The LeBreton question: Who's right, Melnyk or Ruddy?
James Bagnall, Ottawa Citizen
Updated: November 29, 2018
It’s the big question at the heart of the $700-million lawsuit launched Nov. 23 by Ottawa Senators owner Eugene Melnyk.
Why would Trinity Development founder John Ruddy — the target of that suit and one of the city’s most experienced real-estate entrepreneurs — deliberately undercut his part of the massive project to remake LeBreton Flats as alleged by Melnyk?
Ruddy and his team say there is enough housing demand in downtown Ottawa to support his two largest projects — a 1,300-unit apartment-and-retail complex at 900 Albert St. and the 4,400-unit development that is meant to populate LeBreton Flats.
Melnyk maintains that the 900 Albert St. apartments, which will be first to market, will mean slower condo and apartment (and retail) sales for years at the LeBreton project, thus squeezing multiple revenue streams the project depends upon to pay for the upfront construction.
Who is right?
While it’s impossible to be definitive, given the size and complexity of these projects, we can now examine the assumptions each of the partners used in reaching their conclusions.
This newspaper has obtained copies of each of the three real-estate studies commissioned in 2015 and 2018 by the two businessmen and their partnership, RendezVous LeBreton.
What the reports reveal is a wide range of possible scenarios for housing depending on assumptions about population growth, the percentage of buyers who opt for condos or apartments compared to single-family homes, and how many people choose to live downtown.
Melnyk last April commissioned a report by PwC, a consulting group, while Trinity purchased one in August from Urbanation, a Toronto real-estate specialist. The latter was an update of the initial 2015 study paid for by RendezVous LeBreton.
PwC and Urbantion each estimated that condo and apartment projects already in the pipeline would add about 10,000 units to the downtown area over the next decade — excluding the units to be provided by 900 Albert St. and LeBreton.
However, the two consulting groups drew much different conclusions about how many people would actually purchase all these properties.
PwC reckoned that even under its most optimistic economic scenario, there would be room for both 900 Albert and LeBreton only during the first two years of the LeBreton project. Between 2020 and 2024, PwC expected 900 Albert and LeBreton would each make available about 200 units annually for a total of 400 — against estimated demand of only 170.
Under PwC’s pessimistic economic scenario, not only would there be no takers for 900 Albert or LeBreton, there would be a surplus of 480 residential units annually for all the other downtown projects between 2020 and 2024.
Urbanation saw things much differently, noting that Ottawa’s population should grow by roughly 20,000 people annually, leading to projected annual demand for all types of housing (condos, apartments, single-family homes) of 8,000 units, compared to the 10-year average of 6,000.
Urbanation also suggested the drop in rental vacancies bodes well for new condo and apartment construction. The consulting group added the LeBreton project could take some comfort the experience of housing developments around the downtown arenas of the Toronto Maple Leafs and Montreal Canadiens. Condos in these districts sold extremely quickly.
“Despite the large quantity of units proposed in the marketplace generally and at 900 Albert specifically,” Urbanation concluded in its August 2018 report for Ruddy, “market conditions have become highly supportive of new apartment development.”
But even in the Urbanation studies there were some warning signs. In a section that examined housing developments immediately adjacent to the LeBreton site, the Toronto consultants noted that buyers have not been stepping up quickly. Claridge, for instance, had filled just 40 per cent of its 320-unit tower at 485 Preston St. after years of marketing. And the Ottawa component of Zibi — a major new development just to the north of LeBreton — had sold 71 units since December 2015.
It may well be that as the LeBreton area accumulates more residents it will acquire more cachet.
But, for the moment, Melnyk has reason for concern.
Here’s why. Because governments aren’t contributing funding, RendezVous LeBreton is counting on multiple streams of revenue from the project’s various components — condos, retail outlets, office towers, the NHL arena, entertainment venues and a hotel.
The precise allocation and timing of the revenue flows is not public, though Melnyk in his litigation claimed the partners agreed to split the proceeds roughly 50-50.
