for another day. However I wouldn't have minded "vulpine".....
Wednesday, September 30, 2009
Definition is a problem
Maybe I am dazed and confused by attending too many consulations on Lansdowne but there seem to be some obvious loose ends. We need better understanding of two questions of definition in the Lansdowne redevelopment proposal.
The first is defining what is needed to upgrade the stadium and civic centre. It seems that OSEG, the project proponents, are defining what is to be done. Just how crucial are VIP suites to the success of football? How important is it to install wider seats in the stadium?
The reason for my concern is that OSEG decides what is done; OSEG gets the contract to do it and the city pays for whatever OSEG defines as required. We do not seem to be challenging the extensive nature of the renovation. If we look at some other apparently successful CFL football teams and OHL hockey teams, we might rethink what needs to be done.
My second concern about definition centres around the phrase "net cashflow". The panels on display at the public consultations say "The proposed partnership agreement would see the net cashflow of the stadium, retail and parking operations shared between the City (MSC) and the OSEG according to a formula." The formula is of course the famous waterfall which provides for the City to be paid last.
But maybe being paid last does not matter if there is no "net cashflow". Depending on how we define "net cashflow", it would be easy for OSEG to charge management and like fees to such an extent that no "net cashflow" is ever generated. My examination of the documents released to date give no indication that terms and conditions for establishing "net cashflow" will be established. Failure to do so could be the equivalent of signing a blank cheque.
Clearer definition is needed.
The first is defining what is needed to upgrade the stadium and civic centre. It seems that OSEG, the project proponents, are defining what is to be done. Just how crucial are VIP suites to the success of football? How important is it to install wider seats in the stadium?
The reason for my concern is that OSEG decides what is done; OSEG gets the contract to do it and the city pays for whatever OSEG defines as required. We do not seem to be challenging the extensive nature of the renovation. If we look at some other apparently successful CFL football teams and OHL hockey teams, we might rethink what needs to be done.
My second concern about definition centres around the phrase "net cashflow". The panels on display at the public consultations say "The proposed partnership agreement would see the net cashflow of the stadium, retail and parking operations shared between the City (MSC) and the OSEG according to a formula." The formula is of course the famous waterfall which provides for the City to be paid last.
But maybe being paid last does not matter if there is no "net cashflow". Depending on how we define "net cashflow", it would be easy for OSEG to charge management and like fees to such an extent that no "net cashflow" is ever generated. My examination of the documents released to date give no indication that terms and conditions for establishing "net cashflow" will be established. Failure to do so could be the equivalent of signing a blank cheque.
Clearer definition is needed.
Wednesday, September 23, 2009
Sweeping statements
There is too much salesmanship masquerading as analysis around the Lansdowne project.
I have been re-reading the staff report to Council on the Lansdowne partnership proposal and am irritated that what purports to be analysis is in fact a sales brochure.
In my earlier posting "Contradiction and confusion" I noted that the staff report claimed that housing would only be built in phase 2, an optional second stage of the project. This is contradicted by the Memorandum of Understanding.
I also noted that the infamous waterfall of revenue is misdescribed in the staff report. The report suggests that the City is in first and fourth position to receive revenue. In fact the first revenues simply go into a reserve fund. The City is dead last to get anything out of the project.
But on re-reading there are other statements that leap out as unsubstantiated claims. For example, it is maintained that "enhancing trade show and consumer show space on the site would have jeopardized... ...a transformation plan that respects the intention of Council's motion, the unique characteristics of Lansdowne Park, and the financial viability and long-term sustainability of the site." I have seen no evidence to support such a claim.
On the financial front, the staff report says "Compared with historical operations of Lansdowne, the project is expected to generate positive cash flow to the City over the life of the proposed agreement with OSEG". What does such a sales pitch mean? Does is mean that a positive cash flow will be received over the life of the project? Or maybe it means that the negative position of the City will be less than in the "historical operations of Lansdowne"? What is taken into account in coming up with such a statement? How would the cash flow compare if a different sort of arrangement were struck (selling an asset, or receiving rent for example)?
And the most laughable of all is the statement "The financial due diligence carried out by the City and its consultants on the OSEG proposal has demonstrated, among other things, that the City would be receiving fair value under the Plan." For suspicious outsiders, the failure to release any of the meaningful analysis backing this statement looks strange. Moreover, the fact that the City is proposing to strike this deal with the consortium that refused from the outset to contemplate entering into any sort of competition, raises no end of red flags.
Now the really dedicated reader will have noted that there is a document prepared by Pricewaterhouse Coopers among the many documents issued in respect of this proposal. Some might be lulled into believing that a large and highly regarded firm has blessed this project and declared its finances above reproach. No, the Pricewaterhouse Coopers document has an interesting disclaimer at the end. Translated into layman's language is says - 'we were hired to prepare some Power Point slides and here they are'.
Frankly the staff report, thrust under the Councillors' noses at the last minute on September 2 is a disappointment. It is not surprising that the Councillors adopted a flurry of motions to try to get answers to questions which the the staff report failed to address.
Redevelopment of Lansdowne is an important issue for Ottawa. It should be the subject of sensible debate and analysis. Sweeping statements of assurance are to be expected from a salesman. What we need is real analysis.
I have been re-reading the staff report to Council on the Lansdowne partnership proposal and am irritated that what purports to be analysis is in fact a sales brochure.
In my earlier posting "Contradiction and confusion" I noted that the staff report claimed that housing would only be built in phase 2, an optional second stage of the project. This is contradicted by the Memorandum of Understanding.
