4. Lease Financing Agreements - Orleans Arts Centre |
Committee RecommendationS
Subject to adopting the Policy on Debt and
Financing, that Council approve:
1. Entering into a Lease Financing Agreement with Orleans Town Centre Partnership (OTCP) and a loan guarantee, to provide financing for the construction of the Orleans Arts Centre to be repaid over a period of 30 years on the basis of the terms and conditions outlined in this report;
2. Authorizing the City Solicitor and the City Treasurer to bring
forward a by-law as required for this lease financing agreement for execution
by Council.
RecommandationS du comité
Sous reserve
de l’adoption de la Politique sur les dettes et le financement, que le Conseil
:
1. approuve
la signature d’un accord de financement des baux financiers avec le Partenariat
du Centre-ville d’Orléans (PCVO) ainsi que d’une garantie d’emprunt afin de
permettre le financement de la construction du Centre des arts d’Orléans qui
sera remboursé sur une période de 30 ans conformément aux conditions soulignées
dans le présent rapport;
2. autorise le chef du contentieux et le
trésorier de la Ville à présenter un règlement tel qu’il est requis pour le
présent accord de financement des baux financiers pour adoption par le Conseil.
Documentation
1. Chief Corporate Services Officer's report
dated 2 April 2007 (ACS2007-CRS-FIN-0008).
2. Extract of Draft Minute, 3 April 2007.
Report
to/Rapport au :
Corporate Services and Economic Development Committee
Comité des services organisationnels
et du développement économique
and Council / et au Conseil
2 April 2007 / le 2 avril 2007
Submitted by/Soumis par : Greg Geddes,
Chief Corporate Services Officer/Chef des Services généraux
Contact Person/Personne
ressource : Marian Simulik, Director, Financial Services and City
Treasurer/Directrice des services financiers et trésorière municipale
Financial Services/Services financiers
(613) 580-2424 x 14159,
Marian.Simulik@ottawa.ca
SUBJECT: |
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OBJET : |
Accords de financement des baux financiers - Centre des
arts d’Orléans |
REPORT RECOMMENDATIONS
Subject to Council adopting the Policy on Debt and Financing, that
Corporate Services and Economic Development Committee recommend Council
approve:
1. Entering into a Lease Financing Agreement with Orleans Town Centre Partnership (OTCP) and a loan guarantee, to provide financing for the construction of the Orleans Arts Centre to be repaid over a period of 30 years on the basis of the terms and conditions outlined in this report;
2. Authorize the City Solicitor and the City Treasurer to bring
forward a by-law as required for this lease financing agreement for execution
by Council.
RECOMMANDATIONS DU
RAPPORT
Sous réserve de l’adoption de la Politique sur les dettes et le
financement par le Conseil, que le Comité des services organisationnels et du
développement économique recommande au Conseil :
1. d’approuver
la signature d’un accord de financement des baux financiers avec le Partenariat
du Centre-ville d’Orléans (PCVO) ainsi que d’une garantie d’emprunt afin de
permettre le financement de la construction du Centre des arts d’Orléans qui
sera remboursé sur une période de 30 ans conformément aux conditions soulignées
dans le présent rapport;
2. d’autoriser le chef du contentieux et le
trésorier de la Ville à présenter un règlement tel qu’il est requis pour le
présent accord de financement des baux financiers pour adoption par le Conseil.
BACKGROUND
On
11 October 2006, Council adopted a report (ACS2006-POGM-ECO-0017) which, among
other things, authorized staff to finalize negotiations and conclude all
necessary agreements with Orleans Town Centre Partnerships (OTCP) for the
design, build, finance, maintenance and ownership of a Orleans Arts Centre facility; the sale, operation, maintenance
and the provision of a 25 year lease to the City of Ottawa for the Orleans
Client Service Centre (CSC) building.
Discussions and negotiations have been on-going and are at the point
where final agreements are expected to be executed by OTCP and the City prior
to 30 April 2007. Although Council
authorized staff to negotiate and conclude all necessary agreements with OTCP,
this report is required to comply with the requirements of Ontario Regulation
655/05 as amended by 604/06.
Prior
to entering into a lease financing agreement, Ontario Regulation 653/05 as
amended by Regulation 604/06 requires Council to adopt a statement of policies
and goals for lease financing agreements and requires the City Treasurer to
prepare a report assessing the costs and risks associated with the proposed
lease. Given the advanced stage of
negotiations on the Orleans Arts Complex, this report on the proposed lease
financing agreement for the OAC is proceeding to CSEDC and Council for
consideration at the same time as the City's proposed policy on Debt and Financing
(ACS2007-CRS-FIN-0007). In addition to
assessing the costs and risks of a proposed lease, the Treasurer's report is to
provide a comparison with other methods of financing, indicate the effective
cost of the lease, and provide a summary of any contingent payments and the
assumptions applicable to any variations in the payment schedules.
