Agenda Index City of Vancouver

ADMINISTRATIVE REPORT

TO:

Standing Committee on City Services and Budgets

FROM:

City Manager in consultation with the Director of Finance

SUBJECT:

"Expanding the Vancouver Convention and Exhibition Centre" Financial Assessment of the October 2000 Business Plan

 

RECOMMENDATION

CITY MANAGER COMMENTS

This report asks Council to support the development in principle and to agree that, as a minimum Council will provide a limited exemption from municipal property taxes for the project. It does not ask Council to commit to any specific fundingoption; these decisions being deferred until City staff have had the opportunity to discuss the impact of the funding options with the federal and provincial governments, the Task Force, Tourism Vancouver, and the Hotel industry. The options presented are to illustrate the range available, and the order of magnitude impacts to the marketing funds.

COUNCIL POLICY

PURPOSE

In October 2000, the Vancouver Convention Centre Expansion Task Force published a business plan proposing a major renovation of and expansion to the existing Vancouver Convention and Exhibition Centre (VCEC). The business plan makes strong economic case for this project to proceed. This report to Council summarizes the financial aspects of the proposal, assesses the implications of the proposed funding structure on the City of Vancouver, and proposes potential options, including limited City participation, in the financing of the project.

SUMMARY

The Task Force that was responsible for creating this business plan is comprised of representatives from PavCo, Tourism Vancouver, the Vancouver Board of Trade, YVR, BC Chamber of Commerce, and the Vancouver Hotel Association. The work done to create this plan was undertaken by various consultants, including:

· KPMG Consulting was hired to update its 1995 feasibility study of a VCEC expansion,
· Pacific Liaicon & Associates to conduct a capital cost estimate and technical evaluation of the project, and
· LMN Architects to modify and update their original design prepared for Marathon during the 1997 Portside project.

Members of the Task Force funded this consulting work.

The business plan proposes that the $495 million cost of the project be co-funded by theprovincial government, the federal government, and the tourism industry. The funding plan proposes that the tourism industry's contribution would be $90 million through Tourism Vancouver budgets, assuming all of the 2% Hotel tax flows to them, and a 0.5% increase in the tax to 2.5%.. In addition, the business plan proposes that the City of Vancouver make indirect contributions to the project, such as property tax exemptions, although the exact nature and amounts of these contributions are not specified in the plan.

This report to Council comments on the financial aspects of the business plan and explores some alternative scenarios for funding a portion of this project.

PROJECT BENEFITS AND RISKS

The Benefits

This business plan puts forth a very strong economic and financial case for proceeding with this expansion: high returns on investment, relatively short payback periods, and significant economic spin-off benefits for government and industry, all with relatively minimal associated risks.

Staff have completed a review of the business case and note that the stated assumptions appear reasonable.

The estimated benefits for each stakeholder identified in the business case have been estimated using the Input/Output Model developed by BC Stats. BC Stats staff have indicated to City staff that the estimate for incremental municipal revenues is very rough and does not represent an attempt to calculate direct incremental revenues to the City. Therefore, the estimate provided of almost $10 million in ongoing incremental property taxes to the City should be replaced with more accurate projections to be calculated by City staff.

The following are some of the specific benefits identified in the business plan:

Employment. Incremental employment associated with the project is projected to be 6,700 person-years in the construction phase, and 7,500 person-years in ongoing operations. Among the many benefits associated with increased employment is the projected incremental tax revenues to be collected by the provincial and federal governments.

Federal and Provincial Tax Revenues. It is projected that the senior governments will accrue a total of $81 million in incremental income and sales taxes during the four years of the construction phase, plus $66 million annually once operations normalize in 2009.

Municipal Revenues. The plan contains projections that the City of Vancouver will accrue a total of $7 million in incremental revenues (primarily property taxes) during the four years of the construction phase, and $10 million annually once operations normalize in 2009. This estimate is calculated on the basis that the expanded centre will pay property taxes. However, the City collects no property taxes or payments in lieu of taxes from the existing convention centre (VCEC) and the authors of the business plan state that the City will be expected "... to provide a number of concessions such as foregoing property taxes for the convention centre expansion." It is therefore unlikely that the City will receive any direct property tax revenues as a result of the convention centre expansion, despite references to incremental municipal revenues made in the business plan. However, the City does benefit indirectly by generally increased economic activity.

Industry Profits. It is estimated that increased delegate and exhibitor spending on accommodation, food and beverage, local transportation, retail and recreation will generate an incremental $12.5 million in profits annually, as of 2009. As well, the plan projects that the construction industry will enjoy a total of $10 million in incremental profits during the construction phase of the project. The following table summarizes the projected benefits to government and industry as per the business plan.

