erp governance and ownership final

Edmonton Research ParkGovernance and OwnershipCity of Edmonton and Edmonton Economic Development Corporation

January 12th 2015

STRICTLY PRIVATE AND CONFIDENTIALThis report is intended solely for the information and internal use of the City of Edmontonand is not intended to be and should not be used by any other person or entity. No otherperson or entity is entitled to rely, in any manner, or for any purpose, on this report.

Table of contents

2

Section Page

Objective and scope 3Executive summary 4ERP current state and background 17Analysis of alternatives and recommendations 27Roles and responsibilities at RC1 and ATC 35Activation of vacant land 41Activation of the Southlands 47Next steps 52Appendix A: Restrictions 55Appendix B: Case studies and best practices 57Appendix C: Methodology 63

© Deloitte LLP and affiliated entities.

ObjectiveDeloitte LLP was retained by the City of Edmonton (the City) and the Edmonton Economic Development Corporation (EEDC) to work in collaboration with the parties to provide a recommendation on the ownership and governance structure that will best support the future success of the Edmonton Research Park (ERP). There is an overriding implication in our objective and scope of work that both the City and EEDC believe that the existence of a research park in Edmonton is desirable.

The City and EEDC asked us to consider two potential ownership models for the ERP:1. Ownership by a separate entity specifically responsible for the ERP; or,2. Ownership of the ERP through an in-house (City) department.

The City and EEDC also asked us to consider additional alternatives that may best achieve the overall goals of the existing ERP, as well as potential future opportunities.

ScopeOur scope includes:

• Review of historical governance, current state and opportunities for the ERP;• Review of existing roles in the ownership and governance of the ERP;• Comparison of two ownership models;• Engagement of City and EEDC expertise to refine our review and the value of each

potential scenario; and• Next steps and critical success factors.

Objective and Scope

3© Deloitte LLP and affiliated entities.

Executive summary


The ERP requires significant amounts of capital to cover deferred maintenance and ongoing capital improvements. With only 4 vacant lots at the ERP, there is limited development potential and we recommend a hybrid model in which the City owns the assets and EEDC runs the programs and services and activates the ERP. There is the possibility to add some of the surrounding vacant lands, which would significantly increase the footprint and development potential of the ERP.

Executive summary: Overview

© Deloitte LLP and affiliated entities. 5

Bolster the current stateThere are a number of items which require immediate attention. Under our recommendation the City should take over the maintenance and exterior management of ATC, RC1, and BBDC.

We are advising the City and EEDC to jointly explore options surrounding the BBDC building.

The City should effect repairs to all 3 buildings, set aside capital reserve funds, and lease ATC and RC1 to EEDC at less than market lease rates.

EEDC can pass these savings on to potential tenants which in turn will attract higher quality tenants to their incubation programs.

Actualize the visionIn order to realize the full potential for the ERP it is important that the City and EEDC jointly explore the integration of surrounding vacant lands into the ERP.

Enhanced programs and services, implemented by EEDC, also need to be envisioned and implemented.

Enhance valueThe restrictive covenant at the ERP should be modified in a way that does not deter lenders or users, yet still supports the mandate of the ERP.

The City should also initiate changes to the zoning to support higher densities and mixed uses.

Making these changes will increase the value of all property within the ERP.

The ERP of the futureWe believe our recommendations will allow for the ERP to fulfill it’s mandate by becoming “a high quality, high amenity development which embraces the highest standards of industrial park planning and design suited to knowledge based industries and businesses.”

Executive summary: ERP building and land ownership


43K sf/5.1 acATC building

(CoE)

3.4 acresVacant(CoE)

41K sf/2.9 ac RC1 building

(CoE)

67K sf/6.0 acBBDC building

(GoA)

1.7acVacant(COE)

3.8 acresVacant

(Land Enterprise)

Pending(EEDC/SBI)

3.5 acresVacant(EEDC)

Buildings are in need of maintenance:All three buildings that are managed by EEDC have significant amounts of deferred maintenance.

Lots remain empty:There are still 4 large empty lots measuring 12.4 acres, that all stakeholders would like to activate.

Executive summary: ERP current stateThe ERP is currently under-utilized and the City owned buildings have significant amounts of deferred maintenance.

Critical mass of companiesThe ERP is currently home to 1,500 people working for 55 companies and measures approximately 85 acres.

Undeveloped landThere are currently 4 large vacant lots measuring 12.4 acres in the ERP. It is our understanding that no sales have taken place in the last 8-9 years.

The price set for land inside the ERP does not appear to fully reflect the ERP’s restrictive covenant, which requires companies to dedicate 15% of their activity for research and development purposes, nor the ERP’s reduced density stipulated by the zoning.

