Saturday, March 08, 2008

Toronto Sells out for a Big Mac Meal

The City of Toronto owns a bunch of properties along the north side of Bloor Street near the corner of Avenue Road & Bloor Street. These properties the city has owned since the Bloor-Danforth Subway line was constructed. Following the construction of the subway line the city leased the properties along the north side of Bloor Street out.

The leases which were issued in the late 1970s were farely decent. However, since then this area has exploded with population and have turned into prime real estate. So the leases paid by companies like McDonald's to the city for their restaurant opposite the Royal Ontario Museum now seem pretty paltry. McDonald's now has a honey of a deal by paying a mear $15,500 annually ($1291 per month) for decent sized McDonald's restaurant on prime land across from a major children's attraction (the Royal Ontario Museum), easy subway access from the Museum Subway station and St. George Subway stations) and just down the street from the tony Yorkville. In fact I doubt that a Yorkville bought Gucci bag would sell for less than McDonald's is paying for a monthly lease payment.

McDonald's, eying the contract renewal within it's 99 year lease with the city, made an offer of $3.38 million to purchase the property from the City of Toronto. The City had some options:

1. Accept the bid from McDonalds.

2. Reject the bid and propose a counteoffer to McDonald's to purchase the property.

3. Negotiate with McDonald's for a higher lease payment.

Option one would mean the City of Toronto would be basically giving the property to McDonald's for peanuts without realizing that much of a return. This is because, as the Toronto Star noted in it's article: "Some estimates had suggested the site could be worth $7 million to $9 million,..."

Option two would mean the city might be able get more money from McDonald's for the property. However, the city is constrained by the 99 year lease with McDonald's, so the city cannot put the property on the open market in order to get the best value. So really McDonald's holds all the cards in this option.

Option three city staff proposed to raise the lease money to $195,000 per year ($16,250 per month). McDonald's, however, would obviously want a lower lease payment and negotiations would, thus, drag on a for some time.

The city chose Option one and sold the property to McDonald's $3.38 million for the property. Now considering all the constraints the original 99 year lease had placed on the city, one would think this deal was fairly good. Well the deal could eventually get much worse and leave the Toronto taxpayers feeling as bad as waking up the next morning after consuming one too many Big Mac's.

McDonald's, after closing the deal with the city, could turn around and sell the property for a much higher value to a developer who owns the surrounding properties. The developer could then merge all the properties acquired together and build a significant condo or business development on the prime land with a brand new McDonald's restaurant on the ground floor. So in the end, McDonald's would realize from the sale of this property by the city about six million dollars and a brand new modern restaurant facility. The developer, at the end of this deal, would be able to build the twenty something floor condo or business tower as well have a coveted ground floor tenant in McDonald's who would be counted on for lease payments well into the future.

The City taxpayer, who has been milked for a 3.25% 2008 property tax increase and major user fee and other tax increases, would loose millions of dollars in what the property could have been sold for. City council for years has been begging for dollars from the provincial and federal governments as well as cutting services, letting infrastructure crumble and eying even more service cuts. However actions like selling out to McDonald's instead of attempting to drive a hard bargain have cost the city millions of dollars. As it has been said by many of the more fiscally conservative councillors on Toronto city council, Toronto has a spending problem, not a revenue problem. Except in this case, there does seem to be a revenue problem, the deal failed to get the revenue it should of before selling out to McDonald's. So instead of city councillors getting the equivalent of steak to eat on this deal, they received a #3 Big Mac Meal with a fries and medium coke, no upsize please!

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