Did NCC, city light fuse on LeBreton implosion?

Melnyk’s RendezVous lawsuit may be a needed wake-up call

It was a startling omission. For half an hour last Thursday, board members of the National Capital Commission spoke in favour of a resolution that would give RendezVous LeBreton’s two main partners — Ottawa Senators owner Eugene Melnyk and Trinity Development founder John Ruddy — two more months “to get their act together.”

The directors were unanimous in their view that, for once, government was not to blame for the lack of progress on a major project, in this case a potentially historic deal to develop a 53-acre parcel of vacant land west of Parliament Hill.

The problem, they agreed, lay entirely within the RendezVous LeBreton team — an assessment that appeared to be confirmed the following day, when Melnyk launched a $700-million suit against Trinity over the terms of the “failed joint venture.”

Left unsaid Thursday, however, was another reality — that, just maybe, the NCC and city bear significant responsibility for this fiasco.

The more you pull apart the strands of the commercial projects at the heart of LeBreton and nearby developments, the easier it becomes to see how the two levels of government exerted a profound influence over the actions of Ruddy and Melnyk.

The upshot is this: The city and NCC created a playing field that pitted Ruddy’s and Melnyk’s financial interests against each other.

They did so by pursuing goals that worked at cross purposes. The city — determined to ensure the success of its $2.1-billion light-rail transit system — encouraged the development of historically tall residential towers at 900 Albert St. and other stops, while the NCC moved ahead with the $4-billion project to remake LeBreton, just to the north of the Albert Street location.

City and NCC officials assumed there would be plenty of demand for the condos and retail outlets that would ultimately pay for both projects.

Despite considerable pushback by Melnyk on this point for the past two years, the politicians maintained this view, supported in part by a real estate study commissioned by Trinity.

But consider the more cautious report on LeBreton’s economics prepared by the firm PwC. Yes, it was commissioned by Melnyk, but its conclusions are supported by independent data.

The gist of the report, outlined in Melnyk’s statement of claim, is that Ottawa has a once-in-a-lifetime opportunity to create a kind of Times Square in the empty LeBreton quarter.

However, PwC concluded the sheer scale of Trinity’s $400-million condo-and-retail development at 900 Albert — with nearly 1,400 proposed units — would result in a rival centre of activity in an area of the city that has economic wealth to support just one.

Further, PwC concludes, the early commercial advantages belong to Ruddy. Not only would 900 Albert be the first to market its condos, PwC notes, but it would enjoy greater economies of scale because it is taller and requires less spending to prepare the site for construction.

Trinity should therefore be able to sell comparable units for less than would be the case on LeBreton Flats.

PwC’s research points to the need for a master development that includes both LeBreton Flats and 900 Albert, one that would create a single centre concentrated around the arena.

Under the terms of the teaming agreement signed in 2015 between Trinity and Melnyk’s subsidiary, Capital Sports Management Inc., Trinity was responsible for lining up lenders, condo buyers and retail tenants, while Melnyk’s job was to finance and build the arena and related sports-entertainment facilities.

The money to pay for all this infrastructure was to come from condo buyers, retail sales, NHL ticket surcharges and other streams of revenue.

To work, the LeBreton project required a critical mass of shoppers, ticket buyers and people who called the Flats home.

Melnyk’s big concern, as detailed in his suit, was that 900 Albert would drain away potential revenues, leaving his portion of the RendezVous LeBreton project starved of cash.

Certainly Ruddy seemed to face fewer financial risks for the moment. Although the Ottawa developer committed to financing the bulk of the LeBreton project (some $3.4 billion of the total $4 billion), the cash demands were spread over two decades.

For instance, it was expected the project would see an estimated 2,400 condos built by 2032, the end of the first phase. Another 2,000 or so would follow.

In sharp contrast, Melnyk’s proposed $600-million arena was meant to serve as a centrepiece for LeBreton by 2022.

Melnyk appeared to have sufficient assets to backstop financing — provided he could produce a revenue outlook that potential lenders could accept. This meant being able to count on lots of traffic in and around the arena in relatively short order.

His nightmare involved building the arena only to be forced to wait for 900 Albert condos to sell out before significant traffic arrives at LeBreton.

Is he right to have worried that Ottawa’s downtown condo market lacks the mojo to support both projects? The ongoing sales effort at Zibi — the 37-acre condo-retail-office development just north of LeBreton Flats — suggests that he was. The $1.2-billion project, which envisions selling 2,000 condos and other residences over the next 20 years — along with one million square feet of retail space — is unfolding at a very deliberate pace.

In the past 12 months, Zibi has sold or pre-sold just 25 condos, according to the latest financing filings from Zibi’s parent company. Since it began marketing condos in 2015, unit sales as of two weeks ago were 117. Zibi had been projected to sell as many as 100 units a year on the Ontario side of the project alone.

Generally speaking, Ottawa is a wealthy city but it’s growing slowly — the Conference Board of Canada predicts population in the capital region will grow an average 1.1 per cent per year until 2022. That’s not a great base upon which to support aggressive marketing. It’s nice to think the region is on the cusp of a Renaissance in downtown development, but it’s just possible Melnyk’s lawsuit is a much-needed wake-up call.

Are the NCC and city sure they’ve got this right? Better to check now than three years in. Heeding the warnings from Melnyk a couple of years ago would have been even better.