Significant deferred maintenanceATC and RC1, totaling 84,000 sf situated on 8 acres, are buildings inside the ERP that are owned by the City. BBDC, 67,000 sf on 6 acres of land, is an incubation building in the ERP that is owned by the Province and leased to EEDC. Preliminary estimates (the amount could be higher or lower) show significant amounts of deferred maintenance:

• ATC & RC1 require $8M over the next 5 years• BBDC has $6.8M of deferred maintenance


Sources: Letter from Building and Land Management, City of Edmonton, December 2nd, 2014. Technical Building Audit and Capital Asset Renewal Study, Latem Engineering, June 25th, 2012. Enterprise Edmonton Website, January 6th, 2014.

City of Edmonton

EEDC

responsible for marketing land and managing the ERP

Owner/userscomplies with

LAND

CONVENANT

markets to

builds on

occupies

sells/leases to

Current ERP Land Roles

Executive summary: Analysis of alternativesOur analysis of the two models shows strengths and weaknesses of both. We recommend a hybrid model to take advantage of the strengths of each model while mitigating the weaknesses.

We compared and contrasted two different models based on input from the City, EEDC, our experience as advisors and industry leading expertise, and a study of research parks across the world.

1. City owned model – all land owned and developed by the City.2. EEDC owned model – EEDC owns the land and partners with

third party developers to build out the land

We identified and collected information regarding Critical Success Factors (CSFs) and Key Performance Indicators (KPIs) from the City and EEDC and rated the different models on those collected metrics. (See Appendix C for a list of CSFs and KPIs.)

All of the KPIs and CSFs were framed inside the key goals and objectives of the ERP and best practices from research parks around the world.

Based on our analysis, we designed a hybrid model that takes into account the strengths and weaknesses of the different models, the various stakeholders, and the specific intricacies of the ERP.

Our recommendations are all aligned to the City’s Economic Development Plan, The Way We Prosper Goal #4: Creating an Environment for Innovation.


Model CSF Scoring Star Chart

Increase economic development

Promote the brand of the City of Edmonton to the world

Assist in the development of innovative com

panies

Indu

stry

bes

t pra

ctic

es

Operational

Organizational

AffiliationsPolicy &Regulation

Infrastructure

City Owned (Command & Control)

EEDC Owned (Partner & Develop)

Executive summary: Hybrid model structureWe recommend the City own and maintain the land and buildings and lease the same to EEDC on modified triple net lease terms. The rate is to be negotiated between the parties. EEDC can then partner with a 3rd party to develop the land. EEDC should also enhance the programs and services at the ERP to increase the desirability of the ERP as a hub for research oriented companies, incubator facilities, and economic diversification.

City responsibilitiesUnder our recommended model the City would lease both the vacant lots and the buildings to EEDC. The buildings would be leased to EEDC under modified triple net lease terms that would see the City, as the owner of the buildings, maintain them. The lots would be leased to EEDC on a rolling long term basis. The rate is to be negotiated between the parties.

EEDC responsibilitiesEEDC would then partner with developers to construct appropriate development on the land and would then market the space to end users.

EEDC would run various ERP-wide programs and services in conjunction with their subsidiaries to further enhance desirability of occupancy at the ERP.


Role of a JV partnerEEDC has indicated that they have initiated conversations around the development of the ERP with a number of potential JV partners. A JV arrangement will allow EEDC to profit from development at the ERP while mitigating some risk and potentially leveraging a JV partners financial capabilities to develop the ERP quickly.

ERP Advisory Committee (not shown)We are also advising the formation of an informal advisory committee. There are many stakeholders in the ERP: the City, EEDC, ERP land owners and tenants, and members of the innovation community and the community at large. The formation of an advisory committee will provide an informal forum for various stakeholders to come together and provide guidance to the City and EEDC on various ERP related issues.

City Admin

Leasing and Property Mgmt

maintains buildings

JV Partnerleases land and buildings to

partners withEEDC Management

ERP

markets space

Entrepreneurship

runs incubators and ERP programs

Executive summary: Building rolesThe City should maintain the buildings in order to enhance the value of these assets. The buildings should be leased to EEDC using modified triple net lease terms.

There are two buildings owned by the City and are operated by EEDC in the ERP. We recommend that a lease of the buildings be structured based on a modified triple net lease.

• The City can protect its assets by monitoring and maintaining the building

• EEDC resources will be freed up to focus on managing the incubation programs and other programs and services

• Total Cost of Operations for a well maintained building will be less than that of a building not as well maintained

Deferred MaintenanceUnder this model the City would be responsible for all deferred maintenance (estimated at $8M over the next 5 years), all building repairs to items such as building envelope and mechanical systems, and all exterior building maintenance. The EEDC will be responsible for leasehold improvements (interior finishing and fit-outs); interior maintenance; and the management, negotiation, and marketing of any sub-leases.

Capital Replacement FundThe City must also set aside funds for an ongoing capital replacement fund. The City’s normal practice is to set aside 2% of the building value per year, estimated at $290K/year.


Operating CostsWe estimate operating costs (including building repairs, exterior building maintenance, utilities, property taxes, and insurance) to be approximately $1.26M/year ($15/sf x 84,000 sf) for both ATC and RC1. The City could recover all, a portion, or none of these costs from EEDC.

