City Hall and the Management of Our Public Real Estate
Ron Bolin: February 13, 2017
This is the story of how a property owned by the Citizens of Nanaimo and assessed at nearly $4 million dollars was sold to a private developer for $1 (one) dollar.
238 Franklyn St.: Let’s Buy the old City Hall Annex
238 Franklyn Street was constructed in 1937 and operated as a warehouse. In 1979 it was leased by the City as the City Hall Annex. In 1999 a consultant was hired to compare 238 Franklyn Street and 250 Albert St. (the old Coastal Communities Credit Union) for acquisition by the City. Of the two, the consultant recommended the Credit Union building, noting seismic problems with the Franklyn Street structure. The consultant’s recommendation was ignored, and in 1999 238 Franklyn Street was purchased by the City for $1.55 million dollars.
In 2007, given the seismic problems noted by the consultant which had been ignored since 1999, City Staff recommended that a seismic evaluation and upgrade be undertaken. Consultants were retained in 2008 and determined that a satisfactory seismic upgrade would cost between $2.4 and $4.6 million dollars. It was the consultants’ opinion that the structure would sustain severe damage in the event of a major seismic event. At the time Staff noted that seismic upgrade would be required only in the event that the use of the building were changed from its use as office space.
Let’s Buy a New Annex at an estimated cost of $15,700,000 dollars
In an “In Camera” Report dated May 10, 2010, Staff reported that the cost of the seismic upgrade of 238 Franklyn Street would be $6.4 million dollars and, after only 10 years of ownership and expensive upgrades, recommended that Council direct Staff to draft an Expression of Interest to seek proposals from the development community to provide alternative office space for Staff then occupying the City Hall Annex. This recommendation was adopted.
At a Special “In Camera” meeting on December 13, 2010, Council directed Staff to shortlist down to two options: It was moved and seconded that Council:
– direct Staff to shortlist the following options to replace the City Hall Annex:
(a) (No information on this option was included.)
(b) a new building by ICI/Windley Contracting at 411 Dunsmuir Street;
The motion carried.
411Dunsmuir Street was owned by the City. It is notable that no information was provided regarding any alternatives. Is it common that proposals to the City of Nanaimo are anonymous, reporting only the selected contractor? This seems to be a recipe for doubt and difficulty.
On March 7, 2011, in an “In Camera” meeting, Council directed Staff to proceed with the construction of a new Building by ICI Windley Contracting at 411 Dunsmuir Street and to prepare a report on future uses for the old City Annex at 238 Franklyn Street. A Backgrounder on the new structure estimated its total cost at $15,700,000 dollars. (To the best of my knowledge, the new annex building was never put out to tender which I believe to be contrary to City policy, nor to the best of my knowledge has any forensic audit ever been completed for the final cost of the new annex building at 411 Dunsmuir Street.)
Let’s Sell the old Annex (assessed at $3.9 million dollars) for $1 (0ne) dollar:
At its Feb. 13, 2012, Special “In Camera” meeting Council received a Staff report outlining future options for the old City Annex at 238 Franklyn Street. The report provided three options:
- Market the Property through a Call for an Expression of Interest;
- Demolish the Building, Expand the Parking Lot and Retain for City Use; (cost of demolition was estimated at $500,000. (The City has been unable to provide any professional source for this estimate.) and
- Retain the Building for Storage and Re-evaluate in One to Five Years.
Staff’s recommendation was that Council direct Staff to prepare Terms of Reference for an Expression of Interest proposal that would seek to sell the land and building to a purchaser who would either seismically upgrade the building to a minimum of 60 percent of Building Code requirements, or demolish it. The BC Assessment Value of 238 Franklyn Street in 2012 was $3.947 million ($568,000 land, plus $3.379 million dollars in improvements).
At its April 2, 2012, “In Camera” Finance/Policy Committee of the Whole meeting Council directed Staff to advertise an Expression of Interest for the sale of 238 Franklyn Street. The agenda for this meeting offered, among other items, the following information:
- If the building was vacant the seismic upgrade cost could be reduced to around $4.0 million. (Remember that the cost of a seismic upgrade was given as $6.4 million dollars in an “In Camera” Staff Report dated May 10, 2010.)
- The building is to be seismically upgraded to 60% of the BC Building Code 2006 before it is occupied, or it is to be demolished. The successful bidder will have 24 months to undertake the upgrade or demolition.
