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Status: I'm making my own blogging tool using MS Access. Things are generally going well -- just need to work on automating publication and on inserting paragraph breaks. In the meantime, I'm deficient in white space.
Union Station Deal Up in the Air
21/07/2003

There is now a dispute raging over the future of the city's controversial deal to lease out Union Station to an organization that promises to spend $16 million on renovations and to invest $150 million in retail development.

As explained on City Hall's Union Station website:

At a special meeting on July 18, 2003, members of the Administration Committee voted to endorse the final City staff offer to the Union Pearson Group for a 60-year term and the revision to the closing date to February 28, 2004. If the Union Pearson Group does not accept the City staff final offer by midnight, Tuesday, July 22, 2003, the Administration Committee directed that the Commissioner of Corporate Services then commence negotiation with LP Heritage +, the second of two proponents that responded to a request for proposals relevant to Union Station in 2001.

Now, the Union Pearson Group has demanded that the city pay $10 million in cash to offset the reduction in the value of the lease. The city is balking and there is a chance the deal may collapse.

I find this remarkable.

If the present day value of years 61-100 of the lease is $10 million, then what is the present day value of years 0-60? Must be a lot!

Let's try to calculate it.

Here are some assumptions:

  • The Union Pearson Group counts on earning a 10% return on investments.
  • The annual increase in the revenue generated by Union Station will increase by 3% per year (retained by UPG).
  • The present day value of years 61-100 of holding the lease is $10 million.

I think this is equivalent to an equal payment series problem with an interest rate of 7%. The calculation is pretty easy using interest factors for discrete compounding, and specifically the present worth factor.

Let x be the annual revenue of Union Station, in today's dollars.

$10 million = x (P/A, 7%, 100) - x (P/A, 7%, 60)

$10 million = 14.269x - 14.039x

$10 million = 0.23x

x = $43,478,260.87

That's $217 per square foot per year. Hmm. Obviously I've done something wrong, since this is higher than the highest rents in Canada. I'm no finance pro. I must have chosen inappropriate percentages. Either that, or UPG is bluffing and full of it when they demand $10 million for years 61-100.

The bottom line, however, is that this deal doesn't seem to return nearly enough to the city based on the potential of Union Station. As far as I can tell, we only get a $16 million restoration and the same rent we earn now.

Keep in mind that the City Hall could borrow the money to do what UPG promises to do for a cost of around $10 million per year. But then we'd get to keep all the profits... or develop the station in a way more suitable for commuters.


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