January 24, 2011

Friends of Lansdowne (FOL), Ward and Sealey v. The City of Ottawa

ROSEN AND ASSOCIATES REVIEW LANSDOWNE PARK BUSINESS PLAN

One of Canada’s leading investigative accounting firms has presented a report detailing serious deficiencies of the business case for the Lansdowne Partnership Plan (LPP) and challenging the validity of the City of Ottawa’s claims that the Lansdowne redevelopment will be revenue neutral.

Rosen and Associates Limited of Toronto was retained by the Friends of Lansdowne Inc. (FOL), Doug Ward and Gary Sealy to review and reply to evidence filed by the City and its private sector partner, the Ottawa Sports and Entertainment Group (OSEG), in response to their Superior Court application to quash the City’s approval of the LPP.¹

Under the Plan, the City of Ottawa would spend $172.8 million to refurbish the Frank Clair Stadium and arena, provide underground parking, provide public land for a commercial and retail property development, create an urban park and subsidize a new trade exhibition centre near the airport. The City would borrow $162.6 million to cover these costs, but has stated that the project will not result in an increase in property taxes.

The Rosen report offers several pointed criticisms of the economic rationale for the LPP, and the City’s claims that it will be revenue neutral. Among its principal conclusions are the following:

• The annual debt servicing costs should include the urban park and trade exhibition centre.  This will mean an annual cost to the City of  $9.9 million, not $7.2 million as the City has claimed. (p. 24) 

• “...We are not aware of any basis or means by which the City will set aside property taxes from the LPP to service its project-related debt. ...  Consequently, we do not believe that it is appropriate to present property taxes from the LPP being dedicated (or solely used) to satisfy project-related costs” – a proposition that is central to the City’s revenue neutrality claim. (p. 3) 

• “If property taxes are excluded from the City’s revenue neutrality calculation, participating in the LPP is projected to result in a significant net negative cash flow. Based upon our analysis, the City’s deficit from the LPP would range from $111 million to $208 million.”  (p. 3-4)

• If the City’s theoretical use of project-specific tax revenues is factored in, net cash flows to the City would still be negative. (p. 4)

• “Aside from the inclusion of property tax revenues, the City’s so-called ‘revenue neutrality’ analysis tends to grossly overstate the City’s probable financial benefit…” (p 4)

• “The report of the Office of the Auditor General of the City of Ottawa (OAG) on the LPP, dated November 9, 2009, should be interpreted with caution.  …We have identified several serious concerns regarding the LPP financial model, including errors in estimating cost savings and the incomplete analysis of cost contributions by the City.” (p. 5)

The Rosen report is also highly critical of the business case for the LPP prepared by PricewaterhouseCoopers (PwC), and presents the firm’s expert opinion that:

• “ ... the PwC analysis (which relies upon the City and OSEG management figures) has multiple conceptual and technical deficiencies … As a result, the analysis is not reliable and tends to grossly misrepresent the probable financial impacts of the LPP to the City.” (p. 9)

• “... the PwC Business Plans’ cash flow analysis is flawed. The contributions by the City …are not complete, which understates its investment in the project.  The expected receipts are overstated, which inflates the probable benefits of the project. Overall the comparison of cash flows is not reliable.” (p. 9)

• there are “several technical discrepancies in PwC’s calculation of avoidable costs. …Consequently, the estimate of avoidable costs that have been included in the PwC report is overstated.” (p. 16)

•  “ ...  the discount rate applied by PwC to value future cash flows of the LPP is grossly understated, and results in an overstatement of the value of the expected benefits … In addition, given the structure of the Waterfall, certain cash flows to the City will occur at comparatively later time periods compared to OSEG receipts. The more distant cash flows also imply greater uncertainty (and risk).” (p. 22)

As for the balance of risks and benefits under the LPP, the Rosen report presents the following conclusions:

•  “The project’s financial terms raise serious concerns. … an analysis of the overall project cash flows clearly shows an imbalance of risks and benefits. The City will be expected to provide the majority of the required investment capital (including cash and in-kind contributions), but OSEG will receive the greater proportion of the cash distributions from the LPP.”  (p. 4)

• “Important differences between the City and the OSEG’s rights to distributions from the LPP have not been adequately explained in the publicly-disseminated materials.  For example, OSEG enjoys considerable advantages because its LPP-related debt is to be funded directly by the LPP, in priority before profit distributions to the partners.” (p. 4)

• “OSEG’s LPP-related debt appears to be secured by the project’s assets (i.e., mortgage financing). …the private sector partner appears to have the option of abandoning the project …  In contrast, the City intends to issue debentures, for which we expect it would be obligated to pay in full”. (p. 4)

• “… OSEG enjoys a preferred financial position with respect to receiving LPP cash flows to repay its debt. …OSEG appears to bear limited losses in the event of default on its debt. …The brief description of default consequences in the Moss Affidavit suggests that OSEG could simply abandon its investment in the LPP if the project proves to be financially non-viable. ..It is not clear that the City would enjoy a similar option of walking away from the LPP.”  (p. 26)

The Rosen report cautions that its conclusions are preliminary because important and relevant documents, such as agreements relating to the LPP, have not been made public by the City or OSEG. The firm also states that it was “not in a position to recalculate the cash flows of the LPP as we have not been provided with complete financial information on the project.”  (p. 23).

Lawyer, Steven Shrybman of Sack, Goldblatt, Mitchell LLP, who represents FOL, Ward and Sealey has filed a motion with the courts to compel the City to release these financial documents.

Friends of Lansdowne Inc. Ward and Sealey have filed an application with the Ontario Superior court to quash Ottawa City Council decisions on the redevelopment of Lansdowne Park. They contend that the City acted unlawfully by approving the scheme without seeking competitive bids or otherwise complying with City bylaws, and by failing to meet the standard of good faith decision-making required of municipal officials.

Toronto-based Rosen and Associates Limited is one of Canada’s top independent litigation and investigative accounting firms.

1. That evidence was comprised of affidavits sworn by Kent Kirkpatrick, Ottawa City Manager and Mr. John Moss, a lawyer retained by OSEG.