Financial analysis for the Lansdowne Live proposal

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Financial analysis for the Lansdowne Live proposal

  1. 1. Analysis of Lansdowne Park Development Plan Ian Lee, PhD, Sprott School of Business Michael Tiger, Economist
  2. 2. <ul><li>Ian Lee is MBA Director of Sprott School of Business, Carleton University </li></ul><ul><li>former Mortgage Manager & commercial banker in 70s-80s in Ottawa incl Shenkman </li></ul><ul><li>Michael Tiger is retired economist & former FTA & NAFTA negotiator with Industry Canada </li></ul>Authors 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  3. 3. <ul><li>I. Big picture </li></ul><ul><li>II. Financials & the “Waterfall” </li></ul><ul><li>III. Governance Structure </li></ul><ul><li>IV. Analysis </li></ul><ul><li>V. Strategic Alternatives </li></ul><ul><li>VI. Conclusion </li></ul>Overview of Press Conference 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  4. 4. I. Big Picture 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  5. 5. Big Picture of Lansdowne Live <ul><li>- Massive Shopping centre in a public park </li></ul><ul><li>- Office space of 158,000 sq feet </li></ul><ul><li>- Hotel of 100,000 sq feet </li></ul><ul><li>- Two 6 story (168) condos & 40 townhouses </li></ul><ul><li>- Will use 10 acres of 37 acres or 25% of park </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  6. 6. Big Picture of Lansdowne Live <ul><li>City injects $129 M (Kirk Rpt) & $50 M land </li></ul><ul><li>2. OSEG pays NO rent for stadium (Article 6.8a) </li></ul><ul><li>3. retail, hotel & office head leases for 70 years – not 30 years (Articles 5.5, 7.4, 7.7) </li></ul><ul><li>& rent free for first 30 years (7.4b) </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  7. 7. II. “Waterfall” or Financials in plain English – not gobbledy-gook
  8. 8. II. Waterfall or “Trickle Creek”? <ul><li>Waterfall is forecast or plan for the FUTURE </li></ul><ul><li>There are known knowns. </li></ul><ul><li>There are known unknowns. </li></ul><ul><li>But there are also unknown unknowns </li></ul><ul><li>things we do not know we do not know Donald Rumsfeld </li></ul><ul><li>BP must make assumptions about all 3 </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  9. 9. Waterfall or “Trickle Creek”? <ul><li>waterfall determines who gets paid what when </li></ul><ul><li>ensures OSEG receives most of “water” first </li></ul><ul><li>i.e. “water diversion” at each level of waterfall </li></ul><ul><li>reduces flow of “water” at NEXT level </li></ul><ul><li>“ waterflow” reduced to trickle when city’s turn </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  10. 10. <ul><li>Moreover, OSEG is misleading citizens & media </li></ul><ul><li>by suggesting it is sharing all revenues </li></ul><ul><li>per Biz Plan s. 2.3, OSEG’S $80 Million debt for retail paid BEFORE “water” reaches waterfall </li></ul><ul><li>i.e. OSEG $80 M debt absolute priority over waterfall </li></ul><ul><li>but not disclosed in waterfall graph </li></ul><ul><li>due to diversion of funds by OSEG at headwaters </li></ul>Waterfall or “Trickle Creek” 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  11. 11. Waterfall: Who gets paid first & when? <ul><li>1. reserve fund for stadium, arena, parking ($1.5 M - 2013) </li></ul><ul><li>2. OSEG dividend repymt of 8% on $20M equity ($1.6M – 2019) </li></ul><ul><li>3. OSEG repatriation of equity to OSEG over 30 yr ($ ? – 2026) </li></ul><ul><li>4. City dividend of 8% on deemed equity $20M ($1.6 M – 2029) </li></ul><ul><li>inaccurate as city investment of $129 M + 10 acres @ estimated $5 M/acre = $50 M + $129 M = $179 M (yr 2029) </li></ul><ul><li>5. net cash shared 50-50 distributed to OSEG & city in 2040 </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  12. 12. Waterfall Restated – in plain English <ul><li>1. OSEG borrowings recovered above waterfall </li></ul><ul><li>2. Then stadium, arena, parking reserve paid </li></ul><ul><li>3. Then OSEG dividends repaid </li></ul><ul><li>4. Then OSEG equity recovered thro repayment </li></ul><ul><li>5. City provides most $ but comes DEAD LAST </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  13. 13. OSEG Waterfall = trickle creek As promised…… 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  14. 14. <ul><li>one sided deal that ensures OSEG makes most of the money </li></ul><ul><li>10 acres city land undervalued @ $20 M – worth + $50 M </li></ul><ul><li>Stadium rented for 30 yrs with no base rent (6.8a) </li></ul><ul><li>Retail head lease for 50 yrs – OSEG can renew 20 yrs = 70 yrs </li></ul><ul><li>During first 30 years, no base rent for retail head lease (7.4b) </li></ul><ul><li>office & hotel 70 yr lease – first 30 years rent free </li></ul><ul><li>LL is “all about bringing football back to Ottawa” </li></ul><ul><li>YET - CFL team or 67s need not exist for entire 30 yrs </li></ul>Criticism of Waterfall
