November 19, 1999

To: Administration Committee

From: Acting Commissioner of Corporate Services

Subject: Lease of No. 1 Front Street East to Privatized Hummingbird Performing Arts Centre Corporation (Ward 24: Downtown)

Purpose:

To authorize a lease with the privatized Hummingbird Performing Arts Centre Corporation ("HPACC") for the City-owned premises at No.1 Front Street East (the "Property").

Financial Implications and Impact Statement:

The lease of the Property for $1.00 per annum (plus operating costs and all taxes) constitutes a municipal grant to HPACC. The Chief Financial Officer and Treasurer has reviewed this report and concurs with the financial impact statement.

Recommendations:

It is recommended that:

(1) authority be granted for the execution of a lease with HPACC for the Property as well as for such other ancillary documentation as may be deemed by City staff to be necessary or desirable, all to be generally on the terms and conditions outlined in the body of this report and on such other terms and conditions otherwise satisfactory to the Acting Commissioner of Corporate Services and in a form satisfactory to the City Solicitor;

(2) the Chief Financial Officer and Treasurer be directed to transfer the balance of the Stabilization Reserve Fund to HPACC upon execution of the Lease; and

(3) the appropriate City officials be authorized and directed to take the necessary action to give effect to the foregoing.

Background:

The lands and performing arts facility located at No. 1 Front Street East (the "Property") was acquired on September 2, 1977 by The (former) Municipality of Metropolitan Toronto upon the payment of an amount equivalent to that which had been paid by the Carling O'Keefe Breweries for the land alone some ten years earlier, namely, $2,750,000.00. Accordingly, the premises (both land and building) are currently in the ownership of the City. The Property has been managed by a statutory Board, the rights and responsibilities of which were formerly delineated in the Municipality of Metropolitan Toronto Act and are now embodied in the City of Toronto Act, 1997 (No. 2). Except for the purposes of OMERS and, more recently, the section of the Municipal Act related to the provision of municipal capital facilities, the Board is not a local board of the City. The current statutory regime does provide, however, that the City is entitled to: establish the size and composition of the Board, receive any surplus resulting from the Board's activities, and establish general policies to be followed by the Board. The Board's accounts and transactions are to be audited by the City Auditor, and the City is responsible for any Board deficits.

By its adoption of Clause No (1) of Report No. 6 of the Environment and Public Space Committee at its meeting held on April 24, 1996, a copy of which is attached as Appendix 1, the Council of the former Municipality of Metropolitan Toronto approved of the restructuring of the relationship between the (then) Metropolitan Corporation and the (then) Board of Management of the O'Keefe Centre as set out in the document entitled "Report and Business Plan for the Board of Management of the O'Keefe Centre for the Performing Arts (December, 1995)" attached to the report (January 2, 1996) of the General Manager of the O'Keefe Centre, as amended by the transitional steps outlined in the body of such report, to be implemented substantially in accordance with the model described in the draft legislation attached as Appendix "B" to such report; and, further, granted authority for a request to be made to the Province of Ontario to enact legislation to give effect to such recommendation, substantially in the form of the relevant Appendix to such report; and, further, authorized the Metropolitan Solicitor, upon receipt of favourable written indication from Provincial officials relating to the request for such legislation to commence preparation of a draft Lease to the restructured Board for the premises at 1 Front Street East, Toronto, the details of which were to form a future report to Council for its consideration. It is that report relating to the proposed lease which is before you now.

As an interim restructuring step (ie. while efforts to secure provincial legislation were underway), by its adoption of Clause No (4) of Report No. 15 of the Environment and Public Space Committee entitled "O'Keefe Board: Revisions to Name and Composition" at its meeting held on October 9 and 10, 1996, the former Municipality of Metropolitan Toronto changed the name of The Board of Management of the O'Keefe Centre to "The Board of Directors of the Hummingbird Centre for the Performing Arts" and, pursuant to Ontario Regulation 214/96, increased the number of members on the Board from 7 to 12, as well as revised the composition of the Board, such that one member was to be appointed from each of the National Ballet of Canada ("NBC") and from the Canadian Opera Company ("COC") so long as NBC and COC, respectively, continued to be in residence in the Centre, with the ten remaining appointments to the Board to continue to be made by Council, of which up to three members could be appointed from among non-members of Council; and proceeded to appoint citizen members to each of those three Board positions. Accordingly, 7 of the 12 Board Members are currently City Councillors. Metro By-law No. 133-96 implementing the changes to the Board name and composition was enacted accordingly.