Table 1. Summary of Projected Benefits of Convention Centre Expansion Listed in Business Plan

 

Total Over Entire Construction Phase (2002 - 05)

Annually,
Beginning
in 2009

Employment, incremental person-years of labour

6,700

7,500

Incremental Revenues, Federal & Provincial

$81 million

$66 million

Incremental Revenues, City of Vancouver

$7 million

$9.5 million

Tourism Industry Profits

-

$13 million

Construction Industry Profits

$10 million

-

The Potential Risks

There are many risks associated with major infrastructure project. The main risk considerations identified by the authors of the business plan are associated with theconstruction of the project and the future size of the market for trade and convention centre services. If the project were to exceed the capital cost estimates the participants, and potentially the City, could be asked to supply additional funding, either by a direct contributions or by an increase to the Hotel Tax.

If the convention business does not materialize as projected, there are risks to the operating viability of the centre and to the ability to repay the industry capital commitment from the Hotel Tax.

Staff also note that the business plan does not present any alternative scenarios or sensitivity analyses which would demonstrate the implications of a less optimistic set of assumptions. For example, it is hard to assess the proposal without an understanding the impacts of different assumptions around the projected growth in convention centre sales, the level of projected spin-off impacts, projected rates of inflation or final capital costs.

Staff have also identified a number of financial issues that are not addressed in business plan that could affect its viability because no funding sources are identified:

· VCEC Deficit Between 2005 and 2009. It is projected that VCEC will have an operating deficit ranging from $100,000 to $900,000 in each year between the period between construction having been completed and operations having normalised. This shortfall is expected to total a net present value of $1.8 million in 2000 dollars.

· Incremental Marketing Costs. The authors of the business plan project that an additional $3.0 to $5.5 million per year will need to be spent on marketing the expanded convention centre, from 2001 to sometime beyond 2009. Using the low end of this estimate, the net present value of this new cost is $26 million. The plan states explicitly that Tourism Vancouver could only be expected to fund up to 20% of the marketing costs, leaving a net present value of roughly $21 million to be funded by other parties. It is suggested that increased operating funding will be negotiated among funding partners who will participate in the governance of the expanded centre. This project will only be successful if it is appropriately marketed to ensure optimum usage.

· Property Tax Paid to Non-Municipal Taxing Authorities. The business plan seems to make the assumption that property taxes will not be payable on the complex. These payments would normally be due to the City of Vancouver (approximately 55% of thetotal tax bill) and a number of other taxing authorities. Council does have the power to exempt the expanded convention centre from the municipal portion of the property taxes. However, even if Council were to agree to this exemption, it does not have the power to extend that exemption to these other taxing authorities such as school tax. If a broader exemption was not provided, the centre would be liable for payment of these taxes.

· Property Tax Paid on Commercial Portion of Convention Centre. Even if Council were to agree to an exemption from municipal taxes for the convention centre, it is likely that exemption would only extend to the actual convention facilities themselves. It would be difficult to argue that the estimated 15% of the floor space of the project that is considered commercial (parking, retail and marina operations) should be exempt from municipal taxes. This portion of municipal taxes could exceed $1 million a year yet no provision for these taxes seems to have been included. It is noted that if these operations are contracted out, it is likely the tenants and not the convention centre that would be responsible for these taxes.

These apparent omissions in the business plan need to be addressed.

Finally, if the City chooses to invest directly in the project (by building the parking facility), the City would also have exposure to the usual risks associated with any capital investment, namely, potential for cost overruns, and potential for expenses to be higher than and/or revenues lower than anticipated.

THE PROPOSED BUSINESS PLAN: FUNDING SOURCES FOR CAPITAL COSTS

According to the business plan, the capital cost of the renovations and expansion will total $495 million (all figures discussed are provided in Year 2000 dollars, unless otherwise noted.) The analysis in the business plan is based on the following timeline.

The Task Force states a principle that those who receive the financial benefits from the expansion should contribute to the funding of the development. Consistent with this concept, the business plan proposes that capital funding for the project come from four sources: the federal government, the provincial government, the tourism industry using the hotel tax mechanisms and the City of Vancouver.

