Risks and rewards

Ottawa Citizen – September 27, 2009

By Patrick Dare

As Ottawa residents prepare to weigh in on the Lansdowne Live proposal at a series of open houses starting Monday, Patrick Dare takes an in-depth look at who pays for what, and who gets what, in the public-private partnership deal.

The Lansdowne Live proposal is part land deal, part sports venture, part commercial development, part public amenity. City land and buildings are to be redeveloped with a combination of public and private money.

Who pays for what -- and who gets what -- is complicated, and deciding whether Lansdowne Live is in taxpayers' interests means gaming out a variety of future scenarios to evaluate the risks and rewards.

Councillor Michel Bellemare says he still has questions even after getting a personal briefing. And he is concerned about the city entering such a partnership with one group of business people without having an open competition.

"It's a very complex public-private partnership," he said. "They haven't always been successful. This needs to be very carefully considered."

At the same time, he says council is mindful of the fact that Lansdowne is a large public asset in the central part of the city that has been in decline for some years. He says he wants to see the public space revived, "but not at any price."

At its core, the Lansdowne Live deal would be a partnership between the city and a group of four Ottawa businessmen: Roger Greenberg, Jeff Hunt, William Shenkman and John Ruddy. The city owns Lansdowne Park, a collection of deteriorating buildings in a sea of asphalt by the Rideau Canal. The businessmen own the Ottawa 67's junior hockey team. They also have the promise of a Canadian Football League franchise and a pro soccer team.

The group and city negotiators have proposed that to put all these assets together, the city enter into a long-term partnership with the businessmen for the redevelopment and operation of the entire 37-acre property.

The city would rebuild Frank Clair Stadium (for the football and soccer teams) and the Civic Centre (for the hockey team), but have the businessmen manage the construction and operate the facilities, as well as the rest of the site. While the city would have to pay up to a maximum of $110 million, the business group would be responsible for any cost overruns in the construction or operation of the facilities. The city would also pay $19.3 million to build an underground parking garage.

Ottawa Sports and Entertainment Group would build shopping areas and a multi-screen cinema at a cost of $80 million, and contribute $17.5 million for the garage.

Construction of this first phase of the redevelopment would happen by 2013. The city would issue a $117-million debenture to cover its share. That half of the Lansdowne project would be put to public tender.

The first phase also includes:

n replacing the underground pipes on the site for between $4 million and $6 million,

n the $5-million relocation of the Horticulture Building to a new site closer to the Rideau Canal, and

n a $5-million tearing up of asphalt parking lot and landscaping of space near the canal, a cost to be shared equally between the city and Ottawa Sports and Entertainment Group.

So much for the costs. To distribute the revenues from all the activity on the site, the plan proposes a "waterfall" of money, with five levels of claim to the payments made each year. The first level would have to be fully covered before money flowed into the second, and so on.

The first level would be a fund to maintain the Lansdowne properties, designed to avoid the neglect of the buildings. It's estimated this would amount to $1.5 million in 2013, but would grow with inflation.

The second level of the waterfall would be a payment to Ottawa Sports and Entertainment Group of an eight-per-cent return on the group's cash equity of $19.6 million (the money used to buy the sports franchises). That is estimated to be $1.6 million in 2013.

The third level of the waterfall, again to Ottawa Sports and Entertainment Group, would be the return of the firm's equity investment over 30 years.

Level four is the payment of an eight-per-cent return to the city on its "deemed equity" of $20 million, beginning in 2013. That would also be $1.6 million. That equity is based on the land the city is contributing to the development.

Any revenue left would be evenly split between the city and the business partnership. That would be level five of the waterfall.

To pay most of the estimated $7.1 million in annual servicing costs for the city's debt for the construction project, the city is counting on a separate revenue stream: three-quarters of the property taxes from the new retail buildings ($2.8 million a year), and the savings that result from no longer paying for the operations and urgently needed renovations in the existing buildings (estimated at $3.8 million).

There is a second phase to the Lansdowne redevelopment -- involving the construction of a 180-room hotel, a five-storey office building, two mid-rise condominium towers and 40 small townhouses along Holmwood Avenue. This phase doesn't have to happen. If the city opted not to go ahead, however, it would forgo millions in revenue.

There are some safeguards for the city. Ottawa Sports and Entertainment Group can only have debt on a maximum of 75 per cent of the market value of the retail buildings it constructs. If the business partnership fails, the bankers who hold the building mortgages, or their tenants, would have to immediately begin paying rent to the city, as well as property taxes. The partnership has to post a $6-million letter of credit with the Canadian Football League so that if they walk away from a failing franchise, the league steps in and operates the team with that money.

Kent Kirkpatrick, the city manager who negotiated the deal, says that if the franchises were to be sold, the proceeds would come within the Lansdowne partnership and be a part of the "waterfall" of money.

Perhaps most important, the city would continue to own all of the land at Lansdowne -- but through a "municipal services corporation," which would answer to council but be independent. That corporation would own the land but lease the property out for up to 70 years.

Kirkpatrick concedes the private partners would get their payments in the annual "waterfall" payments before the city. He says that is the best deal he could get and that the original proposal from the business group lacked the return on the city's land equity, which this latest agreement includes. He says there are more detailed agreements to work out with the business partnership if council approves the overall deal this fall.

Kirkpatrick says the risk of the business group walking away from the partnership is low because of the equity they would abandon in sports franchises and the retail buildings. But he says if that were to happen, the city would at least have a rebuilt stadium-arena complex.

Kevin McRann, one of the executives with Ottawa Sports and Entertainment Group, says the business plan is conservative in its financial projections. For instance, the CFL operation would likely lose money for the first few years, and the plan allows for that.

At the same time, "every penny" generated on the Lansdowne site goes into the shared pool of revenue.

The city and its proposed business partners have some serious skepticism to overcome at city council and in the community.

Carleton University business professor Ian Lee, a Glebe resident, says the city would be better off simply selling the land that is to be developed for $50 million. Lee said the deal favours the business partnership and he questions whether the CFL can succeed in Ottawa.

Bellemare isn't the only councillor who wants more detailed briefings on the partnership.

For instance, it is highly unusual for a city to dedicate property taxes to a specific expense, as is proposed in this project -- in this case, using the taxes from the retail buildings to cover the debt needed to fix up the stadium and arena for the sports teams to use.

"That is simply wrong," says Councillor Alex Cullen, who also opposes the project because it's not on a major transit route. "Who ends up paying for their services? Everyone else."

Councillor Diane Deans says she is concerned that the city would be putting out most of the money, but would lose much of its control of Lansdowne. Deans is asking Kirkpatrick for a detailed briefing session for councillors, which would be conducted in public.

The first of several open houses on the project will be held on Monday at Lansdowne Park from 6 to 9 p.m. in Salon A.

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Legal questions

The proposed Lansdowne Live project is a unique partnership and could be entered into by the city without an open tendering process, says Rick O'Connor, the city's chief lawyer and city clerk. He recently issued a memo saying he obtained an opinion from the city's law firm, Borden Ladner Gervais, which concludes the proposed deal with Ottawa Sports and Entertainment Group is "sufficiently unique, and only capable of being undertaken as a whole by the proposed partnership."

As a result, it would not be subject to the city's purchasing bylaw that requires a competitive process.

A critic of the project, John Martin, wants to challenge the legality of the partnership in court. The partnership intends to put the construction contract for the redevelopment project to public tender.

As well, city council has brought in its auditor general, Alain Lalonde, to examine the legal issues around the project. This includes whether the information for the business partnership makes sense and includes the proper information.

Lalonde is scheduled to report to council in November.