By its adoption of Clause No (1) of Report No. 27 of the Strategic Policies and Priorities Committee at its meeting held on December 16 and 17, 1998 entitled "Future of the Hummingbird Centre - Enactment of the Proposed Hummingbird Legislation", the (new) City of Toronto granted authority to continue to pursue the process then engaged in by the City and the Board staff with the Province which would lead to the enactment of the proposed Hummingbird Centre legislation, based on the proposed model of legislation previously approved by the Council of the former Municipality of Metropolitan Toronto, and subject to the modifications outlined in the report (December 10, 1998) from the City Solicitor.

Ultimately, the Hummingbird Performing Arts Centre Corporation Act, 1998, (the "Act") was enacted by the Province of Ontario, effective as at December 18, 1998, a copy of which is attached as Appendix 2. This statute establishes a non-share capital corporation named "Hummingbird Performing Arts Centre Corporation" ("HPACC"), being a legal entity completely independent from the City, both legally and financially. The Board will be composed of 12 Directors, who are to serve without remuneration (except for the payment of reasonable expenses). The City will now have entitlement to appoint only 3 out of 12 Directors (compared to the current majority of 7 out of 12 Members). The statute is structured in such a way that should Council authorize the entering into of a lease, then HPACC would, as a result, become the operator of the Property. Until that time, or should Council determine not to approve a lease, then the current statutory Board under the City of Toronto Act, 1997 (No. 2) continues to be the operator/manager of the Property.

In addition, by Order in Council No. 368/99 dated February 24, 1999, the Province has designated HPACC as an "associated employer" within the meaning of the Ontario Municipal Employees Retirement System Act, thereby allowing HPACC employees to participate in OMERS.

Comments:

HPACC is desirous of moving forward with its initiatives as quickly as possible and has accordingly requested that City staff report on the proposed lease as early as possible. City staff has therefore put aside the actual lease negotiations and drafting to concentrate its efforts on the production of this report. City staff is prepared to proceed with a recommendation that authority be granted for the lease based on the prime business points listed below (it being recognized that there yet remains a substantial amount of work to be done in terms of drafting the finer points surrounding each of the main business item). However, given the timing constraints, while City staff does know HPACC's initial position on some of the business items discussed below, it is not in a position to say definitively with which of the points below HPACC is in agreement, and with which it is not.

Lease Duration:

In accordance with the subsisting Council authority, staff has conducted the negotiations based on a ten year term subject, at the City's option, to a renewal for a further ten year term.

Rent:

In accordance with the subsisting authority based upon the Business Plan submitted by the Board, staff have negotiated the rent to be on the basis of One Dollar ($1.00) per year, HPACC to be responsible for the payment of all operating costs.

Realty Taxes:

The lease would provide that HPACC be responsible for the payment of any and all taxes arising from its occupation of the Property. However, the overall intent, of course, is that the premises not become tax exigible as a result of the lease in question. The Province did not accede to City's staff request that the legislation incorporating HPACC provide that occupation by HPACC of the Property would be deemed to be occupation, management and control by the City (ie. for the purposes of the Assessment Act).

Nonetheless, subsequent amendments to the Assessment Act now provide for an exemption from property taxation for large theatres such as the HPACC so long that the theatre is not used, other than by a charitable or non-profit organizations, on a total of at least 183 days in the year to present live performances with the intention of generating a profit. The lease would require that the Property be continuously used solely for the purposes of furthering the objects under the Act (ie. for charitable purposes), and as such, the HPACC as tenant would be exempt from property taxation under section 3(27) of the Assessment Act.

Should the theatre be used other than by charitable and non-profit organizations for the purposes of generating a profit, for 183 or more days in a year, it would be subject to taxation on a pro-rated basis. At present, the maximum potential taxation is estimated to be $615,000 per annum. However, so long as the HPACC was furthering its objects as a charitable organization, Council would have the discretion, by by-law, to allow a deduction from any such taxes payable where the for-profit presentations are used to financially support its non-for profit operations. The Board's staff is confident that HPACC's operations will keep it within the requirements of the taxation exemption. The Chief Financial Officer and Treasurer is of the view that the provision of financial security to guard against the possibility of default in property taxes is unnecessary.