Table 2. Proposed Sources of Funding for Convention Centre Expansion in Business Plan

Investor

Proposed Contribution

Est Annual $ Return

Est Annual % Return

Federal & Provincial Governments

$405 million

$66.3 million

14% - 26%

Tourism Industry

$90 million

$12.5 million

8% - 10%

City of Vancouver,(see notes)

not quantified

$9.5 million

n/a

Notes to Table 2:
· The relative shares of the $405 million to paid by senior governments is not indicated in the plan. It is the understanding of staff that no federal contribution has been committed.
· The "tourism industry contribution" is made of up hotel tax revenues: $33 million from currently collected taxes now going to the Tourism Vancouver budget, and $57 million generated through a proposed 0.5% tax increase.
· The plan states that the City of Vancouver would be expected to provide "benefits during the construction and operation of the convention centre expansion, rather than direct financial contributions." Apart from a mention of tax exemptions, the nature or cost of this contribution is not indicated in the plan.
· The City of Vancouver does not currently receive any property taxes from the VCEC and the expectation of the business plan is that the centre would be exempted from property taxes.
· The projected annual return for each level of government is comprised of estimated incremental taxes associated with the expansion. The projected annual return for the tourism industry is an estimation of the incremental profits that would be generated through enhanced delegate and exhibitor spending that results from the expansion.
· The payback period for the project is anticipated to be between seven and thirteen years for each of the three direct investors.

FUNDING THE INDUSTRY PORTION OF THE CAPITAL COSTS

The funding structure proposed in the business plan assumes that the total industry contribution will equal a net present value sum of $90 million. Tourism Vancouver has committed $33 million from its current budget (of which the Hotel Tax is the primary revenue source) and the remaining $57 million would be generated by a 0.5% increase to the existing Hotel Tax. This follows from the industry view that the use of the existing 2% tax to fund this balance would put the tourism marketing program, and potentially room-night sales, at risk.

However, in response to the draft plan, the provincial government has indicated that it will not approve the 0.5% increase. As a result, the Task Force looked at many other options, including a levy on sightseeing fares, taxi drop-off fees and/or car rentals. All of these were considered to be more complicated to administer and collect and did not generate significant revenue to assist the business case.

City staff have identified a number of alternative scenarios for funding the outstanding $57 million the Hotel Tax increase would have generated, including possible participation of the City by constructing the parking facilities. Three of these options are summarized below, however, it is noted that the analysis should be considered preliminary and will need to be further explored and validated prior to Council making any decisions. Table 3 summarizes the impacts of these scenarios on the Tourism Vancouver budget.

Loan Repayment Alternatives

Each of the scenarios identified below assume that the industry portion of the $90 million will be financed by the issuance of debt with principal and interest due on a annual basis over the term of the debt. The direct financial contribution by the City proposed in Options 2 and 3 would likely be a one time investment.

For each of the three funding scenarios assessed, two loan repayment alternatives are considered, each with a distinct advantage and disadvantage. The loan repayment schedule can be structured in a variety of different ways; the two presented here represent the two extremes of many different alternatives.

· Fixed Loan Payments: With this structure, capital cost would be financed via a traditional loan with a fixed repayment schedule of principal and interest coming out of the Hotel Tax. With fixed loan payments, the share of the Hotel Tax available to fund Tourism Vancouver is the difference between the total Hotel Tax collected and the annual loan repayment. The benefit of this system is that the loan repayment is made in a systematic and guaranteed manner and that the risks related to growth of this revenue source are transferred to Tourism Vancouver. The disadvantage is that Tourism Vancouver's budget is decreased significantly in the early years of the project, although all of the growth in the later years accrues directly to Tourism Vancouver.

· Variable Loan Payments: With this structure, the share of the Hotel Tax committed to Tourism Vancouver is fixed in 2002 and inflated two percent a year thereafter. The difference between the total Hotel Tax collected and this commitment to Tourism Vancouver is used to repay the project financing. The benefit of this structure is that it allows Tourism Vancouver to retain a larger proportion of its current budget in the early years of the project and provides for stable growth to Tourism Vancouver operating revenues each year. The disadvantage is that repayment of the project funding is deferred to the later years of the financing and that the risks related to growth of the Hotel Tax over the life of the project could result in insufficient funding being available. As a result, if this option were chosen, periodic reviews of the status of the repayments would have to be built into the agreement with Tourism Vancouver.

Option 1 - Fully Financed Via Existing Hotel Tax

Option 2 - Financed Through Existing Hotel Tax & City of Vancouver Parking Sites Reserve

Option 3 - Financed Through Existing Hotel Tax, City of Vancouver Parking Sites Reserve & Other Sources

The following table summarises the impacts of each of these options on Tourism Vancouver's annual budget.

