Qualicum Commons - Update - the Lease

I recently reported that the Town of Qualicum Beach and the Qualicum School District announced the finalization of a lease for the Qualicum Commons property and posed the question of how much would this cost the Town. The cost was not known at the time as the announcement did not provide any financial information, nor was the lease included. I requested a copy of the lease and, to the credit of Town staff, it arrived by email shortly after the request.

The lease is for an initial term of one year commencing July 1, 2025 and ending on June 30, 2026. The Town has the right to renew the lease for two further terms - the first renewal for a four year term from July 1, 2026 to June 30, 2030, the second renewal for a five year term from July 1, 2030 to June 30, 2035. As a result, the Town could potentially tie up the Qualicum Commons property for 10 years. However, it should be noted that this may be short-lived as either the town or the School District can terminate the lease by providing one year's notice. This would permit the Town to cancel the lease if, for example, it found the financial obligations to be overly onerous. On the other hand, the School District could do the same if, for example, it needed the property for a new school or it found a buyer for the property.

The rent for the current one year term is stated to be $1 plus the net-lease obligations of the Town pursuant to the lease (more on this later). In the event the lease is renewed by the Town, the same terms and conditions of the initial term, including the $1 rent and net-lease obligations are applicable. It is not clear whether the $1 rent would be for each year of the renewal or $1 for each of the four and five year terms. Given the nominal amount, this is a minor concern.

A greater concern is the net-lease obligations component of the rent. The lease states that it is absolutely net to the landlord (in this case, the School District). The term "absolutely net" is used in commercial leases. It is my understanding that this means that the Tenant (namely, the Town) is responsible for all property-related expenses including structural repairs and maintenance with the the landlord (the School District) having minimal or no financial obligations. The tenant essentially takes on the responsibilities of property ownership without actually owning it. If this is the case, the Town will be assuming, and will be responsible for, repairs to the building that may arise over the term(s) of the lease. As noted in the earlier article, the School District identified approximately $3 million in future repairs including approximately $1 million for roofing and $1.7 million for HVAC. Where will the money come from if those repairs are needed?

In a commercial situation, a tenant would assess the actual and total cost of its rent under a lease and satisfy itself that the revenues produced by its operations at the leased property will be sufficient to pay the rent as well as produce a profit. The lease of the Qualicum Commons property is somewhat different. This is not a commercial venture. The Town is not producing widgets to sell at a profit. Rather, the Town is leasing the property so that it can continue leases currently in place for portions of the building between the School District and various for-profit and not-for-profit organizations. As such, the Town's revenue will consist of the rent paid by those organizations. The actual rent paid by the various organizations (and accordingly, the revenue to the Town) is unknown as Town staff was not able to provide copies of those leases. Also unknown, is whether any of the for-profit/not-for-profit organizations are responsible for paying any of the expenses related to the operations of the property. Typically, commercial leases require tenants to pay numerous operating expenses including such things as electricity, garbage removal and grounds maintenance.

In any event, the lease payments payable to the Town by the for-profit/not-for-profit organizations will be the primary source of revenue for payment of its rent under the lease with the School District. The $1 rent will be easily covered. Not so easy will be the net-lease obligations. These will be any and all costs associated with the property. Hopefully, the Town has conducted the appropriate due diligence to determine the actual costs and is satisfied that the rents paid will be sufficient to cover its obligations under the lease with the School District. No information regarding such due diligence has been released to date by the Town. In the event, the due diligence confirms that the rents are sufficient to cover the Town's obligations under the lease, the information should be released to alleviate any concerns the public may have. On the other hand, the same information should be released in the event the due diligence indicates a shortfall. The public deserves nothing less.

As a final note, hopefully, the Town will account for any and all costs incurred by it for the property. As an example, if the parks crew is used to cut the grass, plant flower beds or pick up garbage at Qualicum Commons, that expense should be posted accordingly, so that the true cost of the lease will be known and disclosed to the public. As with other ventures and assets of the Town, the public is entitled to this information so that it can assess their actual value.

James Noel

June 24, 2023

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