  15. 15. III. Governance 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  16. 16. <ul><li>Assumptions behind waterfall are key </li></ul><ul><li>As large amounts K over long period of time </li></ul><ul><li>Produces uncertainty & thus risk </li></ul><ul><li>MSC with own B of D reduces political risk </li></ul><ul><li>MSC will be UNTOUCHABLE by council </li></ul>III. Governance 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  17. 17. <ul><li>City transfers ALL 37 acres of LP to MSC </li></ul><ul><li>Not 10 acres at LP developed by OSEG </li></ul><ul><li>MSC head lease with OSEG for ALL 37 acres </li></ul><ul><li>To allow OSEG complete control over LP </li></ul><ul><li>Sets stage for further development of LP </li></ul>Governance 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  18. 18. <ul><li>Kirkpatrick & OSEG recognize political risk </li></ul><ul><li>Need structure that supports this one sided deal </li></ul><ul><li>W/O interference from council today or later </li></ul><ul><li>& allows rewrite of lease to further develop LP </li></ul><ul><li>Or alter lease to make more money </li></ul>Governance 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  19. 19. IV. Analysis
  20. 20. <ul><li>sole source violates federal & provincial law </li></ul><ul><li>sole source violates Ottawa policy on P3: ( http://ottawa.ca/calendar/ottawa/citycouncil/occ/2002/06-26/csedc/ACS2002-CMR-OCM-0003.htm )   </li></ul><ul><li>3. Subsidization picks winners & losers – but govt is referee & must be neutral & impartial </li></ul>IV. Analysis 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  21. 21. <ul><li>4. cause transportation gridlock in core </li></ul><ul><li>5. Provides excess retail in core instead of suburbs where needed – per Nabatian study </li></ul><ul><li>6. cause business bankruptcies along Bank St </li></ul><ul><li>& cannibalize sales from businesses across core </li></ul>Analysis 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  22. 22. V. Strategic Alternatives 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  23. 23. V. Strategic Alternatives <ul><li>1. city develops LP alone </li></ul><ul><li>-demonstrated commitment of $117 M re OSEG </li></ul><ul><li>2. city develops LP thro privatization or tendered P3 </li></ul><ul><li>E.g. rezones & sells 10 acres on Bank-Holmwood </li></ul><ul><li>Apply approx $50 M sale to stadium construction </li></ul><ul><li>Borrow any shortfall – keep ALL stadium revenues </li></ul><ul><li>3. exit Lansdowne Park by selling Lansdowne to NCC </li></ul><ul><li>use sale monies to build stadium elsewhere </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  24. 24. V. Alternatives <ul><li>City lacks resources & vision to develop LP </li></ul><ul><li>NCC has resources, expertise & vision to develop LP </li></ul><ul><li>BUT any of 3 alternatives </li></ul><ul><li>Can & will produce a stadium </li></ul><ul><li>For football and/or soccer </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  25. 25. VI. Conclusions 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  26. 26. VI. Conclusions <ul><li>$129 million taxpayer funds & 10 acres /$50 M land </li></ul><ul><li>To subsidize developers, retailers, office & hotels </li></ul><ul><li>W/O any performance guarantees </li></ul><ul><li>PWC stated they did not prepare OSEG`s financials or develop any its assumptions, BP. P. 68 </li></ul><ul><li>And PWC stated financials are unaudited, BP, p. 68 </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  27. 27. VI. Conclusion <ul><li>City betting entire 37 acres on CFL franchise </li></ul><ul><li>City puts up all money upfront in city crown jewels </li></ul><ul><li>City assumes planning & financial risk of $120 M </li></ul><ul><li>To save $3.8 M annual operating costs on Lansdowne </li></ul><ul><li>BUT OSEG extracts value from LP & thus profits </li></ul><ul><li>For 50-70 years </li></ul>06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal
  28. 28. VI. Conclusion <ul><li>i.e. OSEG is only project mgr </li></ul><ul><li>Given gift of equity with 8% return with little risk </li></ul><ul><li>– yet govt risk free rate of return is 3% </li></ul><ul><li>Risk-return ratio completely out of whack </li></ul><ul><li>City assumes the risk – OSEG makes the money </li></ul><ul><li>LL is “Corporate welfare for councillor cronies” </li></ul>
  29. 29. Appendices
  30. 30. <ul><li>Each layer specifies fixed amount to go to it every yr </li></ul><ul><li>if enuf to fill that amount, money flows to next layer </li></ul><ul><li>If not enuf to fill a level, amount owing to that layer is carried forward and accummulated.  </li></ul><ul><li>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).  </li></ul><ul><li>No $ would flow to level 3 until annual maintenance fund paid off & OSEG received overdue $16 M </li></ul>Waterfall or “Trickle Creek” 06/02/10 Lee-Tiger Financial Analysis of Lansdowne Live Proposal

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