THE SALE-LEASEBACK RATIONALE

• A mortgage appears on the company's balance sheet as long-term debt
• On an after-tax basis, debt-service payments are typically more expensive than those under a lease agreement
• Financing is limited to only a portion of the value of the asset, requiring the company to divert capital resources away from its primary businesses.

SUMMARY OF BENEFITS

OFFICE LIFE CANADA
February 2004

1. A sale-leaseback amounts to 100% financing of an asset, versus conventional financing, which rarely exceeds 60-70% of the asset's value.
2. The rental deduction under the lease payments often exceeds the declining depreciation and interest deductions which applied to ownership of the asset, resulting in lower after-tax occupancy costs.
3. Federal and provincial capital tax payments can be diminished for leased properties, and
4. Financial ratios (ROA, ROE, and Debt/Equity) improve.

By redeploying the proceeds from a sale-leaseback into its operations, the vendor/tenant will yield greater returns on its capital than would be realized from owning the real estate.

Similarly, by not using up its own capital for design/build premises and opting instead for a long-term lease, funds remain in the business, where they earn the highest returns. In both cases, the real estate (and any associated debt) are removed from the balance sheet, in a way which is fully transparent to shareholders and in compliance with new accounting standards.

If properly structured, all of the essential elements of flexibility and control can remain with the tenant, virtually as if the premises were still owned.

The argument for leasing over owning real estate is grounded in good business strategy, as well as good accounting. Currently, real estate capitalization rates are at historic lows, as buyers rush to snatch up quality real estate with good corporate covenants. This represents the best-case scenario for leasing its facilities, as a company can get the highest value for its premises while simultaneously leasing it back at low rental rates.

As the Enron effect subsides, and the real estate market continues its record pace, expect to see more and more companies realizing that leasing corporate premises is the option with the greatest benefits, to the balance sheet, to the company and to its shareholders.

Richard A. Abboud is president of Forum Leasehold Partners, a firm actively engaged in acquiring and developing single-tenant assets, with long-term leases to highly credit- worthy corporate and government tenants.

National Post

Garry Marr
Financial Post
December 3, 2004

Richard Abboud, president of Forum Leasehold Partners, says the new $20-million paramedic centre in Ottawa may be the wave of the future for real estate investment.

The 100,000-square-foot building, which will be completed by the end of next year, is a public-private partnership. The city gave Forum a 30-year land lease and the company is constructing the building in exchange for a long-term rental agreement.

The city will own the building after 30 years. Forum teamed with designers Aecon-Westeinde Alliance Inc. and property managers Trammell Crow Co. Canada on the bid.

"The city realizes that the private sector can build this more efficiently, and this also limits the city's risk," said Mr. Abboud, who spoke at a real estate forum in Toronto this week about the future of public-private partnerships.

The benefit for Forum and its investors is that they get a stable cash stream for the next 30 years and can borrow for construction at favourable rates because they have a AAA tenant in the city.

Mr. Abboud would not say what other investors are involved in the project but said there is plenty of institutional money.

"There are pensions and insurance companies looking for long-term stable returns," he said.

Forum was established two years ago and now has a portfolio of $100-million, some of it established using the public-private partnership model.

Pension funds and developers say they're ready and willing to help the Ontario government finance and build $30 billion worth of roads, hospitals, schools and other infrastructure projects over the next five years.

"Infrastructure projects tend to be ideal for pension plans because they are very long term and very stable and they keep up with inflation," said Lee Fullerton, spokesperson for the Ontario Teachers' Pension Plan, with $85 billion in assets. The plan has been frustrated by the lack of opportunities within Canada, she added.

"It's great for Ontario and it's great for us," said Paul Haggis, president and chief executive officer of the Ontario Municipal Employment Retirement System, with $41 billion in assets.

Private developers also welcomed the move. The company that's already building a $20 million emergency medical service for the City of Ottawa called such partnerships the wave of the future.

"From the government's perspective, you get private sector expertise and a project that will likely come in on time and on budget. From our perspective, you get stable returns and great tenants," said Richard Abboud, president and chief executive officer of Toronto-based Forum Leasehold Partners Inc.

The program, one of the biggest spending initiatives in yesterday's provincial budget, is designed to speed up investment in Ontario's aging infrastructure while bringing private sector discipline to capital projects, the government said.

"What we're doing is inviting the private sector, if it has the expertise and access to finances not available to us, to participate," Finance Minister Greg Sorbara told reporters at a budget briefing.

The projects will go ahead with or without the private sector, government officials said.

However, the government was short on details about how the program would work, how much the private sector would contribute and who would own and operate the facilities at the end of the day.

Haggis, who met with Sorbara on Tuesday to discuss the program, agreed: "It's a little vague at this point."

Other business groups praised the infrastructure program, along with the government's plans to invest $6.2 billion in post-secondary education and skills training, saying they were the highlights in a budget that otherwise ignored corporate Ontario's needs.

Small business lobbies wanted the government to cut property taxes, a measure touted as costing the province nothing since municipalities set and collect the taxes.

"We got almost nothing," said Judith Andrew, vice-president of the Canadian Federation of Independent Business.

Small business pays four to six times what residential consumers pay on property of the same value, she said.

"Unless this is addressed, you'll see a hollowing out of the city's core."

Manufacturers wanted the province to accelerate the capital tax cuts on investment and help boost the image of manufacturing to entice more young people to work in the sector.

