Item - 2017.AU9.9

The Audit Committee recommends that:

1. City Council request the Chief Corporate Officer to:

a. determine the City's measurements at Union Station (as at January 1, 2010) and assess the impact of significant changes to the following measurements for each year after 2010:

1. rentable area (occupied and vacant)

2. common areas and facilities

3. common use equipment

4. areas used for municipal purposes

5. areas under construction

b. ensure that current measurements are maintained and used for annual settlement purposes.

2. City Council request the Chief Corporate Officer, in consultation with the City Solicitor, to determine the appropriate action to take to settle the accounts related to the retail operations at Union Station for the period from 2010 to 2015.

3. City Council request the Chief Corporate Officer to:

a. review the VIA Rail settlement calculations for the years 2012 through 2015 to ensure accurate measurement data and operating costs are applied in compliance with their respective contracts.

b. ensure amounts owing by VIA Rail, for settlement of additional rent for the years 2012 through 2015, are recorded and collected on a timely basis.

4. City Council request the Chief Corporate Officer to:

a. review the current Metrolinx settlement calculations to ensure accurate measurement data and operating costs are applied in compliance with their respective contracts.

b. calculate and recover amounts owing related to Metrolinx occupancy of the West Wing and Centre Block office space from September 7, 2012 to June 30, 2013.

c. ensure amounts owing by Metrolinx, for settlement of additional rent for the period from July 1, 2013 to December 31, 2015 are recorded and collected on a timely basis.

5. City Council request the Chief Corporate Officer to:

a. complete the 2016 settlements of additional rent for all occupants at Union Station and ensure the amounts owing are recorded and collected on a timely basis.

b. ensure future settlements of additional rent are completed with each occupant at Union Station on an annual basis and in accordance with their respective agreements.

6. City Council request the Chief Corporate Officer to annually review and update lease data for each occupant at Union Station in the City's financial information system.

7. City Council request the Chief Corporate Officer in consultation with the Director, Accounting Services Division, to develop and implement a process to periodically review the accuracy and completeness of Union Station leasing receivables and revenues recorded in the City's financial information system.

8. City Council request the Chief Corporate Officer to ensure the estimated Union Station operating costs are calculated annually and each occupant is notified of their required monthly installment payment towards rents and recoveries.

9. City Council request the Chief Corporate Officer to report to City Council on the plans for the East Wing of Union Station. Such plans should include a complete financial analysis of the capital funding requirements and potential profits, costs, and opportunity costs of the available options (i.e. City purposes, retail, office, or strata sale) for the space.

10. City Council request the Chief Corporate Officer, in consultation with the Corporate Finance and Financial Planning Divisions, to validate assumptions underlying the existing financial forecasts for Union Station and report back to City Council with an up-to-date forecast of expected revenues and expenses.

11. City Council request the Chief Corporate Officer, in consultation with the Financial Planning Division, to develop and implement a comprehensive financial model to annually evaluate the financial performance of the commercial operations in Union Station.

12. City Council request the Chief Corporate Officer to develop and implement a cost allocation model that clearly defines how annual operating costs associated with different areas of Union Station will be allocated to and recovered from the Station's occupants.

13. City Council request the Chief Corporate Officer to determine the proportionate share of property taxes payable by each occupant at Union Station relative to the annual property tax bill.

14. City Council request the Chief Corporate Officer, in consultation with the Director, Accounting Services Division, to obtain a financial statement audit of the Leasing Manager's financial records for Union Station's commercial operations from 2010 to 2015.

15. City Council request the Chief Corporate Officer to develop formal policies and procedures to perform periodic reviews of budgets and actual expenditures provided by the Head Lessee. Reviews and explanations for variances should be documented and retained.

16. City Council request the Chief Corporate Officer to:

a. obtain audited financial statements of commercial operations to accompany the annual statement of profit distribution which is contractually due within 120 days after the end of each lease year.

b. determine whether there is a need for a periodic, independent contract compliance review to ensure that commercial revenues, expenditures, and profit calculations comply with the defined terms in the Head Lease Agreement.

17. City Council request the Chief Corporate Officer to implement processes to oversee the commercial enhancement works at Union Station for the purposes of ensuring that construction costs are minimized and the City only contributes up to its contractually agreed share of these enhancements.

18. City Council request the Chief Corporate Officer to review the City's rights under the Head Lease Agreement to enter into rental agreements with the Head Lessee for use of office space in Union Station and take the necessary actions to generate leasing revenue and recover operating costs.

19. City Council request the Chief Corporate Officer, in consultation with the City Solicitor, to determine the City's contractual right to retain any property tax refunds for Union Station and, if necessary, ensure refunds are distributed to the correct occupants.

20. City Council request the Chief Corporate Officer to clarify and summarize the terms in the Head Lease Agreement that are significantly material  or subject to interpretation so that quick reference summaries are readily available for City staff assigned to manage leasing at Union Station.

21. City Council request the Chief Corporate Officer to centrally retain records related to Union Station leases.

22. City Council authorize the public release of Confidential Attachment 1 following the settlement of all Union Station occupant accounts up to and including 2016.

Beverly Romeo-Beehler, Auditor General, and Ina Chan, Assistant Auditor General, gave a presentation to the Audit Committee on this Item.

This report presents the results of the Auditor General's audit of leasing at Union Station.

The Real Estate Services Division oversees leasing at the Station. Union Station has generated approximately $59.4 million in leasing revenue over the last five years. The operating costs over this same period were $62.4 million.

Overall, we found that lease administration functions have not been performed for the past number of years and immediate action is needed to resolve past issues. Of particular importance is the need for management to finalize, record, and collect in a timely manner, the estimated $9.4 million in rents and recoveries owed by Station occupants for prior periods. The details of the outstanding rents and recoveries to be collected are provided in Confidential Attachment 1 of this report. We estimate that the delayed collection of these funds has resulted in the City losing the opportunity to earn a return on capital of $740,000.

Once the focus on Union Station leasing has been restored, attention should quickly be turned towards ensuring future success of leasing in the revitalized Station. Currently, 4,000 out of an anticipated 165,000 square feet of commercial space under the Head Lease is already operating. During this initial phase of commercial operations, management should implement a strong framework to proactively and effectively monitor commercial operations under the Head Lease.

The effective implementation of the 21 recommendations contained in this report will remediate the collection of the City's annual leasing revenue streams and restore contract compliance. In addition, the development of effective controls will lay the foundation for the City to both contain costs and monitor future commercial revenue streams. Collectively, these measures will contribute to Union Station's long-term financial sustainability.