About that Exhibition Hall and Trade Centre at the Airport…
15 reasons why the Shenkman deal is bad for taxpayers
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1. There were no other bidders beside Shenkman. This is a warning sign that it is a lousy business proposition. If it were a good opportunity it would have attracted more bidders.
2. The city has to finance the deal to induce it. So does the Airport Authority. Another warning sign that it is uneconomic.
3. Financing is only available for 50% of the deal ($20.7 M with interest payments of $1.463 M/yr = 7% which is a typical cap rate for real estate developments). Another warning sign that lenders don’t think it is economic
either.
4. Shenkman doesn’t risk more money than the City in the deal as both but in $8.5 M. Another warning sign that Shenkman is not really bullish on the opportunity either.
5. Shenkman’s equity of $8.5 M is actually less than the City’s if they bring the $39.2 M construction in under budget. Any cost savings accrue to Shenkman’s benefit alone. If the facility ends up costing only $35 M, Shenkman will only need to put in $4.3 M and the City still puts in $8.5 M. The city may argue that Shenkman is on the hook for any overage in costs, but realistically Shenkman can simply not construct part of the facility to reduce costs to avoid that situation. E.G. not build the hotel or not pave the parking lot (just as Bryden did to reduce the cost of the Corel Centre).
6. Shenkman furthermore gets a tax holiday by avoiding normal development charges, property and school taxes! Why is it that developers never get to pay property taxes in this city?
7. The City’s participation is funded as a 30-year balloon loan of $8.5 M. Yet as a lender, if they want to call the loan and terminate the agreement, they are on the hook for $12.3 M to buy out Shenkman. This is unheard of in banking.
8. Furthermore the City enters into a lease so that they can pay rent for a building that they financing and be on the hook for the bank that is putting up the $20.7M financing. Otherwise the bank won’t finance the deal because it is too risky!
9. Meanwhile Shenkman gets to charge $1.50 per head for all users to create a Reserve Fund that ensures that they can pay the $1.5 M/year in debt payments. If they make money, so that they don’t need to dip into the reserve fund, they get to use 100% of the Reserve Fund to increase their profits further. But if they don’t make enough money such that the head tax doesn’t over the $1.5 M /year, Shenkman only has to cover 50% of the downside and the City eats the other half by adding onto the loan that can’t be paid off. Asymmetric deals are another huge red flag.
10. If Shenkman defaults, the City is stuck with the whole deal without penalty to Shenkman. The city will have financed 3⁄4 of the deal with no collateral from Shenkman other than the $8.5 M initially invested by Shenkman (less incentive for lower construction costs).
11. In 30 years, the free cash flow from the facility will only be $3.25 M per year. If we assume the 7% cap rate as a discount factor, this future cash flow that is 30 years out is worth only $427K in current dollars. Shenkman estimates that $650 K per year is needed for ongoing capital improvements (in current dollars). So on an earned value basis, the facility loses money within 30 years.
12. The city’s financial analyst agrees that the project loses money, showing that the NPV for the city is a negative $2.7 M after expending $23 M in a best case scenario.
13. Futhermore, there is a high likelihood that the City may not recover any of its original $8.5 M “investment” with a NPV of negative $13.5 M!
14. All this is “justified” on the basis of generating $13 M in annual economic benefit in Ottawa – of which very little actually flows directly back to the City. Evidently the taxpayers in Ottawa are supposed to feel good about making merchants rich off of the $7 M in annual spending by visitors and $5 M in operational spending by the facility (e.g. buying toilet paper).
15. The staff solution is to enter into a longer loan period and to hope to sell the city’s half of this boondoggle to Shenkman in 30 years. As if Shenkman would want to buy something that by then will have a negative cash flow.

Paul Renaud
16 October 2010