Loading...
HomeMy WebLinkAboutCAO-09-025 - Centre Block Agreement of Purchase & Sale REPORT REPORT TO: Finance and Corporate Services Committee DATE OF MEETING: April 20, 2009 SUBMITTED BY: Rod Regier, Executive Director, Economic Development PREPARED BY: Rod Regier, Executive Director, Economic Development WARD(S) INVOLVED: All DATE OF REPORT: April 15, 2009 REPORT NO.: CAO-09-025 SUBJECT: CENTRE BLOCK AGREEMENT OF PURCHASE AND SALE RECOMMENDATION: That the Mayor and Clerk be authorized to execute an Agreement of Purchase and Sale with Andrin Investments Limited for the sale of the Centre Block Lands, said agreement to be satisfactory to the City Solicitor. BACKGROUND: On June 16, 2008, Council selected Andrin Investments Limited as the developer for Centre Block. Andrin’s proposal met all of the criteria set out in the Centre Block Terms of Reference adopted by Council in October 2006. The company proposed a high-quality mixed-use development which includes diverse residential development, ground floor retail, combinations of safe, connected public and private outdoor spaces. They have proposed the allocation of 250 parking spaces in a portion of the underground structure to be retained in City ownership at a competitive cost. The project sets a new standard for architecture and urban design for a high density residential project in the Waterloo Region. It achieves maximum density on the site and makes a significant contribution to Kitchener’s downtown as a vibrant urban place by attracting new residents and contributing to an improved balance between employment and residents in the downtown. The proposal addresses the City's requirement for Leadership in Energy and Environmental design (LEED), supporting Kitchener's Environmental Strategy. It also advances the objectives of the City’s Economic Development Strategy, and the Economic Development Investment Fund by creating a new magnet for talented young people and investment, strengthening the brand of Downtown Kitchener. The developer has a track record of high quality reurbanization projects in Kitchener, the Greater Toronto Area and in the United States. They have the financial, technical and marketing expertise to successfully build this project. ïë ó ï Andrin’s proposal was subjected to a rigorous public consultation process. Public opinion gathered through this process was strongly supportive of the project. The specific feedback from the public was utilized in discussions with Andrin regarding the details of their proposal and has resulted in changes to the proposal that improve its ability to achieve the City’s objectives. REPORT: In October 2008, staff was directed to complete negotiation of the purchase and sale and development agreements with Andrin. The attached Agreement of Purchase and Sale has been negotiated between the parties and is being tabled with Council for its discussion at the April 20, 2009 Finance Committee and subsequent ratification, if approved. It is one in a series of agreements that is required to move forward with the project. The Agreement of Purchase and Sale follows the non-binding letter of intent, and is contingent upon completion of a Development Agreement with the developer by November 30, 2009. In summary, the Agreement of Purchase and Sale (APS) has been designed to protect the interests of both the City and the Developer. The City of Kitchener’s interests are to sell the land for fair market value, to retain a portion of the land via a strata reference plan to accommodate the parking structure that it will retain the Developer to construct for the City at a reasonable cost to the City, and to ensure that the development proceeds as planned on a timely basis. The Developer’s interest is to purchase the development site at fair market value, and to be assured that if it succeeds at selling the required number of units in each phase, that it will have access to the development site justifying the expenditure of resources in marketing and design. A key condition of the APS is that the City has required a sunset clause outlining that the Developer has 36 months from the completion of the Development Agreement to commence construction of the project, following which, if the developer does not proceed with the project, the agreement becomes null and void. The City can then proceed to find an alternate developer for the site. This provision is to ensure that the Developer does not hold the development in abeyance indefinitely. To ensure this flexibility, the City will not convey the title to the property until the developer has sold sufficient units to finance the project, filed for and received a building permit and commenced construction. External Review Dr. James McKellar, Fairness Advisor, Centre Block Evaluation Committee The Agreement of Purchase and Sale has been reviewed by Dr. James McKellar, Fairness Advisor to the City of Kitchener and Associate Dean of External Relations, and Director of the Program in Real Property at the Schulich School of Business, York University. A brief report by Dr. McKellar is attached. Dr. McKellar concludes: “I would encourage the City of Kitchener to proceed with the current Agreement in a spirit of co- operation and understanding. The City must understand that the next three years are not going to be easy for any