How The CBC, Needing New Facilities, Played The Great Toronto Real Estate Game And Lost Big
By ADAM CORELLI
(First Published Saturday Night Magazine, September 1994)
The CBC finally has a new home, the postmodern Broadcast Centre, located just west of the bulging glass-and-steel office towers of downtown Toronto. It is a fitting edifice for one of the world’s pioneer broadcasting organizations: a remarkable facility, with its ten-storey stomach-shaped atrium encircled by ribcage-like floors. Executives at the Crown corporation like to call it the miracle on Front Street, but the real miracle isn’t the building so much as its advertised price.The CBC has long claimed its new digs cost no more than what they replaced: twenty-six ramshackle buildings scattered about twenty-four Toronto sites. This fantastic economy has been achieved, it is said, by a unique arrangement between the public and private sectors – a marriage in which the broadcaster has been enriched by the entrepreneurial efficiencies and market skills of real-estate developers.
A wonderful story: the only problem is that it isn’t true. Leaked banking and leasing documents on the Broadcast Centre, as well as information tucked away in the CBC’s annual reports, indicate that the real story is one of how the broadcaster played the Great Canadian real-estate game and lost big. The true annual cost of the project is many millions of dollars more than the CBC was admitting. Additionally, the Broadcast Centre has been encumbered in a financial strait-jacket that threatens to push the cost still higher. Even taking into account the damage done by a meltdown in the value of commercial real estate, the Broadcast Centre deal was never what the CBC claimed it would be.
No one could dispute that the CBC desperately needed a new home in Toronto. By the late 1980s, CBC employees, more than 3,000 of them, were toiling in a grab bag of dreary offices, old theatres, and at least one former girls’ dormitory. Just over 1-million square feet, seventy-seven per cent of them rented, were crammed with office and broadcast equipment, and staff. Some of Canada’s favourite radio shows, including “As It Happens” and “Morningside,” were produced in buildings that were not just decrepit and unsafe but also desperately inefficient.For thirty years, successive federal governments and various dynasties of CBC management had attempted to consolidate the Toronto operations. Finally, in 1978, the CBC purchased a giant undeveloped block of 9.3 acres on Front Street West. The seller was Canadian Pacific Railways. The price was $ 19.5-million. With a site secured, it seemed the CBC was set to go.
But no. For the next nine years, CBC executives grappled with the question of how to pay for their new home. At first, there were hopes that Ottawa would cough up the construction money. That prospect dimmed when the Conservatives were elected in 1984. But there was at least a stroke of good luck, for the Front Street site had soared in value during Toronto’s manic real-estate boom and, by 1987, was worth as much as $200-million. No shortage of experts urged the CBC to sell the land, buy a site available for just $25-million a bit farther west of Toronto’s core, and use the profits towards construction of the new facilities. Why CBC executives rejected this is unknown; perhaps they feared that money-hungry Ottawa itself might find a way to pocket the windfall. Increasingly, the CBC was drawn into the real-estate game.
The result was a joint venture between the public corporation and the private sector. In June, 1987, the CBC announced that Toronto Broadcast Centre Ltd., a company established and owned by the developer Cadillac Fairview, would build CBC’s new ten-storey, 1.7-million-square-foot home at a cost of $381-million. Because the CBC was then prohibited by Parliament from borrowing money, special financing arrangements had to be made. Toronto Broadcast Centre Ltd. agreed to build with virtually nothing down, borrowing the construction funds itself in return for the CBC’s government-backed promise to lease the premises from the builder for thirty-five years. The lease payments would supposedly cover the construction and financing costs incurred by Toronto Broadcast Centre Ltd. Thus the CBC was able to borrow without actually borrowing. At the expiration of the lease it would own the building.
Around the same time, the CBC struck two additional deals. Its own building having taken up only forty per cent of the 9.3 acre site, the corporation leased, on favourable terms, about three acres to Cadillac Fairview, which planned to build two office towers and a shopping mall. Another acre was leased to Bramalea Ltd. for a hotel and condominium project. (The last acre was donated to the City of Toronto for use as a park.) The CBC expected revenues from the Cadillac Fairview and Bramalea deals would partially cover its own heavy lease payments on the Broadcast Centre.