"We were quite disappointed," said Ian Howcroft, vice-president, Ontario division, of Canadian Manufacturers and Exporters. The one bright spot for him was increased training in skilled trades because many of his members are facing labour shortages.

"The minister heard the door of opportunity knock but failed to answer it," said Len Crispino, president and chief executive officer of the Ontario Chamber of Commerce, who was critical of the increased health care spending.

Just how much the private sector might contribute to the $30 billion infrastructure program was unclear yesterday. New Democratic Party leader Howard Hampton, who denounced it as "privatization by stealth," pegged the amount at $12 billion and said it would add $5.5 billion in borrowing costs over the 30-year life of the loans. The private sector has higher borrowing costs than government.

Mary Webb, a vice-president at the Bank of Nova Scotia, said there are models for the program in British Columbia, the United Kingdom and Australia. Under those schemes, the private sector raises the money, oversees the construction and in some cases either owns or operates the facility.

Some of the funding may come from an existing program that gives municipalities access to lower-cost loans, she said.

The government has said it will not hand ownership of any hospitals, schools or municipal sewer or water projects to the private sector. But it hasn't ruled out private ownership of roads, bridges or other transportation projects.

The projects will help business by unclogging roads, particularly in southern Ontario, which bears 70 per cent of the province's truck traffic, the province said, estimating that congestion costs business $5 billion a year.

The plan will face stiff opposition from public sector unions and teachers, whose cash-rich pension plans are the likeliest participants in the scheme. Union leaders vowed to fight it.

"They're not going to use the pension plan money of my members and gamble it on risky ventures like public-private partnerships," said Syd Ryan, head of the Canadian Union of Public Employees.

"Not only that, it puts us out of work."

Ryan said his union is forming a coalition with the teachers.

Orleans to get $220-million town centre
Deal gives area its long-awaited arts complex

The City of Ottawa says the east end's day has finally arrived with an agreement to construct $220 million worth of buildings in the Orleans town centre, including an arts centre.

Mayor Bob Chiarelli yesterday signed a memorandum of understanding with Richard Abboud, president of the Orleans Town Centre Partnership. As well, city managers released some details and drawings of what the project will look like. City council is to vote on the complex deal on Oct. 11 and legal agreements on various aspects of the project will follow.

The city will get a $36.8-million Orleans Arts Centre -- about $10 million more expensive than had been expected -- built by a development consortium headed by Forum Leasehold Partners, the company that built Ottawa's new paramedic headquarters. The project will also involve construction of a series of commercial and residential buildings, and an 80-room hotel, to complete the Orleans town centre.

It's to be built on 19 acres the city owns between Centrum Boulevard and the Queensway, near Place d'Orleans.

The 86,000-square-foot arts centre -- a dream for 20 years -- will include a 500-seat performing arts hall, a 100-seat studio theatre, an art gallery, theatre studios, rehearsal studios and office space.

The arts centre will cost the city $3.2 million a year to operate. About 50 arts groups in the Orleans area have been pushing for the centre.

The city will hand over its Orleans client service centre building, the former Cumberland township hall, which is worth between $6 million and $8 million, as well as the 19 acres, which is valued at somewhere between $4 million and $6 million. The city will sign a long-term lease with the consortium to continue occupying the Orleans municipal building.

The deal works in three steps:

- The developers will borrow $27.8 million, backed up by the city's promise of a long-term lease for the space it continues to occupy in the Orleans municipal building. Construction of the Orleans Arts Centre will start next spring.
- The developers will pay the city $12.1 million for the land and the 70,000-square foot Orleans municipal building, while the city will pay $3.1 million for new roads, sewer work and parks.
- Finally, the city will lend the developers $9 million, with no interest and principal payment for 30 years. That money -- in addition to the loan backed by the 30-year lease -- will give the consortium enough money to build the arts centre. At the end of the 30 years, ownership of the arts centre, and the land on which it is built, will revert to the city.

If the total building project doesn't progress for some reason, the city can take back ownership of the land or reduce its financial contribution to the project.

After years of complaining that the east end of Ottawa is missing out on the capital's economic growth, city council members said yesterday that business growth is finally coming to Orleans. And the Orleans town centre -- stalled for years in a sometimes weak east-end commercial real estate market -- is finally moving.

Mr. Chiarelli said the project is the biggest in the history of the east end. He said business people in Orleans have been pushing for a hotel for at least the last 10 years.

Orleans Councillor Bob Monette said the project will round out "the heart of Orleans," though he said some people may be disappointed at the small size of the hotel.

"There's a lot of optimism attached to this. It's a great initiative," said Innes Councillor Rainer Bloess.

He said the movement on the town centre project could help spark development across the Queensway on land owned by Minto Developments that is approved for office buildings.

"One thing leads to another, that's what we're banking on," said Mr. Bloess.

Minto President Roger Greenberg said yesterday that the company's 16-acre site, across from the Orleans town centre, is approved for several hundred thousand square feet of office space. The company is just waiting for the tenants to build for.

City officials hope the federal government gives the area a huge boost by putting a branch of the government on the Minto property, easing the morning wave of commuters who drive or take the bus on congested roads to government offices downtown.

Rob Mackay, the city's manager of strategic partnerships, said the town centre project should make Orleans a more walkable neighbourhood. He noted that, with the existing stores, professional offices and the YMCA gym in the area, as well as the new arts centre and apartment buildings to come, the place should be an attractive place to live, especially for seniors.

© The Ottawa Citizen 2006

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