Union Station tenants owe city $10 million

Auditor general reports raises red flags about city’s oversight of commercial leases at station, finds routine administrative tasks haven’t been performed for years.

Thestar.com
June 20, 2017
By Ben Spurr

The city has failed to collect almost $10 million it’s owed by commercial tenants at Union Station and has not exercised basic oversight of some leases at the rail hub for years, according to an auditor general’s report.

The report, which will be debated by the city’s audit committee June 27, determined that “lease administration functions” at Union “have not been performed for the past number of years and immediate action is needed” to rectify the problem.

Among auditor general Beverly Romeo-Beehler’s findings were that the city’s real estate division has not properly billed the station’s major tenants for operating costs for at least four years, could not demonstrate that it had collected what was owed from retailers who have since vacated the station and does not have up-to-date measurements of the commercial space or even a complete list of leases at Union.

Councillor Stephen Holyday, who sits on the committee, said that city real estate staff need to explain what went wrong.

“I am concerned,” he said. “I’m going to give the management a chance to explain it to us, and I really want to feel confident that this will stop ... It is a lot of money, and it does speak to the public’s trust in our government.”

The city is the primary owner of Union Station, which is in the eighth year of an $800-million renovation.

In 2009, the city entered into an agreement with a private company, Osmington Inc., to administer leases for 33,000 square feet of retail space at Union between 2010 and 2015 and to administer commercial leases in the revitalized station.

In the past five years, Union has generated $59.4 million in leasing revenue, while over the same period, the city has incurred operating costs of $62.4 million.

The operating costs include expenditures on security, utilities, maintenance, cleaning and waste removal. The city also pays for common facilities such as washrooms and the station’s loading dock.

Under the terms of the leases, commercial tenants are supposed to pay in advance for rent and estimated operating costs.

However, at the end of each year, the city is contractually obligated to provide tenants with a notice of the actual operating costs. If the amount is more than originally estimated, tenants must pay an additional amount under an agreement known as an “annual settlement.”

The audit discovered that “the city did not perform annual settlements with each of its occupants as contractually required.”

City staff could not show that they reached annual settlements with all of Union’s former retail tenants between 2010 and 2015 and couldn’t say whether the tenants owed any money, the report said.

The real estate division also had not reached a settlement with Via Rail, one of the station’s anchor tenants, in the last five years. The most recent settlement with another anchor tenant, Metrolinx, the provincial transit agency, was in 2013.

The report estimated the amount of uncollected payments could total $9.4 million. The auditor general found that by failing to collect the money on time, the city has missed out on about $740,000 in interest it would have accrued. It had also lost an opportunity to take in up to $122,000 a year by failing to exercise the right to charge Osmington for office rent.

Furthermore, the auditor general found that despite the amount of occupied space and common areas in the station changing throughout the renovation, city staff used 2010 measurements in calculating operating costs for the period between 2012 and 2015 as they negotiated annual settlements. Staff also didn’t record anticipated lease revenue in the city’s financial information system.

“The city needs to take immediate action to review the accuracy of current settlement calculations, record the appropriate receivable and collect outstanding amounts owing,” the report said.

The auditor general’s estimates for how much each tenant owes have not been made public.

Via Rail and Metrolinx wouldn’t provide estimates for how much they owe either, but both said they were working with the city to settle up in full.

“We are doing our due diligence and are working with the City of Toronto to conclude this matter in a timely manner,” Via spokesperson Mariam Diaby wrote in an email.

“Metrolinx fully intends to continue to pay its fair share of the operating and maintenance expenses for Union Station,” said Anne Marie Aikins, a spokesperson for Metrolinx.

The report made 21 recommendations, including settling outstanding retail accounts for 2010 to 2015, reaching back payment agreements with Via and Metrolinx, ensuring settlements are reached annually with all tenants from now on, and updating and maintaining accurate measurements of rentable space and common areas.

The auditor general said it was vital that “a strong control framework” be in place before the renovation is complete in 2018. It’s expected that there will be 165,000 square feet of commercial space available for rent in the revitalized station. Space is being freed up as the renovation progresses and Osmington has so far leased out just 4,000 square feet of retail space.

A spokesperson for the real estate division declined to answer specific questions about whether it mismanaged the Union leases. The department has agreed with all the auditor general’s recommendations.