A few weeks before the tumult at Toronto's MaRS centre exploded into public view, Ryerson University approached the Liberal government with a request: Was there anything the province could do about the lease rates at the MaRS tower, the gleaming monument to innovation sitting near-empty across from Queen's Park?
Ryerson's science department was searching for 25,000 square feet of specialized lab space near its Yonge and Dundas campus, making the tower, known as MaRS phase II, an ideal fit. But the school couldn't afford to move there.
"The cost structure of MaRS was going to be very challenging," Julia Hanigsberg, the vice-president of administration and finance at Ryerson, said. "If it was challenging for a university, it was obviously going to be very challenging for a start-up."
Ms. Hanigsberg was told the government was working on the issue, but what she didn't know at the time was the Liberals were quietly preparing a $317-million bailout of the MaRS tower, which, unable to lure enough tenants, was in danger of defaulting on the $235-million government loan that had made the innovation centre's second phase possible.
Now, with another election looming, the Liberals are under fire for extending the loan in the first place, and for proposing in secret a plan to purchase the MaRS tower, buy out an American developer's remaining interest in the project, and convert at least 10 floors of the tower to office space for bureaucrats.
Ryerson's experience illustrates why whoever forms the next government could have a problem on its hands with MaRS, a private-public project founded by Toronto's scientific and business elites in 2002 as a way to commercialize the eureka moments in the city's thriving basic research sector.
MaRS is saddled with a unique 20-storey tower outfitted for labs and office space, a complex-to-engineer combination that has helped make the space too expensive for even a publicly funded university to rent, let alone newborn companies. Undisclosed terms with a U.S. developer have further restricted MaRS's freedom to lower lease rates at the tower, which is finished and home to a handful of recently moved-in tenants.
The empty floors at phase II and the proposed taxpayer bailout have also raised questions about MaRS itself, and whether its model of bringing together public money and private players in a showpiece building is the best way to create and grow innovative companies.
When the main MaRS centre opened inside the old College wing of Toronto General Hospital in 2005, its focus was transforming life-sciences research into money-making products and companies. (MaRS stood for Medical and Related Sciences, a file name that stuck.)
The organization has since widened its ambitions, supporting companies in info-tech, communications, social innovation and "cleantech" through below-market rents in its incubator space, entrepreneurship classes, mentorship programs, seed funding and other services.
There were early signs that the phase II tower could be difficult to fill, according to interviews with people familiar with the expansion plans, but the Liberals backed the project nonetheless, buoyed by the apparent success of MaRS's first phase.
One source with a long history in health-related real estate said that when MaRS was searching for a developer for phase II in 2007 his company contacted more than 80 players in the private life-sciences sector and found most had no desire to be at College and University. Those that did couldn't justify the cost.
"We couldn't find one single tenant or even a prospect that said, 'Yeah, if you guys do this, I'd be interested.'"
MaRS CEO Ilse Treurnicht remembers it differently. In her first interview since the Progressive Conservatives released confidential government documents detailing the proposed bailout last week, Dr. Treurnicht said that, with the main MaRS facility bursting at the seams, the organization was sure there would be demand for the second phase.
She still believes that. "We're absolutely confident that once we complete these current negotiations [with the government and a U.S. developer,] these tenants that are in our pipeline and are ready to proceed will come into the building and phase II will mirror the success we've had in phase I."
Some in the private sector say that success isn't as impressive as MaRS claims, in part because of how heavily the organization leans on government funding.
"MaRS has always been the government's well-intentioned contribution to accelerating innovation that comes out of the research corridor in Toronto," said Brian Bloom, president of Bloom Burton & Co., an investment banking firm that specializes in health-care companies. "Many of us in the investment community have often thought it's a very large investment, not necessarily into the companies, but into a large infrastructure of buildings and people."
The leaked documents, which the Tories say they received from a whistle-blower, combined with The Globe and Mail's review of Ontario's public sector salary disclosure, MaRS's financial statements and its charitable tax filings, reveal an organization that has come to rely on public funding more and more as it has grown.
MaRS Discovery District, the official name of the charitable organization that oversees a web of MaRS-related entities, grew from 10 full-time employees in 2005, the year the centre opened, to 97 last year, 37 of whom made more than $100,000, including Dr. Treurnicht, who earned $532,501 plus $12,260.16 in benefits.
Some of the money for those salaries comes from profits from the main MaRS building, which is at capacity and returns profits to support MaRS's programming.