Melnyk however, faces significant upfront costs. He is responsible for financing and building a $600-million NHL arena, which was to have been in operation as early as 2022.
The condos and apartments, mainly Ruddy’s responsibility, are to be built over two decades — roughly 200 per year until 2027.
The key to making the LeBreton project work is the partners’ ability to quickly create a community that would attract visitors and buyers of condos and apartments — people who would spend money in the shops and buy NHL hockey tickets. The risk for Melnyk is that arena-related development and costs could outpace the other elements of the project, leaving him short of revenue.
It would have helped RendezVous LeBreton to have partners in place with shared history and understanding about this very large project — and a willingness to adapt to changing circumstance. But that was not to be.
When the NCC launched the competition to remake LeBreton, Melnyk had every intention of running the bid himself. According to two sources familiar with his business dealings that year, Melnyk invited several real-estate firms to consider joining him.
The sources say Brookfield Properties of New York took a close look but in the end passed on the opportunity, reportedly over concerns about the relatively small size of the city in relation to such a large project. Brookfield did not reply to a query by this newspaper.
It was Cyril Leeder, then chief operating officer for the Ottawa Senators, who introduced Melnyk to Ruddy in 2014. Shortly after, Melnyk’s liver began failing. After his May 2015 transplant, Melnyk needed time for recovery — and it was during this period he signed the letter of intent that split the Rendezvous LeBreton proceeds 50-50.
As Melnyk’s health improved, so did his determination to protect his business interests. As he became aware of the 900 Albert St. project, which grew in scope after 2015, he warned the National Capital Commission that he had engaged independent consultants (PwC) to assess the impact on LeBreton. In early January 2018, Melynk wrote to the National Capital Commission warning the agency his company was “reassessing its involvement in the LeBreton project.”
After city council approved the three-tower development 900 Albert that included significant retail, office and residential units, Melnyk pursued his case to Mayor Jim Watson.
It was a straight line from there to last week’s lawsuit.
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LeBreton Flats analyzed – three reports
Author: Urbanation – commissioned by RendezVous LeBreton partnership
Date: Nov. 12, 2015
Conclusion: The 10,000 apartment/condo units proposed for downtown Ottawa represent a 15-year supply, or 650 units per year. With Ottawa’s improving economy and employment growth, Urbanation predicts there will be sufficient demand to accommodate the additional 200 residential units proposed by LeBreton Rendezvous by 2027 and another 150 starts annually by 2033. Trinity Development’s 900 Albert St. project was not included in this analysis, as Trinity had not yet applied for zoning changes on the property.
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Author: Urbanation — commissioned by Trinity Development
Date: Aug. 17, 2018
Conclusion: Although the supply of apartment/condo units proposed for downtown Ottawa has jumped to 11,650 (including 1,300 units at 900 Albert St.), Urbanation maintains there is still enough room in the market to add another 200 units each year at LeBreton. The reason: Ottawa’s population is growing faster than expected, creating demand for housing that will outstrip supply.
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Author: PwC — commissioned by Ottawa Senators
Date: April 2018
Conclusion: About 10,000 apartment/condo units are expected to be built in downtown Ottawa by 2028, not including LeBreton or 900 Albert St. PwC estimates downtown units will be built at the rate of 800 per year this year and next, rising to 1,200 per year between 2020 and 2024. Under PwC’s optimistic scenario, there’s enough room in the market outside the 10,000 units already proposed to support the construction of another 170 units per year. But Rendezvous and 900 Albert are planning to build 200 units each from 2020 to 2024, leaving room for just one of these projects.
https://ottawacitizen.com/news/local-news/bagnall-the-lebreton-question-whos-right-melnyk-or-ruddy
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Also, TD Place is an outdoor stadium, why would an exterior walk for a couple of blocks be such a big deal WRT facing the elements? I don't think we should be encouraging people to not dress properly for the weather. This is why people freeze to death when their car breaks down in the middle of nowhere in winter.
Yay, "sports!"
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