I also noted that the infamous waterfall of revenue is misdescribed in the staff report. The report suggests that the City is in first and fourth position to receive revenue. In fact the first revenues simply go into a reserve fund. The City is dead last to get anything out of the project.
But on re-reading there are other statements that leap out as unsubstantiated claims. For example, it is maintained that "enhancing trade show and consumer show space on the site would have jeopardized... ...a transformation plan that respects the intention of Council's motion, the unique characteristics of Lansdowne Park, and the financial viability and long-term sustainability of the site." I have seen no evidence to support such a claim.
On the financial front, the staff report says "Compared with historical operations of Lansdowne, the project is expected to generate positive cash flow to the City over the life of the proposed agreement with OSEG". What does such a sales pitch mean? Does is mean that a positive cash flow will be received over the life of the project? Or maybe it means that the negative position of the City will be less than in the "historical operations of Lansdowne"? What is taken into account in coming up with such a statement? How would the cash flow compare if a different sort of arrangement were struck (selling an asset, or receiving rent for example)?
And the most laughable of all is the statement "The financial due diligence carried out by the City and its consultants on the OSEG proposal has demonstrated, among other things, that the City would be receiving fair value under the Plan." For suspicious outsiders, the failure to release any of the meaningful analysis backing this statement looks strange. Moreover, the fact that the City is proposing to strike this deal with the consortium that refused from the outset to contemplate entering into any sort of competition, raises no end of red flags.
Now the really dedicated reader will have noted that there is a document prepared by Pricewaterhouse Coopers among the many documents issued in respect of this proposal. Some might be lulled into believing that a large and highly regarded firm has blessed this project and declared its finances above reproach. No, the Pricewaterhouse Coopers document has an interesting disclaimer at the end. Translated into layman's language is says - 'we were hired to prepare some Power Point slides and here they are'.
Frankly the staff report, thrust under the Councillors' noses at the last minute on September 2 is a disappointment. It is not surprising that the Councillors adopted a flurry of motions to try to get answers to questions which the the staff report failed to address.
Redevelopment of Lansdowne is an important issue for Ottawa. It should be the subject of sensible debate and analysis. Sweeping statements of assurance are to be expected from a salesman. What we need is real analysis.
Saturday, September 12, 2009
Contradiction and confusion
Understanding the "Lansdowne partnership plan" isn't easy. There are many documents to read including:
1- the staff report to Council (23 pages - available on the city website)
2- the glossy giant-sized "plan" document (56 pages - available on the city website)
3 - a 5 centimetre thick book of appendices
4- a slide presentation to Council (promised on the city website but not there)
But it would be simpler for everyone if the documents didn't contradict each other. Or maybe someone could tell the public which documents are correct and which are in error.
Just to illustrate the problem, here are some of the contradictions.
-- When is the housing built?
The staff report to Council describes all residential components as being in Phase 2 Before Council it was said this was "plug and play" (apparently intended to suggest that residential components were optional and subject to some subsequent decision by Council). This is contradicted by the Memorandum of Understanding including in the glossy plan document. Clause 4.5 of the MOU says "The Stadium, the Retail Component, the Front Lawn, the Holmwood Townhouses and all parking except residential and hotel component parking, must as a condition of the Project, proceed concurrently."
Well, are the townhouses in phase 1 or phase 2?
-- When does the City get paid?
In the staff report to Council it is said that "the City of Ottawa is in the first and fourth position in the waterfall structure" indicating that funds start flowing to the City. But later on the same page (and in other documentation) it is clear that the first payments go into the "Lifecycle fund". This is not a flow of cash to compensate the City; it is a reserve fund for major maintenance of the stadium and civic centre. That fund will be called upon to keep the facilities from deteriorating. It is like the reserve funds of a condo or a portion of rent paid to a landlord to cover real costs. OSEG receives return on its equity and repayment of its equity before any distributions are made to the City.
So how is the City first in line to receive payment?
The more you read these documents, the more questions you have.
1- the staff report to Council (23 pages - available on the city website)
2- the glossy giant-sized "plan" document (56 pages - available on the city website)
3 - a 5 centimetre thick book of appendices
4- a slide presentation to Council (promised on the city website but not there)
But it would be simpler for everyone if the documents didn't contradict each other. Or maybe someone could tell the public which documents are correct and which are in error.
Just to illustrate the problem, here are some of the contradictions.
-- When is the housing built?
The staff report to Council describes all residential components as being in Phase 2 Before Council it was said this was "plug and play" (apparently intended to suggest that residential components were optional and subject to some subsequent decision by Council). This is contradicted by the Memorandum of Understanding including in the glossy plan document. Clause 4.5 of the MOU says "The Stadium, the Retail Component, the Front Lawn, the Holmwood Townhouses and all parking except residential and hotel component parking, must as a condition of the Project, proceed concurrently."
Well, are the townhouses in phase 1 or phase 2?
-- When does the City get paid?
In the staff report to Council it is said that "the City of Ottawa is in the first and fourth position in the waterfall structure" indicating that funds start flowing to the City. But later on the same page (and in other documentation) it is clear that the first payments go into the "Lifecycle fund". This is not a flow of cash to compensate the City; it is a reserve fund for major maintenance of the stadium and civic centre. That fund will be called upon to keep the facilities from deteriorating. It is like the reserve funds of a condo or a portion of rent paid to a landlord to cover real costs. OSEG receives return on its equity and repayment of its equity before any distributions are made to the City.
So how is the City first in line to receive payment?
The more you read these documents, the more questions you have.
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