But much of that leasing revenue comes from government itself: Nearly 60 per cent of the square footage of phase I is occupied by publicly funded academic and research entities and MaRS programming offices, according to a leasing status chart in a confidential report to the Treasury Board for a May 13 meeting which was cancelled because of the election.
Tax filings show that in 2012 and 2013, MaRS DD received approximately $27.1-million and $28.3-million, respectively, in provincial government funding, or about 60 per cent of total revenue. That is up from the years 2007 to 2011, when between 30 and 40 per cent of the organization's revenue came from the public purse. Overall, the province has pumped $172-million in programming funds to MaRS and its related entities, plus $71-million in capital funding and the $235-million loan for phase II.
MaRS says the public investment has paid off, with $3-billion in economic impact since its launch. Over the last three years, MaRS clients raised $1-billion in capital, $451-million of that in 2013 alone and 78 per cent of it from private-sector sources. A KPMG survey found 85 per cent said MaRS had improved their chances of success.
"I think our results actually speak for themselves," Dr. Treurnicht said. "We are a highly accountable organization governed by a demanding board of directors. We are all here because we are absolutely committed to making a difference."
MaRS clients such as Curtis VanWalleghem, the CEO of a cleantech company called Hydrostor, rave about how MaRS helped launch their companies.
MaRS hooked up Mr. VanWalleghem with his now business partner, Cameron Lewis, whose concept for large underwater air batteries might have remained a back-of-the-napkin idea if not for MaRS staff and volunteers providing patent-protection guidance and introductions to angel investors. Three other MaRS clients The Globe interviewed echoed that praise.
Past plaudits aside, the future of MaRS now rests on phase II, a project plagued by delays and trouble.
In 2007, MaRS and the Dalton McGuinty government announced that Alexandria Real Estate Equities, Inc., had won a competition to build the nearly 800,000-square-foot tower, doubling the size of the MaRS centre.
The real-estate source said excitement over the MaRS mission seemed to overshadow some mundane but crucial challenges, such as basic market demand and the fact that private developers had rarely, if ever, stacked expensive "wet labs" – where scientists handle chemicals, drugs and biological matter in liquid form – on top of each other in a tower combined with office space and multiple, yet-to-be named tenants with different needs.
"It is far too expensive," he said. "It makes it out-of-bounds unless you're in one of two environments: It's a new university building and there's a big grant, or it's government backed."
Calvin Stiller, one of the co-founders of MaRS and a member of its high-powered board, said the organization recognized filling the building could be a challenge, but believed the "spectacular success" of phase I could – and should – be repeated. He spoke on his own behalf, not for the board.
"We knew this was going to be a long haul," said Dr. Stiller, a revered entrepreneur-physician whose research paved the way for modern transplant medicine. "We needed to have the courage and the patience to build this, knowing it would not be easy to fill."
Alexandria, which specializes in life-sciences parks, stopped work at the site in 2008, blaming the financial crisis.
The construction site languished on Queen's Park's doorstep. Three Canadian winters ate away at the exposed concrete and steel, raising the possibility MaRS might have to pay to redo Alexandria's work so far, Dr. Treurnicht said.
Meanwhile, two government-funded anchor tenants for the new building – Public Health Ontario's central labs and an expansion of the Ontario Institute for Cancer Research labs, already located in Phase I – were trapped in limbo.
The delay was particularly hard on PHO, whose Etobicoke lab, built in 1964, was already inadequate and deteriorating fast.
All that led the Liberal government to extend a repayable loan through Infrastructure Ontario – whose loan program, including the MaRS loan, is being investigated by the auditor-general – that revived the phase II project. On July 26, 2011, Glen Murray, then the minister of innovation and research, announced the deal, a few months before the Oct. 6, 2011 election.
Now, with, another election just days away, the consequences of that deal are a hot election topic.
Liberal Leader Kathleen Wynne told The Globe and Mail editorial board this week that if there was any indication MaRS was in trouble in 2011, she wasn't aware of it. "The conversation at the cabinet table has always been: We want to make sure that MaRS is successful," Ms. Wynne said. "And how do we make sure that those businesses actually get commercialized, and that they create the jobs that we think they're capable of."
She has defended the proposed buyout as a smart deal for taxpayers because it would consolidate government offices in a publicly owned building.
Dr. Treurnicht, bound by confidentiality rules, could only hint that she is hopeful a better solution is in the works, one more in keeping with the innovative vision that launched MaRS in the first place.