Lease RateAlthough we are not recommending a specific lease rate, there is a strong case to be made for providing EEDC with free rent ($0 base rent and $0 operating costs).

By providing free rent, EEDC can sub lease space in the incubator for subsidized rates. This will spur significant demand for people to locate in the ERP and allow EEDC to choose the best mix of tenants in the incubation spaces.

High demand and high quality tenants are two of the KPIs identified by the City and EEDC, to measure success at the ERP.

EEDCCity of Edmonton

Interior/Service

Leasehold

Capital Improvements

Building RepairsBuilding

Maintenance

Recommended Building Roles

Executive summary: BBDCWe recommend that the City and EEDC jointly explore options surrounding BBDC. There is currently a large amount of deferred maintenance on the building that needs to be addressed along with ongoing capital reserve requirements. Notwithstanding, the City should repair the BBDC and set aside a capital reserve fund to cover future capital expenditures on BBDC.

Current stateThe BBDC building is currently owned by the Government of Alberta and is leased to EEDC. Under the agreement EEDC is responsible for the repairs and maintenance of the building and leases the building for $1/year. The building has $6.8M in deferred maintenance which are the responsibility of EEDC.

The value of the building, taken from current City tax assessments, is estimated to be $20M.

RecommendationOur recommendation is for the City and EEDC to jointly evaluate and select the best option for BBDC going forward .

Our recommendation is subject to a detailed evaluation of deferred maintenance and a full due diligence that includes a legal, financial, physical, and an environmental assessment.


Operating CostsWe estimate operating costs at BBDC to be approximately $1M/year. Upon acquisition, the City could recover all, a portion, or none of these costs from EEDC.

Capital Replacement FundEEDC is currently contractually obligated to maintain the BBDC building and it will also require a capital reserve account. We recommend that the City set aside this amount on an annual basis.

Based on the City’s normal estimate of 2%/year of building value, the capital reserve requirement for BBDC is estimated to be $400K/year.

Executive summary: Activation of vacant ERP landsWe recommend that the remaining vacant lots be owned by the City and, upon approval of a specific development plan, be leased to EEDC on a long term basis. Both the restrictive covenant and the zoning of the ERP should be modified to increase the value of the City’s holdings and increase demand for occupancy at the ERP.

ERP lands should be retained by the City and leased to EEDCIn our recommended model the City would own the land. Upon approval of a development plan, the City would lease the lands to EEDC (using rolling long term leases) and EEDC would subsequently develop buildings and lease them to users. The land and buildings would revert to the City at the end of the lease. By adopting this model, the biotech lease would no longer be used as it is unlikely the land would be purchased by an outside party.

The restrictive covenant needs to be modifiedIn its current form, the restrictive covenant stipulates that all ERP occupants must dedicate 15% of their activity to research. This limits the type of companies that can take residence in the ERP, makes financing of new construction difficult, and significantly impairs the value of the land at the ERP. An alternate restrictive covenant needs to be crafted in such a way as to not deter lenders while still having the ability to enforce the mandate of the ERP.

Zoning needs to be updated to increase density and allow for other usesOur research and experience with successful research parks shows that increasing density and adding mixed uses (coffee shops, restaurants, retail, housing, etc.) can have a beneficial effect on the ERP, its goal as a destination, and its occupants.


Recommended Land Roles and Responsibilities

JV Partner

City of Edmonton

EEDC

LAND

occupies

leases land to

ownership reverts to

builds on

leases space to

JVs with

CONVENANT

complies with

Users

We recommend the formation of an advisory committee where all stakeholders can have a voice.

Executive summary: ERP advisory committee

Advisory committee functionsThe advisory committee would be an informal group where the various stakeholders of the ERP could meet and discuss common issues. The advisory committee could then advise both the City and EEDC on those issues. Examples could include:

(a) Guidelines for new tenants;(b) Providing guidance on ERP programs and services required;(c) Recommendations around communications and branding of the ERP; and(d) Providing recommendations on design and architectural guidelines.


EEDCCity of Edmonton Province

Investment Representative

ERP Occupant R/E Development Advisor

Industry Representative

Clear Mandate & VisionInnovation Representative

Community Member

Recommended Advisory Committee Members

The Government of Alberta needs to be engaged regarding the potential integration of the Southlands into the ERP. Upon integration, the size and scope of the Southlands may warrant the formation of a separate entity to guide and steward the development of a new ERP.

Executive summary: Southlands

The SouthlandsThe Southlands refer to a large a piece of land on the southern side of the ERP. It is home to Alberta Innovates: Technology Futures (AITF) but remains largely vacant. The integration of this land into the greater ERP could provide significant opportunity to create additional density and create a further affiliation with the Government of Alberta (GoA).

An alternate model to develop the SouthlandsWith only 4 vacant lots, there is limited development potential to capitalize on in the ERP at present. If and when the Southlands are integrated, it may be prudent to examine a different model in which the Southlands are placed into a separate entity that integrates the ERP with the Southlands and provides coordinated programs and services. This entity would develop the new ERP with a focus on building a sustainable research park that would support the innovation community in perpetuity.


