Federal building sell-off led to bickering and legal threats

A controversial 2007 real estate deal to sell seven federal office buildings to a private company and then lease them back resulted in years of bickering, a lawsuit and questions about whether the transaction was worth it, according to documents obtained by CBC News.

Documents obtained under Access to Information include allegations of overpayments, double-charges

When former Public Works minister Michael Fortier signed a sale-and-leaseback agreement for seven government buildings in 2009, he said investments in office towers "should not be a priority for government." (Adrian Wyld/Canadian Press)

It was a big deal.

In the fall of 2007, the Conservative government sold seven federal office buildings to Vancouver-based Larco Investments for $1.4 billion in a controversial public private partnership.

For a government looking at deficit reduction and a credit crunch, offloading a bunch of valuable yet aging structures requiring massive repairs was a no-brainer. The arrangement promised savings for taxpayers, reduced risk to the government and accelerated maintenance at prime downtown properties in Calgary, Edmonton, Ottawa, Toronto and Montreal where civil servants occupied most of the offices.

But documents obtained by CBC News show the deal resulted in years of bickering, a lawsuit and bureaucrats questioning whether the transaction was worth it.

Investing in office towers is not — and should not be — a priority for government- Michael Fortier, former Public Works minister

More than 3,000 pages of emails, memos and reports obtained under Access to Information after a wait of more than two years reveal, among other things:

  • Legal threats.
  • A $250,000 squabble over parking fees.
  • Millions in unexpected budget increases.
  • Repeated demands for Larco to back up budgets.
  • Drawn-out spats over repairs, salaries and operating costs.
  • A clash of cultures in how public and private sectors conduct business.
  • Disagreements over the tendering of contracts.

The sale-and-leaseback initiative was the first of its kind for the federal government. When then-Public Works minister Michael Fortier announced the deal with Larco Investments he said, "Investing in office towers is not - and should not be - a priority for government."

Under the complex agreement, Larco would be responsible for a backlog of maintenance and repairs that had to be completed within 10 years, which is also how long the company would have to wait if it wanted to sell the buildings. As for the government, it would stay on as the buildings' biggest tenant, paying rent for 25 years and have some influence over how the private company would conduct business.

Based in Vancouver and owned by Amin and Mansoor Lalji, Larco is one of Canada's biggest real estate developers. It owns high-end hotels, shopping malls, storage facilities, office and apartment buildings. Managing federal government office properties, though, was a new venture.

Over-payments and parking pains

Just a stone's throw from Parliament Hill, the Thomas D'Arcy McGee Building at 90 Sparks St. was built in 1981. Among its tenants are several hundred government employees, diplomats, the Federal Court, Court Martial Appeal Court and a branch of the Royal Bank. It used to have a bustling food court and several retail stores but today there's just a news stand and muffin shop.

Maple Leaf Property Management, a Larco-owned company, took over the day-to-day operations of the building on April 1, 2009. Within months though, tempers flared at Public Works and Government Services Canada about alleged over-payments.
Michael Fortier, then minister of Public Works, left, and Amin Lalji of Larco Investments, agreed to the sale and leaseback of seven federal office properties, Oct. 31, 2007. Documents obtained by CBC show the deal has been fraught with disagreements and threats of legal action. (PWGSC/Marketwire/Canadian Press)

In February 2010, a series of emails between Public Works managers warned each other to be prudent when approving future budgets from MLPM, as they felt the government paid far too much for services including insurance.

"For the 2009-2010 fiscal year, for 90 Sparks for example, we approved $250,211.00 and then MLPM came back later and said they really only needed $152,885 (after they received a quotation), a difference of $97,326 plus fees that is sitting in their accounts right now and to which they say is their money to manage," wrote asset manager Myles Forget.

His colleague Mario Arès chimed in on the email chain, "For our 2 (buildings) does it mean that we will give the landlord more than $200,000 he won't spend and he'll give us back in September? It looks like a no-interest loan!"

The conversation among Public Works staff continued for another two weeks. On Feb. 25, 2010 another asset manager, Ginette Bouvier, questioned the entire deal by asking, "What is the benefice (sic) of the Crown in Sale/Leaseback? If the taxes payers (sic) know that the private sector is making interest on their money — what will be the reaction of the public?"

Then there was the dispute over double-payment for parking stalls in the underground garage. Emails from May 2010 show Public Works took issue with a bill for $47,250 in arrears for parking stalls that MLPM had decided were "reserved" spots.

In investigating the situation, Forget discovered something even more startling — that for years, Royal Bank staff and the government had both been paying for the same parking spots.

