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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.

Comments

  • bigdaddyhame

    sorry, no sympathy for the city on this one. Their predecessors signed a lease in 1971 with McDonald’s and the company has the city over a barrel now.
    I think you can be certain there are larger issues in play here – a developer or two are probably trying to buy up the remaining unre-developed land between Avenue and Bedford and the McDonald’s deal is the only thing preventing its completion. The city fucked up and now they’re going to lose again. McDonald’s will probably get the property, and then enter into a sweetheart deal with a developer so that they get a cherry storefront in whatever massive project goes in there.

  • RealityCheck

    Complete and total ignorance seems to be a requirement to write for Torontoist! I hope you’re still in grade 8, because otherwise that was a shameful attempt at creating an argument.
    Margaret Atwood and her amazingly wealthy racist pseudo-hippies do a much better job at creating a Nimby controversy to preserve their $4M Annex houses. Where else should condos be going except on top of a subway station in a dense urban area? Do you even know what parcel of land we are talking about in your handwaving proposals?
    Then there’s the insanity with respect to the negotiations over rent. The city signed a horrendous agreement and even if they get their max rent McDs will be getting an amazing deal. Unfortunately they will have a very hard time getting out of the agreement, hence the low price for the lease buy-out. You really should try to be a bit more evenhanded when dealing with the respective negotiation positions (foot dragging is just a wee bit negative, especially when no one would be racing to pay a higher rent than they contractually have to).
    Someone should be doing their homework: you and whoever assigned this piece to you without being sure that you understood the issues and had seen any of the coverage of it! Cloning a bad article from the Star does not a Torontoist post make, nor does it excuse the 3 day delay. Go take Econ 101 and several remedial composition courses, then try to write again.

  • dowlingm

    it’s either about money or it isn’t.
    The City would probably make quite a bit of money if they sold to McDs who resold to the city:
    * 3.34 million in cash
    * land transfer taxes from condos (if that’s what happens)
    * development charges for the condo building
    * a million or two in variance payoffs to “community benefits” to obtain the inevitable height variance.
    Of course, if they really wanted to be sneaky they sell the land for 3.34m, expropriate the land and building for 3.34+whatever the building is appraised at and sell the unemcumbered land… but I think the amount of eminent domain the City has might not stretch to that!

  • McKingford

    I don’t know where this idea comes from that the city can’t sell the property to someone else without breaking the lease with McDonalds.
    Of course the city can sell the property to someone other than McDonalds, *and* can do so without breaking the lease. However, the lease goes with the property – so your pool of prospective buyers is limited to those who think they can do a better job of extracting higher rents from McDonalds than the city. The fact that there are some 70 years left on the lease considerably depreciates the value of the property below what it would be worth if there were no encumbrances.
    The fact that, in light of the long-term lease, nobody but McDonalds wants to buy the property does not mean the city, in theory, *cannot* sell the property to someone else.

  • Jaime Woo

    You’re right in noting that the city could sell the property to someone else; however, McDonald’s would remain the lessee until 2070. Whoever bought the new property would not want the lease with McDonald’s so they could use the land however they wished.
    The main question is not if Toronto should sell, but have all the options been reviewed? Casali and McDonald’s have stayed tight-lipped allowing rumours and speculation to spread.
    Part of the speculation also stems from McDonald’s taking three years to re-negotiate the lease. If the company is looking to resell to a developer, the company would not want to be locked in for another 33 years of lease, regardless of the price of rent. The city could take advantage of this urgency to get a better price. Otherwise, the city could argue in arbitration that the price it is asking for is justified.
    The sale has a lot of unknowns involved, and critics of the deal aren’t sure that it’s such a lose-lose situation to need to sell now.

  • Skippy the Magical Racegoat

    Can’t we put a museum somewhere where there AREN’T already a bunch of museums? Doesn’t the city/UofT own enough land in the most central part of the city already? I say give it back to the people, even if that does translate to condo developers.
    We need “culturally valuable” property anywhere but that neighbourhood.

  • RealityCheck

    Jaime you again fail at reading comprehension. McKingford said “However, the lease goes with the property – so your pool of prospective buyers is limited to those who think they can do a better job of extracting higher rents from McDonalds than the city. The fact that there are some 70 years left on the lease considerably depreciates the value of the property below what it would be worth if there were no encumbrances.”
    I also love your passive aggressive dishonest reporter tricks. “Casali and McDonald’s have stayed tight-lipped allowing rumours and speculation to spread.” Who is spreading rumours? You are. Anyone else? You are speculating.
    You need to be BANNED from posting until you are able to articulate a coherent argument and actually understand what you are talking about.
    The worst case scenario for McDs is they continue to print money from their location. In the real world, lease re-negotiations take a long time, especially when they involve politicians who are on a 3 year (now 4) election schedule. When one party has a solid lease that the other party really doesn’t like (99 year lease with very low guaranteed rent), negotiations take a very long time. McDonalds knows that they have the strongest position and that there is nothing to gain from a negotiation. They will win in court or arbitration, so why agree to a higher rent than necessary? You sound like a shill for the city, rather than someone with a greater than room temperature IQ reporting on the situation.

  • rek

    Why does this have to be done now? Won’t Toronto be around in 2070?

  • becmonchu

    “Reality Check” poster needs to check into reality. Your argument is valid but then so is the interpretation of the Original poster. Since when does an opinion equate to a ban just because the original poster’s opinion differs from your own? Freedom of speech much?