Southlands

Edmonton Research Park

AITF

Executive summary: Reasons for a separate entityThe Southlands provides both opportunities and challenges in developing a greater ERP. We recommend that the possibility of a separate entity be explored to tackle the scope and complexity involved in the integration of the Southlands.

Separate entityOur research indicates that there is significant benefit to using a separate entity to develop a research park. In its current state however, the ERP does not have enough development potential to warrant the costs (in terms of both time and money) associated with the formation and ongoing management of a separate entity.

The integration of the Southlands would provide a unique opportunity to build an innovative research park from the ground up that would include the existing ERP lands.

A single entity focused on the development of the ERP would provide a number of important benefits:

1. a single point of communications for the new ERP;2. the potential to develop a more robust brand;3. leverage that brand to attract companies to Edmonton; and4. a closed loop system that would keep the value of the ERP in

the ERP.


ERP-wide programs and servicesThe new entity would work closely with EEDC, with EEDC continuing to provide city wide programs and services, and the new entity taking responsibility for more geographically sensitive programs and services. Examples of services provided by either EEDC and the new entity could include:

1. coordinated programs and services with other incubation and technology commercialization services such as: TEC Edmonton, Startup Edmonton, and Alberta Innovates;

2. direct connections to University campus’ such as MacEwanUniversity, NAIT and the University of Alberta with specific focus on relevant departments such as computer science, agricultural, engineering, health & medical and energy programs;

3. a robust financing program with direct links to government (e.g. IRAP, WED, etc.) and private financing;

4. close ties and connections to industry associations and industry specific commercialization organizations (CanMet, FoodtechCanada, EETP, etc.) that are related to cluster focuses at the ERP;

5. Specific programs designed to reach out to the community and beyond to attract tenants and owners including industry sector focus; and,

6. a well-managed infrastructure program that provides high quality, industry-leading infrastructure and facilities to ERP tenants.

Executive summary: Next stepsThe implementation of our recommendations requires a number of processes to be started, some potentially, in parallel.

There are a number of steps that need to be taken in order to implement the recommendations contained in this report. It is expected that many of these actions can be started in parallel.

1. Bolster current stateThese are a number of items that need to be implemented at the very minimum to allow the ERP to continue operations in an efficient manner that protects the interests of all parties. The first step will be to quantify and allocate costs related to deferred maintenance, ongoing capital reserve contributions, and ongoing operating costs for all 3 buildings.

2. Enhance valueThese action items will allow the City and the other owners in the ERP realize additional value from their assets and should also lead to additional development over time by the owners in the ERP.

3. Actualize the visionThese steps speak to the desire to create a more connected community in the ERP and to increase the footprint of the ERP by integrating nearby vacant lands.


Bolster the current state• Identify and allocate funding for the ERP• Draft and sign building leases for ATC and RC1• Implement repairs to ATC and RC1• Draft the land lease between the City and EEDC• Explore options surrounding BBDC

• Subsequently implement repairs to BBDC

Enhance value• Modify the restrictive covenant on ERP lands• Propose and implement new zoning on ERP lands• Integrate additional programs and services through EEDC• Optimize the tenant mix at the ATC and RC1

Actualize the vision• Engage stakeholders by creating an advisory committee• Enhance programs to attract more tenants/owners to the ERP• Explore the possibility of integrating nearby vacant land

ERP current state and background


ERP current state

The current model at the ERP uses EEDC to manage and market the ERP. Development in the ERP is controlled via a restrictive covenant and zoning. Lots are sold to companies who develop the land and retain ownership of the land and buildings.

The ERP is home to 55 companies that employ approximately 1,500 people.


Established 198085.4 Acres18% vacant land16 buildings482,000 SF+3 bldgs

City of Edmonton

EEDC

responsible for marketing land and managing the ERP

Owner/users

LAND

CONVENANT

complies with

builds on

markets to

occupies

sells/leases to

Current ERP Land Roles

ERP mandate and governance history

Mandate• create a high quality, high amenity development which embraces the highest standards of industrial park planning and design suited to

knowledge based industries and businesses.• attract a specific tenant group engaged primarily in scientific research and development so as to augment and broaden the industrial

base of Edmonton.• create an environment best described as a “place to think”, a campus like complex including areas for reflection and thought as well as

sections where the free flow and exchange of ideas can take place.• ensure that development takes place in an orderly and economic manner.


1980: Edmonton Research and Development Park

Authority formed

1982: Operating/Management agreement created with the

Authority to develop, design, lease, convey lands. City Council approval

required for any significant work.

1992: Authority assigned agreement to EDE

1996: New agreement with 15% research

covenant put in place

1999: Biotech lease put in place

Covenant:The terms of the agreement stipulate that every tenant in the ERP must devote 15% of their activity to research & development.

