Financial analysis for the Lansdowne Live proposal

Analysis of Lansdowne Park Development Plan

Ian Lee, PhD, Sprott School of BusinessMichael Tiger, Economist

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• Ian Lee is MBA Director of Sprott School of Business, Carleton University

• former Mortgage Manager & commercial banker in 70s-80s in Ottawa incl Shenkman

• Michael Tiger is retired economist & former FTA & NAFTA negotiator with Industry Canada

Authors

06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal

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I. Big picture

II. Financials & the “Waterfall”

III. Governance Structure

IV. Analysis

V. Strategic Alternatives

VI. Conclusion

Overview of Press Conference


I. Big Picture

06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal 4

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Big Picture of Lansdowne Live- Massive Shopping centre in a public park

- Office space of 158,000 sq feet

- Hotel of 100,000 sq feet

- Two 6 story (168) condos & 40 townhouses

- Will use 10 acres of 37 acres or 25% of park


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Big Picture of Lansdowne Live1. City injects $129 M (Kirk Rpt) & $50 M land

2. OSEG pays NO rent for stadium (Article 6.8a)

3. retail, hotel & office head leases for 70 years – not 30 years (Articles 5.5, 7.4, 7.7)

• & rent free for first 30 years (7.4b)


II. “Waterfall”

or Financials

in plain English

– not gobbledy-gook

II. Waterfall or “Trickle Creek”?

• Waterfall is forecast or plan for the FUTURE

• There are known knowns. • There are known unknowns. • But there are also unknown unknowns

• things we do not know we do not knowDonald Rumsfeld

• BP must make assumptions about all 3


Waterfall or “Trickle Creek”?

• waterfall determines who gets paid what when

• ensures OSEG receives most of “water” first

• i.e. “water diversion” at each level of waterfall

• reduces flow of “water” at NEXT level

• “waterflow” reduced to trickle when city’s turn 906/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal

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• Moreover, OSEG is misleading citizens & media

• by suggesting it is sharing all revenues

• per Biz Plan s. 2.3, OSEG’S $80 Million debt for retail paid BEFORE “water” reaches waterfall

• i.e. OSEG $80 M debt absolute priority over waterfall

• but not disclosed in waterfall graph

• due to diversion of funds by OSEG at headwaters

Waterfall or “Trickle Creek”


Waterfall: Who gets paid first & when?

1. reserve fund for stadium, arena, parking ($1.5 M - 2013)

2. OSEG dividend repymt of 8% on $20M equity ($1.6M – 2019)

3. OSEG repatriation of equity to OSEG over 30 yr ($ ? – 2026)

4. City dividend of 8% on deemed equity $20M ($1.6 M – 2029)

• inaccurate as city investment of $129 M + 10 acres @ estimated $5 M/acre = $50 M + $129 M = $179 M (yr 2029)

5. net cash shared 50-50 distributed to OSEG & city in 2040


Waterfall Restated – in plain English

1. OSEG borrowings recovered above waterfall

2. Then stadium, arena, parking reserve paid

3. Then OSEG dividends repaid

4. Then OSEG equity recovered thro repayment

5. City provides most $ but comes DEAD LAST


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OSEG Waterfall = trickle creek

As promised……


• one sided deal that ensures OSEG makes most of the money

• 10 acres city land undervalued @ $20 M – worth + $50 M

• Stadium rented for 30 yrs with no base rent (6.8a)

• Retail head lease for 50 yrs – OSEG can renew 20 yrs = 70 yrs

• During first 30 years, no base rent for retail head lease (7.4b)

• office & hotel 70 yr lease – first 30 years rent free

• LL is “all about bringing football back to Ottawa”

• YET - CFL team or 67s need not exist for entire 30 yrs

Criticism of Waterfall

III. Governance


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• Assumptions behind waterfall are key

• As large amounts K over long period of time

• Produces uncertainty & thus risk

• MSC with own B of D reduces political risk

• MSC will be UNTOUCHABLE by council

III. Governance


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• City transfers ALL 37 acres of LP to MSC

• Not 10 acres at LP developed by OSEG

• MSC head lease with OSEG for ALL 37 acres

• To allow OSEG complete control over LP

• Sets stage for further development of LP

Governance


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• Kirkpatrick & OSEG recognize political risk

• Need structure that supports this one sided deal

• W/O interference from council today or later

• & allows rewrite of lease to further develop LP

• Or alter lease to make more money

Governance


IV. Analysis

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1. sole source violates federal & provincial law

3. sole source violates Ottawa policy on P3: (http://ottawa.ca/calendar/ottawa/citycouncil/occ/2002/06-26/csedc/ACS2002-CMR-OCM-0003.htm)

3. Subsidization picks winners & losers – but govt is referee & must be neutral & impartial

IV. Analysis


http://ottawa.ca/calendar/ottawa/citycouncil/occ/2002/06-26/csedc/ACS2002-CMR-OCM-0003.htm

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4. cause transportation gridlock in core

5. Provides excess retail in core instead of suburbs where needed – per Nabatian study

6. cause business bankruptcies along Bank St

& cannibalize sales from businesses across core

Analysis





1. city develops LP alone• -demonstrated commitment of $117 M re OSEG

2. city develops LP thro privatization or tendered P3• E.g. rezones & sells 10 acres on Bank-Holmwood• Apply approx $50 M sale to stadium construction• Borrow any shortfall – keep ALL stadium revenues

3. exit Lansdowne Park by selling Lansdowne to NCC• use sale monies to build stadium elsewhere


V. Alternatives

• City lacks resources & vision to develop LP

• NCC has resources, expertise & vision to develop LP

• BUT any of 3 alternatives

• Can & will produce a stadium

• For football and/or soccer


VI. Conclusions


VI. Conclusions

• $129 million taxpayer funds & 10 acres /$50 M land

• To subsidize developers, retailers, office & hotels

• W/O any performance guarantees

• PWC stated they did not prepare OSEG`s financials or develop any its assumptions, BP. P. 68

• And PWC stated financials are unaudited, BP, p. 68


VI. Conclusion

• City betting entire 37 acres on CFL franchise

• City puts up all money upfront in city crown jewels

• City assumes planning & financial risk of $120 M

• To save $3.8 M annual operating costs on Lansdowne

• BUT OSEG extracts value from LP & thus profits

• For 50-70 years


VI. Conclusion

• i.e. OSEG is only project mgr

• Given gift of equity with 8% return with little risk

• – yet govt risk free rate of return is 3%

• Risk-return ratio completely out of whack

• City assumes the risk – OSEG makes the money

• LL is “Corporate welfare for councillor cronies”

Appendices

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• Each layer specifies fixed amount to go to it every yr

• if enuf to fill that amount, money flows to next layer

• If not enuf to fill a level, amount owing to that layer is carried forward and accummulated.

• E.g. In first 9 years if only enough for maintenance fund, by year 10, the next layer of OSEG's return on equity would be owed $16 M (10 x $1.6).

• No $ would flow to level 3 until annual maintenance fund paid off & OSEG received overdue $16 M

Waterfall or “Trickle Creek”


Documents

Financial analysis for the Lansdowne Live proposal