Lansdowne Live – Financial

Model Review

Lorne Cutler, P.Eng., MBA

November 13, 2009.
Lorne Cutler, P.Eng., MBA November 2009 1
 Financial Model
• City has indicated it wants project to be
financially neutral but model yet to be
tested
• PriceWaterhouse Coopers (PWC)
prepared model but never measured
sensitivity or likelihood
• A prudent investor always investigates
sensitivity upfront before proceeding
Lorne Cutler, P.Eng., MBA November 2009 2
 Financial Model
• Purpose of sensitivity analysis is to
understand what could happen
• Sensitivity analysis is easy, assigning
probabilities is harder
• Not enough information available to model
the Waterfall – either take it or leave it
• My sensitivity model of City’s cash flows
show this project is highly unlikely to be
“revenue neutral”
Lorne Cutler, P.Eng., MBA November 2009 3
 Cost of Doing Nothing
• Over past five years, City spent $2 million annually to subsidize
Lansdowne
• Going forward City claims it must spend $3.8 million per year for next ten
years. Not clear what will be spent after year 10.
• Have these amounts ever been independently substantiated?

• Cost of $3.8 million per year over 10 years and $2.0 million thereafter is
$43.5 million*
• Cost of $3.8 million per year over 40 years is $57.5 million*

* Based on Net Present Value (NPV) at 6% discount rate

Lorne Cutler, P.Eng., MBA November 2009 4

 Best Case Scenario
• Only one scenario considered to date by City
• Assumptions
– Interest rates stay at historic low of 5.35%
– Capital Cost stays at $129.3 million
– 40 year financing
– TIF financing – 75% for commercial property taxes

• Based on assumptions, cost of Lansdowne Live project over 40 years is $62

million without Waterfall revenue and $43.7 million with full Waterfall revenue*
• Barely less expensive than Do Nothing scenario and only if Waterfall works for
City

* Based on Net Present Value (NPV) at 6% discount rate

Lorne Cutler, P.Eng., MBA November 2009 5

Impact of Interest Rate Increases
• Interest rates are currently at record lows
• City will not borrow for 2 to 4 years
• Most economists predict rates will go up
• Ontario’s credit rating downgraded two weeks
ago which increases borrowing costs
• For every 1% increase in interest rates, City’s
cost increases by about $15 million* based on
$129.3 million capital cost

* Based on Net Present Value (NPV) at 6% discount rate

Lorne Cutler, P.Eng., MBA November 2009 6

 Impact of Capital Cost Increases
• OSEG not guaranteeing cost overruns over $129.3
million
• OSEG guaranteeing cost overruns on actual bid prices
received in 2 year’s time
• Every $10 million in additional capital costs, results in
project costing $10.8 million in additional financing costs
for City based on 5.35% interest rate.* Annual
repayments rise by $780,000.
• Capital costs don’t include City’s cost to relocate trade
show facilities

* Based on Net Present Value (NPV) at 6% discount rate

Lorne Cutler, P.Eng., MBA November 2009 7
 Impact of Foregone Rent
• City foregoing rent on site for 30 years
• Every million dollars in rent received
annually would decrease the City’s cost by
$13.9 million.*
• Give up Waterfall, Charge Rent! – A sure
thing

* Based on Net Present Value (NPV) at 6% discount rate

Lorne Cutler, P.Eng., MBA November 2009 8

 Impact of Ongoing Support for
Trade Shows
• Every million dollars in potential annual
subsidies to relocated trade show facilities will
cost the City $15 million over 40 years

* Based on Net Present Value (NPV) at 6% discount rate

Lorne Cutler, P.Eng., MBA November 2009 9

 Conclusion
• Interest rates that are currently at record lows are
expected to rise over next 2 to 4 years
• Difficult to predict capital costs one to two years in
advance of obtaining actual bids. City of Ottawa’s ability
to accurately predict capital costs is not strong
• City’s financing model for LLP does not include capital or
operating costs of trade show facilities which are funded
in the Do Nothing scenario.
• Waterfall revenue is a poor tradeoff for rent
• Based on high probably of interest rate increases,
capital cost increases and additional support for trade
shows, Lansdowne Live will not be revenue neutral!

Lorne Cutler, P.Eng., MBA November 2009 10