Biotech Lease:The biotech lease allows qualified biotech companies to lease land for $1 per year with a 10 year option to buy the land at market price at the time the lease was signed. To date, 1 company has exercised their option and 2 are currently in the midst of their lease term.

ERP building and land ownership


43K sf/5.1 acATC building

(CoE)

3.4 acresVacant(CoE)

41K sf/2.9 ac RC1 building

(CoE)

67K sf/6.0 acBBDC building

(GoA)

1.7acVacant(COE)

3.8 acresVacant

(Land Enterprise)

Pending(EEDC/SBI)

3.5 acresVacant(EEDC)

Buildings are in need of maintenance:All three buildings that are managed by EEDC have significant amounts of deferred maintenance.

Lots remain empty:There are still 4 large empty lots measuring 12.4 acres, that all stakeholders would like to activate.

Current buildings in the ERP


Owner/Occupant Sector Lot Size (acres)

Building Size(square feet)

Assessed Value

City of Edmonton/ATC Incubator building 5.11 43,000 $9,061,500Chandos Construction 4.62 28,000 $10,117,500Alberta Boiler Safety Association Standards Organization 3.81 21,000 $8,564,500City of Edmonton/RC1 Multi tenant 2.92 41,000 $5,411,000LabsMart Inc. Pharma/Food/Ag testing facility 1.61 13,400 $3,603,500Epsilon Chemicals Chemical Cleaner Manufacturing 2.57 13,633 $3,024,500Schlumberger Oil & Gas Services 3.78 30,000 $5,789,000LogiCan Technologies Inc. Contract Electronic Manufacturing 5.88 48,000 $5,813,000Province of Alberta/BBDC Biotech incubator 6.03 67,000 $19,967,500Micralyne Inc. Micro Machine Manufacturing 9.84 50,000 $11,737,000DycorZedi

Engineering TechnologyOil & Gas Technology/Services

3.98 49,500 $7,641,500

Canadian Standards Association Standards Organization 1.52 20,500 $2,784,000Quantium Technologies Advanced/Nano Materials 4.05 34,700 $7,164,500Bentley Nevada (GE Energy) Condition Monitoring Instruments 2.24 7,300 $2,325,000Syncrude Canada Ltd. Oil & Gas Producer 6.90 77,400 $13,356,500C-FER Technologies Oil & Gas Technology/Services 5.39 56,000 $7,601,500Total 70.25 600,433 $123,962,000

The Southlands

The Southlands are adjacent to the ERP and are currently home to Alberta Innovates - Technology Futures (AITF) which “provides innovation, research and commercialization services delivering economic and social benefits to Alberta.”

The Southlands have been earmarked for innovation purposes by the Province of Alberta and are largely undeveloped. Its alignment and integration into the ERP has been identified as a CSF to the ERP.

EEDC has initiated contact with the GoA, but no significant discussions have taken place.


Southlands


AITF

Current roles & responsibilities


ACTIVATION OF LOTS

MAINTENANCE OF BUILDINGS

PROGRAMMING

EEDC is responsible for the marketing of land on behalf of the City.

The City assists by preparing the leases and conveying the land.

EEDC is responsible for the maintenance of all City owned buildings in the ERP

EEDC manages a variety of incubation programs and is responsible for the marketing and branding of the ERP. Marketing activities are done through EEDC’s central office.

The roles and responsibilities of the parties were created under the terms of a management agreement dated October 30th, 1996 (amended September 1st, 1999).

EEDC is “granted the exclusive right to develop, promote, design, lease, construct, and market the Research Park lands”.

By the terms of the agreement all occupants of the ERP must devote 15% of their activity to research and development.

There are special provisions included in the agreement for qualified biotech companies which allows those companies to lease the land for $1/year with an option to purchase at t=0 market price for 10 years.

Existing governance and management structure


EEDCs board consists of 11 members from a variety of industries:• Hotel, Oil & Gas Services, Tax Advisory, the

University of Alberta, Insurance, Construction, Management Consulting, Non-Profit;

• and the Mayor of Edmonton.EEDC Board

funds

makes decisions for

EEDC Management

ERP Entrepreneurship

City Admin

City Council

directs

conveys land, provides leases

EEDC is split up into a number of divisions: Edmonton Research Park, Enterprise Edmonton, Edmonton Tourism, the Shaw Conference Centre, Marketing and Communications, and Corporate Services.

In addition, EEDC has stakes in a number of other ventures including TEC Edmonton (JV with UofA), Startup Edmonton, and the Edmonton Filmed Entertainment Fund.

EEDC operates 2 buildings owned by the City which it uses for incubation and technology transfer programs, RC1 and the ATC. They also lease a 3rd

building from the GoA for Biotech R&D, BBDC.

