town of bancroft building bancroft project...208 person years of employment and $11.2 million in...

Town of Bancroft

Building Bancroft ProjectPresentation to the Project Committee

June 9th, 2010

Table of Contents

• Disclaimer 2

• Introduction 3

• Peer Review of PKF Report 8

• Financial analysis 9

• Market sounding 13

• Risk assessment 15

• Conclusions 18

© Deloitte & Touche LLP and affiliated entities.1 Town of Bancroft - Building Bancroft Project CONFIDENTIAL

Disclaimer

• This report is for internal use only by the Town of Bancroft. It is not intended to be used for external purposes or by third parties. The results of this report are intended to assist the Town of Bancroft in making management decisions with respect to the Building Bancroft Project.

• The estimated capital and operating budgets are based on current assumptions. The budgets are compiled from information provided by a variety of sources and we have not evaluated the support for the assumptions or other information underlying the information.

• The underlying assumptions may change, subsequent to this report date, and changes will have an impact on our analysis and results. We take no responsibility for updating our analysis after the date of

© Deloitte & Touche LLP and affiliated entities.

impact on our analysis and results. We take no responsibility for updating our analysis after the date of this report. Additionally, since these assumptions reflect anticipated future events, actual results may vary from the information presented and these variations may be material. As such, we do not provide any opinions or any other form of assurance on the financial estimates.

2 Town of Bancroft - Building Bancroft Project CONFIDENTIAL

IntroductionTown of Bancroft’s economic situation

• Over the past 5 years, the Town of Bancroft’s tax revenues have increased an average of 9.4% per year. These increases are attributed to a mix of increases in tax rates and the tax assessment base. The increase in the tax rate specifically has been in the range of 2-3% annually and has been required to meet increases in operating expenses and capital funding requirements.

• The Town of Bancroft senior staff and the Building Bancroft project staff (collectively the “Project Team”) have completed an initial analysis of Town’s current economic situation1:

Item 2006 2007 2008

Cumulative Annual Growth -0.5% -1.2% -5.3%

Surplus/Deficit as % of Own Purpose Taxation 10% 1.7% -7.1%


• The Town of Bancroft is experiencing a negative Cumulative Growth Rate of -5.3% which illustrates that municipal expenses are growing significantly faster than revenues. This is significantly higher than the municipal comparison average of 0.67%.2

• Based on the 2008 Financial Information Return, the Town’s debt burden per household is 37%2 higher than the average debt burden for similar municipalities to Bancroft. The Town estimates that its position will remain at a moderate rating in the 2009 evaluation and will increase to a high rating in 2010.

• Building permit revenues have declined, largely attributable to a decline in Residential development. From 2003 to 2008 the residential building permit revenues decreased in excess of 450%2.

• The Town of Bancroft’s population has decreased 6.1% for the period 2001 to 2006, with the median age being 47 as compared to 39 in Ontario2.

1 - Excerpt from the Ministry of Municipal Affairs and Housing Financial Indicator Review, based on 2008 Financial Information Return.

2 – Building Bancroft Economic Report

Surplus/Deficit as % of Own Purpose Taxation 10% 1.7% -7.1%

Total Debt Burden per Household $247 $463 $817


IntroductionTown of Bancroft’s economic situation

• The Town Treasurer forecasts continued increases of at least 4% year over year in the Town’s operational spend and there has been an identified need for an initial capital spend in the range of $15M1 to sustain the town’s infrastructure.

• Without additional revenue sources or an increase in the tax base, it is anticipated that tax rates will continue to rise and the town’s economic condition will continue to decline.

• The objective of the Building Bancroft project is to address the current economic situation in the Town of Bancroft by generating direct benefits to the Town.

1 - Consists of $5M for geothermal heating and cooling plant.

© Deloitte & Touche LLP and affiliated entities.4 Town of Bancroft - Building Bancroft Project CONFIDENTIAL

IntroductionBuilding Bancroft – Expected Benefits

• The PKF Integrated Business Plan identified a number of Economic Impacts associated with the Building Bancroft project1. They include:

• Direct incremental property tax revenues of $93,000 per year;• Expected increase in visitors of 10% (or 16,000 visitors), generating $2M per year in new expenditures;• Development impacts from the project will generate direct impacts of $20M in GDP, $14.1M in labour income,

208 person years of employment and $11.2 million in direct tax revenues to Hastings County; and• Direct benefits of $21.7M in GDP, $15.2M in labour income, 221 person years of employment and $11.8M

in direct tax revenues to the Province.