Banking documents show these were expected to start in the early 1990s at $28-million per year.Of all the lines delivered by CBC executives involved in these plans, the most magical was the promise that Broadcast Centre lease payments would not exceed the projected cost of the old accommodations. It made the deal seem a no-brainer – great new space for the price of the old. But, in fact, the projected cost of the old rent bills was quite a bit higher than their actual cost.In 1987, the year the project was announced, the CBC was paying just over $14-million in annual rents, about half the amount of its first $28-million lease payment on the Broadcast Centre.
Banking documents show the CBC bridged this gap by projecting that the cost of staying in the old sites would rise to $28-million by the early 1990s – around the time its first Broadcast Centre lease payment would be due. The projection was based on generous assumptions that the old premises would require $200-million in refurbishing, and that the rents would continue to increase at a fierce rate, fuelled by inflation which, it was assumed, would remain abnormally high in perpetuity.
In many ways, then, this was a typical 1980s deal, based on dreams of undying prosperity and spiced generously with debt. Nonetheless, CBC executives marvelled at their own dexterity. In late 1987, CBC’s Broadcast Centre project director, Janet Dey, an urban planner who joined CBC in 1980 to stickhandle the development, was quoted in The Toronto Star: “We figured out this would be less expensive to the CBC, and ultimately the taxpayer, than to continue paying the cost of operating out of [all these] different locations, many of them rented and open to drastic, unpredictable rent increases. In times of decreasing government grants, more public agencies are going to try to make the most of their land value by this sort of arrangement. I don’t apologize at all for working with the private sector.” By April, 1988, the project had been approved by Ottawa, and on October 5, 1988, Knowlton Nash and Peter Gzowski co-hosted the ground-breaking ceremonies.
Of course, much changed in the following six years. Toronto’s skyline now brims with skyscrapers but many of them are one-third empty. The vacancy rate in the city’s office market has jumped from less than four per cent six years ago to more than eighteen per cent, knocking down rents by up to seventy-five per cent. Inflation has all but disappeared. Two years ago, Steve Cotsman, CBC’s vice president of finance and administration, conceded the CBC was off the mark on its rental forecast, saying that “rental payments are lower than what we estimated in 87-88.” In fact, by 1992 the abandoned former premises could be had for a song.
Where the new economic realities have done the CBC even more damage, however, is in its new lease on the Broadcast Centre. It, too, is based on an assumption of permanent high inflation. From $28-million in the early 1990s, the payments are expected to climb seven per cent annually until 2028 when, according to banking documents, the final payment will be a stunning $272-million.
“They were optimistic, very optimistic at the time, not just in retrospect,” says one Toronto real-estate analyst. “They were ignoring what was coming to the marketplace. [Rental] rates themselves were not escalating but were moving down.
“In addition to overestimating inflation and rental rates, the CBC understated the cost of construction. Banking documents show the true projected cost of the building was $497-million. (The $381-million figure bandied about by the CBC allowed for the offsetting revenues from the rest of the site – revenues which were not guaranteed.) What’s more, there was a cost overrun during construction of about $32-million, bringing the latest construction cost to $529-million.
The Toronto Broadcast Centre Ltd., the company established by Cadillac Fairview to finance and build the project, arranged for a standard construction loan of $550-million, and the banking documents put the cost of financing that debt at about $49-million per year.
How would the CBC make up the difference between what it believed it could afford to pay in the first year – around $28 million – and the $49 million it in fact had to cover to get its Broadcast Centre? Well, caught up in the 1980s Zeitgeist, it relied even more on borrowing. In addition to the construction loan, the Toronto Broadcast Centre Ltd. arranged for something called a “rollup facility,” a line of credit in the amount of $250-million that did not have to be repaid for ten years and that was available to the CBC to subsidize its lease of the building. Thanks to the rollup facility, the first-year payment would be offset by almost $21-million, down to an acceptable $28.2million. The $21-million would still have to be repaid but not for at least a decade. In the meantime, the Broadcast Centre would look a bargain.
The rollup facility isn’t detailed in any of CBC’s annual reports and would have remained unknown in the absence of leaked documents. Confronted with the details of the documents, Cotsman conceded that “what the roll-up facility is intended to do is, that in the first few years we’re in the centre, there is a chance that the rental payments we’re able to make may not be able to meet that, and so it will help cover [the shortfall].”The $250-million roll-up facility, added to the construction loan, brings the total financing arranged for the new Broadcast Centre to $800-million. Unless the project were to be refinanced, total payments during the life of the lease would be $1.7-billion, according to the CBC’s private projections, included in the banking documents.