Corporate Development (ERP division) is in charge of the activation of the remaining lots and the maintenance of the 3 buildings which house the various programs.

manages, maintains, markets land & buildings

Mayor

sits as a member of

runs incubators

is the soleshareholder of

selects theboard to sit on

Deferred maintenance on existing buildings

Regarding ATC and RC1A letter dated December 2nd, 2014 from Building and Land Management at the City of Edmonton indicates that City has done a walkthrough of the building and in conjunction with a 2012 report (not provided) the following costs are noted. The costs were scaled to 2015 by using an inflation rate of 3% per year. Further, additional costs for mold testing, a roof condition report, and a glazing report were added. The reports, once completed, could indicate additional repairs (at additional cost) that need to be completed.

Regarding BBDCBBDC maintenance amounts were taken from a report completed by Latel Engineering on June 25th, 2012.

All three estimates are based on reports that are over 2 years old. There is a significant chance that these amounts will be materially higher than indicated.


Building Owned by: Amount of deferred maintenance Notes

ATC City of Edmonton ~$6.0M to 2020 2012 study with 2014 adj prices

RC1 City of Edmonton ~$1.9M to 2020 2012 study with 2014 adj prices

BBDC Government of AB ~$6.8M to 2015 Study completed in 2012

SWOT Analysis of the ERP


Strengths

• Available undeveloped land for greenfield opportunities

• Location is accessible• Close to South Edmonton Common• Proximity to Alberta Innovates: Technology Futures• Existing tenant base includes some high profile

companies (Syncrude, Schlumberger, Micralyne)• Has contributed to the economic diversity of the city• Has developed a certain sense of critical mass regarding

the number and longevity of many of its tenants

Opportunities

• Southlands• Presence of large companies in the ERP (Schlumberger,

Syncrude, Chandos)• Strong Energy, Agricultural, Health, ICT, Engineering,

and Construction sectors in Edmonton• Strong, growing local economy• Strong local innovation focused organizations (Startup

Edmonton, TEC Edmonton, Alberta Innovates)

Weaknesses

• Low demand for space/land− Restrictive covenant

• Buildings have significant deferred maintenance• Limited industry, industry association, and university

affiliation• Limited connection to ATIF• Located away from all local academic institutions• No place in the ERP to socialize/connect• Minimal ERP services and programs

Threats

• Many alternatives for early stage companies in Edmonton in other locations

• University might build their own research park• Downtown Edmonton is “the place to be” due to recent

construction projects• Declining presence of life science companies in the ERP• Many tenants pay below market lease rates; changes to

lease terms or rates could cause tenants to consider alternate locations

Analysis of alternatives and recommendations


Methodology overviewWe framed our analysis inside the goals and objectives of the ERP along with best practices from research parks around the world. We collected critical success factors (organized into 5 categories) and key performance indicators (divided into 4 quadrants). We used these tools to quantify and measure the strengths and weaknesses of each model.

We interviewed stakeholders within the City and the EEDC to determine what the current/future goals and objectives of the ERP should be. Although the answers were varied there were a number of common themes:

1. Increase economic development in the City of Edmonton;2. Promote the brand of the City of Edmonton to the world;3. Assist in the development of great, innovative, companies.

We also scanned and studied industry best practices, and used these along with the goals and objectives of the ERP to frame the remainder of our analysis

We then proceeded to collect Critical Success Factors (CSFs) and Key Performance Indicators (KPIs) specifically in reference to the goals and objectives of the ERP. (See Appendix C for details).

The CSFs were broadly organized into 5 categories: Infrastructure, Operational, Organizational, Affiliations, Policy & Regulation. And the KPIs into 4 quadrants on 2 axes Real Estate/Innovation vs. Financial/Non-Financial.

Our team of experts then scored the various models on the 5 CSF categories and compared them to the KPI quadrants to determine which model would prove most effective.





panies

Indu

stry

bes

t pra

ctic

es

Comparison of potential modelsWe compared the 2 potential models, based on the current state and the 3 different case studies we examined, and measured them based on the CSFs.

1. City Owned We envisioned a City owned model where the buildings were maintained in-house and the ERP lands sold through the City’s internal real estate services. This model gives the City the most direct line of sight. The City would be able to maintain the infrastructure, change the zoning, and modify the covenant easily. But the City’s internal policies and procedures might make it difficult to develop the ERP due to the time it takes to change policies and procedures and approve new courses of action.

2. EEDC OwnedEEDC has indicated they are ready to partner with developers to build a number of buildings on ERP land. Their greatest asset though, is the affiliations with the greater innovation community and their portfolio of programs and services.


Model CSF Scoring Star Chart

Operational

Organizational

AffiliationsPolicy &Regulation

Infrastructure

City Owned EEDC Owned

Each of the potential models has strengths and weaknesses. By taking the best aspects of each, we created a hybrid model that leverages the strengths of the parties involved and mitigates the weaknesses.

Hybrid model


Operational

Organizational

AffiliationsPolicy & Regulation

Infrastructure

Real Estate Innovation

Financial

Non-financial

Hybrid Model Star Chart




paniesIn

dust

ry b

est p

ract

ices

Hybrid model strategyWe are recommending a significant shift in strategy from a model where land is sold to end users, to one in which land is never sold. Even in the event of the integration of the Southlands, we would recommend the same stipulation that land is not sold, though ownership could be held by a separate entity other than the City.