• In addition to the above noted benefits, Deloitte noted that the operations of each of the hotel, community facility, heritage attraction and library, retail/commercial development and medical centre will give rise to annual economic


heritage attraction and library, retail/commercial development and medical centre will give rise to annual economic impacts as summarized below:

• Additional one time revenues are expected from various development charges and permit fees in the amount of $0.5M.

• 1 - The benefits are estimated using the Ontario Ministry of Tourism’s Tourism Regional Economic Impact Model (“TREIM”).


Project Component Spending Employment Income Employment Taxes

Hotel $1.365 million $0.425 million 20 person years $0.425 million

Community Facility $0.335 million $0.15 million 5 person years $0.095 million

Heritage Attraction and Library

$0.535 million $0.24 million 10 person years $0.155 million

Retail/Commercial/Medical $0.3 million $0.135 million 5 person years $0.085 million

TOTAL $2.53 million $0.95 million 35 person years $0.755 million

IntroductionThe Building Bancroft project

• The Building Bancroft project is an extensive re-development of the downtown core of the Town of Bancroft, based on a private/public partnership, which will ensure the long-term economic and environmental sustainability of the broader community.

• The vision is to provide amenities, attractions, services and entertainment facilities that will appeal to current residents, attract new seasonal and permanent residents, and attract visitors to the Town of Bancroft as a year-round tourism destination, in order to ensure the long-term economic and environmental sustainability of the regional community.1

• To achieve this vision, the key components of the

Public Sector Private Sector

Heritage Attraction & Library


• To achieve this vision, the key components of the development currently include:

– Heritage attraction and library

– Town Centre

– Community Facility

– Hotel

– Retail/Commercial

– Medical clinic

– Residential condominiums

• The chart on the right depicts the categorization of each development in terms of ownership and operations.


1 - http://bancroftregion.com/default.cfm?id=3

2 - The public sector will own the facility and be responsible for the initial capital costs and ongoing lifecycle maintenance obligations while the private sector will be responsible for the operations of the facility, including collection of revenues and payment of all operating costs.

Heritage Attraction & Library

Town Centre

Community Facility2

Hotel

Retail/ Commercial

Medical

Residential

IntroductionDeloitte’s scope of work

• The Town of Bancroft invested a significant amount of effort to date to develop a business case for the Building Bancroft project. Specifically, they have engaged consultants1 to provide:

– Master concept plans;

– Capital and operating cost estimates for each development;

– Engineering work to identify existing infrastructure need and requirements to support future developments;

– Market assessment for residential development;

– Market assessment of expected tourism generated from the heritage attraction; and

– Integrated Business plan to assess the viability of the project.

• The key findings of the work completed above were summarized in PKF’s Integrated Business Plan. They were:


– The land must be “development ready” to attract private investment;

– Except for the residential development, the private sector will need to acquire the land for their developments at no cost in order to achieve positive returns on their investment;

– Concerns exist over the viability of the hotel; and

– The Heritage Attraction is a key catalyst to attracting new visitors.

• Deloitte was engaged to build upon the work conducted above and to specifically review and assess:

– The PKF economic impact assessment and comment as a peer reviewer;

– The funding requirements and ongoing obligation to the Town of the public sector developments, taking into account ongoing lifecycle and maintenance obligations;

– The potential viability of the private sector developments – assessed through financial analysis and market sounding; and

– The risk to the Town of proceeding to seek funding partners.

1 – Including: PKF Consulting Inc., N. Barry Lyon Consultants Ltd, AW Hooker Associates Ltd, Lord Cultural Resources, Forrec Ltd, Greenview Environmental Management


Peer Review of PKF Integrated Business PlanSummary of findings

• Deloitte was engaged to conduct a peer review on PKF’s Integrated Business Plan, dated April 2010.

