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$3.38 Million Extra Value For McDonald’s?

mcdonaldssqueaky.jpgIn Tuesday’s news round-up, we told you that the plan to sell McDonald’s the land at Bloor and Avenue had been halted until January 18. It’s a good thing, too, as there are many questions that must be answered before the $3.38 million sale is finalized. Is it in the best interest for Toronto taxpayers? Is the sale a smart corrective action to the bungled 1971 lease agreement or another dumb move we’ll regret for the next 33 years?
There are two reasons to sell. First, the city would receive the money now, instead of haggling with McDonald’s for increased rent or waiting out the remaining 72 years on the lease before selling. Second, a sale would reduce some legal issues at hand. If the city chooses to continue the lease but charge a higher rent, there’s a good chance of going into arbitration with McDonald’s. (The fast food giant has dragged its feet in renegotiating rent on the Bloor and Avenue property since 2004 because the city wants to increase the monthly rent by thirteen times to $16,500. $3.38M would be worth almost 20 years of increased rent.) If Toronto chooses to sell the property to other parties, the city would first have to break the lease with McDonald’s. In addition, McDonald’s owns the physical building at the location and that complicates a sale to another buyer.
However, the current terms aren’t favourable enough for selling. How can city staff justify selling the land at $550 per square foot, when the annual cost to rent on high-end Bloor is $200 per square foot? The city’s director of real estate services, Joe Casali, hasn’t given sufficient reasoning for the price, except that he’s “done his homework on it.” (We’re giving him a D for not showing his work.) However, a neighbouring developer told the Star that he’d buy the land for $5 million “without even thinking about it.
The most confusing part of the agreement is the provision that the city would be entitled to half of any gain in value if McDonald’s resells the land within ten years. Implicit in this provision is that the land will escalate enough in value to make the asking price require supplementation, so why not increase the asking price? Also, if Toronto is hedging its bets against McDonald’s reselling the land so soon after purchasing it, then why is the city making the sale at all?
If the problem is McDonald’s taking the city to arbitration for the rent increase, could the lease have been written so poorly as to allow the rent to stay at $1,250 until 2070? (Could a Big Mac combo cost that much by then?) Inflation in Toronto has increased by over 510% since the lease was signed in 1971. Rent for the land based solely on inflation would be around $6,400 a month. Couldn’t the city make the case that the increased value from the surrounding luxury vendors and ROM renovations in the area supports a rent of $16,500 a month?
In the end, the sale must come down to whether or not it is in the best interests for the citizens of Toronto. The city should not be badgered into selling the land because McDonald’s is playing nasty over rent. The motives for McDonald’s buying the land are unclear, and if the intention is to sell to a land developer to allow a new condominium, does Toronto needs another condominium on Bloor? Instead, we’d prefer the city to keep the land for a more culturally valuable property, like a museum or gallery to complement the Royal Ontario Museum and the Gardiner. Besides, the land is bound to increase in value, so there’s no rush to sell. Unlike the short-sighted lease agreement, a short-sighted sale would be permanent.
Photo by Squeakyrat from the Torontoist Flickr Pool.

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