Report to/Rapport au :

 

Corporate Services and Economic Development Committee

Comité des services organisationnels et du développement économique

 

and Council / et au Conseil

 

31 May 2004 / le  31 mai 2004

 

Submitted by/Soumis par : Kent Kirkpatrick, City Manager/Directeur général des services municipaux

 

Contact Person/Personne ressource : Réjean Chartrand, Director, Strategic Delivery Unit/Directeur, Unité d'exécution stratégique

(613) 580-2424 x21696, Rejean.Chartrand@ottawa.ca

 

 

Ref N°: ACS2004-CMR-OCM-0007

 

 

SUBJECT:

PUBLIC-PRIVATE PARTNERSHIP (P3) PROJECT -
Ottawa Paramedic Service headquarters

 

 

OBJET :

PROJET DE PARTENARIAT PUBLIC-PRIVÉ (3 P) -
QUARTIER GÉNÉRAL DU SERVICE PARAMÉDIC D’OTTAWA

 

 

REPORT RECOMMENDATIONS

 

That the Corporate Services and Economic Development Committee recommend Council:

 

1.            Authorize the Deputy City Manager for Community and Protective Services to finalize the negotiations and conclude and execute all necessary agreements with a subsidiary of Forum Leasehold Partners Inc. for the design, construction, financing and operation of the Ottawa Paramedic Service Headquarters in accordance with the terms and conditions of the Request for Proposal (RFP), the proposal submitted, the subsequent negotiations between the parties, and the framework set out in this report;

 

2.            Authorize the City Treasurer on behalf of the City to enter into loan guarantee agreements with a financial institution selected by Forum Leasehold Partners Inc., and satisfactory to the City, to provide financing for the construction of the Ottawa Paramedic Service Headquarters, to be repaid over a period of up to thirty years;

 

3.            Designate the Ottawa Paramedic Service Headquarters, to be located at 2465 and 2495 Don Reid Drive, as a Municipal Capital Facility as permitted under section 110 of the Municipal Act and Ontario Regulation 46/94, and that this designation be implemented by way of an Agreement, as set out in recommendation 1, between the City and a subsidiary of Forum Leasehold Partners Inc., and by presenting to Council for enactment of a by-law in accordance with the requirements of the Municipal Act and this report;

 

4.            Authorize that development charges, site planning and building permit fees, and property taxes, both municipal and education, be exempted under the Municipal Capital Facilities Agreement.

 

RECOMMANDATIONS DU RAPPORT

 

Que le Comité des services organisationnels et du développement économique recommande au Conseil municipal :

 

1.            d’autoriser le le Directeur municipal adjoint, Services communautaires et de protection à finaliser les négociations entreprises avec la société Forum Leasehold Partners Inc. ainsi qu’à conclure et à signer toutes les ententes requises avec une filiale de cette dernière en ce qui a trait à la conception, à la construction, au financement et à l’exploitation du quartier général du Service paramédic d’Ottawa conformément à la proposition présentée, aux négociations ultérieures entre les parties, aux conditions de la demande de proposition (DDP) ainsi qu’au cadre établi dans le présent rapport;

 

2.            d'autoriser le trésorier municipal, au nom de la Ville, à conclure des accords de garantie d'emprunt avec l'institution financière choisie par Forum Leasehold Partners Inc. et à assurer, à la satisfaction de la Ville, le financement nécessaire à la construction du quartier général du Service paramédic d'Ottawa, lequel sera remboursé sur une période de trente ans;

 

3.         de désigner le quartier général du Service paramédic d’Ottawa, qui sera situé au 2465 et au 2495, promenade Don-Reid, en tant qu’immobilisation municipale comme le permet l’article 110 de la Loi sur les municipalités et le Règlement de l’Ontario 46/94, et de mettre en œuvre cette désignation au moyen d’une entente, comme le décrit la recommandation 1, conclue entre la Ville et une filiale de Forum Leasehold Partners Inc., et en soumettant au Conseil municipal une proposition d’adoption d’un règlement municipal conformément aux exigences de la Loi sur les municipalités et du présent rapport.

 

4.            d’accorder une dispense de redevances d’exploitation, de droits de permis de construire et de plans d’implantation ainsi que de taxes foncières, qui s’appliquent à la fois aux parts municipales et scolaires, en vertu de l’entente sur les immobilisations municipales.

 

 

BACKGROUND

 

The Ottawa Paramedic Service currently operate out of leased premises located at 530 Tremblay Road.  The Tremblay Road facility does not meet operational requirements of the Ottawa Paramedic Service Branch for the long term, and the property is currently for sale by the Ontario Realty Corporation (ORC), owner of the property. The existing lease is on a month to month basis with a 90 day notice period required to terminate.