• The results of our peer review are:

– The methodology and approach utilized by PKF in assessing the economic impact associated with the Building Bancroft project was reasonable;

– There is a risk that if the underlying assumptions do not materialize, the project will not be viable. The key assumptions in the PKF report include:

• Securing the LCBO and Post Office as anchor tenants in the Retail/Commercial development;

• Enticing a developer to take on both the Residential and Hotel developments by providing land in kind; and


• Enticing a developer to take on both the Residential and Hotel developments by providing land in kind; and

• Attracting the required number of visitors to the Heritage Attraction.

– In addition to the direct benefits identified by PKF Consulting Inc., it is anticipated that an additional $2.5M in ongoing economic impacts could be generated.


Project Component Spending Employment Income Employment Taxes

Hotel $1.365 million $0.425 million 20 person years $0.425 million

Community Facility $0.335 million $0.15 million 5 person years $0.095 million


$0.535 million $0.24 million 10 person years $0.155 million

Retail/Commercial/Medical $0.3 million $0.135 million 5 person years $0.085 million

TOTAL $2.53 million $0.95 million 35 person years $0.755 million

Financial AnalysisPublic Sector’s initial capital funding obligation

• A Base Case financial model was developed and consolidated based on the assumptions and findings of various consultants’ reports to answer the question: For the public sector developments, that is the Heritage Attraction and Library, Town Centre, Community Facility and infrastructure and site work, what is the Public Sector’s total

capital funding requirement and ongoing funding obligation?

• The Base Case assumes the following, in line with PKF’s Integrated Business Plan:

• On-site infrastructure work for all developments will be funded by the public sector. This is a requirement to attract private investors to make the project “development-ready”;

• The public sector will acquire the land for all public and private developments, with the exception of the residential land, and use this in negotiations with the private sector as a potential source of contribution; and

• The Heritage Attraction’s operating costs will be funded entirely through a partnership arrangement with Ontario Parks, a branch of the Ministry of Natural Resources that administers the provincial parks in Ontario, Canada.


the Ministry of Natural Resources that administers the provincial parks in Ontario, Canada.

• The initial capital funding requirement is approximately $50M. This includes the cost for land acquisition, infrastructure and site works, and soft and hard construction.


$13.6M

$7.2M$5.7M

$14.7M

$6.7M

$1.9M


Financial AnalysisPublic Sector’s ongoing funding obligation

• It is anticipated that, during the operating period, sufficient cash flows would be generated to cover operating costs and lifecycle and maintenance obligations for all three of the public developments – i.e. Heritage Attraction and Library, Town Centre and Community Facility.

-

500,000

1,000,000

1,500,000

2,000,000

CD

N $

Operating Gap (Excess) for all public sector's developments(Heritage Attraction and Library, Town Centre and Community Facility)


• The Base Case financial analysis indicates that there is no expected increased obligation to the Town of Bancroft with respect to this project provided that:

• The Town obtains funding from provincial and federal governments in the amount of $50M to cover the initial funding requirement;

• Ontario Parks acts as a funding partner and agrees to pay for the ongoing obligations associated with the Heritage Attraction; and

• Revenues from the public developments are generated as expected.


-

Operating Years

Total operating cost Total lifecycle maintenance cost Total revenue

Financial AnalysisPrivate sector developments

• For the private sector developments, that is the Hotel, Retail/Commercial, Medical Clinic and Residential Development, the Base Case financial model has been developed based on the assumptions and findings of various consultants’ reports.

• The key question the base case attempts to answer is “Will the commercial developments generate sufficient returns to attract private investors?”

• The Base Case assumes the following:

• On-site infrastructure work for all developments is funded by the public sector. This is a requirement to attract private investors to make the project “development-ready”;

• In negotiations with the public sector, all land required will be contributed to the private sector, with the exception


• In negotiations with the public sector, all land required will be contributed to the private sector, with the exception of the residential land;

• Future tenants in the retail / commercial complex and medical clinic will pay economic lease rates, i.e. lease rates that are projected to be higher than market value;

• The LCBO and Post Office will relocate to the new retail commercial site and will pay their own cost of relocation; and

• The Hotel operator must also fund the operations of the Community Facility.


Financial AnalysisPrivate sector developments

• The expected return on investment and developer’s profit for the private sector developments are summarized below:

Hotel

7.7%

Retail / Commercial Medical Residential

6.5% 4.8% $1.8M

Base Case

Returns on Investment Developer’s Profit


• The results indicate an expected positive return of investment in the range of 5-8%, and in the case of the Residential Development, an expected developer’s profit of $1.8M over expected costs of $10.5M.

