Ottawa has hired a pair of investment banks to advise it on a range of options for about $5-billion worth of federal buildings, a review that could recommend spinning off some of these properties into a publicly traded real estate investment trust.
Public Works and Government Services Minister Michael Fortier said Friday that BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. have won a mandate to help the government deal with its aging property portfolio, which needs an estimated $4-billion worth of investment for renovations and maintenance.
The banks will focus on 35 of the 325 Crown-owned buildings, which account for more than half the value of its holdings. This group includes the National Library and Public Archives and the Lester B. Pearson buildings in Ottawa; the NFB Building in Montreal; the Sinclair Centre in Vancouver; and a pair of office complexes in Toronto.
A banker working on the advisory team said the process is "wide open" in terms of options, whether that be orchestrating a sale and leaseback of some of the landmark buildings or bundling a select few into a REIT. He said the estimated value of the 35 properties under consideration is about $5-billion, and predicted the review could lead to a significant transaction, perhaps as much as $2-billion.
The real estate review is part of a broader initiative by Mr. Fortier to eliminate $3.5-billion worth of costs over five years. His predecessor, Scott Brison, who ran the department under the previous Liberal government, invited banks to pitch on the review last year, but the effort was eventually scrapped before anyone was selected.
"Over the last several years, the government has not made the necessary investments in these assets," the government said in a release. It added that its occupancy costs are about 20-per-cent greater than in the private sector.
Mr. Fortier is a former lawyer and investment banker with TD Securities Inc.
In an interview earlier this year, he said establishing a process under which government services and assets are bought and managed in a cost-effective manner was more important than simply selling buildings or doing other transactions.
Ottawa's real estate holdings would attract interest from numerous quarters. The properties could be sold to public investors as a REIT, or parcelled off to institutional investors such as the major pension funds. Canadian real estate assets have also attracted interest from as far away as Australia and Singapore.
But even if there are bids for the portfolio, investment bankers said the government may be a reluctant seller. Political factors such as elections, changes in department leadership or scandals can derail deals.
Just weeks ago, the Public Works department let go two advisers who were hired to help find $600-million in savings on real estate and purchasing costs. David Rotor and Douglas Tipple were shown the door after they embarked on a fact-finding mission to London that resulted in a series of cancelled meetings.
Paul Haggis, chief executive officer of the Ontario Municipal Employees Retirement Board, said his fund recently to tried to buy a provincial courthouse complex for $450-million from the Alberta government. At the last moment, the politicians cancelled the sale.
"We need to get infrastructure investment decisions out of the election cycle, and into the hands of owners whose view is as long as the life of the asset," Mr. Haggis said last week. "Governments, quietly and sometimes reluctantly, are coming around on this."
The banks are expected to report back to Ottawa with their findings by the end of this year. Bankers suggested that if the government does follow through on some of their recommendations, the financial work will be handled by BMO and RBC.
Update, July 20, 2010: The federal government was ordered to pay Douglas Tipple $1.4-million in damages after an adjudicator found his dismissal unlawful. Read the full story here.