 

As a result, in October 2002, Council (ACS2002-CMR-OCM-0008), approved the design, construction, financing and operation of a Paramedic Service Headquarters facility as one of  five projects to be delivered under a public-private partnership arrangement.

The new facility is intended to provide long term, secure, efficient and effective support for the centralized processing of emergency response vehicles, administration, as well as interaction of paramedics, supplies and supervisory staff.   The facility will be approximately 100,000 sq. ft. in size and located on city-owned property at 2465 and 2495 Don Reid Drive in the Ottawa South Business Park. 

 

A Request for Qualifications (RFQ) was issued on 5 June 2003 by Supply Management and advertised on MERX.  The RFQ closed on 7 July 2003 and qualification submissions were received from eight firms.  In September 2003, Council (ACS2003-CMR-OCM-0010), approved a short-list of four firms to receive the Request for Proposal (RFP).

 

The RFP was issued by the Supply Management Division and distributed to these firms on 26 September 2003.  The RFP closed on 4 December 2003 and the City received proposals from each of the four short-listed respondents.

 

The evaluation team determined that the proposal received by Forum Leasehold Partners Inc., provided the best value for the City, having met all the mandatory criteria and achieved the highest point total.  The members of the Forum Leasehold Partners, Inc. team include  Forum as the prime proponent and Developer/Owner, Westeinde Construction, An Aecon Alliance Company, as Design/Build Constructor, and Trammell Crow Services Canada, Ltd. as the Property Manager.

 

On January 28, 2004, Council (ACS2004-CMR-OCM-0001), authorized staff to enter into negotiations with Forum Leasehold Partners Inc. for the design, construction, financing and operation of an Ottawa Paramedic Services Headquarters facility. 

 

 

DISCUSSION

As part of the RFQ, proponents were given the opportunity to propose their own site for the construction of this new facility and/or use this project as the trigger for a larger development, which could have included other development opportunities or complementary uses.  However, none of the respondents on the short list included these types of options in their proposal, and, as a result, the project will be built on city-owned property on Don Reid Drive, and the City will be the sole tenant in the facility.

 

This outcome greatly reduced the City's ability to fully benefit from a public-private partnership in terms of a larger development, which could have generated other revenue sources to reduce the cost of the City's occupancy in the building.  The current structure of the partnership is therefore closer to the traditional approach of delivering these types of facilities, with the benefits to the City being more comparable.

 

The following details the agreement content and framework that is being recommended for approval under this public-private partnership.

 

Design and Construction

 

Since the selection of the private sector partner by Council, staff have been working very closely with the design/build team to optimize the City's requirements and achieve an effective and efficient building design. A review of all building systems design was also undertaken to achieve the highest benefit between initial capital costs and long-term operational costs.

 

A price of $19.9M has been negotiated for the delivery of this facility by the private sector partner, subject only to an adjustment for increases in steel prices and minor adjustments by the City at the time of production of detailed design drawings, if required. It is well known in the industry that steel prices have increased anywhere from 30% to 100% since last fall depending on the type of steel, and it is impossible for the partnership to guarantee their price until the legal agreements are executed and steel orders are placed.

 

The agreement to be finalized with the partnership will recognize this situation and will allow for an adjustment to the negotiated price, proportional to the increase in steel prices for the various categories, from the time of the submission to the execution of the agreements. Industry experts expect a downward correction in steel prices over the coming months, but the timing and extent of such a correction is unknown. The City will benefit from any such correction if it takes place ahead of placing the steel orders.

 

As part of its P3 process, the City develops a Public Sector Comparator (PSC) to ensure it is receiving value for money. The PSC is developed based on the standard delivery approach that the City would normally use for a particular type of project. In this case, the City's approach would have been to retain the services of an architectural firm, complete a full set of design drawings and tender specifications based on the City's need, tender the project, and award construction to the lowest bidder.

 

The PSC was developed by Delcan Corporation with the assistance of Pelican Woodcliff Inc., an experienced cost estimating firm from Toronto, and reviewed by city staff. The PSC was estimated at $20.1M, approximately $140K more than the fixed price received from the private sector partner. This difference indicates a benefit of the design/built approach over the more standard approach, albeit at a modest level.

 

As stated at the beginning of the report, the fact that the private sector did not take the opportunity to build this facility on their own land as part of a larger development reduced the potential benefit of this P3 to the City, but still preserved the competitiveness of the process, as shown by the comparison above.

