Land registry records show the title to the two 22-storey towers was transferred from Rostrust Investments Inc. – part of the Rosdev Group – to the Crown on July 21 for $20 million.
Ontario Superior Court documents reveal the purchase was part of a $35.15-million settlement Public Works paid the Montreal developer to resolve their long-standing disputes.
L’Esplanade Laurier occupies the entire city block bounded by Laurier Avenue and Bank, Gloucester and O’Connor streets and contains almost one million rentable square feet of office space. It houses some of the federal government’s most important branches, including the Department of Finance and the Treasury Board Secretariat.
With the question of ownership settled, attention now turns to the massive construction contracts that will eventually be tendered to rehabilitate the 35-year-old towers.
But before work begins, some 4,000 to 5,000 bureaucrats will likely have to be relocated to existing office space or one of the five new federal buildings that Public Works plans to construct in the coming years.
“L’Esplanade Laurier is another piece of a really big puzzle,” says Greg Clark, managing director at brokerage firm CB Richard Ellis.
The building was completed and leased to the federal government by Olympia & York in 1975. Facing financial difficulties, O&Y sold L’Esplanade Laurier to Rosdev in 1995 for $54 million.
Several years later, marble cladding began falling off the building’s first and second floors. Public Works signed a deal with Rosdev to replace the cladding, but the Montreal firm refused to do the work because it said the contract did not specify when it had to do the repairs.
The building’s image took a further beating when water quality problems were discovered in 2002. Workers accidently dumped hundreds of litres of ethylene glycol, better known as antifreeze, into the fresh-water pipes. Further tests revealed traces of lead in the building’s drinking water.
But, putting its well-publicized problems aside, L’Esplanade Laurier nevertheless contains a significant amount of square footage in a prime downtown location that a Public Works spokesperson calls “strategic.”
“This transaction provides excellent value to the Crown,” says Nathalie Bétoté Akwa.
The $20-million purchase price is a fraction of the building’s $150-million market value, she says, citing an appraisal by the Altus Group.
Like any 35-year-old office, L’Esplanade Laurier requires “mid-life rehabilitation,” says Ms. Bétoté Akwa, adding Public Works intends to begin extensive planning this fall to determine the scope and costs of a renovation and modernization program for the building.
All procurement options are on the table, including an “extensive use of private-sector expertise,” she says.
The federal government is currently using a variety of public-private partnership models to construct and redevelop its office buildings.
Broccolini Construction is presently raising Export Development Canada’s new downtown headquarters after winning a build-to-lease contract with the Crown corporation, officially announced in May 2009.
More recently, the real-estate development and construction company won a pair of build-to-lease contracts in May to erect two new office towers for Public Works in Gatineau.
Derek Howe, Broccolini’s vice-president of real estate and development, says his firm will be listening when Public Works announces its plans for L’Esplanade Laurier.
“We look at any and all opportunities,” he says.
Minto is another company that is keeping its eye on the property. The firm attempted to buy L’Esplanade Laurier in June 2007 when it entered into a purchase agreement with Rosdev.
However, the deal never closed because Minto was unable to negotiate a long-term lease with the federal government, according to court documents.
Greg Rogers, the executive vice-president of Minto Commercial Properties, says his company will be watching when Public Works releases its plans.
“They are our biggest customer and we like working for them. We understand their requirements really well and we also understand L’Esplanade Laurier really well.”
Other interested developers could include those companies that expressed interest in buying the property from Rosdev over the past decade. According to court documents, they include Glenview Properties Inc., and Busac Real Estate.
The biggest factor affecting the cost of any redevelopment project is whether or not the building is empty while work is underway, says Mr. Howe.
Mr. Rogers says his earlier plans suggested a certain amount of the building could remain occupied while work is underway.
Public Works says “parts of the building” will be vacated during renovations, but offered no comment on when work might begin.
That’s because the timeline to redevelop L’Esplanade Laurier is likely tied to a planned construction project several blocks over on Elgin Street, between Slater and Albert streets.