Our strategy is a significant shift from the current model of selling land directly to interested owner/users. Under the old strategy, over time the City and EEDC would have only held interest in the ERP through the ownership of ATC and RC1.

Recommended modelUnder our recommended model the City would retain ownership of all the vacant lands and EEDC would be encouraged to retain equity interest in any newly developed properties.

We believe that this model better aligns to industry best practices and is more sustainable over changes in administration and changes in EEDC’s board and management.

In addition, we strongly believe that by implementing our recommendations, there is the potential to realize significant additional value in the ERP. By selling the land to outside partners the opportunity to capture that value will be lost.

There are also disadvantages to consider as well. The most material disadvantage is the ability for the ERP to be developed quickly. Our recommendation attempts to mitigate this by the formation of an advisory committee for the ERP that can provide guidance for the stakeholders.


Separate entity modelIf, and only if, the Province agrees to integrate the Southlands into the ERP, we recommend organizing the ERP into a separate entity. The details of the structure of the entity can only be determined with input from all stakeholders.

Regardless of the organizational structure we still recommend the same strategy under which land is never sold and the entity take equity positions in all the developments in the new, larger ERP.

Hybrid model ownership and management


ATC building(CoE)

Vacant(CoE) RC1 building

(CoE)

Vacant(CoE)

Vacant(CoE)

Vacant(CoE)

Programs by EEDCExisting building would continue to be owned by the City with incubation programs and other services run by EEDC.

Lots to be leased to EEEDCThe existing vacant lots would be transferred to the City and then leased to EEDC on a long term basis. EEDC would then use the land lease to partner with a 3rd party to develop the lots.

Hybrid model roles and responsibilitiesWe recommend the City own and maintain the land and buildings and lease the same to EEDC on modified triple net lease terms. The rate is to be negotiated between the parties. EEDC can then partner with a 3rd party to develop the land. EEDC should also enhance the programs and services at the ERP to increase the desirability of the ERP as a hub for research oriented companies, incubator facilities, and economic diversification.

City responsibilitiesUnder our recommended model the City would lease both the vacant lots and the buildings to EEDC. The buildings would be leased to EEDC under modified triple net lease terms that would see the City, as the owner of the buildings, maintain them. The lots would be leased to EEDC on a rolling long term basis. The rate is to be negotiated between the parties.

EEDC responsibilitiesEEDC would then partner with developers to construct appropriate development on the land and would then market the space to end users.

EEDC would run various ERP-wide programs and services in conjunction with their subsidiaries to further enhance desirability of occupancy at the ERP.


Role of a JV partnerEEDC has indicated that they have initiated conversations around the development of the ERP with a number of potential JV partners. A JV arrangement will allow EEDC to profit from development at the ERP while mitigating some risk and potentially leveraging a JV partners financial capabilities to develop the ERP quickly.

ERP Advisory Committee (not shown)We are also advising the formation of an informal advisory committee. There are many stakeholders in the ERP: the City, EEDC, ERP land owners and tenants, and members of the innovation community and the community at large. The formation of an advisory committee will provide an informal forum for various stakeholders to come together and provide guidance to the City and EEDC on various ERP related issues.

City Admin

Leasing and Property Mgmt

maintains buildings

JV Partnerleases land and buildings to

partners withEEDC Management

ERP

markets space

Entrepreneurship

runs incubators and ERP programs

There are 3 areas of recommendation

1. Bolster the current state(Building roles and responsibilities)Our recommendation is to manage the building management and maintenance roles at the incubator buildings based on a modified triple-net lease with the owner responsible for capital improvements and maintenance, and the tenant (EEDC) responsible for lease hold improvements; interior services; and the management, negotiation, and marketing of any sub-leases.

We are also recommending that the City explore options regarding the BBDC and subsequently repair the building.

All 3 buildings also require funds to be set aside on annual basis for capital reserve funds.

2. Enhance value(Activation and ownership of vacant land)We recommend that the remaining vacant lands in the ERP be owned by the City and leased to EEDC for development. In addition, the restrictive covenant should be modified on all vacant lands at the ERP and the zoning should be modified to allow for higher densities and mixed use applications.

3. Actualize the vision(Advisory committee and integration of nearby vacant lands)The ERP needs a forum where the various stakeholders of the ERP can come together to discuss relevant issues. We recommend the formation of an informal advisory committee to provide advice to the City and EEDC on a variety of relevant issues.

There are also significant undeveloped lands in close proximity to the ERP. We recommend that the City and EEDC jointly explore the possibility of integrating these lands. Upon integration we recommend that the stakeholders involved reevaluate the development model for the ERP.


Bolster the current state

35

Building roles and responsibilitiesLease rate analysisOptions for BBDCCapital reserve requirements


Owner/user

Under normal circumstances, the building owner would be in charge of all capital improvements and mechanical repairs. This is to protect the value of the asset. Building maintenance and service roles vary, but often exterior maintenance and management is assumed by the building owner.