- A restrictive covenant will be placed on the title of the property which will prohibit the use of the Building for the purpose of any human occupancy. Once the building is compliant with the seismic requirements or completely demolished the City will remove the development covenant.
- A Re-purchase Option Agreement will require the successful purchaser to undertake the seismic upgrade or demolition within 24 months of the closing date. Failure to complete the works will result, at the City’s option, in the property transferring back to the City of Nanaimo at a price equal to the purchase price paid by the purchaser less liquidated damages in the amount of ten thousand dollars.
(Note: Here is where things really become odd. The restrictive development covenant mentioned in the above refers to Section 219 of the BC Land Titles Act which permits restrictions for the benefit of certain local or provincial governments. It is this element, entirely at the whim of the City, which reduces the value of the property to virtually zero. Remember that: a) unless the use of the building were changed to something other than “office”, the seismic state of the structure was immaterial and was therefore fully considered in the assessment process; and b) if this were not the case then it is probable that half or more of the buildings in downtown and in the older areas of the City would be classed as similarly valueless. I have not found any reason why this should have been done. Why should Nanaimo taxpayers be deprived of the reasonable value of the property?)
At the December 3, 2012 Special “In Camera” meeting of Council, it was moved and seconded that Council approve the disposition of 238 Franklyn Street to Tectonica Management Inc. under these, among other, conditions:
Purchase/Sale Price: One ($1) dollar;
Closing Date: 2014-JAN-14
Payment for Covenant & Compliance: The City of Nanaimo will pay $40,000 (the equivalent of two year’s property taxes) to Tectonica as a performance bonus upon removal of the development covenant if the conditions are met within the two-year time frame.
(Note: Why should taxpayers offer to pay Tectonica a $40,000 performance bonus just because they meet the basic terms of their agreement?)
Re-Purchase Option: The City of Nanaimo has the option to re-purchase the land and building if the purchaser has not, within 2 years following the closing date, either completed design and construction of the renovations, modifications and upgrades necessary to render the building 60% compliant with the seismic requirements of the Building Code, or demolished the structure.
(Remember that the BC Assessment Value of 239 Franklyn Street in 2012 was $3.947 million ($568,000 land plus $3.379 million improvements). The Section 219 encumbrance reduced the assessment of the property to two dollars ($1 dollar land plus $1 dollar improvements. Note also that the City has the Option to re-purchase. In other words the City can let the new owners non-perform into the indefinite future unless the City takes action.
At the Open Council Meeting of January 14, 2013, It was moved and seconded that Council approve the disposition of 238 Franklyn Street to Cracey Holdings, a secondary firm associated with Tectonica, with a closing date set for January 14, 2014. The motion carried.
Extend the $1 dollar deal for Five more Years (Current Council )
At its Special “In Camera” Council Meeting of October 5, 2015, Staff recommended that Council:
– direct Staff to amend the existing Option to Purchase Agreement with Cracey Holdings Inc. (“Cracey”) and extend the agreement by 2 years subject to the removal of the $40,000 performance bonus payable by the City of Nanaimo to Cracey.
The minutes of this meeting show that:
It was moved and seconded that Council instruct the Corporate Officer and Mayor to execute the necessary documents to discharge the re-purchase option for 238 Franklyn Street. The motion was defeated. Opposed: Mayor McKay, Councillors Brennan, Hong, Thorpe
(Note: The motion to discharge the re-purchase was defeated on a tie vote: Councillor Kipp was not at the meeting. Discharging it would have removed the City’s option to repurchase the property and would, in effect, have left the Section 219 covenant on the property forever, or until the agreed conditions had been met, thus effectively postponing any question of the $10,000 cost of non-performance while leaving the holding cost on the property due to property taxes at virtual zero and with no option for the City to take the property back.)
It was then moved and seconded that Council:
– direct Staff to amend the existing Option to Purchase Agreement with Cracey Holdings Inc. and extend the agreement by 5 additional years subject to the removal of the $40,000 performance bonus payable by the City of Nanaimo to Cracey. The motion carried unanimously.
The agreement, as amended, now extends the date before which the re-purchase option can be can be exercised out to 2021. Qui bono?