• This positive return is expected provided that:

– The public sector ensures the proposed sites are “development ready” by injecting the necessary funding to improve the site infrastructure;

– The public and private sector negotiate the contribution of the land for the Hotel, Retail/Commercial and Medical developments in recognition of the anticipated economic impact of this private sector investment; and

– Tenants are willing to pay economic lease rates which are in excess of current market rates.

• Even with an expected positive return, the quantum of the returns are lower than would be typically required by private investors.


Market Sounding Private sector insights

• Deloitte conducted a confidential market sounding with local, regional and Toronto developers in order to gain insight from potential private investors as to their interest and ability to undertake some or all of the developments identified in the Building Bancroft project.

• These confidential market sounding discussions were held with six (6) private sector participants: two (2) Local/Regional Developers with regional knowledge of the Bancroft area; two (2) large active P3 Developer operating across Canada; one (1) Toronto-based developer; and the developer who has signed a MOU with the Town of Bancroft for the development of the Building Bancroft project (Evanco Properties).

• The discussions with these Developers focused on six broad areas:

– Potential developments;


– Potential developments;

– Development approach;

– Financing and payment issues;

– Risks to the project;

– Timeline; and

– Other.


Market Sounding Private sector insights

• The key findings are:

– Preliminary interest exists amongst some developers to develop one or more of the private sector developments provided key risks are addressed such as securing stable and reliable long term tenants, for example the LCBO and the Post Office, for the Retail/Commercial development.

– Developers will need to perform their own due diligence and satisfy themselves as to the attractiveness of the development opportunities comprised within the Building Bancroft project.

– Developers typically expect a return in the range of 10-35% on their investment, depending on the extent to which key risks are mitigated (i.e. 10% return is a minimum for those developments that are relatively lower risk);

– There is a perception that the Town is fractured with respect to support for the project, which adds uncertainty and risk to the project.

– To be successful, the project requires the articulation of a clear and coherent vision which should come from the


– To be successful, the project requires the articulation of a clear and coherent vision which should come from the Town and also, requires the Town to assist in the developments (e.g. facilitation/expediting of required permits/approvals; provision of geotechnical, environmental and other due diligence reports to interested developers; promotion of the different components of the Project, etc.)

– Generally, developers would prefer to see the public developments being built prior to investing in the private developments as a means of assessing the impact of the public developments on visitors and to establish some Project momentum.

– Generally, developers do not see any of the private developments being completed within three (3) years, and predict that the entire Project would take approximately three (3) to seven (7) years.


Risk AssessmentResults of the initial assessment process

• A key driver in the success of this project is the ability of the Town to secure funding partners in various phases of the project:

– Public sector funding is required as the Town continues to explore development options and apply for capital funding sources;

– Public sector funding is required to pay for the entire capital cost of the public developments and the infrastructure and site works;

– Private sector investment is required to develop the commercial developments; and

– Ongoing public sector funding is required to sustain the operations of the Heritage Attraction.

• The next phase will be critical to the success of this project. In the next phase, the Town will seek to secure the funding


• The next phase will be critical to the success of this project. In the next phase, the Town will seek to secure the funding partners described above.

• The Building Bancroft Project Team and Deloitte have undertaken a risk assessment process to answer the question, What is the risk to the Town of proceeding to the next phase?


• Phase 1 – Current Phase

• Defining the project, establishing Business Case and Project risk assessment – ends on June 30, 2010 (efforts fully funded to that date)

• Phase 2 – Funding Search Phase

• Seeking support from government/public and private partners

• Continuing engineering work, regional tourism promotion efforts and various other supportive activities


• The initial risk assessment identified three key risks in the current phase. The risk of Community Support and Availability of Funding were seen as those risks which required mitigating strategies in place.

• The risks in the current phase must be mitigated and addressed before the Project Team can proceed to the next phase.

ID #

Category/Risk Mitigating Strategies

Phase 1 – Current Phase

1

Community Support: Risk that support for the project is not sufficient to obtain council approval to move to the next phase.

Community education and communication on the vision and objectives of the Build Bancroft project. Continued due diligence on the part of the Town to explore various options and implications of this project. Engagement of third parties to validate and/or provide input necessary to build a business case.