"I've calculated that MLPM/Larco owe us $257,890 and they will be required to reimburse. I am quite certain that they will not agree to this amount nor will they agree to the concept and they will plead ignorance," Forget wrote in an email to colleagues. The situation had not been resolved by Nov. 15, 2010 when Forget updated staff, "I believe that there could be potential legal action regarding this issue."

However in January, 2011 an email from another Larco company called Canadian Leaseback said it would only credit Public Works for a portion of the parking funds if it agreed in writing to a number of demands, including that it abandon "any further request for reimbursement of past parking already paid for RBC employees or for any other contractual obligations PWGSC has or had with their subtenants or any other third party."

There are many times that the tenant continues to try to act as it were still owner, thereby impeding the ability to achieve the goals of the transaction- Mansoor Lalji, Larco co-owner

Bouvier, fired back on behalf of Public Works with a fax on Feb. 1, 2011 that said Public Works would not accept a credit of $23,721. "This is our demand for payment notice to Canadian Leaseback (GP) Inc. to refund the over, payment of $257,890 (...) Please govern your actions accordingly."

Throughout the parking dispute, Public Works was also fighting with Larco over its budget for 2011-2012. Amid repeated requests for more documentation is a terse March 10, 2011 email from Sandy Warda, PWGSC manager of lease administration and real estate. She said the budget contained estimates for operating costs and capital repairs that, according to the lease, should not be paid for by the tenant. Warda also complained about estimates for salaries and insurance.

That didn't go over so well with Canadian Leaseback — another Larco company.  Mansoor Lalji took Warda to task over Public Works' "endless requests for changes and the imposition of arbitrary guidelines or budget amounts." 

He said his company seeks a productive relationship with the government where it can attain savings while providing taxpayers with value but "cannot do so in an environment whereby PWGSC creates insurmountable hurdles without sufficient grounding in the Lease and creates processes which are burdensome and can never be sufficiently completed (...) there are many times that the tenant continues to try to act as it were still owner thereby impeding the ability to achieve the goals of the transaction."

Public Works questions value for money

In an Aug. 10, 2011 review of MLPM's revised budget for 90 Sparks, Public Works property and facility manager Krystal Chevrier questioned changes to planned repairs, maintenance or replacement of everything from a garbage compactor and revolving doors to the fire alarm and roof.

"Overall it is evident that MLPM has not provided value for money to PWGSC. As you know we have raised this issue on several occasions with various tenant projects and have demonstrated that MLPM costs are by average over 50 per cent higher," wrote Chevrier.

Public Works took issue with MLPM's budgets for every building, including Canada Place in Edmonton. In July, 2010 Public Works' property and facility manager David Hastings told MLPM it would not approve its 2010-2011 operating budget.

Hastings cited what he called an unexplained $1,076,203 increase for roads, grounds and security. He also made sure to remind the company that the government was already paying rent of $14,615,559. There were also disagreements over the tendering of janitorial and security contracts, insurance rates, high consultant fees on boiler replacement and unacceptable on-side labour rates.

"We have indicated on many occasions that we are obligated by legislation to only pay for actual expenses — not an estimate or average," wrote Sandy Warda in March 2011. By October, 2011 the complaints focused on the inaudibility of the public address system during fire alarms. "This situation is a significant life safety concern to both our occupants and to PWGSC."

Thousands of pages of documents show many of the same complaints surfaced at the Harry Hays building in Calgary, Skyline Campus Towers in Ottawa, 305 Rene-Levesque St. in Montreal and the Joseph Shepard Building in Toronto.

Larco and Public Works refuse interviews

Public Works refused CBC's request for an interview. Among CBC's questions was whether the government ever sued any of the Larco group of companies. In an unsigned email the department said, "In 2009, PWGSC initiated legal proceedings against Canadian Leaseback (GP) Inc. that resulted in an out-of-court settlement in 2011."  The department has refused to provide more detail about the building or issue at the heart of the disagreement.

As for specific disputes identified in the documents, PWGSC said "appropriate measures have been taken to address specific issues and continue to be taken throughout the duration of the contract." 

 In its own emailed response to CBC, Larco executive Thaddas Alston said the company is contractually bound by the leases with Public Works not to disclose the substance of its relationship with the government.

"As a general comment though, we are pleased with this investment and with our relationship with PWGSC. If we had the opportunity to make a similar investment in the future, we would do so as we believe such an investment is not only aligned with our long-term investment strategy and goals, but is also in the best interest of the government and taxpayers," wrote Alston.