The financial future of Metropolitan United Church will be shaped by decisions the Congregation makes at its Sunday, June 24 meeting after the Sunday worship service. At that time, amendments to Met's agreement with Lancer Corporation, the company chosen to develop the north section of our property (the North Property), will be considered. All are encouraged to attend, to hear the details of our intricate arrangements with Lancer, and to help make a wise decision for our future.

Below, we give the history of the agreement and its development since the Congregation accepted it in 2005. The meeting, however, will be asked to consider a motion to move things forward. Since it is the tradition at Met that both members and adherents vote, we hope you can find time to read the following and to be part of a large turn-out on Sunday.

The 2005 Agreement

History

Over the years Metropolitan, like many churches, has had trouble financing all the good work it wanted to do in the community. As far back as 1979, Met began looking at ways it could finance some of its programs through what some call “air rights" transfers, or what are more properly called “transfer of development rights" (TDR). In the 20 years that followed, Metropolitan was able to bring in more than $1.1 million through selling options for TDR. None of these options was ever exercised, however. In the late 1990s, a committee was formed to recommend a strategy for dealing with development, or TDR, in the future. This group was called the “Property for Programs" committee. In 1999 this group recommended that Metropolitan replace the Church House building on the north of the property (often referred to as the “North Property") with a commercial building. Its recommendation was accepted by the congregation.

Various proposals were received from developers, and the one from Lancer Corporation was the most promising. An enormous amount of time, effort and money was spent in negotiating a complex legal agreement with Lancer to proceed with development. The “Agreement" actually involved many separate contracts and approvals, including those from the City of Toronto, Toronto South Presbytery (of the United Church of Canada), Lancer Corporation, and of course Metropolitan United Church itself. Basically, though, it breaks down into two separate categories: agreement about the nature of the development (what gets built, officially called the site plan) and the financial arrangements (who pays whom for what).

The site plan: what gets built

Lancer will build a 37-storey residential apartment building and a multilevel underground parking facility. There will be commercial facilities on the ground floor and in the low-rise pedestal surrounding the tower. Lancer will manage it as a rental property for 70 years, at which point the building will become the sole property of Metropolitan United Church.

The underground parking garage will replace the surface parking around the current Met building, and may require digging up some of the current open area (park) to the south of the building, at least temporarily. The park, however, is to be restored and improved. As a condition of approving the site plan, the City of Toronto insists that Metropolitan restore the fence that had originally surrounded the park, but which was removed in the mid 20th century because the congregation could not afford to maintain it.

Prior to the opening of the Metropolitan Centre (church basement), many of Met's programs were housed in the Church House building. To facilitate the North Property development and to avoid the additional cost of maintaining the Church House, Met proceeded with the development of the Metropolitan Centre. At the time, it seemed like a reasonable financial decision to build the Met Centre even if the north property construction hadn't started and, in fact, Met has already benefited from some cost savings in taking this course of action. The north building, however, must still be insured and maintained.

Financially, it would be much better if the building were replaced by a parking lot. This is particularly true because St. Michael's Hospital is about to embark on a large construction project (the Li Ka Shing Knowledge Institute) and will shortly be demolishing its own parking lot. That coupled with the loss of other lots in the area (Church and Adelaide for example) means that parking in the area will probably be in short supply in the coming years.

Financial arrangements: who pays what to whom

The current Agreement is essentially a 70-year lease. Metropolitan leases the land to Lancer Corporation, and Lancer Corporation pays Metropolitan cash. At the end of the 70-year lease, the land and any buildings that have been built on it will belong to Metropolitan.

Monthly rent - prior to construction

Currently, Metropolitan receives payments from Lancer of $20,000 per month in “rent". These payments have the effect of keeping Lancer's option open to build the proposed building. Because of the uncertainty surrounding the deal, these payments weren't included in the 2007 operating budget but have been received up to June, 2007.

Lump Sum - at start of construction

Under the 2005 Agreement, when Lancer announces its intention to start construction, Metropolitan is to receive a payment in the neighbourhood of $1.2 million. While this may sound like a lot of money, it is being paid specifically to compensate Met for having to replace the Church House. Correspondingly, the $1.2 million is dedicated to repaying the $1.5 million loan from the United Church Toronto Conference (now reduced to $1.35 million) that was needed to complete the Metropolitan Centre.

