September 18, 2016 | Posted in Politics
For all the success we had at PortsToronto from 2007-2015, there was one piece of unfinished business when I departed that Chair role in August of last year.
It was PortsToronto’s Property Development Project at the vacant 30 Bay Street/60 Harbour Street site. For more than 100 years, this parcel of land has been “land banked” by PortsToronto and its predecessors. 90 days ago, I wrote to the Ministers of Finance, Transport and Treasury Board 3 months ago to outline the key business elements of this project. Enough time has now passed and it seems only fair to share them with the rest of you. Not that the project hasn’t been public for years, mind you.
What is the history of the project?
In late 2007, the PortsToronto Board of Directors invited presentations from our auditors and leading external real estate advisors to provide advice as to the highest and best use for this otherwise fallow site.
We had six clear choices at the time:
In 2010, once it became apparent that PortsToronto would be proceeding with the pedestrian tunnel project at Billy Bishop Toronto City Airport without any financial support or guarantee from the Conservative government’s infrastructure stimulus program, the 30 Bay Street development became necessary to mitigate the risk associated with the pending P3 availability payment (negating choice #1).
Given the 18-year availability payment associated with the BBTCA P3 Pedestrian Tunnel project, selling the parcel for cash was not as prudent, in our business judgment, as matching our annual P3 liability with the annual revenue anticipated to flow from the 30 Bay Street development (negating choice #2).
The previous President of the Treasury Board, Tony Clement, declined the value lift and benefit to taxpayers from the “mixed-use” development opportunity, despite excellent briefings dated June 15, 2011 and August 29, 2011 (negating choice #3).
Our professional advisors counseled that a long term ground lease would be unlikely to generate as high an implied value for the property as either a joint venture or an asset sale (negating choice #4).
Although the PortsToronto staff has many diverse capabilities, we did not believe they had the skills or relationships required to succeed on a solo basis as a building developer. Even if we were to outsource the construction of the project, we’d still need to find tenants. Moreover, the amount of debt required to complete the project on a solo basis well exceeded our agency’s amended borrowing limit of $52 million (negating choice #5).
As such, option #6 was the prudent choice.
PortsToronto announced an RFP process for a joint venture partner to develop the site as an office-only tower on October 19, 2011. Bidders from around the world were approached, and Othe project attracted a great deal of interest. On March 28, 2012, two weeks after the former Prime Minister and I kicked-off the pedestrian tunnel construction project, PortsToronto publicly announced that a very suitable candidate (Canada-based Oxford Properties) had been chosen to lead the joint venture development.
What is the business case for the Office Tower project?
At the present time, the parcel is a traditional parking lot, generating perhaps modest annual revenue. Under the terms of the joint venture development agreement with Oxford and their partner, CPP Investment Board, PortsToronto stands to earn royalties each year, growing in perpetuity with inflation. Those royalties would provide PortsToronto with a new revenue stream to reinvest in harbour infrastructure, airport and Outer Harbour Marina. It is important to remember that PortsToronto receives no tax revenue from any sources,; nor does it receive funding from any government. By law, it must be financially self-sustaining. As such, if boaters want new dock walls, PortsToronto needs to pay for them out of harbour user fees, for example. Since sections of the current harbour infrastructure were built more than a 100 years ago, you can appreciate it is a constant maintenance project. Those funds have to come from somewhere.
Once the 30 Bay real estate project proceeds as planned, it will generate 10 to 20 times more economic impact to Toronto than the status quo. And it doesn’t cost the taxpayers a penny to launch. It is hard to believe I’m still writing about it.
With the new revenue stream, Toronto’s port will be insulated from the economic and business concentration risks that are bound to challenge the agency and its stakeholders over the coming years and decades. As Directors, we believed this to be our fundamental obligation as fiduciaries of an arms-length Government Business Enterprise. It was inconceivable as a business person with more than two decades on Bay Street that we would proceed with the pedestrian tunnel project without also prudently mitigating our “airport risk”.
This was clear to the former Government prior to our execution of the P3 pedestrian tunnel contract. There are also the benefits to the Greater Toronto Area economy from the short term jobs created by the construction of the office tower, plus the longer term impact of the taxes and business generated by both the project as well as the companies that will be drawn to it. This is why Toronto Mayor John Tory wrote to Transport Minister Marc Garneau in support of this $500 million shovel-ready infrastructure project on May 27, 2016.
How has PortsToronto mitigated financial risk?
First and foremost, our Board of Directors mitigated the inherent financial risk of operating a Port and Billy Bishop Toronto City Airport via the proposed 30 Bay Street project. Over the past number of years, tens of millions of non-government dollars have been invested to ensure that the infrastructure at this long under-utilized airport kept up with the tremendous passenger growth experienced since the launch of Porter Airlines in 2006 (24,800 annual passengers to 2.4 million over a 10 year period). These infrastructure investments have been financed by the Airport Improvement Fees we have received over the years from our passengers as well as commercial bank debt.
Although both the Port of Toronto and the Outer Harbour Marina generate an operating profit, these cash flows are modest. And both require constant capex each year.
Based upon the terms of the Canada Marine Act, PortsToronto (and therefore BBTCA) must be financially self-sufficient; any future operating deficit cannot be covered by the Government of Canada. And that ignores the substantial funding requirements for the recently announced BBTCA runway resurfacing: to the tune of tens of millions of dollars.
The proposed 30 Bay real estate project will ensure, as much as is possible, that PortsToronto can never be a financial liability for the Government of Canada. When I joined the PortsToronto Board beginning in August 2007, the agency was losing money. During 2006, it had negative net income of $4.6 million. In 2007, it lost a further $1.7 million, despite the arrival of Porter Airlines. Although PortsToronto earned ~$6 million in 2015, the exposure of the agency to the shipping, marina and airline industries is clear. As is the requirement for ongoing capital investment in a prop-only airport.
Second, Oxford & CPP Investment Board are investing the capital required to develop the project. PortsToronto contributes nothing beyond the vacant parcel of land in exchange for a 50% ownership stake in the future office building. PortsToronto has expressly not guaranteed any of the bank debt required. In the unlikely event there are cost overruns on the project, PortsToronto is not obligated to fund its 50% share of same.
The Federal government is not exposed whatsoever by this joint venture structure. It is not the “lender of last resort” should difficulties arise during construction. With ~$400 billion of assets under management, OMERS (Oxford’s parent) and CPP Investment Board have sufficient combined financial resources to manage any eventuality.
Despite all of the positives, and the support of former Transport Minister Lisa Raitt, and former Finance Minister Joe Oliver, the project wasn’t launched prior to the federal election as then-Treasury Board Minister Tony Clement was worried that the “NDP would criticize the government for doing a deal with Bay Street.” No one understood this fear, beyond Mr. Clement, as the project RFP had been won years earlier and the beneficiaries of OMERS and CPPIB are actually pensioners in Ontario and across Canada; the kinds of people that the NDP advocate for as a rule of thumb.
The Liberals now have the luxury of capitalizing on Mr. Clement’s miscalculation, and launching a “free” $500 million infrastructure project at a time when the economy needs all the help it can get. Toronto’s office market continues to soak up new AAA space in the South Core, and given Mayor John Tory’s support, Ministers Bill Morneau (Finance), Marc Garneau (Transport) and Scott Brison (Treasury Board) must be grateful to have this project fall into their laps.
Let’s start digging; the windows of opportunity in the commercial real estate sector open and shut with a moment’s notice.
(disclosure: this post, like all blogs, is an Opinion Piece reflecting a personal view based upon publicly available information)