 

The larger benefit is likely to come from the fact that construction of the facility can now be delivered very quickly, with occupancy anticipated for November/December 2005, and that staff from RPAM and EMS have spent considerable time with the design/build team and have an in-depth understanding of the building design. This should greatly facilitate the delivery of the project during the construction stage.

 

As is necessary for these projects, quality assurance will be provided during construction, and funds to a maximum of $250K will be added by the City to the project cost to support this requirement.

 

It is intended that this facility will be declared a Municipal Capital Facility, and, therefore, exemptions for development charges, site planning and building permitting fees, and property taxes, both municipal and education, will be provided. As a result, the cost for these elements is not included in the negotiated price.

 

Property Management

 

The property management of the new facility will be under the responsibility of the partnership, and Trammell Crow will be providing that function for the term of the agreement. Trammell Crow and the City will agree on levels of service required in the building, security protocol, emergency plans, life-cycle renewal, and annual budgets, and Trammell Crow will be responsible for implementation.

 

Trammell Crow will provide the property management services described above for an annual  base management fee of $64,089, with 10% escalations each five years.  All costs related to the operation of the facility will be a direct flow-through to the City without mark-up, contingencies, or premium of any kind. 

 

The City will be required to budget for rent and operating dollars for this facility starting in November 2005. Current leasing and operating costs to sustain the Paramedic Services operations at 530 Tremblay Rd. and at 1887 St. Joseph Blvd are currently around $770K annually. It is anticipated that the annual operating cost for the new facility will also be in that range, exclusive however, of the lease payments, which effectively will be lease to own payments.

 

 A life-cycle renewal fund will be set-up to ensure timely capital repairs to the building over time, and funding will be contributed annually into this reserve, as an addition to the lease payments. On the basis of typical industry standard contribution rates for life-cycle renewal, an annual amount of $150K (1% of reconstruction value) will be contributed commencing in year five of facility operations and continuing through year ten.

 

Commencing in year eleven of facility operations and continuing through to the transfer of ownership at the end of the term, this annual contribution will be increased to $220K (1.5% of reconstruction value), to reflect an aging infrastructure and price escalation.

 

These annual contributions to the life-cycle renewal fund will be paid to a trustee and will be available to Trammell Crow for the implementation of life-cycle capital repairs, under instructions from the City. Any amount left in the fund at the end of the term of the agreement will transfer to the City with the building.

 


Financial Framework

 

The private sector partner is responsible to secure the funding required to build this facility with  costs to be recovered in the form of lease payments from the City. In order to secure the best financial rates possible, the City has agreed to provide a date certain loan guarantee, similar to the other P3 projects approved earlier by Council.

 

The financing will be in the form of a construction loan which will convert into a  term loan with a maximum amortization of  thirty years. The private sector partner will enter into  interest rate protection agreements (IRPA) to protect against interest rate fluctuations over the term and therefore ensure a stable level of lease payments by the City over time.

 

Term sheets have been submitted by two different competing financial institutions, and based on the City's loan guarantee, the private sector partner has received very competitive financing rates. Although final negotiations between Forum, the lending institution, and the City may vary some of the terms proposed, it is anticipated that the interest rate on the construction loan will be based on Bankers Acceptances (BA) plus 20 basis points (bps).

 

This rate, applied to the negotiated price to deliver the facility over an anticipated construction period of fifteen months, will generate approximately $400K of interim financing cost. This cost will be capitalized and added to the project cost for long term financing.

 

At the time of writing of this report, the rate for the 30-year term loan offered by Forum's lending institution was 5.83% inclusive of the IRPA and BA stamping fee of 20 bps. This rate is comparable to the 5.65% rate that the City could obtain if it were to finance the project directly, either through a 20-year serial or amortizing debenture. Also for comparison purposes, the indicative rate for a 30-year term for the recently announced Ontario Strategic Infrastructure Financing Authority (OSIFA) is 5.81%.

 

It is important to recognize, however, that the interest rate for the term loan will be set based on the prevailing rate at the time the agreements are executed, and that the actual lease payments by the City will be affected accordingly.

 

As discussed previously in this report, Forum's fixed construction cost of $$19.9M will be adjusted to allow for increases in the price of steel, and an amount of up to $250K will be added by the City for quality assurance during construction. Interim financing costs of approximately $400K will also form part of the capital requirements, which will result in a projected total capital requirement of over $21M to be financed over the 30-year term. These additional project costs would be identical if the City were to deliver the project directly, such that the comparison with the City's PSC remains unaffected.

 

A project cost of $21M at a 5.83% interest rate over a 30-year term will require an annual lease payment by the City of approximately $1.5M, and this amount will need to be reflected in future operational budgets.