The federal government is currently reviewing bids to demolish the seven-storey Lorne Building, formerly home to the National Gallery of Canada, and build a new 489,000-square-foot building on the site and adjacent surface parking lot.
Solicitation documents say the new building will house the Department of Finance and the Treasury Board Secretariat, both of which are currently in L’Esplanade Laurier.
Three pre-qualified firms, which Public Works refuses to identify, had until last month to respond to a request for proposals. Government officials hope to award a contract for 90 Elgin St. this fall so the building can be completed by the fall of 2014.
However, some skeptics question whether that timeline will be met. They say a deficit-fighting federal government, eager to control the growth of the civil service, could put off the project to control expenses. They also point to government delays in procuring two new office buildings in Gatineau.
Both Quebec construction projects were first scheduled to be completed by September 2011. However, that was pushed back after the federal government concluded none of the original bids met its requirements and restarted the entire procurement process.
After awarding the two contracts to Broccolini, the federal government unexpectedly signed another contract with Multivesco for a third office building.
The three buildings are scheduled to be completed between October 2012 and June 2013.
No tenants have been announced for any of the Gatineau builds, which total 1.3 million square feet. However, some have speculated that the Department of National Defence is headed to 455 Boul. de la Carriere, given that DND is already in the nearby Louis St-Laurent Building at 555 Boul. de la Carriere.
But all of the government’s new construction projects combined still pale in size to the Nortel campus on Carling Avenue. The 2.35-million-square-foot property was placed up for sale in April, but local real-estate watchers have long predicted the federal government will eventually lease or buy the property.
With 47 per cent of its leased portfolio up for renewal over the next five years and many aged Crown-owned assets – such as L’Esplanade Laurier – in need of extensive repairs, the federal government will be moving tens of thousands of bureaucrats to new office space in the coming years.
“The government has a lot going on right now,” says one industry observer.
“The ball could really start rolling in the next few months.”
When L’Esplanade Laurier was constructed in 1975, the federal government entered into a 35-year lease with two options to purchase the property.
The first option period ran from Oct. 1, 1995, to June 30, 2005, and allowed the federal government to buy it for a price determined by a formula based on a discounted income stream, or discounts of the cash flow to the end of the lease term.
The federal government had a second option, which ran from June 1 and June 30, 2010, to buy L’Esplanade Laurier for $18 million.
On June 25, 2004, the federal government gave notice in a letter to Rosdev that it intended to exercise its option during the first period for a price of zero dollars, but not close the purchase until June 30, 2010. Along with giving its notice, the Crown registered a notice on title to the property of its intention to purchase the property for zero dollars.
Salvatore Fratino, executive vice-president of Rosdev Management Inc., later testified he was surprised and flabbergasted by the letter. He said the Crown’s notice on title prevented the firm from selling or mortgaging the property.
The relationship between Rosdev and the federal government was already strained, as Public Works had withheld some rents in a dispute over the interpretation of the lease and management agreement.
According to a 2006 media report, the federal government said Rosdev was withholding “service which caused the erosion of the buildings' value as well as tenant dissatisfaction.”
Rosdev launched five lawsuits, claiming a total of $24 million, while the federal government countered with two lawsuits totalling $10 million.
In a decision dated Dec. 21, 2009, an Ontario Superior Court judge ruled the federal government validly exercised its option, but said the price of the property should be $18 million.
Rosdev successfully appealed the decision. However, in the weeks leading up to a scheduled hearing this April over Rosdev’s rent arrears claim, the two parties reached a settlement of all outstanding pieces of litigation.
Under that settlement, the federal government agreed to pay Rosdev $35.15 million. Included in that is $20 million for the purchase of the building and $150,000 in legal costs related to the rent arrears claim.
A subsequent dispute over GST charges on the remaining $15.15 million settlement held up the property sale. Public Works finally took possession on July 21.