There's a happy ending in sight for one of the many political headaches plaguing the Ontario government: the taxpayer-funded bailout of the MaRS Discovery District tower building project. The government is set to be repaid "the vast majority" of the $224-million it lent to the innovation-focused charity to complete construction this year – three years ahead of schedule, MaRS chairman Gord Nixon said.
"The province is going to get 100 per cent of its money back plus interest plus everything else," said Mr. Nixon, the former Royal Bank of Canada CEO. "The story [for MaRS] going forward will be very different … simply because the real estate will be a given rather than part of the story."
Several recent developments have improved the fate of MaRS' tower project. The 20-storey, 780,000-square-foot building is 90 per cent leased, attracting such tenants as Facebook, Airbnb and Autodesk, public-sector organizations including the Ontario Institute for Cancer Research and University of Toronto (now a part owner of the building), and several venture capitalists. Startups on-site include League, the latest from Kobo co-founder Mike Serbinis.
"There is a complete energy here that's changed," said financier Daniel Klass, who moved his Klass Capital into MaRS seven months ago. Canadian Imperial Bank of Commerce, Moneris and Manulife have also put money and employees into MaRS.
When the building is fully occupied next year, it will generate more than $15-million in annualized net operating income, informed sources told The Globe and Mail. This has increased the tower's appeal to private lenders. Real estate advisory firm Altus Group recently assessed the building's value at $513-million, well above the almost $400-million the Ontario government committed to complete it, sources said. It doesn't hurt that the tower is located in a corridor with a 1.4-per-cent vacancy rate and where average Class A office rental rates have increased 20 per cent since 2011, according to CBRE Canada.
With assessment in hand, MaRS and adviser Murray & Co. are working to refinance the property by selling close to $300-million in 20-year mortgage bonds, using the proceeds to repay most of the government loan. Term sheets were received last month from a handful of private insurance company lenders.
"We're now in a position that's actually financially much more attractive over the long haul and much more on mission," MaRS CEO Ilse Treurnicht said. "We have control over our destiny."
That's in contrast to two years ago, when it was revealed the province had bailed out MaRS to finish the tower at the complex, which is dedicated to innovation in health, clean tech and information technology.
The tower was to have been built in partnership with U.S. developer Alexandria Real Estate Equities, hosting established companies and research bodies, with startups provided cheaper space subsidized by donors and rental income. But after the 2008-09 financial crisis, Alexandria halted construction, leaving behind an unfinished stump. The government stepped in to finance construction as MaRS, partly funded by the province, lacked the resources to do so.
The tower was completed in 2013, but Alexandria retained the right to approve leases. Because of "a misalignment," as Ms. Treurnicht put it, between developer and government, the building was only 30 per cent leased by the spring of 2014, when the project's difficulties became public. Reports revealed Infrastructure Ontario approved the loan before any leases were signed and that the government considered filling the building with public servants instead of innovation-minded tenants, leading to criticism from Ontario's Auditor-General.
The government tapped former OMERS head Michael Nobrega and retired Ivey School of Business dean Carol Stephenson for advice. They recommended Queen's Park up its commitment to nearly $400-million so MaRS could buy out Alexandria and make the tower tenant-ready. They believed the building would be fully leased by 2017, the loan repaid by 2019 and additional funds reimbursed by 2035.
After buying out Alexandria in the spring of 2015, MaRS leased the building to innovation-themed tenants, though the government helped by giving U of T $18.3-million to fit out a floor for lab space. Still, Mr. Nobrega said he's pleased as the leasing and refinancing "have been better than anyone expected."
Next up for MaRS is finding a replacement for Ms. Treurnicht, who leaves next year, and launching a fundraising campaign aimed at bringing in close to $50-million.
Whether MaRS, which provides programming to help young companies grow, is making a measurable impact on the startup ecosystem is a matter of debate, though a recent internal survey shows 56 per cent of clients felt MaRS had either a vital or significant impact on their success.
With a report from Adrian Morrow