HPACC Revenues:

The restructured relationship results in HPACC being financially independent of the City, such that the City is no longer entitled to any of HPACC's surplus, nor is it responsible for any of HPACC's deficits. Accordingly, given the new relationship between HPACC and the City, the Stabilization Reserve Fund -- Hummingbird Centre for the Performing Arts ("SRF") established by the former Metropolitan Council by its adoption of Clause No (2) of Report No. 31 of the Financial Priorities Committee at its meeting held on December 18, 1996 into which was to be transferred any operating surplus of the Hummingbird Centre, for the purpose of offsetting operating deficits of the Hummingbird Centre, will be redundant. Accordingly, as contemplated by the Business Plan, it would be reasonable to transfer to HPACC any balance in the SRF once the lease has been executed.

Building Maintenance:

In 1996, a building audit report was prepared for the Board which reflected various items of capital maintenance and repair required to bring the Property up to useable and competitive state. The Business Plan indicated that private sector donations for such repairs would less likely be forthcoming where the facility was, in essence, simply an arm of government. The Business Plan presumed that a change in governance would assist in the solicitation of private funding. The Business Plan, prepared and based on the Board's projections (related to, among other things, ticket surcharges and receipt of the capital installment payments from the naming sponsorship) indicated that the required repairs could be brought up-to-date in approximately five years. Since then, the Board has proceeded with certain repairs and improvements in accordance with the building audit.

The maintenance and repair of the Property, both operating and capital, will be the responsibility of HPACC during the term of the lease, at HPACC's sole expense. HPACC will prepare an initial five year capital plan, to be subject to the approval of the Commissioner of Corporate Services, such plan to be reviewed annually. The Commissioner of Corporate Services will be entitled to perform an annual inspection to determine the level of compliance with the approved capital plan. HPACC has requested that it not be responsible for various types of building defects. City staff is of the view that it is reasonable to exclude from HPACC's responsibilities any environmental or major structural defects if such defects were in existence prior to the lease commencement date. Presumably, any such structural defects should be revealed, if not by the 1996 building audit, then by the capital plan currently in preparation.

In accordance with the terms set out in the restructuring report, it is also recommended that if an intended repair, even if within the approved capital plan, is structural in nature, or if relates to a building system (eg. mechanical, electrical, etc) or could impact on either the structure or one or more building systems, then the plans and specifications are to be subject to the approval of the Commissioner prior to implementation. Other types of work, whether within or outside of the capital approved plan, will only require such prior approval of the Commissioner where the estimated cost exceeds $100,000.00.

Given that the Property is to be put under the control of HPACC, and HPACC is to be completely responsible for its upkeep, both operating and capital, it would be inappropriate to impose upon HPACC any requirements relating to the City's Fair Wage policies or tendering/capital practices.

Reserve for Maintenance Obligations:

Historically, there has been an arrangement whereby the Board imposed an ongoing ticket surcharge, the revenues from which were put into a Capital Improvement and Rehabilitation Reserve Fund ("CIRRF") and were matched by certain monies from the former Metropolitan Corporation, to effect capital repairs and improvements to the Property. At the same meeting of Metropolitan Council on January 31, February 1 and 2, 1996 during which the donation by Hummingbird Communications Ltd. of the phased donation of Five Million Dollars was acknowledged by the stated intention to rename the Centre, Council directed that those funds be placed into the CIRRF, and further, as a step in allowing the Board to proceed with renewing the Property, by its adoption of Clause No (3) of Report No. 3 of the Financial Priorities Committee, Council authorized that monies held in the CIRRF be made available for replacements, refurbishment and repairs to the Property (as long as no material physical change to the existing structure was involved), without the requirement for the Metropolitan Corporation to match (Metro 75%, CIRRF 25%) such expenditure, as was the original arrangement as set out in Clause No. 1 of Report No. 11 of the Metropolitan Executive Committee adopted as amended on April 25, 1980. The Board of Management of the O'Keefe Centre was also authorized to execute contracts in relation thereto.

In the future, the City will not be involved in HPACC's budgetary process, except to the extent of its minority representation on the Board. Due to the fact that the proposed lease is to be granted on the basis of nominal rent payments only, in the event of default by HPACC in its maintenance/repair obligations, the City would not be in a position to, in essence, step in and make those repairs with the funds it had notionally accumulated as a result of the payment of rent. Accordingly, as a prudent landlord, the City should ensure that there is an ongoing requirement imposed on HPACC to annually contribute a stipulated amount to a capital reserve fund, i.e. to ensure that there are, indeed, funds available to meet the required maintenance/repair standards for the Property.

