No proper business case was done for $224M MaRS loan, opposition says

TORONTO – Scores of documents released Thursday by the Ontario government failed to convince the opposition parties that the Liberals did a proper business evaluation before granting a $224-million loan to a troubled Toronto real estate project.

The Progressive Conservatives and the New Democrats have been calling on the government for weeks to release a business case for the loan that Infrastructure Ontario granted for the MaRS Phase 2 office tower in 2011.

The released documents included an appraisal for the tower, a debt service guarantee and the financing agreement, which the Liberals say essentially comprise a business case.

But Tory MPP Randy Hillier said those don’t add up to a business case.

“We had some suspicion that they had not done their due diligence and hadn’t evaluated this on any merits and it’s clear so far from the released documents that we were right.”

Construction of MaRS Phase 2 was halted in 2008, when the recession hit, and resumed in 2011, but the building has had trouble attracting tenants. MaRS didn’t originally qualify for a loan under Infrastructure Ontario’s rules, so the government has said that in 2010 the regulations were changed to ensure MaRS was eligible.

NDP house leader Gilles Bisson suggested the government wanted to give an appearance of transparency with release of the documents, but didn’t actually show how the loan was approved.

“There are municipalities across this province that tried to get approved under Infrastructure Ontario,” he said. “They couldn’t qualify and the government moved heaven and earth in order to qualify this loan without having the business case…I think it’s a question where the government really wanted to do this and they didn’t have the proper business case in the first place to go forward.”

Infrastructure Minister Brad Duguid insisted the paperwork released Thursday equals a business case.

“It’s unfortunate that Randy Hillier doesn’t seem to know that a business case for a loan comprises of a value assessment and a secure creditor, which are included in this package of documents,” he said in a statement. “Mr. Hillier also conveniently leaves out the fact that the loan is repayable, including all interest accrued.”

The 2010 appraisal of the MaRS medical research office tower valued the project at about $380 million, but only if they could rent out 80 per cent of the building.

That has not happened, and the tower still sits mostly empty. MaRS and the developer have been unable to repay the loan and the province now has to pay interest of up to $7.1 million a year — for up to 15 years — on it until an agreement on the future of the new tower is finalized.

The government has blamed high rents the American company was charging for why it had trouble attracting tenants. Infrastructure Minister Brad Duguid has said that buying out Alexandria Real Estate’s share of MaRS for $65 million gives the province the authority to manage and operate the facility and the flexibility to set rents at a more attractive rate.

But the appraisal done by Altus Group, while listing various strengths, also cited several weaknesses, including that the special-use nature of the office space could limit leasing demand.

“The (Greater Toronto Area) office leasing market has softened over the last 12 months as a result of the negative effects of the recession,” the appraisal said.

It also noted that the investment market weakened substantially over the past year due to the tightening of the credit markets, but pointed to recent benchmark transactions indicating a stabilizing trend.

Hillier said he would have thought there would have been more thorough evaluations done to see whether there is a market for the special-use medical office space.

“There doesn’t appear to be a market for that building,” he said. “Who else throws around hundreds of millions of dollars without actually doing an analysis, an evaluation of the expenditure?”

The Liberals have said taxpayers won’t lose in the long run because the MaRS office tower is worth more than the $309 million the province has laid out so far, but the opposition parties worry the final bill will be a lot higher.