As
approved by Council, this public private partnership involves the design,
construction maintenance for a visual and performing art centre on a 30 year lease, the sale of the Orleans
Client Service Centre (CSC) with a 25 year lease back to the City and the
partnership arrangement will also initiate the sale and development of
approximately 6.5 hectares of City land that is expected to result in more than
$220 million worth of construction value to occur. The arrangements also
involves a $9 million loan from the proceeds of the sale of the land and CSC by
the City to the OTCP partnership payable only at the end of the 30 year term. At year 30 the City will also have the
option to purchase the OAC for the same amount as the accrued value of the loan
to OTCP. The lease financing
arrangement involved in the development of the Orleans Arts Centre falls within
the intent and definition of a lease
financing agreement under the City's proposed policy on Debt and Financing and
has been reviewed as follows. Although
the lease of the Orleans CSC is an integral component of the overall project
financing, it is not being entered into for the purpose of obtaining long-term
financing for the City and therefore a separate Treasurer's report is not
required.
Orleans
Arts Centre Lease Agreement:
OTCP
requested financing proposals from a variety of financial organizations,
including banks, life insurance companies, pension funds and private
placements. A proposal from TD Capital with funding from a private investor has
been recommended as the lowest cost solution. TD Capital will provide financing
of approximately $ 28.8 million to fund construction of the OAC to be repaid
through irrevocable lease payments from the City over 30 years from a date
certain representing the expected date of project completion. The monthly lease
payments will increase at a rate of 2.5% per year over the term to amortize the
full amount of the loan. The interest rate will be fixed for the full term of
the financing and will be based on a spread over the applicable Government of
Canada bond. The rate will be set on an
agreed date approximately two to three weeks prior to funding. On the basis of
prevailing interest rates the fixed rate of interest would be 4.89%. Interest
will accrue during the construction period with payments only starting on
commencement of the lease. In order to
attract the best available financing terms the loan will be guaranteed by the
City as indicated in the Request for Proposals and approved by Council on 11
October 2006.
The
cost of the proposed lease financing for the OAC is the lowest offer obtained
from OTCP. The cost of a direct City
debenture for a similar financing structure with a 18 to 24 month construction
period to be paid in approximately equal monthly payments over 30 years would
be similar and is estimated to be the same spread over Government of Canada
bonds. The City would normally finance
costs during the construction period from internal cashflows and reserves and
issue debt once sufficient spending has occurred on a project or it has been
completed. The proposed lease financing
agreement provides construction period financing with interest accruing during
this period which is added to the
amount of the loan. Although this
increases the amount of the loan,
interest will be earned by investing these funds during construction
which will partially offset the cost of construction financing.
A
significant benefit resulting from this structure, is to fix the interest rate
for the lease payments for the full 30 year term at the beginning of
construction. This provides certainty on the cost of financing and sets the
base lease payments for the entire 30 years.
With a traditional City debenture issue the interest rate is only
determined when debentures are issued
thus leaving the City exposed to changes in interest rates during the construction period. The proposed lease financing reduces the
financial risk of unfavourable movements in interest rates and meets the
requirements for a fixed rate loan for the entire period.
A
comparison of the proposed lease to a City debenture is attached in Annex A.
This analysis is based on interest rates prevailing at this time and takes into
consideration the expected interest earnings which will result from funds held
in trust under the lease financing agreement.
These funds will be held in a trust arrangement to be released to make
progress payments as construction milestones are achieved. To provide an equivalent comparison, the
present value of a City debenture also
takes into consideration lost investment earnings as under this scenario
progress payments during construction would be funded from City cash balances and
investment portfolios. This analysis
indicates that a City debenture would have a present value of $29.0 million
compared to the lease agreement with $29.4 million. However, as indicated
previously this assumes that the interest rate for a City debenture to be
issued in 21 months will be the same as today's rates while there is really no
certainty that current interst rates will exist at that time.
Interest
rates are continually changing in response to various economic events and
investor expectations for future trends in rates. A review of rates over the past ten years indicates that 10 year Government of Canada bond yields
averaged 4.52% with a range from 3.78% to 6.68%. Over the same ten year period
the long Governemnt of Canada bond (30-33 years) averaged 5.40% with a range
from 4.02% to 7.38%. The outlook for
interest rates even over the next twelve to eighteen months varys widely. Some forecasts expect rates to remain near
current levels or decline while others are expecting longer-term rates to
increase by 60 basis points.
By
locking-in interest rates through the OAC lease agreement, the City will fix
the base lease cost for the full 30 year term. An increase in rates of only 13
basis points would increase the present value of the City's debenture set out
in Annex A by $400,000 thus eliminating any difference with the proposed lease
financing agreement on a present value basis.
Or in other words, the $400,000 present value difference in the OAC lease
buys protection against an increase in rates of more than .13%. Given the changes in rates evidenced over
the last ten years, an increase in rates of .13% could easily occur and the
advantage of locking-in a rate for this project is recommended.