homebuilder. The City has an obligation equal to that of the Purchaser to make the project successful. I find nothing in the current Agreement that is not consistent with this position, nor that is unfair or unreasonable to either the vendor or the Purchaser.” The Agreement of Purchase and Sale has also been discussed with the Kitchener Business Improvement Area Board of Directors, the Downtown Advisory Committee, the Building Owners Sub-committee, and a portion of the Economic Development Advisory Committee. ïë ó î Downtown Advisory Committee The Downtown Advisory Committee had a full discussion of the agreement; however, did not pass a formal resolution relating to the Centre Block Agreement of Purchase and Sale. Downtown Building Owners Consortium Downtown building owners were supportive of the agreement. They expressed a desire for the project to move forward as soon as possible, but acknowledged that under the current market conditions, the provision of 36 months to commence construction of Phase 1 was reasonable. However, they noted that the timeframe allowed for the redevelopment of the Mayfair Hotel and 156/158 King in Phase 3 of the project was too long. They expressed an interest in working with Andrin to accelerate the development of that Phase of the project. Kitchener Business Improvement Area Board of Directors Staff met with the KBIA Board of Directors on April 16. The Board discussion reflected general support for the agreement with specific reference to the fact that Andrin was going to invest considerable resources in the sales office and model suite and should be allowed sufficient time to market the project. The Board expressed concern with timing of Phase 3 and suggested that Andrin be encouraged to accelerate that phase of the project or find alternative uses for the heritage buildings on the site. A resolution from the KBIA Board will be brought to Finance and Corporate Services separately. Economic Development Advisory Committee The Economic Development Advisory Committee held a special meeting on April 15, but did not nd have a full quorum. EDAC will meet again at its regularly scheduled meeting of April 22 and will pass a formal resolution at that point. Members at the April 15 meeting expressed support for the agreement, indicating that it balances the interests of both the City and the developer. Comments from individuals attending indicated that the 36 month time frame for Andrin to commence construction of Phase 1 was reasonable in the current market context, and that the selling price of the land was reasonable. The group identified the need to accelerate the redevelopment of the historic buildings on the site and suggested that the City should ask for a firm commitment to the timing of the development of the sales office and model suite. FINANCIAL IMPLICATIONS: The attached Agreement of Purchase and Sale is a binding commitment between the City of Kitchener and Andrin Investments Limited, to sell the lands known as Centre Block for $3.1 million and retain a portion of the site underground for the purposes of creating for City/public use a parking structure with between 200 and 250 spaces at a rate of $35,000 per space, subject to the completion of mutually agreed development agreements outlining the final built form of the project. CONCLUSION: The Agreement of Purchase and Sale balances the interests of the City of Kitchener and Andrin Investments Ltd. and advances a strategic project that is the result of extensive public consultation. Execution of this agreement will allow Andrin to proceed with detailed project planning and marketing. Staff will work with Andrin and the local business community to find ways to accelerate the redevelopment of the two heritage buildings on Centre Block. Kitchener’s downtown is in the midst of a transformative process. Over 12,000 people now work in Kitchener’s downtown and, although much smaller, its residential population is growing as well. Centre Block, redeveloped as City Centre Condominiums, will help balance the residential and employment growth in the downtown and contribute to the vitality of its urban streetscape by bringing new residents into Downtown Kitchener. ïë ó í Centre Block is a key project in a constellation of major projects in the downtown including the Health Sciences Campus, the consolidated Provincial Courthouse, the Kitchener Market, the upgraded central Kitchener Public Library, and the King Street Master Plan. Together with Rapid Transit and GO Transit services, they will help transform Kitchener’s Downtown into a vibrant urban centre. Attachments: Report by Dr. James McKellar Bio of Dr. James McKellar Phasing Map for Centre Block ACKNOWLEDGED BY: Rod Regier, Executive-Director, Economic Development ïë ó ì McKellar Associates Strategic Advisory and Consulting Memorandum To: Rod Regier, Chair, Center Block Evaluation Committee CC: Hans Gross, Lesley MacDonald, Carla Ladd From: James McKellar Date: 4/17/2009 Re:Kitchener Center Block - Purchase and Sale Agreement I am responding to your request, by email April 2, 2009, concerning the Kitchener Center Block - Purchase and Sale Agreement. I was asked to review the terms with particular consideration of the time allowed for marketing and pre-sales of the condominium units, the possible effects of the current