HPACC is currently in the process of preparing the initial five year capital plan for the review of City Facilities and Finance staff. Upon completion of that review, there may be some changes required but, as a minimum, Finance staff have calculated, based on the 1996 building audit and reserve fund analysis, having regard only for those items related to the maintenance of building and structure, that the minimum annual contribution should be in the amount of $600,000.00. On the periodic review of the building audit (every 3 years), the minimum required annual contribution would be adjusted, either upwards or downwards, to reflect the actual reserve balance and any revisions in the projected expenditures, as determined by the Commissioner of Corporate Services, in consultation with the Chief Financial Officer and Treasurer and HPACC.

The capital reserve fund is to be used exclusively for the discharge of HPACC's maintenance/repair obligations under the lease and for no other purpose. The current balance in the CIRRF will be made available to "kick start" the funding of HPACC's maintenance/repair obligations under the Lease.

At this point in time, rather than stipulate how HPACC is to generate the amount required to be deposited to the capital reserve (eg. ticket surcharge), the City should simply oblige HPACC to make the required deposit to the reserve and leave it up to HPACC as to how best to raise both its necessary operating funds as well as the required amount of the annual contribution to the capital reserve fund.

Board staff has requested that HPPAC be permitted to extract any "surplus" monies from the capital reserve fund from time to time. City staff are of the view that the obligation on HPPAC to deposit the stipulated amounts means that all those funds are to remain in the capital reserve fund, and accordingly, there will not be any surplus. If HPPAC is successful in its fundraising efforts for capital repairs in excess of the annual contribution requirements, such excess funds may be kept by HPACC in a separate account.

The question of who should have the ultimate control of the capital reserve fund has been the subject of much discussion. On the one hand, it is the general intention that HPACC solely be responsible for the required contributions to the fund, and for the use of the fund for the maintenance/repair obligations under the lease. On the other hand, while the prima facie purpose of the fund is to accumulate resources in order to have them available at the time, and in the amounts, required for repairs as they come due, the City also wants to ensure that in the event of dissolution of HPACC at a time when it is in default of its maintenance/repair obligations, or abandonment by it of the Property, the City has uncontested access to those funds. Accordingly, it is recommended that the fund be held by the City, and the Chief Financial Officer and Treasurer be authorized to transfer funds to HPACC for the purposes of carrying out HPACC's maintenance /repair obligations under the lease.

Audited Statements:

HPACC will provide audited statements annually, including a report on the capital reserve fund.

Insurance:

The City's Risk Manager has indicated that HPACC should provide its own Commercial General Liability insurance ($10,000,000.00 coverage), Non-Profit Directors & Officers Liability insurance ($1,000,000.00 coverage), property insurance for contents/chattels, etc, as well as certain other coverages (eg. crime) which will be set out in detail in the lease. Insofar as property insurance for the building is concerned, the Business Plan put forward by the Board and approved by the former Metro Council included no suggestion that the municipality would be requested to pick up this coverage. However, HPACC advises that its current investigation reveals that the premium for it to obtain its own property coverage (for the building) is, in HPACCC's view, extremely high (eg. $29,685.00 with a $2,500.00 deductible). Accordingly, while it is the clear preference of the City's Risk Manager that HPACC provide all its own insurance coverages, the City can carry the property coverage for the building and charge the cost thereof back to HPACC (approximately $5000) on condition that HPACC be responsible for the actual, full and expeditious payment for all losses below the City's deductible, in whatever amount same may from time to time be (currently $100,000.00).

Signage/Sponsorship/Advertising:

While the City, as Landlord, does not wish to interfere with HPACC's revenue generation by means of sponsorships or advertising generally, it certainly does wish to impose guidelines and constraints related to signage, sponsorships or advertising in or on the City-owned Property itself. Accordingly, City staff are recommending that the lease contain a prohibition of any signage or advertising not in compliance with industry standards, in conflict with any City policies from time to time for advertising/sponsorships/signage for its property, or considered by the Commissioner to be, among other things: vulgar, indecent, scandalous, defamatory or otherwise contrary to public policy.

Membership of the Board:

The Act provides that the new Board shall be comprised of 12 directors, of whom 3 shall be appointed by the City Council, and the other 9 shall be chosen in accordance with a nomination and election process established by HPACC. The Business Plan having previously been approved by the former Metro Council provided that, of the twelve spaces on the Board, one would be allocated for a member of each of the NBC and the COC, for so long as those companies remained in residence at the Property. The Act was specifically drafted to omit the requirement to include a member of each of the COC and NBC on the Board, since it was recognized that if COC and/or NBC were no longer resident at the Centre, it would be too difficult to secure legislative amendments. Accordingly, it was intended that the Council decision with respect to COC/NBC Board membership would be codified in the lease. However, the factual situation with respect to NBC and COC has changed substantially since that time. That is, the COC has very publicly indicated its intention to build its own performance facility and would, therefore, no longer be utilizing the Property as its prime performing venue. Likewise, there has been some discussion that NBC may also vacate the Property as its prime performing venue. Such facts, coupled with the possibility that a performing venue to be built by COC could well be in competition with the Property, it no longer makes sense to maintain a requirement that members of the NBC or COC have membership on HPACC's Board.