As
required by the proposed policy on Debt and Financing the following additional
payments and risks have been identified:
The
proposed lease agreement provides an option at the sole discretion of the City
to extend the term of the lease for an additional 20 years. The agreement also
provides for the City to deposit a payment each year which will accumulate to
an amount equivalent to 1% of the fixed price for the OAC as a life cycle
renewal account.
In
the event of lease termination, as a result of non-performance or default by
OTCP, the City will have
"step-in" rights to take ownership of the facility as long as the
payments continue to be made to the investors.
Thus the risk of losing the use of the facility as a result of default
or non-performance by OTCP is minimal
and controllable by the City.
CONSULTATION
The Orleans Arts Centre development was subject to public consultations as outlined in the previously mentioned report to Council on 11 October 2006. This report which involves a report by the City Treasurer to comply with a Provincial Regulation and related City policy, has not been subject to public consultation. Legal Counsel has been consulted, as appropriate on various documents associated with the proposed lease financing agreement.
FINANCIAL IMPLICATIONS
The
yield on a direct City debenture for a similar financing structure as the
proposed lease agreement for the OAC with a 18 to 24 month construction period
to be paid in monthly payments over 30 years would be similar to and is
estimated to be the same margin over Government of Canada yields as the
proposed lease agreement. The
assessment of the OAC lease should also take into consideration the overall
Orleans Town Centre development which also involves the sale of the Client
Service Centre and City lands which is expected to result in significant devlopment in the surrounding
Town Centre lands in the order of $220 million in future years.
In accordance with Regulation 653/06 as amended and the City's proposed Policy on Debt and Financing, it is the opinion of the City Treasurer that the costs and financial and other risks of the proposed lease agreement for the OAC have been assessed and in consideration of the overall economic benefits which are expected to be generated from the development of the Orleans Town Centre area, that the City should enter into the proposed lease financing agreement.
SUPPORTING DOCUMENTATION
Annex "A" provides a comparison of the proposed lease agreement to a City debenture for the same terms.
DISPOSITION
Following consideration by Corporate Services and Economic Development Committee and subject to Corporate Services and Economic Development Committee recommending the proposed policy on Debt and Financing to Council, this recommendation will be forwarded to Council for its consideration.
Lease
Financing Agreements - Orleans Arts Centre
Accords de financement
des baux financiers - Centre des arts d’Orléans
ACS2007-CRS-FIN-0008
Moved by Councillor R. Jellett
That the Corporate Services and Economic
Development Committee approve the addition of this item for consideration by
the Committee at today’s meeting, pursuant to Section 84(3) of the Procedure
By-law.
Carried
At Councillor Wilkinson’s request, Ms. M. Simulik, Director of Financial Services and City Treasurer, spoke to a PowerPoint slide presentation, which served to provide the Committee with a brief overview of the staff report. A copy of her presentation is held on file with the City Clerk.
Responding to questions from Councillor Wilkinson, Ms. Simulik confirmed that the City would be loaning the partner $9M from the proceeds of the sale of the land and that at the end of the 30-year term, the City will have the option to purchase the facility for that amount plus the accrued value of the loan. She further confirmed that the lease payments, which will start at approximately $1.4M per year, will escalate by 2.5% year over year in order to retire the full amount of the loan within the 30 year period.
With respect to the Client Service Centre (CSC), Mr. Chartrand confirmed that part of the agreement reflects a decision made by the last term of Council. When staff presented to Committee and Council last fall, the disposal of the CSC was one of the incentives put forward as part of this public, private partnership in order to see some town centre development. He explained that the transfer of the CSC enables the City to fund part of the Orléans Arts Centre facility. The City will be leasing the facility back for a firm period of 25 years. He maintained the benefit was the town centre development, which was the very strong second objective approved by Council for this public, private partnership.
Responding to questions from Councillor Bloess, Mr. R. Chartrand, Director of Economic Development and Strategic Projects, confirmed that as part of the agreement, the City has step-in rights specifically for the Orléans Arts Centre in the event of a default. However, he felt that was virtually no risk of the partner defaulting because he was setting up a special purpose corporation specifically for that loan. With respect to the rest of the development, he indicated the City had performance security of $2.5M for 2 major developments; a seniors’ residence and a hotel. Furthermore, he noted there was also land reversion as an underlying performance security.
Subject to Council adopting the Policy on Debt
and Financing, that Corporate Services and Economic Development Committee
recommend Council approve:
1. Entering into a Lease
Financing Agreement with Orleans Town Centre Partnership (OTCP) and a
loan guarantee, to provide financing for the construction of the Orleans Arts
Centre to be repaid over a period of 30 years on the basis of the terms and
conditions outlined in this report;
2. Authorize the City
Solicitor and the City Treasurer to bring forward a by-law as required for this
lease financing agreement for execution by Council.
CARRIED
* This amount includes interest accrued during the construction period and added to the amount of financing while a typical City debenture does not include this interest. With a City debenture payments during construction are funded from the City’s cash flow.