Base rent - once building is occupied

Upon completion and occupancy Lancer starts paying Metropolitan a regular, monthly fixed amount of rent. The amount of so-called “base rent" increases over the life of the Agreement according to a schedule which escalates at the Consumer Price Index (CPI) starting in year 20 of the lease. The increase in base rent is specifically meant to protect Metropolitan from exceptional inflation in the future.

Participating rent - six years after occupancy

Once six years have passed from the date that the building is fit to be occupied, Metropolitan is entitled to collect another type of rental payment from Lancer. This type of payment is geared to the amount of revenue that Lancer is generating from the property. Since revenue is much easier to agree on than expenses, we generally want our share of the pie to be based only on what Lancer takes in, not on what it claims to have earned after other expenses.

The proposed amendments to the 2005 Agreement

The cost of construction for the Project is expected to be around $100 million, and Lancer is hoping to borrow at least $75 million. Lancer's lenders are unwilling to lend unless a mortgage insurance certificate is obtained. The decision to start construction now essentially depends on the Canada Mortgage and Housing Corporation (CMHC) accepting to issue an insurance certificate.

CMHC has two major concerns with the Lease Agreement that was approved by the Congregation in 2005:

1. that part of the base rent (that starts as soon as construction is complete, and escalates over the lease period) is dependent on the CPI. CMHC's primary concern is for the initial term of the mortgage, which is 30 years. It doesn't like the fact that some of the escalation in base rent refers to the Consumer Price Index. What it's worried about is that inflation might get out of hand, and all the money that Lancer takes in might go out the door to Metropolitan to cover the escalating base rent. This might make it difficult for Lancer to make mortgage payments, and cause CMHC to have to pay out on its insurance policy. In the current Agreement, CPI-linked escalations start in year 20. The CMHC would like the escalations to be delayed until year 30, at which point the original mortgage should have been retired.
2. that if the Project falls on hard times, Metropolitan will be able to collect its participation rent (the part that starts six years after occupancy) before CMHC gets paid anything. It's not that CMHC has anything against Metropolitan, it's just that mortgage lenders, and the financial institutions who insure them, are accustomed to being first in line when it comes to collecting money owed by bankrupt or insolvent organizations.

   The current agreement puts Metropolitan United Church first in line if Lancer gets into trouble. The CMHC wants to be first, and has asked Lancer to ask us if we'll agree to that. What's important to note here is that the amount that Metropolitan is entitled to doesn't change, and is still based solely on Lance's revenue, not its profit after certain expenses are paid. The CMHC and Lancer are simply asking Metropolitan to take second position in line to be paid should Lancer become insolvent (after the CMHC and certain others blessed by the CMHC get paid what is due to them).

As a result, the CMHC has told Lancer that it will not provide insurance unless these terms are changed. Lancer has in turn asked Metropolitan to agree to make the proposed changes. The Trustees believe that by agreeing to these two requests, the Church is making major concessions, and has proposed that Met receive compensation as a result.

What the proposed amendments don't change

They will not change what gets built, because the site plan approval is complete. Also, what Metropolitan expects to receive by way of Base Rent and Participating Rent remains unchanged, except that inflation protection related to the Consumer Price Index gets deferred to year 30 instead of year 20.

What the proposed amendments do change

The developer will provide, upon signing the Amended Agreement to Lease, a Bonded Contract to demolish the Memorial Hall portion of the North Property, seal off the old Manse, and pave the site. Consequently, even if the Project does not proceed for whatever reason, the Church will have gained a larger surface parking lot, reduced its insurance costs on that portion of the North Property, and will have avoided having to pay for the demolition itself.

Increased monthly rent - prior to construction

As consideration for these concessions, the Church has asked that the monthly rental payment prior to the start of Construction be increased to $25,000/month from the current $20,000/month.

Lump sum - on signing the amendment

In addition, upon signing the Amendment, Metropolitan will finally receive the originally scheduled payment of $1.2 million which will be used to pay down the Mortgage which we incurred in order to complete the Metropolitan Centre. Previously, this amount was paid at start of construction.

Summary

We are being asked to agree to certain amendments to the original deal that will facilitate the developer's obtaining construction financing. The amount which Metropolitan is expected to receive under these Amendments is not expected to change from that expected under the original Agreement approved by the Congregation in 2005. However, our priority of payment is to be subordinated to other expenses of the developer including mortgage payments and certain operating expenses. As consideration, the developer will demolish the Memorial portion of the North Property in short order. In addition, upon signing the Amendment, Metropolitan will receive the payment of $1.2 million which will be used to pay back some of the money we borrowed to complete the Metropolitan Centre.