Rob Granatstein: why the city should sell off its assets—slowly but surely
To close the budget gap, Rob Ford wants to sell city assets. Good idea, bad timing. Even a novice real estate investor knows to fix up the house before putting it on the market
Cities acquire assets for many reasons. Sometimes a wealthy citizen donates a property, as in the case of High Park; sometimes assets, such as Henry Pellatt’s Casa Loma, are seized when tax bills go unpaid. A city grows to meet the needs of its citizens, adding public housing and office buildings, a zoo (or three), convention centres, highways, police and fire stations, parks, arenas, garbage trucks, landfill sites and libraries.
Over its 180-year history, Toronto has amassed an impressive array of land, utilities, subways and buildings—we’re sitting on $18 billion in real estate holdings alone. However, what seems like an enviable and diversified portfolio that should pay massive dividends is actually a money-sucking liability. The taxes, rents and fees the city collects aren’t enough to cover its ownership costs—contributing to the operating budget hole Rob Ford is currently trying to plug.
Ford likes to say Toronto has a spending problem, not a revenue problem. In fact, Toronto has a non-spending problem—that is, a chronic failure to regularly upgrade and replace its assets. It’s time to operate Toronto with an eBay expert’s mentality: shine up the stuff we don’t need, then sell it to pay for the goods we do need. The important thing is to do it on our terms, not in a fire sale. Ford is pushing city council toward a historic liquidation sale, but with no strategy to maximize the value of the assets. Just about everything except the TTC, Toronto Water and city hall could go on the block, and mistakes are irrevocable.
Asset sales have worked for us in the past. In 2005, facing a sudden deficit, the city sold its streetlight poles to Toronto Hydro for $60 million. Toronto Hydro Telecom (a Hydro subsidiary) then used the tops of the poles to build a Wi-Fi network downtown, which it in turn sold to Cogeco for $200 million in 2008. The city used part of its proceeds from the deal—$75 million—to fix up ramshackle Community Housing buildings. Smart move.
Not all municipal asset sales go swimmingly, however. Chicago offers a case study in the perils of selling potential income generators for one-time cash infusions. In 2009, then-mayor Richard M. Daley made a privatization blunder that sent a chill through cities across North America. He sold the investment bank Morgan Stanley a 75-year lease on Chicago’s 36,000 parking meters in return for $1.16 billion in cash. Parking rates immediately quadrupled, and the city burned through most of its windfall in two years. The loss in revenue contributed to a drop in Chicago’s credit rating, and interest payments rose. Meanwhile, the parking business—recently sold to investors in Abu Dhabi and Luxembourg—can expect to earn $9 billion in profits over the course of its lease.
Since the Chicago debacle, Los Angeles, Pittsburgh, Memphis and New Haven have all nixed plans to sell or lease parking assets. Indianapolis, on the other hand, went for it, but learned from Chicago’s mistakes. Last November, the city entered into a 50-year deal that included a big lump sum payment, an exit clause and, most significantly, a revenue-sharing arrangement. Already, the private partner has modernized the parking system and is generating greater profits for both itself and Indianapolis taxpayers.
Toronto appeared to be heading down a similar path earlier this year, as Ford’s inner circle and city staff quietly discussed privatizing the Toronto Parking Authority’s revenue stream while keeping its real estate assets for future lucrative development. The TPA controls 57,000 spaces, which bring in roughly $50 million a year. The privatization plan could have meant, among other things, depositing an enormous cheque into city coffers, more efficient management of the parking business, and taking ticketing away from the Toronto Police’s unionized (and expensive) parking enforcement officers. Unfortunately, council voted against the idea in September. They should reconsider. If done right—with a revenue-sharing arrangement similar to the one in Indianapolis—it’s a potential money saver and money-maker for a mayor trying to change the way business is done at city hall.
One of the biggest hurdles Ford faces is Torontonians’ inherent aversion to privatization. We need to get over it. Sometimes it makes good economic sense to sell. For example, Toronto owns six city halls if you include Metro Hall, as well as several other valuable downtown buildings full of municipal workers. Why? Ford should sell Metro Hall—a plan that failed in 2001 due to a soft office rental market—then start moving city workers from prime space to less expensive buildings elsewhere along the subway line. He could also sell 277 Victoria Street, a municipal building across from the increasingly popular Dundas Square.
Beyond that, the two assets that Ford is considering monetizing, and the ones that will generate the most money to pay down debt, are Enwave (the deep lake water–cooling corporation 43 per cent owned by Toronto) and a 10 per cent share of Hydro—potentially worth a half-billion dollars combined. Enwave helped push the city’s green agenda forward by using lake water to cool downtown office buildings, but it’s never paid a dividend to the city, and it’s time we cashed in. As for Hydro, rates and environmental initiatives are locked in. The city is already guaranteed at least $25 million a year in dividends. Yet Ford’s executive chickened out on the sale in November and asked for further study before making a final decision.
Toronto’s best opportunity to generate cash over the long term is to let Build Toronto—the aggressive professionals running the city’s real estate arm—turn vacant lots and Class A buildings into revenue generators. The job of the agency, set up under David Miller, is to evaluate city assets and either sell, lease or improve them. Councillor Doug Ford insists that selling the Port Lands will raise billions of dollars quickly and eliminate our fiscal problems. However, the land isn’t worth billions today—it’s a contaminated flood plain with no water or sewer connections and no transit links. As the cliché goes, you have to spend money to make money. Without millions of dollars of government investment, that prime land will deliver a fraction of its true value.
To see how investing in a site before selling can pay off, Doug Ford should consider the former police impound lot, a pie-shaped parking lot at the foot of Harbour Street. It was worth about $4 million when Build Toronto took it over in 2009. After doing the rezoning and preparatory work (at a cost estimated to be in the six figures), the agency partnered with a developer to launch a 75-storey building. For assuming some risk and taking its time, the city can expect a final payout worth at least 10 times more than a straight land sale.
Sadly, the Fords are not only desperate, they’re categorically opposed to spending money—even if it means making more money in the long run. Build Toronto’s first dividend was originally scheduled for delivery in 2016, giving the agency time to boost the value of its portfolio of properties before selling them. Instead, Rob Ford is demanding a cheque with lots of zeros on it in 2012—yet another example of his “need money, sell quickly” mentality. If he’s not careful, he could ruin Toronto for generations.