 

It is recommended that the City Treasurer be delegated with the authority to negotiate, finalize, and execute all the relevant transactions and agreements necessary to secure the loan required to finance the construction of the Paramedic Services Headquarters, including an interest rate forward agreement, and International SWAP Dealers Association Master Agreement (ISDA).

 

Agreement Framework

 

Subject to final negotiations, it is anticipated that the agreement between the City and the private sector partner will be developed in accordance with the following framework:

 

- Forum Leasehold Partners Inc. will incorporate a subsidiary company to be the legal entity responsible for the agreement, as is often common practice in public-private partnerships; Forum's fees will be used as security for the successful delivery of the facility by its subsidiary company

 

- The City's land at 2465 and 2495 Don Reid Dr. will be made available to the partner through a ground lease covering the 30 year term

 

- The ground lease will cover the requirements from the City, namely, that the partner will build the facility required by the City for the firm price, in accordance with the program of requirements and design brief agreed to between the parties; the partner will enter into a design\build agreement with Westeinde to build the facility

 

- The partner will secure the financing for the construction of the facility, based on terms acceptable to the City; the City will provide a date certain loan guarantee to the lending insititution to secure the lowest financing costs possible

 

- The project will be executed under a Municipal Capital Facilities Agreement; the partner will be exempted from development charges, site planning and building permitting fees, and from property taxes, both municipal and education

 

- The City will enter into a sub-lease with the partner to occupy the building and will make lease payments to the partner

 

- The partner will be responsible for the property management of the facility based on the terms summarized in this report; the partner will enter into an agreement with Trammell Crow for the provision of these services to the City

 

- At the end of the 30 year term, the ground lease will expire and the land and facility will transfer to the City for one dollar

 

Schedule

 

With the approval of this report by Council, the City and Forum will immediately proceed to finalize the necessary legal agreements and then seek the necessary site planning and construction approvals.  A start of construction is anticipated by early September 2004 with the opening of the facility in November/December 2005.

 


Benefits

 

This public-private partnership approach is providing the City with good value as it builds on the strength of both partners. Some of the more significant benefits to the City are as follows:

 

- the City is getting a new facility through a competitive process, at a slightly better cost than under our standard procurement process

- the partnership is committed to deliver the building for a firm price, subject only to adjustments for steel price increases; any risks associated with the design and construction is accepted by  the partner

- the City, through its extensive discussions with the partner, has refined and confirmed its requirements for the new facility; this ensures that there is a very high level of understanding among all parties on the facility being delivered, and will facilitate the construction management process

- the approval of this partnership will ensure timely construction of the facility and remove the operational risks associated with our current leasing situation at 530 Tremblay Rd.

- this partnerhip provides the City with a build to suit/lease to own type of arrangement, with the land and facility transferring to the City for one dollar at the end of the term; this is essentially a risk free proposition to the City, as the building will be for the exclusive use of the City

- the lease payments from the City will be the lowest rates possible from the private sector, as the City will provide a loan guarantee on the debt to obtain the lowest interest rates possible, and all operational costs are flowed through the City without any mark-ups

 

The new facility will support public safety, health, and well being of residents and visitors alike, through the provision of efficient and effective emergency response services. It will also support improved operational efficiencies through the consolidation of services in one location. 

 

RURAL IMPLICATIONS

 

The Ottawa Paramedic Service Headquarters facility will serve all residents in the City of Ottawa, including those in rural areas.

 

 

CONSULTATION

 

As per Council’s direction, a public meeting will be held on June 8, 2004 to present the new facility design and agreement framework for the Ottawa Paramedic Service Headquarters public-private partnership. The feedback received at the open house will be communicated verbally to the Corporate Services and Economic Development Committee at the time of the presentation of the report.

 

 

FINANCIAL IMPLICATIONS

 

This agreement will result in an additional pressure on the City’s operating budget over the term of the agreement.  As the new facility is expected to be delivered in late 2005, the financial impact will be reflected partly in 2005 and then fully from 2006 until conclusion of the lease and subsequent transfer of ownership.

 

Currently, the total annual cost to house the Paramedic Service at 530 Tremblay Rd. and at 1887 St. Joseph Blvd. is $770K. With the new facility, operating costs are expected to be in the same range. The lease to own payments will be approximately $1.5M annually, depending on final project costs and interest rates at the time of closing, and this amount will need to be added to the departmental base budget starting in late 2005.

 

 

DISPOSITION

 

The Strategic Delivery Unit, along with the Real Property Asset Management Branch, the Emergency and Protective Services Department, and the Corporate Services Department will finalize the terms and conditions of the agreements with Forum as outlined above. The Legal Services Branch will prepare and arrange for the execution of these Agreements and the Municipal Capital Facilities By-law.