Government Operations Committee on May 29th, 2007

[Keith Jameson]

First of all, I can say that in previous transcripts that I have seen, Minister Fortier has already indicated that the base of the lease was taken from a lease that was previously negotiated between Morguard and the CBC, which various parties considered to be a strong and balanced lease. We, our colleagues at RBC, third-party lawyers, and government lawyers have worked on that lease to develop a lease that effectively reflects what the government truly needs to create to protect itself and to achieve the objectives they've asked us to address.

All of the protection mechanisms, in our opinion, exist in the lease that is being proposed.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

Obviously this is not your only client. You have a number of clients, as you've expressed, and you have quite a track record and a history of accommodating many transactions of various sizes and shapes and distortions or arrangements.

I'm wondering if you could comment on other transactions that you have completed, once again without breaking confidentiality. Obviously people have made efforts to improve the management of their portfolios, be they in the private sector or the public sector. Have you been able to glean any of their experiences that you could bring to bear to effectively offer some constructive advice in this transaction?

[Keith Jameson]

I would say that there's something that is maybe a misconception. We keep talking about property management and poor property management. I think what you need to do is to take this to the higher level. If you look at major property owners, what they really use is what they call asset managers. Property managers, with all due respect to their skills and services, are maintaining properties; they're coordinating janitorial and snow removal and so on.

Asset managers are making key decisions on what should be spent and why. For example, if there is a leak in the roof, do they fix the roof or repair the roof? The asset manager makes the strategic decision that he can keep repairing it for five years at say $100,000 a year, or he could fix it for $500,000 and never see the problem again.

I think the reality is that we're seeing professional managers, asset managers who make valid decisions to maintain the integrity of their real estate. I guess if there's a lesson to be learned, the reality is that sometimes you have to pay money to save money.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

There are some people who obviously might wish to participate in this process, and for some variety of reasons they find themselves unaware that this transaction is even taking place or being promoted. Because it's very local to us and we're all aware, we just assume that everybody's aware.

In order to make sure that we have a competitive market and to open it up to as many people as we can and hopefully get the best buy for the Canadian taxpayer, what sorts of tools or marketing efforts have you enacted to be able to broaden the market appeal on this?

[Carolyn Blair]

There were ads placed in four Canadian newspapers at the beginning of this process on either three or four different occasions. We found the awareness is really quite high in our marketplace. As a result of the experience that we have built up over the years, we also would be aware of who many of the buyers might be, and they would have received an e-mail reminder of the transaction. If they were interested in it, then additional information was made available to them, subject to a confidentiality agreement.

[La présidente, Liberal, Diane Marleau]

We'll go to Madam Nash.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Madam Chair.

Welcome to our witnesses this afternoon.

I have a few questions. This, we're told, is one of the largest real estate deals in decades. We've not seen the study that you've conducted to justify the sale. So I guess what I'm curious about is why it is these nine buildings. There are many other buildings that are available, and there were 40 that were proposed. Why was it these nine? Would you say these nine were the best of the 40 buildings, and if so, would you qualify what best means?

[Carolyn Blair]

Certainly the reasons for the selection of the nine buildings.... In fact our whole report covers how the government can meet its objectives on the 40 buildings they laid out. The market, as Keith mentioned earlier, is very strong right now, with a tremendous amount of capital available globally. Interest rates are quite low. The type of transaction for these nine buildings is very attractive to the market right now.

Without going fully into the contents of our report, we'll simply say that these nine met certain objectives of the government, and those were the nine that met those objectives. Others did not.

[Peggy Nash, NDP, Parkdale—High Park, ON]

But would you say these buildings are in better shape than are some of the others? Are these high-quality buildings? Are there particular qualities that would make these desirable?

[Carolyn Blair]

Yes, I would say the dominant characteristic, rather than trying to define what “better” means, is that they are in a location and are of a design that is suitable for a number of tenants. Whether the government is there or somebody else could be there, the buildings are suitable for tenants other than the government.

[Keith Jameson]

I would add that I think one of the key characteristics is that they are what we would describe as “conventional office buildings”. They are basically downtown, straightforward office buildings that have utility for government operations throughout, and they effectively are optimized in terms of their utility.

If, for example, there was a property that had one building and it was 50 acres, you would clearly not sell and lease back that when you had future development potential that you were leaving on the table. You would enhance the value of that land before you created your optimum value.

These assets have already gotten to that point, and they are simply conventional office buildings--no more.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Okay. But they're in reasonably good shape.

[Carolyn Blair]

Yes. I couldn't say, on average, whether they are better or worse than the rest of them.

I think Professor McKellar, in his testimony, described them as “commodity-type buildings”, and that would probably be a fair characterization in addition to Keith's characterization of them as “conventional office buildings”.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Because of the kind of confidentiality around this tender--the whole process, all of the conditions around it--we've really seen nothing that gives us an indication whether or not this is going to be good for Canadians. Is this very strict confidentiality typical in the real estate transactions you're involved in?

[Carolyn Blair]

The type of process that we are running now is very typical. The information is made available only to those who sign confidentiality agreements.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Is this a requirement of the banks, then, that this would be confidential?

[Carolyn Blair]

I would say anybody who is active in large commercial real estate, whether it is bank-owned or otherwise, would run a process just like this.

[Peggy Nash, NDP, Parkdale—High Park, ON]

And is it typical that the party or parties advising a potential vendor to sell would then also be the same party or parties that conduct the sale, as you're doing with Public Works?

[Carolyn Blair]

It is very typical in our business, whether it's real estate, or mergers and acquisitions, or infrastructure finance, that the clients who are dealing with large, sophisticated projects want that level of advice. They want the people who are active in the deal flow to be giving them advice. They ultimately make the decision. The client makes the decision of whether to proceed or not, but you can't get that advice with respect to accounting firms and what not. People who are not in the deal flow are not able to give that type of advice as to whether it's a good idea or not.

[Peggy Nash, NDP, Parkdale—High Park, ON]

And is it typical that the proposed sale and leaseback would be for 25 years? Is that a typical leaseback period?

[Carolyn Blair]

It depends on the objective of the client and what their expected uses are for the building.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Have you handled other 25-year leasebacks?

[Carolyn Blair]

Certainly. We've handled shorter and handled longer. It just depends on the client's needs.

[Peggy Nash, NDP, Parkdale—High Park, ON]

And is the goal in this sale that all of the space will be leased by the vendor?

[Carolyn Blair]

With the exception of a very small number of third-party tenancies--one that is already in place has been mentioned--very dominantly the Government of Canada is the tenant.