economic climate on the development of urban condominium development projects, and the sales price of medium to high density residential land in the GTA. I have received a copy of the Agreement of Purchase and Sale and it is this document, plus my knowledge of the residential housing market, that I am relying upon in this response. I have not undertaken market research specific to this project as this was not the mandate. First, let me clarify that I am not qualified to comment on the Agreement itself and this is a legal matter for which you have independent legal counsel. I will focus my comments on one particular issue arising from the Agreement and that is the Closing Date of Phase 1, falling on the third anniversary of the Effective Date. The Effective Date is November 30, 2009 and the Purchaser then has 36 months from this date to meet the requirements for Closing. I see no need to discuss subsequent phases as they are predicated on the successful closing of Phase 1, at which time sales over the 36 previous months will be the best indicator of actual market conditions. It is my understanding that some members of Council have difficulty with the time period from the Effective Date to the Closing Date. It is a matter of deciding whether this date is fair to both Purchaser and Vendor given what we know today. This matter should be addressed in a context that brings the current economic situation into the discussion. At the heart of the matter is “market risk” and the apportionment of this risk between Purchaser and Vendor. According to the current Agreement, yet to be executed, both parties mutually agree that a 36 month Closing for Phase 1 is a fair and reasonable assignment of market risk given the agreed upon purchase price. I assume that some members of Council may want to shift more of this market risk to the Purchaser by shortening the Closing Date, and I 1 r d 49 Jackes Avenue, 3 Floor, Toronto, Ontario M4T 1E2 B: 416-964-8333 x112, F: 416-964-8336 ïë ó ê April 17, 2009 assume with no adjustment of price. Obviously, this is to the advantage to the Vendor and a disadvantage to the Purchaser if price is not adjusted downward accordingly. This brings in the matter of market context as this is the relevant factor in judging what is fair and reasonable. At a macro-economic level the question is whether we at the beginning, the middle, or even the end of a very tumultuous period in the Canadian and even the global economy? Nothing that we have experienced over the past several decades prepared us for what is now happening. There is an abundance of bad news in the media and I do not wish to dwell on just how bad things are, or might be. The best minds just don’t know when this downturn will end, who will be affected, and how. This is the predicament we are all in. There does seem to be agreement among these thinkers that when we recover many things will not be the same and what worked before will not offer sufficient guidance in moving forward. Case in point is the auto industry. Professionally, I am more sure about what I don’t know than I am about what I do know regarding the future. Three years from know how much will gasoline cost, what will be the interest rate, will GM and Chrysler be in business? All indications are that we are in for a prolonged period of global economic contraction with consequences that will last for three to five years. Let us hope not, but plan accordingly. Assume Canada and Kitchener will not be immune. This may be a period characterized by a high level of economic uncertainty, an absence of liquidity, massive amounts of public spending to prompt job creation, and conditions that will undermine the demand side of the housing market including jobs losses, diminished household wealth, and more stringent mortgage underwriting standards. The bottom line is that market risk for any residential developer contemplating a new project in this period is greatly increased. It is typical for residential developers in current circumstances to step back and place as much as possible of the market risk on the Vendor of land. This means paying down land only when the units are sold and expected value is realized. Today, even qualified pre-sales to a stipulated level may not be enough to convince the construction lender to advance a construction loan. Major banks are now setting maximums on any given loan and requiring borrowers to assemble a construction loan from several banks - the so called “club deal”. Business dealings have become very complex. Those who will survive through this harsh economic climate must be well capitalized and have access to increased sources of equity, as well as debt. This is a time for true “public-private” partnerships. It is difficult to obtain detailed market information for Kitchener as compared to what is available for the GTA on a monthly basis. While it would also be unfair to imply a comparison between the GTA and the Kitchener new home markets, one might assume that the trend lines between the two should correlate since recent trends are largely driven by macro-economic factors. Below, I have listed some salient facts that provide a sense of the current trend lines in the GTA, based on 2008 data. The source of this material is RealNet which tracks actual date for the housing industry. Activity in the first quarter of 2009 has not mitigated the downward trend lines. 