In Summary
This example of the property management skills of our City in dealing with our land and with private developers leaves me bewildered at every turn: from the original purchase of 238 Franklyn Street which had been professionally identified as having seismic problems; to the costly upgrades to the building which took place following its purchase; to the short time it was held by the City; to the decision to replace it without a call for tenders; to the mystifying agreements and avoidance of diligence on behalf of the public displayed in its sale. This record does not provide a great deal of confidence in the City’s current promotion of yet another property development deal on a vastly increased scale.
If this is the level of financial management provided to Nanaimo citizens in the sale of the old and purchase of the new City Hall annex, when coupled with the memory of the many dubious decisions associated with the Conference Centre which still seriously haunt our pocketbooks, how can we even contemplate a Referendum question which, if passed, would put $80 million dollars in taxpayer debt at the disposal of a City administration which seems, thus far, to be basing its business plan on a long series of Hail Mary passes.
I look forward to your questions and opinions!
End/RLB
Posts and Comments on Nanaimo Governance 
As a high school student I had occasion to enter this very solid structure, then owned by Kelly Douglas, to pick up wholesale grocery items for the store where I worked. I’m not trained in seismology, but I find it hard to imagine that this structure is in peril unless we experience an earthquake that would reduce most of the old city to rubble. Which is not likely.
Of course it’s now common, it seems, for engineers to play the earthquake card. Witness the Colliery Dams fiasco. In fairness, I suppose, one could say that they are obliged to consider the worst case scenario as a matter of liability exposure for their professional advice. On the other hand, I have seen engineers propose an absurd amount of latitude on behalf of developers who want to do something that is not in the public interest and in violation of city by-laws — which are then amended accordingly so that the engineers’ generous views legitimate the project.
When it comes to the conference centre, for example, it’s hard to imagine an engineer giving an earthquake pass to such a structure because it was built on what amounts to hardened mud after bedrock could not be found. This method was billed as suitable based on just one other example of its use, and that example was not at all like the unstable old waterfront area in Nanaimo where the conference centre was built.
When the Big One arrives, no one should be surprised, then, if the former city hall annex — i.e., the old Kelly Douglas building — remains standing and the conference centre collapses.
The ‘Press Release’ from the City Staff, dated December 17, 2012 was Titled “238 Franklyn St. sale to Tectonica Management Inc. to spur new development”
The release went on to say….
– “to encourage investment in the downtown core“, and
– “Having reviewed our options carefully, Council believes the agreement with Tectonica supports our strategic priority for effective asset management while successfully supporting the community’s vision to see continued development of the downtown core“, and
– “today’s announcement is a win-win for the community of Nanaimo”
…as stated by the then Mayor Ruttan.
– in the Press Release the purchaser (Tectonica Director, Darren Moss) stated “our firm is keen to proceed with the project…….for redevelopment including residential and commercial space” …… and stated the existing building provides a great location and a strong base for redevelopment.
Yet to date (four years later) redevelopment has not taken place and the Development Permit, as issued November, 2014, has expired.
In summary, while the objective was commendable, to date the objective has failed and in the meantime the Property was sold by the City for $1 (One) dollar and zero realty tax dollars have been generated from the Property due to the Restrictive Covenant demanded by the City.
The question remains….
Does this transaction meet the standards of ‘effective asset management’?
What is particularly significant the City Hall real estate dealings, that Ron examines, is that they extend over nearly two decades. Given the staff turnover during this period it is unlikely that the same cast of characters were making the same poor decisions. What this tells us is that the problem is systemic.
All business activities whether it is running a restaurant or developing property does require skills. City Hall staff typically lack expertise in property matters. Management personnel at the municipal level mostly have public administration or town planning degrees. Most of them are careerists. They are no match for an experienced wheeler dealer from the private sector. Add in Nanaimo’s chronic inferiority complex and we get the predictable serial bad deals.
If the Event Centre comes to past we will get another bunch of losing deals. There will be an inevitable capital cost overrun because a hard nosed contractor will insist upon tough extra work clauses. Desperate for a WHL franchise the City will give away the house, or in this case, the arena, to an astute hockey club owner – low rent, poor share of concessions, etc. The City will enter into a long term management agreement with a party that gets too many profit guarantees and too few incentives.
Wow: 40% of buildings destroyed. There goes the neighbourhood… and the property taxes… What to do???
http://www.timescolonist.com/news/local/big-quake-could-destroy-nearly-40-of-victoria-buildings-1.10207008