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Heritage building focus of another audit's wrath

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A downtown Winnipeg heritage building that served as a focus of a scathing 2000 city real estate audit has re-emerged as a contentious facet of the city's latest real estate audit.

Fourteen years ago, an internal audit of city real estate transactions conducted in 1998 and 1999 concluded Winnipeg paid too much to lease the Confederation Life Building, a 10-storey steel-frame structure erected on Main Street in 1912. The building contains city office space.

In a report issued in the spring of 2000, former city auditor Shannon Hunt lambasted municipal officials for signing a 15-year lease on the structure that involved projected payments of almost $11 million, or roughly five times what she and a team of accountants determined the city could have paid to acquire the heritage structure.

The lease with building owner Shindico Realty was slated to expire in January 2015. In early 2011, city officials began renegotiating the lease and recommended council approve a 25-year extension in December 2011.

As part of the Winnipeg Real Estate Management Review, a report made public by the city last week, consulting firm EY concluded there was no reason for the city to renegotiate the Confederation Life Building lease so far in advance -- a move that wasn't in the city's financial favour.

"By renegotiating early, the city incurred approximately $1.2 million of additional base rent costs," EY auditors wrote in their report.

They said the extra cost wasn't highlighted in the 2011 report to council, although it was included in the "additional comments" section. The report recommended the lease be bundled with a lease renegotiation for the Hamilton Building, another Main Street heritage structure.

The Hamilton Building renegotiation saved the city $1.5 million, wrote the auditors, suggesting they could see no reason to bundle the two lease renegotiations together.

EY also rapped the city for paying above industry-standard rates for building-management fees on the Confederation Life Building, not having city lawyers scrutinize the contract and signing a 25-year lease extension with no cancellation clause.

"Priorities of the city could change over time. Longer-term leases do occur in practice in the public sector; however, they would typically contain shorter than 25-year terms, with renewal options, or an option to purchase over a number of years," the auditors wrote.

They also criticized the city for failing to conduct a detailed assessment of the building's condition and failing to consider other places to rent city office space, especially since the city is expected to contribute $4.3 million over 10 years to help maintain the building.

"An expression of interest from other possible landlords to assess fair value rent options (including options which may not have required a capital expenditure amount) should have been considered," the auditors wrote.

In response to EY's concerns, city officials told the auditors the idea to present both leases in a single report came from current city auditor Brian Whiteside. Given the contentious history of the Confederation Life lease, both Whiteside and consulting firm KPMG reviewed the deal.

City staff also said former Winnipeg chief administrative officer Phil Sheegl was granted the authority to set the final conditions.

In an interview last week, Sheegl took issue with EY's conclusions. He said he found them surprising, considering both Whiteside and KPMG reviewed the lease. "How the auditor can now turn that around is beyond me. He needs to look in the mirror," Sheegl said.

The EY audit, however, suggests the final terms were set after council approved the deal in December 2011. "The leases were not finalized until well after the leases were approved," they wrote.

The original 2000 audit's conclusion was also flawed, suggested Shindico Realty president and CEO Sandy Shindleman.

He suggested the notion the city could have purchased the building for a fraction of the lease payments was mere conjecture.

"Who said they could have bought it?" Shindleman asked.

Republished from the Winnipeg Free Press print edition July 7, 2014 B1

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