1phase. parties to validate and/or provide input necessary to build a business case.

Conduct risk assessment to identify risks and understand the implications and potential mitigation strategies.

2

Availability of Funding: Risk that the Town does not obtain additional funding to proceed to the next phase of concept development and project planning (i.e. RED).

Work directly with RED on the Town’s application for funding to increase chances of success. Apply to other funding sources as a backup if RED funding is not received. Engage in early discussions with various government agency to solicit input and support early on.

3

Scheduling: Risk that the final business case analysis and risk assessment will take longer than anticipated resulting in a delay in the project.

Low probability and low impact of risk - implications are minimal. Town will continue to monitor progress against schedule and reassess risk if circumstances change.

The Project Team are currently engaged in the mitigation strategy activities identified above. It is expected that the work will continue to the end of June on a variety of activities.



• If the risks in the current phase are appropriately mitigated (i.e. Town Council supports the project and RED funding is obtained to continue to explore development options) it is expected that a decision to proceed to the Funding Search Phase would present a low risk to the Town.

• A total of 20 risks were identified in the Funding Search Phase. If the decision is made to proceed to the next phase, the Project Team will need to mitigate risks identified as “high”. These include mainly:

– Availability and sufficiency of public sector funding for both capital and operating requirements;

– Risk of municipal election impacting decision making ability and/or support for the project; and

– Risk that private developments are not viable due to inability to attract anchor tenants.


– Risk that private developments are not viable due to inability to attract anchor tenants.

• It is anticipated that the next steps to mitigate the risks identified above will include:

– Additional due diligence to qualitatively and quantitatively (as possible) assess the benefits and risks of the project; and

– Focused discussions with key partners (i.e. funding partners and operating partners) to refine the project details and address the risks identified.


Conclusions

• After completing our analysis, our overall conclusions are:

1. The economic impact assessment conducted by PKF Consulting is reasonable. In addition to the direct benefits identified in that report, it is anticipated that economic impacts associated with the operations of the hotel, community facility, heritage attraction and library, retail/commercial and medical clinic could provide $2.5M in direct and indirect GDP impacts, $950,000 in direct and indirect employment income impacts, 35 person years of employment and $755,000 in total tax revenues to government.

2. There is no anticipated increased obligation to the Town of Bancroft with respect to this project provided that:

– the Town obtains funding from provincial and federal governments in the amount of $50M to cover the initial funding requirement; and


funding requirement; and

– Ontario Parks acts as a funding partner and agrees to pay for the ongoing obligations associated with the Heritage Attraction.

3. There are anticipated positive returns on investment for the private developments provided that:

– the public sector ensures the proposed sites are “development ready” by injecting the necessary funding to improve the site infrastructure;

– the public and private sector negotiate the contribution of the land for the Hotel, Retail/Commercial and Medical developments in recognition of the anticipated economic impact of this private sector investment; and

– tenants pay economic lease rates which are higher than current market rates.


Conclusions

4. Based on the scenario testing, the key risks moving forward are:

– Failing to secure a funding partner to cover all of the ongoing operating costs associated with the Heritage Attraction as this is likely to result in a burden to the Town’s taxpayers; and

– Increases in cost estimates (initial capital and ongoing lifecycle and maintenance) may lead to a funding gap which the Town would be obligated to cover.

5. The market sounding revealed some interest by developers in participating in the project, however:

– there is a perception that the Town is fractured with respect to support for the project, which adds uncertainty and risk to the project;

– expectations for returns on investment are greater than the anticipated returns in the base case; and

– there is a preference for a phased approach whereby the public sector developments are built first.


– there is a preference for a phased approach whereby the public sector developments are built first.

6. The next phase of this project, seeking and securing funding partners, is key to the feasibility of this project. A risk assessment process has identified a preliminary list of risks to be mitigated in the current phase. Provided that these risks are mitigated, there is a low risk to the Town of proceeding to seek and secure funding partners.

– the due diligence being conducted currently will provide insight to the Town to allow them to package the project for the best possible chance of obtaining funding; and

– provided that RED funding or other funding is obtained, there is no financial obligation to the Town in the next phase.


Our recommendation is to proceed to the next phase of this project to determine if public sector funding is available in the amount required and to determine if

private sector developers will invest.

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