2 ïë ó é April 17, 2009 2008 saw the lowest number of new home sales of the last 9 years Residential land investment by dollar volume was the lowest in the last 6 years Unsold new home inventories have increased to record levels Medium density land prices declined by about 5% in 2008 Total new home sales were down 37% in 2008 over 2007, their lowest of the last 9 years Only 3 of 17 sub-markets saw increases in new home sales from 2007 to 2008 From my perspective, and based on a rather extensive knowledge of and involvement in the housing industry dating back at least two previous recessions, I would deem that a 36 months Closing is fair to both parties given current market conditions. Challenges in the next three years will require all of the skills of the most experienced developers to achieve success with new product. The downtown Kitchener market presents its own unique challenges on top of those caused by the economy. This is a relatively small and undeveloped market with a low price point. I would be remiss if I did not underscore the fact that the challenge for many developments today is keeping an existing deal intact despite legal agreements. Even governments are being much more accommodating and flexible in approaching their private sector partners as evidenced by the various Public-Private Partnerships (PPPs) now in the pipeline and where credit has all but dried up. In some cases, governments will be forced to become equity partners - the lender of last resort. I would encourage the City of Kitchener to proceed with the current Agreement in a spirit of co-operation and understanding. The City must understand that the next three years are not going to be easy for any homebuilder. The City has an obligation equal to that of the Purchaser to make the project successful. I find nothing in the current Agreement that is inconsistent with this position, nor do I find this Agreement unfair or unreasonable to either the Vendor or the Purchaser. James McKellar Professor of Real Estate and Infrastructure Schulich School of Business York University 3 ïë ó è JAMES McKELLAR Professor James McKellar is Associate Dean, External Relations, Schulich School of Business, York University, and Director of the Program in Real Property in the Schulich School. Prior to joining York University, he was a faculty member at the Massachusetts Institute of Technology (MIT) and served as the founding director of the Center for Real Estate at MIT. In addition to MIT, he has held faculty appointments at the University of Pennsylvania and the University of Calgary. He has lectured at universities in North America, Asia and Europe. In addition to his academic and professional interests, Professor McKellar has addressed various international audiences on current issues within the real estate industry. He has spoken at numerous conferences, addressing the performance and the prospects for the real estate industry. Professor McKellar is intimately familiar with the international real estate industry and has addressed professional, government, and trade organizations in many countries. Professor McKellar has a life-long commitment to the real estate industry. He has consulted to businesses and governments in Canada, the U.S., Russia, Poland, Japan, and South Korea, on real estate matters covering housing, development, finance and investment, asset management, and market performance. Within the Government of Canada, he has worked with the Office of the Auditor General, Treasury Board, Public Works, Foreign Affairs and the National Capital Commission. His work in the U.S. has included the Department of the Interior, the Department of State, USAID, and the U.S. Post Office. Other clients in Canada include the Toronto Home Builders Association, Canadian Real Estate Association, City of Calgary, and the Toronto Waterfront Revitalization Corporation. He acted on behalf of the City of Calgary as fairness commissioner for Phase One of the Bridges, an inner city project now in construction. He continues to serve as a one of five members of a committee delegated by the board of the Toronto Waterfront and Revitalization Corporation to oversee all proposal calls and select the successful proponents. In additional his leadership role at the Schulich School of Business, he is former Board member, Vice Chair, and Acting Chair of the Ontario Realty Corporation; former member of the Oak Ridges Moraine Advisory Panel; former member of the North Pickering Land Exchange Panel; former Vice-Chair of the Oak Ridges Moraine Foundation; current member of the Board of the Humber River Regional Hospital, Toronto and continues to serve as Academic Advisor to the National Executive Forum on Public Property. He is a member of the American Real Estate Society; the American Real Estate and Urban Economics Association; the Urban Land Institute; and an Honorary Life Member of the Society of Office and Industrial Realtors (SIOR). He is a Fellow of the Royal Architectural Institute of Canada (FRAIC) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS) He is co-editor with Olga Kagonova of “Managing Government Property Assets: published in May 2006 by the Urban Institute Sharing International Experiences”, Press, Washington, D.C. ïë ó ç