The Federal Government Plans To Sell Billions Of Dollars Of Real Estate

This article from the Globe and Mail shows how bright the government can be when it comes to investing. The federal government plans to sell billions of dollars of real estate, then lease it back from the people who bought it. Nice wealth strategy. Wait, no, that is dumb. Ottawa's real estate targets exceed market appraisals. Confidential figures show nine buildings expected to fetch millions more.

Article by DANIEL LEBLANC of the Globe and Mail

OTTAWA -- The Harper government is hoping to sell nine buildings for hundreds of millions of dollars more than recent market appraisals as part of its controversial plan to lease back the office space for 25 years, confidential figures show.

The Globe and Mail has obtained a breakdown of the $1.4-billion price tag for the nine buildings across the country, with one of them valued at $120-million more than its recent market appraisal.

While the government is praising the potential cash haul, the opposition parties argue that Ottawa will, in fact, be borrowing money from the eventual buyers and leaving taxpayers to pay back the loans through quarter-century leases.

"It may look good on the books in the short term that there is a big sale price. The question is whether this is in the long-term interest of Canadians, because we're going to be on the hook for these lease arrangements," New Democratic Party MP Peggy Nash said.

"Would any of us sell our house and lease it back for 25 years?" she asked.

Public Works Minister Michael Fortier has refused to release a recent report from federal advisers at the Bank of Montreal and the Royal Bank of Canada who recently appraised the nine buildings for his department.

"There is information in there that could affect the offers made by third parties," Mr. Fortier said in an interview.

However, The Globe has obtained the figures independently, in addition to information on recent market appraisals for the buildings. According to the BMO and RBC advisers, the government can get:

$265-million for the 16-storey Canada Place in Edmonton, even though the building received a market appraisal of $145-million last year; $250-million for the Harry Hays building in Calgary, which is worth $87-million according to a time-adjusted appraisal; $200-million for the Skyline Complex of seven buildings in Ottawa, which Ottawa bought for $91-million in 2003; $180-million for the Joseph Shepard building on Yonge Street in Toronto, which had a $78-million market appraisal in 2002; $140-million for the Thomas D'Arcy McGee building on Sparks Street in Ottawa, which was bought from RBC for $66-million in 2001; $105-million for the Howard Green building in Vancouver, which cost $58-million in 2002; $100-million for the historic Sinclair Centre in Vancouver, which was appraised at $40-million in 1999 but needs at least $10-million in repairs; $85-million for a building on René-Lévesque boulevard in Montreal that was given a market value of $39-million in 2002; $40-million for a building in Westmount, Que., that used to house the RCMP.

While the buildings have undergone renovations and real estate markets are hot in Canada's major cities, experts say their value is boosted by the government's promise to lease them back for 25 years.

"A typical analysis is done on a 10-year payback period. If they're talking about a 25-year rate, that adds a lot of return and removes a lot of the risk," said a commercial real estate broker in Edmonton.

An academic expert said the value of the buildings is related directly to the amount of rent the government is willing to pay to the buyers. In that context, a guaranteed 25-year lease would boost any market appraisal.

"This is as good as buying a [Canadian government] bond," said James McKellar, a professor of real property at York University.

In their recent report, the BMO and RBC advisers urged the government to pursue longer leases for the buildings. They are now scouring the globe for the best offers among major investors.

The government is refusing to specify the terms of the contracts with the bankers, but a Public Works spokesman said they will earn a commission if sales occur. Sources indicated that such a large assignment could bring fees of between $1-million and $5-million.

There is opposition to the plan inside the government, but Mr. Fortier said Ottawa needs to find about $4-billion to renovate its real estate portfolio.

Mr. Fortier said any sale of one or more of the nine buildings will have to obtain cabinet approval and be vetted by an independent third party.

He insisted the government will sell the buildings only if the price is right.

"If we don't have a good deal, we won't do it, that's for sure," he said.

Mr. Fortier stated that he doesn't know the value of the eventual sale.

"Some people have speculated on the value of the nine buildings, but it depends on how many buyers are interested," he said.

On the block Ottawa says that nine buildings are on the market in a bid to raise funds to refurbish the rest of its real estate portfolio. The sale is being handled by Bank of Montreal and Royal Bank of Canada, which have produced a confidential report on the value of the assets. Here is a fact sheet on the buildings.
HOWARD GREEN BUILDING
Vancouver
Estimated value: $105-million
Market assessment:
Bought for $58-million (2002)
Rentable area: 19,000 square metres
Quality: Class A
Comment: One of Ottawa's greenest
buildings, it houses Environment Canada
SINCLAIR CENTRE
Vancouver
Estimated value: $100-million
Market assessment: $40-million (1999)
Rentable area: 23,000 square metres
Quality: Class B
Comment: Classified as a historic building,
needs $10-million in renovations
HARRY HAYS BUILDING
Calgary
Estimated value: $250-million
Market assessment:
$87-million (time-adjusted assessment)
Rentable area: 45,000 square metres
Quality: Class B
Comment: Good condition,
but requires significant midlife renovations
CANADA PLACE
Edmonton
Estimated value: $265-million
Market assessment:
$145-million (2006)
Rentable area: 78,000 square metres
Quality: Class A
Comment: Good condition
and requires only normal maintenance
JOSEPH SHEPARD BUILDING
Toronto
Estimated value: $180-million
Market assessment: $78-million (2002)
Rentable area: 52,000 square metres
Quality: Class B
Comment: Built in 1977 and said
to be in fair to good condition
THOMAS D'ARCY McGEE BUILDING
Ottawa
Estimated value: $140-million
Market assessment:
Bought for $66-million (2001)
Rentable area: 38,000 square metres
Quality: Class A
Comment: Bought from Royal Bank
and said to be well maintained
SKYLINE COMPLEX
Ottawa
Estimated value: $200-million
Market assessment:
Bought for $91-million (2003)
Rentable area: 68,000 square metres
Quality: Class A
Comment: Bought from Nortel in 2003,
has since undergone renovations
305 RENÉ LÉVESQUE WEST
Montreal
Estimated value: $85-million
Market assessment: $39-million (2002)
Rentable area: 31,000 square metres
Quality: Class B
Comment: Good condition, has new roof
and has undergone floor rearrangements
4225 DORCHESTER WEST
Westmount, Que.
Estimated value: $40-million
Market assessment: N/A
Rentable area: 18,000 square metres
Quality: Class C
Comment: Former RCMP building
has a darkroom, holding cells and a gym
SOURCE: GOVERNMENT OF CANADA