The following presentation was made by Lorne Cutler, P.Eng., MBA on August 18, 2011 to the City of Ottawa Finance and Economic Development Committee.

Previous Involvement with Lansdowne

• In 2009, I was engaged by Councillor Leadman to do a financial review of the Lansdowne Live Project (LLP), including review of accepted criteria for entering into PPPs

• In 2010, I was engaged by Sack Goldblatt Mitchell to assist in the financial review of the project for the court case

• I was the person who found the $60 million error in the equity formula and identified that the City’s Funding Equity could drop precipitously if interest rates were to decrease.

Funding Equity Model and the Waterfall

• Marion Wilkinson’s motion of November 2010 read:

“WHEREAS the equity provided by OSEG is a minimum of $30 million and the cash equity from the City of Ottawa is approximately $12 million in cash and deemed equity of $20 million land value and future air rights of $7.5 million; “

• While motion refers to cash infusion and reserves, nowhere does it refer to the requirement for a formula to be used to calculate the City’s Funding (or Deemed) equity

• Where did the formula come from and why?

Equity Vs. Debt

• A definition of equity would be:

“On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity"

• Since the Partnership is not responsible for servicing the City’s debt the full cost of the stadium is the City’s equity contribution to the project

• For purposes of calculating equity, since the project is not responsible for the debts, it makes no difference if the City borrows the money or gets it from reserves.

• The proforma balance sheet of the Municipal Services Corp., prepared by PriceWaterhouseCoopers realizes this and shows equity of $129 mln.

• Any concept of “Funding Equity” is merely an artifice to avoid having to pay the City a return on its full equity contribution

• If “Funding Equity” is merely an artifice, why not at least fix it at something reasonable for Ottawa taxpayers?

Equity Formula

• Formula is based on the amount of debt that can be covered by i) Sale of Air Rights; ii) Taxes received (regardless of whether they are truly incremental); and iii) Avoided Costs

• If the City’s borrowing rates drop low enough, City’s deemed equity could drop to 0 or even a negative amount

• We were told that OSEG would walk if the City received too high of a return on its equity.

• How low does the equity return to the City have to be for the City to walk?

Issues Related to the Revised Model Waterfall Model

Issue

City has shown an increase in tax revenue of $0.44 million due to switch of 45,000 ft2 from office to retail

 

• Does this take into account mill rate for Shopping Centres is 1.614021 while mill rate for office space is 2.344209, a decrease of 32%? Could taxes in fact decrease by substituting retail for commercial space?

Issue

City has assumed that property taxes will increase by 2% each year from initial level

 

• Does this take into account City’s policy of lowering non-residential mill rates to reach the same level as residential rates as mandated by the Provincial government? City has followed this policy for several years. If City were to reach the Range of Fairness, expected property taxes from Lansdowne could be almost 35% lower

Issue

City has assumed higher rent due to changing mix of retail/office space

 

• Since commercial land values are based on the value of future earnings from the land, has the City increased the value of its land contribution in recognition of its increased earning capacity? If not, why not? If they have, has the value of the land changed for purposes of return under Level 5 of the Waterfall?

Issue

PriceWaterhouseCooper’s financial model shows no debt for OSEG after 25 years which results in increased bottom line to Waterfall. Project Agreement, however, indicates that OSEG has the right to refinance the shopping complex presumably for refurbishment.

 

• What happens to the financial flows to the City if OSEG refinances? If this happens, will any money flow to levels 5 and 6 of the Waterfall in the later years when the City is to get its return under Levels 5 and 6 of the Waterfall. OSEG will have already been substantially paid out at levels 2, 3 and 4 before refinancing occurs but City will have received little return

Revenue Neutral Vs. Tax Neutral

• City has sold the project to the public on the basis of revenue neutrality

• It has never made the case that the taxes generated by the project are incremental and are surplus.

• To date, all announced tenants are not unique (cinema, LCBO and food store) and could have easily located elsewhere if LLP not being considered

• If the LCBO & Empire Theatres close other locations, how can these taxes be incremental?

• City refused to apply for Tax Incremental Financing under the Tax Incremental Financing Act

• While the City may want to pretend that the project is revenue neutral…

• The Project is not tax neutral

Lansdowne Tax Increase

• Taxes will have to go up to pay for project regardless of “revenue neutrality”

• Debt servicing costs will be approximately $9.48 mln. per year (based on 5% interest rate and $162.6 mln. debt)

• Amount currently spent on Lansdowne is approximately $2 mln. per year not $3.8 mln. Regardless of whether $3.8 is spent on LLP or maintaining existing site, $1.7 mln. will be new spending.

• 75% of taxes from commercial development is $2.94 mln. (based on updated estimate).

• Any potential substantial money from Waterfall will not be available to City for 20-25 years. Will City lower our taxes once Waterfall starts flowing to them?

• Lenders will not accept an IOU until the Waterfall flows in the City’s direction. Payment is due each year

• With total Lansdowne-related debt at $162.6 million, the City will be required to raise $4.54 mln. in new taxes

• $9.48 - $2.0 (current spending on Lansdowne) - $2.94 (incremental taxes as determined by City) = $4.54 mln. per year in new taxes from Lansdowne

• Even if City wants to pretend that Lansdowne related debt is only $129 mln., annual debt servicing will be $7.52 mln. resulting in $2.6 mln. per year in new taxes