City, province reach agreement on convention centre financing

The city and province have signed a deal for financing for the proposed convention centre, Infrastructure minister Bill Estabrooks and mayor Peter Kelly announced today. The short of the agreement: the city completely backed down on two negotiating points, and nearly completely backed down on a third.

As a result, the city faces potentially unlimited risk for funding continued convention centre operations, faces a potential $12 million to purchase the existing convention centre and has agreed to a confusing property tax formula that reduces city revenues from standard property tax assessments on commercial properties.

The new deal is still dependent upon $56 $47 million in federal funding; although the federal government has been asked for the money, there’s yet to be any response.

Operating risks

Presently, operation costs of the existing convention centre are ultimately a provincial responsibility—each year, when Trade Centre Limited, which runs the convention centre, goes into deficit, the province bails out TCL. Since 2004, these bailouts have ranged from a low of $110,000 to a high of $2.1 million. Additionally, the city pays an annual subsidy, which is about $570,000 this year, and is capped at the rate of inflation.

But under the new agreement, the city and province will split the operational costs of the new convention centre. The new arrangement includes an annual payment of $2.9 million, for 25 years, to centre developer Rank Inc. for “facility upgrades” and “facilities operations and management” plus any further operational deficit, which used to be covered by the province alone.

That means the city goes from its present $570,000 annual subsidy to a $1.45 million annual subsidy and assumes half of any further losses incurred by TCL.

Some councillors had previously told me this potentially unlimited risk was unacceptable to them, and today five councillors—Sue Uteck, Debbie Hum, Jennifer Watts, Jackie Barkhouse and Reg Rankin—voted against the deal, precisely because of the increased risk to the city.

At today’s press conference, I asked Peter Kelly about this additional risk directly. Understand that besides about 10 reporters, the room was packed with bureaucrats and convention centre supporters.

Bousquet: In terms of operational costs, is there a cap on what the city would end up subsidizing?
Kelly: We agree that we’re a full partner in terms of capital, in terms of the board and also in terms of the operating expenditures as well.
Bousquet: So no matter how those costs might go, the city’s responsible for half of them?
Kelly: We’ll be very mindful, and we’ll be watching what’s going on. We’ll be making sure that we keep [TCL president] Scott [Ferguson] and his team fully accountable, to make sure those costs are reduced as much as possible, and hopefully there is not an operating deficit but we know convention centres usually do have some, and it’s our responsibility to make sure we keep them all in check.
Bousquet: There have been years when that number has gone up very high—into the millions of dollars, and the city was protected by an inflator and that inflator’s gone now.
Kelly: Right now, we are full partners. We’ll be mindful of the board’s responsibilities, we’ll keep them accountable, we’ll be ultimately accountable and we’ll also make sure we work with the business sector to bring in other opportunities—again, there are several other groups that have indicated that they want to use this new facility fully, and with those opportunities we should see increased revenues and increased opportunities as well.
Another reporter: What’s the mechanism to make sure there’s accountability?
Estabrooks: There’s going to be a new board established, 50/50 representatives from the province and the HRM. The accountability piece is important for taxpayers and I can assure you that with the mayor and council and of course my colleagues in the legislature, it will be an important factor—we’ll look at each year at how this business is doing and how we’re doing with our new convention centre.
Bousquet: How high would be too high? Would you ever just say, ‘We should close this thing down because it’s too high,’ or no number?
Kelly: The glass is half-full. We’re moving forward on a very positive basis. This will be a very successful operation. It’s economic development and we’re moving the project forward, and we’re going to hold the board accountable to make sure they do what they’re supposed to do, and we’re going to maximize every single opportunity. So we’re not going down the road of negativity, we’re being positive, we’re being optimistic, and we’re moving ahead to move the project forward.
[wild applause breaks out in audience]

So, evidently, no consideration at all was given to potential failure of the business—there is no way out, no point at which the city can say “this is too rich for our blood.”

And anyone who challenges the assertion that the new convention centre will necessarily make money is drowned out by applause for platitudes like “we’re being positive.”

Have doubts about the convention centre? Clap louder.

Takeover of the existing convention centre

A second sticking point in city/provincial negotiations was what to do with the existing convention centre and office tower complex—the province’s first offer to the city insisted that the city buy it outright. As shown with today’s announcement, the city completely caved to this demand, although it was wrapped in some pretty words about “cooperation.”

The final deal looks like this: the province will attempt to sell the building until 2015, with the city having “first refusal” rights to match or better any offer. If no one buys the building by 2015, the city agrees to buy it outright, at the province’s “book value,” which this year is about $12 million. Presumably there will be some depreciation for the building over the next five years, but it’s unlikely to be much.

Left unresolved are several issues: Will the province commit to continuing to lease office space in the building once the city takes it over? Since the city’s lease for the bulk of municipal offices, which are in Duke Tower, doesn’t expire until 2021, what will the city do with the existing convention centre tower in the meanwhile? Also: What will be the effect on the market for Class B office space downtown if that much office space suddenly becomes available?

Property taxes

The province’s initial offer to the city included the stipulation that the new convention centre will not pay property taxes. (TCL now pays property taxes on the existing convention centre.) At the time the offer was received, councillors were adamant that this provision in particular was a deal breaker.

But while council didn’t cave in completely to the province on this issue, its acceptance of the final deal comes pretty close to a total cave-in.

The way the deal is now structured is that the province, not TCL, will pay property taxes on the new convention centre. (This is a back-handed subsidy for TCL operations which we’ll need to chronicle in future years, but that’s not what’s most wrong about the proposal.)

Rather than paying taxes based on normal assessments, however, the new deal turns property assessment on its head. Taxes on the shiny new convention centre will be based on the square footage tax rate of the crappy old convention centre—in other words, about $550,000 going to the city annually. An inflator will be added—either two percent a year or the consumer price index, whichever is lower.

Understand that the existing convention centre has about 55,000 square feet of rentable space, while the new convention centre will have about 120,000 square feet of rentable space—so the city just agreed to a 54 percent reduction in the rate on assessed value, based on square footage alone. If you factor in the age and condition of the existing convention centre compared to the new one, the reduction likely becomes something like 80 percent or more.

To say this is precedent-setting is putting it mildly. Why shouldn’t any other business setting up shop in town demand a similar reduction in property assessments? I’ll just leave that question out there, and return to it when that invariably happens.

It was a strange day at City Hall. After council voted for the agreement, and after the Estabrooks/Kelly press conference celebrating the city acquiring potentially unlimited risk with the new convention centre, and a $12 million bill for buying the existing convention centre and a radical change in the tax structure, council went back into chambers to start a three-day meeting called for dealing with…a $13 million budget shortfall this year.

This article appears in Dec 9-15, 2010.