Table 3. Proposed Sources of Funding for Convention Centre Expansion in Business Plan, Industry Portion Only - Impact on Tourism Vancouver's Operating Budget (inflated dollars)

 

2001 Tourism
Vancouver Budget

2002 Tourism
Vancouver Budget

2010 Tourism
Vancouver Budget

2034 Tourism
Vancouver Budget

Option 1 -
Full $90 million from existing Hotel Tax

        

    A. Variable Payments

$8.9 m

$6.7 m

$7.8 m

$12.5 m

    B. Fixed Payments

$8.9 m

$2.6 m

$6.0 m

$26.2 m

Option 2 -
$78 million from existing Hotel Tax
$12 million from Parking Site Reserve

        

    A. Variable Payments

$8.9 m

$7.3 m

$8.5 m

$13.7 m

    B. Fixed Payments

$8.9 m

$3.5 m

$6.9 m

$27.1 m

Option 3 -
$33 million from existing Hotel Tax
$12 million from Parking Site Reserve
$45 million from other sources

        

    A. Variable Payments

$8.9 m

$8.9 m

$10.4 m

$16.7 m

    B. Fixed Payments

$8.9 m

$6.8 m

$10.2 m

$30.4 m

Notes to Table 3:
· Tourism Vancouver budget figures are presented for discussion purposes only, there are many possible loan repayment alternatives that would impact Tourism Vancouver's budget differently.
· Based on an analysis that assumes: average annual occupancy rate of 65%, average annual growth in room stock of 2.0%, average annual growth in room rates of 2.0%, and growth in Tourism Vancouver operating budget of 2% (the latter under variable payments options only).

THE CITY OF VANCOUVER'S CONTRIBUTION

Although it appears in the business plan that the City is making no direct contribution to this project, and at the same time is receiving significant returns, this is not accurate.

First, if Council agrees to exempt the centre from municipal property taxes (as is the current convention centre), the City will forego these incremental direct revenues from the project. This will leave the anticipated incremental revenues for the City as the following:

(i) Utility Charges. These are ongoing cost-recovery fees for utility services such as water and sewerage, and as such will not generate any incremental net revenues for the City.

(ii) Development Cost Levies. Like other developments in the City, the project would be expected to pay appropriate development cost levies.

iii) Development and Building Permit Fees. These are one time cost-recovery fees to be collected during the planning and construction phases of the project, and again, do not represent a net financial benefit to the City.

At the same time, the City could make the following contributions to the project.

(i) Foregone Property Taxes. Foregone property taxes should be considered a direct financial contribution to this project. City staff have calculated an estimate of the foregone property taxes associated with this project to be $5 million to $7 million per year, based on the development proposed by the Task Force. This assumes taxes are paid on the commercial portions of the development (estimated at 15% of the total) and that the entire development would be classified as Business Class (Class 6) for taxation purposes.

(ii) Direct Capital Contribution. Under two of the funding options proposed in this report, the City would contribute approximately $12 million to the capital funding of the project. The feasibility of this investment would be reported back to Council prior to any decision being made.

(iii) Incremental Operating Costs. An expanded convention centre will create incremental demand on municipal services and, without incremental property taxes, the ongoing cost of providing these services also represents a municipal contribution to the project.

CONCLUSION

The business plan prepared by the Vancouver Convention Centre Expansion Task Force presents strong economic and financial arguments in favour of expanding the existing convention centre facilities, through investments made by the federal government, the provincial government, the City of Vancouver (indirectly through tax exemptions among other contributions), and Tourism Vancouver (via redirected Hotel Tax revenues).

The plan presents a scenario which appears to benefit all stakeholders: federal and provincial governments, the City of Vancouver, the tourism industry and the construction industry. No alternative scenarios are presented, and no sensitivity analyses have been included in the plan.

While the City of Vancouver would in many ways benefit from expanded convention centre facilities, it would also incur significant incremental costs associated with this project. Under the status quo, the City would not directly collect any new taxes or payments in lieu of taxes from the expanded centre. The City's tax revenues would decrease by about $500,000 per year if the expanded convention centre was exempt from municipal taxes. City staff estimates the property taxes that would be foregone if the convention centre was tax exempt to be between $5 million and $7 million per year.

While the City would benefit indirectly from the existence of an upgraded and expanded convention centre, this project also represents directly increased costs to the City, rather than increased revenues as indicated in the plan.

This report presents a preliminary analysis of three alternative scenarios for the industry portion of the funding - with varying amounts of the $90 million provided from the existing Hotel Tax, the City of Vancouver Parking Sites Reserve, and a potential surcharge on the existing municipal business license fee for hotels. Council direction to staff to review thesepossible funding sources with federal and provincial staff, with the Convention Centre Task Force and with Tourism Vancouver is sought with a report back to Council prior to any decisions on City participation being made.

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