CBC executives have been unwilling to discuss financing of the Broadcast Centre. Two years ago, after some delay, an interview was granted with Cotsman, but he was reluctant to comment on the project’s financial details. Finally, in the spring of 1994, senior director of corporate communications and public affaiirs Charlotte O’Dea agreed to have written answers provided to a list of written questions. Also approved was an interview with Jim Byrd, vice president of English television networks, but the subject was limited to the benefits of the new building.
It is not just to the news media that CBC appears unwilling to disclose the project’s financial details. CBC executives stated several times that all details of the project were approved by CBC’s board of directors, the Treasury Board, and the federal Cabinet. Yet a CBC board member, who requested anonymity, was surprised when later told about the schedule of lease payments, the details on the roll-up financing, and the actual cost of the project. “They just kept telling us the project would cost no more, or even less, than the old rent payments,” the director said. “They also never stopped telling us that it was on budget and on time.”
Even the CBC’s annual reports don’t offer much assistance. The lease was mentioned in the 1988-89 annual report but the financial details were not forthcoming. Nor were they in the next year’s report, nor in the two following that. It wasn’t until the 1992-93 annual report that the CBC announced a lease obligation of $1,503,154,000 (a figure that, adjusted for fluctuating interest rates, corresponds to the $1.7-billion the CBC estimated in banking documents that it would pay). But, even then, the details of the lease obligation, including the use of the roll-up facility, are not spelt out.
It’s a particularly rich irony that the CBC would be so reluctant to explain the numbers behind the Broadcast Centre at the same time as the corporation has been crying poverty and cutting services. In December, 1990, CBC’s then president, Gerard Veilleux, suggested the corporation faced a budget shortfall of $108-million for 1992. Veilleux blamed the shortfall on Ottawa’s 1989 expenditure-reduction programme, inflation, declining ad revenue, increases in CBC’s contribution to its pension fund, and new provincial and federal payroll taxes. In fact, since construction began on the Broadcast Centre, CBC’s annual appropriations from Parliament have jumped almost $200-million, from $915.2-million in 1989 to $1.109-billion in 1993. That’s an increase, beyond the inflation rate for the same period, of more than twenty per cent. And, according to CBC’s annual reports, revenues from other areas, such as advertising and miscellaneous income, also increased over that same period, by about $8-million.
Regardless, the CBC, sticking to the image of public-corporation-under-siege, instituted the chopping of a broad range of services, including the closing of three regional stations and the paring back of eight others into news bureaus, and the layoff of 1,216 employees. The station cuts were designed to save CBC $46-million a year. “There is no connection between the December ’90 cutbacks and the building of the Broadcast Centre,” Cotsman said. “We’re going to have a problem if you start asking detailed questions.”
Six years after the ground was turned, the CBC Broadcast Centre is largely finished. Since mid-1992, staffers have slowly been moving in. The job is enormous. A complicated and fantastic array of new broadcast equipment, some $253-million worth, is being installed in the new building. The money spent on this equipment is being paid out of CBC’s capital-appropriations budget, which the Tories permanently bumped up by $20-million.
One bankruptcy later, the once-mighty developer Bramalea Ltd. is no longer involved in the project, the hotel and condominium project no longer planned. As part of the settlement, CBC was awarded about $2.2-million in Bramalea shares. Cadillac Fairview too has run into financial turmoil and only one of its twenty-nine-storey office towers was built. The CBC had counted on collecting more than $150-million from these developers by now – money it would have put towards its own heavy lease commitment on the Broadcast Centre. To date it has received only about $62.6-million.
Like a lot of big players from the 1980s, the CBC is left holding title to land worth a fraction of its value in the boom years. Troubles at Cadillac Fairview could have further implications. The company is currently unable to arrange the long-term financing the CBC needs to replace the construction loan. Now the CBC will arrange its own financing on the project, perhaps by issuing a mortgage bond. (Parliament recently gave the corporation the legal right to borrow money.)
CBC vice president Jim Byrd remains convinced the Broadcast Centre will inspire a new creative spirit among thousands of employees once scattered about the city. “The fact that we’re all in this one building and the fact that there are those opportunities to rub shoulders and meet people in the cafeteria, to sit down in the atrium or go for a walk on Front Street and talk about things, it is helpful,” Byrd said. “It will lead to greater synergies, a greater sense of one corporation and a set of objectives and goals. And that will lead to a vision.”
But while visions brew and synergies bind, the CBC and the taxpayers it serves, and upon whom it relies, will continue to wrestle with that old problem of how to pay for the building.