A report on the proposal for a new learning centre in Ponoka, as it currently stands, shows the risks outweigh the benefits.
This report came from the Town of Ponoka’s accounting firm Rowland, Parker and Associates and was presented at the regular meeting of town council March 14. Speaking to the report was Gord Parker, who provided council with clear, concise language on just how much the town will end up paying over the proposed 35 year lease.
Parker told council that the long-term costs are high. “The gross lease payments over the term of the lease, basically assuming no inflation adjustments would be about $24.5 million.”
“If I used inflation of 2.31 per cent, which is the inflation rate since 1982 now, which is over a 35 year period, it would work out to about $37.7 million in gross lease payments for the term,” stated Parker.
Proposed is to enter into a 35-year lease agreement for a 28,000 square foot facility. The price, which is still under negotiation, would be no higher than $25 per square foot, costing the town annually about $700,000 with lease adjustments. Landrex is the development company but the lease would be to Thackaray Enterprises.
Where the town would also face risk is neither party can exit from the 35 year lease, there is no buyout option for the town as well it would have to pay into a capital maintenance fund. Where Parker focused his attention was this lease meets the term of borrowing under the Municipal Government Act (MGA). This requires long term leases past five years be considered borrowing, which would affect the town’s debt limit.
Mayor Rick Bonnett questioned why this would fall under a borrowing considering the goal is to have lease payments come out of the town’s operating funds. Parker said the length, term and value of the lease are what need to be considered.
“Basically the town is assuming way more risk than the developer is in this instance,” said Parker.
The developer has indicated it wants to receive a 10 per cent rate of return. “The issue with it is they’re getting a 10 per cent rate of return for 35 years.”
The town would be a risk-free rate of return and would own 90 per cent of the building. “They have no business risk, no risk of credit, no risk of vacancy and on top of that you’re contributing to a capital fund to maintain the building so they don’t have to have that risk.”
He said at the end of the day it looks more like ownership rather than a lease and further to that could be other risks with companies that purchase buildings and lease contracts similar to the one being proposed.
The developer could sign the town, sell the building and flip it to an insurance company wanting to pay about five to six per cent on the $7.5 million, stated Parker. That company could pay $11 to $12 million for the building while the town still paid into the long-term lease.
“They could flip this thing the next day and make a cool $3 or $4 (million),” stated Parker.
The developer has indicated the total land and building development costs at $7.5 million, which is said to include the fair value of the land and service costs, said Parker. He added that if the town were to build on its own it would have to borrow money, which would add to those estimates.
Within the proposed agreement includes consumer price index increases but Parker pointed out even without that the gross lease payments will be $24.5 million. “If you were to build this thing you could borrow for 35 years with Alberta Capital Finance, at 3.5 per cent.”
“Your total debt payments on this would be $13 million,” said Parker. “That’s a difference of $11 million.”
Under the current terms there’s a $24 million difference in prices, he added.
What happens with Campus Alberta Central?
The news was a setback for Bonnett whose hope is to see the old building removed with new improvements in place.
Plus the proposal would see the development of Campus Alberta Central (CAC) and a variety of post-secondary education courses within Ponoka. Coun. Loanna Gulka asked if there is a chance the town could deal with CAC.
CAO Albert Flootman replied that CAC is interested in working with the Town of Ponoka on this project. “I believe they would be more than willing to look at an alternative with the town.”
Bonnett replied he wants to be fair to the developer who provided the opportunity to meet with CAC, adding that they would still need to be paid for the work done in designing the concept drawings. He added that there are other intangible benefits, one being the destruction of an aged building.
CAC has indicated its desire to move quickly and already courses are being designed for the fall, said Flootman, who added that the town is looking for space for those programs. “They are clearly very interested.”
If the developer were to start building in the spring, it could take about five to six months to be constructed and the town would have 120 days following completion to move in and have its work done, explained Flootman. “If we were to go on our own we would have to restart the process.”
The town would need to go into a request for proposals for design work taking about another year before construction starts.
Lease negotiations continue. Since the meeting Bonnett has indicated he is stepping into the lease negotiations with Landrex.