Security of Tenure for NBC/COC:

Likewise, while at the time the Business Plan was put forward, one of its integral components was that if the building could be maintained in a competitive state, one could be assured that the NBC and COC could have a permanent performance home (ie. which they would not have if the facility could no longer remain operative). Again, for the reasons outlined above, the situation has changed with respect to what degree of security of tenure should be afforded to the NBC and COC in the Hummingbird Centre. Accordingly, staff is recommending that COC and NBC continue to be given a priority entitlement to utilize the facility pursuant to licence agreements (as has historically been the case), but in order to allow HPACC to programme efficiently and competitively, COC and NBC will have to renew their respective licence agreements at least 24 months prior to expiry in order to maintain priority to the desired time slots.

Name of the Property:

By its adoption of Clause No (2) of Report No. 3 of the Financial Priorities Committee at its meeting held on January 31, February 1 and 2, 1996, the former Metro Council, in recognition of the donation from Hummingbird Communications Ltd., authorized the renaming of the facility, for a twenty year period, to "Hummingbird Centre for the Performing Arts". Upon request of HPACC, the Act allows the City, by by-law, to change the name of the Centre and the Corporation (ie. thereby obviating the need for amending provincial legislation in the future).

Non-Assignment:

The business plan put forward by the Board and adopted by the former Metro Council did not rely upon borrowings to operate and maintain the Property. While the City would not be in a position to control, in the future, whether or not, in fact, HPACC wished to borrow for its financial needs, one of the provisions of the lease should clearly be that the City will not consent to an assignment of the lease as security for any financing. That is, it would not be unusual in normal commercial practice, for a tenant to, in essence "mortgage" its leasehold interest to a lender in order to secure funding or more favourable funding. In the event of default in such circumstances, of course, the financial institution is then, in essence, the holder of the lease and would then attempt to market that lease. The City should not be put in a position in the future in the event of an unfortunate default by HPPAC, to have to contemplate either a financial institution or a "purchaser" of the lease attempting to take advantage of this lease granted on very special conditions to a very particular entity. In addition, of course, a different tenant could well attract full realty taxation of the Property, in default of payment of which the City, as owner, is liable. Accordingly, staff clearly recommends that no assignment of the lease be permitted.

Chattels/Inventory:

City staff in conjunction with HPPAC staff will prepare an inventory of, respectively, those items which are either owned by HPACC or which are to be transferred to HPACC on the commencement date of the lease, and of those items are to remain the property of the City, but which will be included as part of the lease to be used by HPACC.

General Security Agreement:

To secure HPACC's lease obligations, HPACC should provide a General Security Agreement ("GSA"), which is a general floating charge on all HPACC's assets, including inventory, equipment and accounts receivable, to be registered pursuant to the Personal Property Security Act.

Heritage Designation:

The Property is currently on Toronto Historical Board's Inventory but is not the subject of a designating by-law under the Ontario Heritage Act. While some thought had been given to including a restriction in the Lease precluding HPACC from objecting should the City proceed to take steps in the future to designate the Property, it was generally felt that, in such circumstances, it would be preferable to allow HPACC, as tenant, to have its voice heard on the matter, and to allow Council to make its decision at that time, taking whatever concerns HPACC may have, into account.

Conclusions:

A lease between the City and Hummingbird Performing Arts Centre Corporation on the terms set out above will allow HPPAC to undertake, in a manner encouraging of HPACC's future success, its proposed initiative including the autonomous operation of the Property which, in turn, should lead to the provision of diverse theatrical programming being made available to City residents, while, at the same time, affording the City a reasonable measure of continuing control over its physical asset.

The Chief Financial Officer and Treasurer concurs in the recommendations contained herein. The City Solicitor has been consulted in the preparation of this report and advises that the terms and conditions outlined above may be embodied in appropriate documentation.

Contact Name:

M.A. Fischer 392-8054

Brenda Glover

Acting Commissioner of Corporate Services

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