The City of New Westminster has sold Merchant Square office tower for $36.5 million.
“We are really pleased with everything about this deal from beginning to end. It was a tough, hard slog,” said Mayor Wayne Wright. “The price? The price is right.”
Although a developer may have attempted to sell the building for more money, the city’s motivation for selling wasn’t to maximize profits.
“Value in an office building is on the income side, which is all the leasing. The leasing part of this building is where the risk is,” said Lisa Spitale, the city’s chief administrative officer. “We are not assuming that risk.”
Spitale said the project was never envisioned to be a profit-driven venture, as it was done for job creation, revitalization and expansion of the downtown’s economic base. The city’s goal was to minimize risk to taxpayers and maximize the project’s other contributions to the community, such as property taxes and economic development.
“The city sold the office building to remain whole,” she said. “It is basically to recover our costs and create a situation where all the goals we sought out to pursue are being achieved there.”
Coun. Bill Harper said the deal wasn’t just about cost recovery, saying the city will turn a profit. While city officials couldn’t pinpoint the net financial gain to city coffers because of the way the deal is structured, Wright said it could be “several” million dollars.
According to the City of New Westminster, the office tower’s total budget was $40 million, which included $30 million for construction and $10 million to outfit the building for tenants, as well as money for and commission and leasing costs. Because the purchaser has assumed responsibility for tenant improvements and leasing of the office space, the city will not require $9.5 million that had previously been budgeted to prepare the space for future tenants.
“They gave us a $5 million irrevocable credit, basically the same as cash that we’ll hold until closing. Closing will happen on Dec. 30, 2014, at which time they will transition the letter of credit to cash, and then we will add another $6.25 million. We will have cash in our pocket on Dec. 30, 2014 of $11.25 million,” said Gary Holowatiuk, the city’s director of finance and information technology, during a media briefing. “The balance – $25.25 million – will be paid out basically through a vendor take-back mortgage. It will be paid out Dec. 30, 2017 – or when that office tower is 75 per cent leased up. They will be paying interest on that mortgage during that time, compounding semi-annually, paying interest out on an annual basis.”
City officials said it’s not unusual for a deal of this magnitude to be paid out
in instalments. In addition to providing the city with $11.25 million Dec. 30, 2014, the purchaser will provide the city with the remaining $25.25 million within three years - with interest.
“I think we definitely got market value for this building,” Holowatiuk said. “I think the city did very well by the deal, given the fact that it is a vacant office tower. We were able to put off the risk associated with leasing up a tower like this.”
Holowatiuk said the contract with 777 Columbia Street doesn’t include any escape clauses that would allow it to walk away from the deal. Financial experts who have been advising the city have stated that the $11.25 million deposit is a substantial sum.
“That is one-third of the purchase price,” he said of the $11.25 million the city will have by year-end. “That is almost kind of unheard of in these kinds of deals. It’s the kind of security that is going to prevent anybody from walking. Our understanding in dealing with Mr. Segal, that is not going to be an issue.”
Holowatiuk said the city will receive $36.5 million for the building, which cost $30 million to construct.
“The $6 million was an additional piece – you can call it cash in lieu for parking. We are able to take that $6 million and reduce the cost of that parkade so we are not going to have to take on as much debt to build that parkade,” he said. “That is how we are doing the financing.”
Instead of having to finance the parkade construction with $11 million from debt, Holowatiuk said that $6 million can go toward parkade construction costs. The city will retain ownership of the parkade and make space available to the office tenants at set market rates, generating income for the city.
