ADMINISTRATIVE REPORT
Date: May 15, 1996
Dept. File No. D 583
TO: Vancouver City Council
FROM: Manager of Real Estate in consultation with the Director
of Legal Services
SUBJECT: Fraser Pointe II - 3083 E. North Kent Avenue:
Long Term Lease to VLC Leaseholds Ltd.
CONSIDERATION
THAT Council agree to amend the lease as follows:
(a) to allow the tenant to terminate the lease at any time (rather
than after the 60th anniversary) if damage exceeds 25% of the
value of the building;
(b) to compensate the City for the concession in (a):
(i) the six month period for demolition following damage or
destruction shall be shortened to ninety days;
(ii) if the lease is terminated because of damage to the
building, in addition to the payments already called for
in the lease and regardless of whether there is insurance
money available, the tenant shall also pay the City:
1. the amount of the cumulative replacement (repair)
reserves as of the date of the damage (This is in
additional to paying a like amount to the extent that
insurance proceeds allow after paying off the mortgage
and clean up costs. This shall not apply to a lender
who comes to hold the lease.);
2. an amount equal to 1/2 of the gross income of the
building for the last calendar year prior to the
damage; and
3. if demolition is not completed within ninety days then
as of the 91st day and until demolition is complete
the tenant shall pay daily 8% of the assessed value of
the land and buildings for the year prior to the
damage divided by 365.
None of (b) shall apply to CMHC if it comes to hold the lease;
(c) leasehold mortgagee to receive notice of termination for
failure to commence or complete construction and right to
participate in arbitration if affected.
GENERAL MANAGER'S COMMENTS
The General Manager of Corporate Services RECOMMENDS approval of
the foregoing.
COUNCIL POLICY
When Council approved various options to lease to VLC Properties
Ltd. (as it was then named) on August 31, 1989 Council approved
certain features of the participation-rent leases to be granted.
Relevant here is that each lease must be for 80 years and not until
the 61st year does VLC have the right to terminate if damage exceeds
25% of the value of the building.
On June 14, and December 6, 1994 Council approved a similar request
from VLC for the 26th and Nanaimo project lease and the Collingwood
Village lease, respectively.
PURPOSE
This report presents to Council VLC's request to modify the lease so
that VLC can obtain from CMHC the mortgage insurance required for
re-financing the current high ratio mortgage for this project. The
proposed lease amendments are presented as a package; they should be
wholly adopted or rejected.
BACKGROUND
When Council approved the VLC participation rent leases on August 31,
1989 it was understood that at the beginning and perhaps for some time
the rental return would be modest. To make the City's participation
worthwhile, until the 60th anniversary, VLC was denied the right to
terminate the lease if the buildings were damaged greater than 25% of
their value.
DISCUSSION
VLC is re-financing the current high-ratio mortgage on the Fraser Point
II project. As a condition of qualifying for high ratio financing, the
lender insists on mortgage insurance from CMHC. CMHC will not insure the
mortgage unless the lease terms conform to CMHC requirements. As a
matter of course, CMHC requirements are in our social housing leases.
However, this VLC participation rent lease does not meet CMHC
requirements. The CMHC requirement relevant here is that the tenant can
terminate the lease whenever building damage exceeds 25% of its value.
VLC has requested a modification of the current lease to conform to the
above described CMHC requirements.
The CMHC requirement on termination following damage enhances the risk
of the City's rent being interrupted, or terminated much earlier than
expected and significant delay in reestablishing a return from the site.
To compensate for this, it is appropriate for the City to require from
VLC additional financial concessions upon termination, as proposed for
Council's consideration. As well, with the mortgage insurance, VLC will
achieve a mortgage rate 1.105% lower than the current mortgage on
refinancing of the project, and the benefit of the lower rate would
ensue for 17 years. However, there will be an insurance premium charged
by CMHC at 1.75% of the loan amount, and the premium will be offset by
the loanrate reduction for an 18-month period. The refinancing would
have a net benefit to the City and VLC of a lower debt service payment
for about 15 years.
The proposed amendments are similar to those approved by Council in the
case of 26th and Nanaimo and Collingwood Village leases.
In the case of 26th and Nanaimo, an extra concession was obtained from
VLC and that is the CMHC insurance premium will not be a building
expense or a cost which will reduce the City's rent. This is reasonable
in that particular circumstance where VLC was also requesting
flexibility in the construction of the townhouse portion of the project,
which relaxation was approved by Council. Otherwise, the current lease
already permits the increase of development costs due to financing cost
and therefore the model used in the Collingwood Village lease
modification is presented here for Council's consideration.
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