Agenda Index City of Vancouver

POLICY REPORT
DEVELOPMENT AND BUILDING

TO:

Standing Committee of Council on City Services and Budgets

FROM:

City Manager in consultation with the Directors of Real Estate and Legal Services

SUBJECT:

False Creek Leaseholders

 

INFORMATION

This report is presented to Standing Committee of Council on City Services and Budgets for INFORMATION only.

CITY MANAGER'S COMMENTS

The City Manager submits this report for INFORMATION.

COUNCIL POLICY

There is no applicable Council policy.

HISTORY

Planning for the redevelopment of False Creek began in 1968 when City Council instructed the Planning Department to explore alternatives to the existing industrial uses. By November 1974, City Council adopted the area development plan for the first phase of the False Creek South Shore development, comprising 80 acres of land, and the plan focused on residential and recreational uses. The City required that the land be leased, not sold, in order to ensure it remained under City control and would be available as a single parcel for redevelopment. Since that time, False Creek South Shore has been developed in the following phases:

Second Phase (Alder to Granville) 1979+

Third Phase (Granville to First Avenue) 1982+

To date, over 1800 dwelling units have been constructed in twenty-three different projects including cooperatives, rental buildings (including non-profit and seniors), condominiums, a special needs project, an intermediate care facility and liveaboard marinas.

The land leases are generally for 60 years, and in the case of the condominium projects current legislation requires the City to either purchase the improvements at the end of the lease term or renew the leases. Developers, and subsequent condominium owners, were initially given several alternatives to pay the ground rent. In some cases, the ground rent was paid in full in advance at the commencement of the lease; alternatively, annual payments were chosen, based on several formula options. In the case of condominiums, these annual payments were fixed for the first 30 years and then were subject to periodic reviews for the remainder of the lease. Subsequent purchasers of the units are locked into the lease payment plan selected by the original owner.

In 1988 and early 1989, several strata corporations requested Council and staff to consider a prepayment formula for those units with annual lease payments.

The strata corporations were concerned about future rent increases causing difficulty in financing and selling their units. Specifically, the strata corporations asked the City to address the following items:

a. determine if an equitable formula to calculate the prepayment amount for the remainder of their lease terms could be devised; and

b. provide a methodology for periodic adjustments to this formula, thereby providing a lessee with an expedient process to establish the prepayment amount at any time in the future.

Two appraisal companies, Burgess Austin and Associates, and Nilsen Realty Research, who were considered the most knowledgeable of leasehold valuations, were asked to present proposals for the study. In March 1989 Council approved the hiring of Burgess Austin to undertake a study of the prepayment options for the leasehold strata lots on False Creek. In August 1989 Council after receiving a written request for the conversion of leasehold to freehold in False Creek reconfirmed the conversion of leasehold to freehold will not be considered.

Staff and Nilsen Research carried out a detailed analysis of the Burgess formula and assumptions. A result of this analysis was a questioning of some of the assumptions in Burgess's proposed formula. Recognizing the complexity of the problem staff recommended and Council approved in November 1992 that both Burgess Austin and Associates and Nilsen Realty Research be retained to collectively prepare an independent estimate for lease prepayment.

Burgess and Nilsen together completed a review of the methodology and data used to derive estimates of the prepayment amounts for the 376 residential strata lot leases. Their results were cross-checked and compared with market sale transactions.

Staff supported the assumptions made in the joint report, as well as the final estimates of prepayment. The appraisers concluded that the prepayment amounts were fair to both the City and individual lessees as:

a. they represented amounts which would provide the City with a reasonable return on its investment;
b. individual lessees would be able to take advantage, through the prepayment program, of refinancing at favourable rates; and
c. individual lessees would have the benefit of greater certainty in terms of the marketability of individual units.

The prepayment amounts totalled $16,237,408, and the average prepayment was $43,185. Individual prepayment figures are dependent on factors such as view, unit size, lease rent option chosen by the original purchaser, current land values and interest rates.

Council, in May 1993, approved the prepayment amounts as per the combined Burgess Austin and Nilsen report and the prepayment program commenced for a 2 year period.

At the outset of the prepayment program in 1993, each lessee was mailed a letter explaining the prepayment program, their prepayment amount and indicating the program was voluntary. In addition, all lessees were invited to one of 3 public meetings with the consultants and Real Estate Services who explained the program and answered questions.

In May 1995 Council approved a 2 year extension of the prepayment program at the 1993 prepayment rates.

As the prepayment amounts were based upon market factors such as land values and interest rates, the prepayment amounts calculated were assumed to require revision from time to time, with Council approval. As such, the original prepayment amounts were to cease in1997, with a recalculation to be carried out. The recalculation resulted in higher prepayment amounts for many units, due to the effect of a change in market interest rates since the original calculations were done in 1980's. Council decided to extend the prepayment program using the existing prepayment amounts. A letter was sent to each lessee advising that the new prepayment amounts would take effect in January 1998 and would be in effect for a 2 year period.

Staff prepared, at the request of the False Creek South Neighbourhood Association, individual confidential letters to each lessee of a non-prepaid unit outlining an estimate of the "potential" market rent for their lease at renewal (typically 2006), based on the then current land value and interest assumptions. This enabled them to consider their options as to prepayment. The False Creek South Neighbourhood Association also requested a 6 month extension of the current prepayment amounts, to June 30, 1998.

Staff recommended, and Council approved, a further 6 month extension of the lower prepayment rates until June 30, 1998.

In August, 1999 in response to questions raised about the prepayment program, Real Estate Services staff sent each lessee a question and answer bulletin.

In May 2000, Council approved an extension of the right to prepay at the 1997 rates for an additional 18 months until December 31, 2001and confirmed that the prepayment program would end as of December 31, 2001.

PRESENT SITUATION

On December 15, 2000, the False Creek Leaseholders Action Committee ("FLAC") commenced legal action against the City regarding the City's voluntary lease prepayment program, although the City has not been served with the writ.

In a June 18, 2001 meeting with the Deputy City Manager and the Assistant Director of Legal Services, FLAC requested the opportunity to appear before Council to present and discuss the following issues:

1. the advantages to both the leaseholders and the City in having fee simple title to the lands transferred to the leaseholders; but if Council were to decide to not dispose of the lands

2. why the City should agree to binding arbitration to set the prepayment amounts; and thirdly

3. why FLAC sees advantage in simply proceeding with the court action.

On July 12, 2001 the City Manager sent a letter to all False Creek Leaseholders who had not originally prepaid outlining the City's position on both the arbitration and freehold options, and offering the first available Committee meeting for Council to hear from the Leaseholders.

CONCLUSION

The City of Vancouver was approached by the strata corporations representing the lessees on City land in False Creek to offer a lease prepayment program. As the leases between the City and the False Creek lessees did not have a prepayment option, any program offered would be at the discretion of the City and completely voluntary for the tenants. The City, in offering the program, had to consider a prepayment amount high enough for the City to forego at the time a 47 plus year income stream with rent hikes to market every 10 years after the initial 30 year period for the vast majority of the leases. Once there was agreement between City staff and its consultants on the formula for calculating prepayment, the appraisers produced an independent prepayment amount for each lessee. Vancouver City Council and staff made it clear from the beginning of the voluntary prepayment program that the prepayment amounts were not negotiable, however, errors in fact such as suite size, lease terms, etc. would be corrected. In June 2000, Council approved a modification to the prepayment amounts for 3 strata lots and refunds, with interest, to 35 units to correct survey inconsistencies between stratas.

Since the program started in 1993 167 of 376 lessees have prepaid.

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