Turning problem properties into profit

Posted on 23. Aug, 2010 by in News

Steve Ladurantaye, Real Estate Reporter — Globe and Mail Update Published on Monday, Aug. 23, 2010 6:49AM EDT

The Dominion Building in downtown Charlottetown was every landlord’s nightmare when the federal government declared it surplus to its needs.

The feds had built a new home for its employees on the island, leaving the run-down six-storey building without a single tenant to occupy its 176,000 square feet of office space. The 55-year-old property was in need of some major repairs and would be unlikely to fetch much beyond its scrap value on the open market.

There was only one real option: sell the property to Canada Lands, a Crown corporation that has been discreetly disposing of problem properties for 15 years. It was a good call – Canada Lands sold the building last week for $1-million, twice as much as it paid in 2007.

The agency has been working behind the scenes for 15 years, but has suddenly found itself the subject of global interest as governments from around the world send delegations to learn how Canada turns a profit on properties that would be difficult to sell without improvements and updating.

In the past few months it has hosted delegations from China, the United States and Eastern Europe. They are all interested in the same thing – how to redevelop government properties such as abandoned army bases in a way that they earn profits for the taxpayers instead of only the developers.

“We always pay market value when we take over a property and we never sell low because there’s no need for us to engage in fire sales,” said Gordon McIvor, Canada Lands’ vice-president of strategic acquisitions. “We have the luxury of time and remediation. When we sell, we are getting maximum value for those assets.”

Foreign governments are interested for one main reason – Canada Lands has never received a cent of federal funding and has paid $370-million in dividends to the state. It has spent about $61-million on environmental improvements to its properties, and every building and piece of land in its sizable portfolio will eventually be sold to the private sector.

Mr. McIvor points to an executive order issued in June by U.S. President Barack Obama in which he called for the government to undertake a review of its properties with an eye of unloading surplus space onto the private sector as a sign the Canadian government has been ahead of the rest of the world in dealing with unwanted properties.

“For decades, the federal government, the largest property owner and energy user in the United States, has managed more real estate than necessary to effectively support its programs and missions,” Mr. Obama wrote. “Both taxpayer dollars and energy resources are being wasted to maintain these excess assets.”

Here at home, the government’s decisions about what is and is not surplus has led to the creation of a quirky portfolio of properties for Canada Lands to deal with. It owns five military bases (it has already redeveloped and sold six others), a trendy housing development in Calgary, a bustling industrial park in Burnaby, B.C., and plots of land in the downtown cores of many of the country’s largest cities.

In each case, it buys the property and then consults with the local governments about what each site’s best use would be. If there are environmental issues – many old military homes are packed with asbestos, for example – it will take care of them before marketing the site to developers.

Its most high profile holdings are in downtown Toronto, where it inherited the CN Tower, the Metro Toronto Convention Centre and the Intercontinental Hotel as a side effect of CN Rail’s initial public offering in 1995.

The properties could be sold at any time, at least in theory, but Queen’s University real estate professor John Andrew said Canada Lands is a convenient way for the government to park valuable properties it doesn’t want to be seen as holding onto as a landlord. But, it also operates in a grey area because its role is to sell unusual properties that aren’t easy to slap a value on.

“The role of Canada Lands is a bit odd because on the surface of it their job is to dispose of real estate assets, yet they hold some for a long time and others are really not for sale,” he said.

“Some of these are so unusual that it is difficult to determine their fair market value, or for any buyer to offer what they might be worth to the government,” he said. “If the asset is of great value to a wide range of potential buyers – an office building with government tenants, for example – one wonders why the government is selling it at all.”

Mr. McIvor insists every property is on the table except the CN Tower, which is being held “on behalf of Canadian taxpayers to ensure things like federal visual identity.” Everything else in downtown Toronto – the hotel and convention centre as well as an office tower – will make it to market at some point.

“Since the company does not engage in fire sales and because of the serious economic downtown last year, the properties have not yet been put on the market but we intend to do so in the near future,” Mr. McIvor said.

That could happen as soon as this fall. The Canadian commercial real estate market rebounded sharply in the first half of the year from the recessionary lows of 2009, up around 60 per cent compared to the year earlier period.

If ever there was a time to sell, he said, this may be it.

“The interesting thing about being a large national organization is we can have a balanced approach to development and hold on to things until the time is right,” he said. “You’ll see three very big commercial announcements from Canada Lands this fall in three different areas of the country.”

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