Traditional building responsibilities


Capital Improvements

Building RepairsMechanical

Leasehold

Depreciable

Additions/improvements

Building Maintenance

Exterior

Interior/Service

Single owner/user

User

Mechanical

Leasehold

Depreciable


Exterior

Interior/Service

City of Edmonton non-profit lease

City

User

Mechanical

Leasehold

Interior/Service

Traditional NNN single tenant lease

Owner

Depreciable


User

Traditional NNN office space lease

Owner

Depreciable


Mechanical

Exterior

Interior/Service

Leasehold

Exterior

Due to the condition and age of ATC and RC1, we estimate that they would attract lower lease rates and higher operating costs than the average for the area.

Triple net lease rates

Lease rate componentsTraditional triple net leases are made up of two components: base rent, which includes owner profit; and operating costs, which include building repairs, building maintenance, utilities, property taxes, and insurance.

From the owner profit the owner must pay for any capital improvements. The additional rent is variable, meaning the owner recovers all costs incurred for providing those services.

Lease rates and operating costs in EdmontonOur estimate is based on the age and quality of the building as well as the lower densities in the ERP.


*Source: Office Market Report Q3 2014, Avison Young

Square Footage Base Lease Rate Operating Costs

Southside Average* $17/sf $12.25/sf

Deloitte estimate $12/sf $15/sf

ATC (Deloitte estimate) 43,000 sf $516,000/year $645,000/year

RC1 (Deloitte estimate) 41,000 sf $492,000/year $615,000/year

Total for both buildings 84,000 sf $1,008,000/year $1,260,000/year

Recommended building responsibilities and lease rateOur recommendation is to adopt the responsibilities, but not necessarily the rent structure, of a traditional single tenant triple-net lease. Wherein the owner is responsible for all capital improvements, mechanical repairs and exterior maintenance and EEDC as the tenant would be responsible for leasehold improvements (interior finishing and fit-outs); interior maintenance; and the management, negotiation, and marketing of any sub-leases.

The lease between the City and EEDC could be structured in one of three ways:1. Market rent including full operating costsThis option allows the maximum cash flow to the City, however at market rents, the EEDC may be forced to charge higher rents to their incubator tenants in order to recover some or all of their costs.

2. Below market rent with full operating costsThis option strikes a balance between City revenues and costs. At the extreme low end, rent could be $0 with EEDC only paying the operating costs. The current lease terms have EEDC paying $1 rent and rather than paying the City for operating costs, EEDC is responsible to operate and maintain the building at their own cost. Under the new recommended model (where the City operates and maintains the building) the cost to EEDC would increase from today.

3. $0 rent with subsidized op costsThis option gives EEDC maximum flexibility and puts all the financial burden on the City. At the extreme end EEDC could pay $0 rent and $0 operating costs. This would result in costs to the City of approximately $1.26M/year for the operating costs of ATC and RC1.


EEDC

Recommendation

City of Edmonton

Depreciable


Mechanical

Exterior

Interior/Service

Leasehold

The goal of the incubator is to graduate tenants from the incubator and therefor rents should either change over time or be based on some other metrics such as change in revenue, change in assets, and/or number of employees.

Below market rates will help to increase demand at the ERP and allow EEDC to select the best mix of tenants to fit the mandate/vision of the ERP.

Options for BBDCWe recommend that the City and EEDC jointly explore various options in regards to BBDC.

Current stateThe BBDC building is currently owned by the Government of Alberta and is leased to EEDC. Under the agreement EEDC is responsible for the repairs and maintenance of the building and leases the building for $1/year. The building has significant amounts of deferred maintenance which are the responsibility of EEDC.

RecommendationOur recommendation is for the City and EEDC to jointly evaluate and select the best option for BBDC going forward .

Our recommendation is subject to a detailed evaluation of deferred maintenance and a full due diligence that includes a legal, financial, physical, and an environmental assessment.


Ongoing capital reserve costsThe City should immediately create a capital reserve fund for the ongoing costs related to ATC and RC1. The City should also consider creating a capital reserve fund for BBDC.

ATC and RC1As the building owner it is prudent for the City to maintain a capital reserve account for their owned buildings. The City normally sets aside 2% of the building value every year to cover capital expenditures. We estimate this amount to be approximately $290K/year.

BBDCEEDC is currently contractually obligated to maintain the BBDC building. It will also require a capital reserve account, estimated in the amount of $400K/year.


Enhance value

41

Land ownership and responsibilitiesLand lease vs. land transfer analysisLand lease rates and termsRestrictive covenant and zoningEnhanced programs and services


ERP land ownership and responsibilitiesLand ownership should be retained by the City, and upon approval of a development plan, leased to EEDC. At the end of the land lease all improvements would revert to the City.

ERP lands should be retained by the City and leased to EEDCIn our recommended model the City would own the land. Upon approval of a development plan, the City would then lease the lands to EEDC (using rolling long term leases) and EEDC would subsequently develop buildings, possibly in partnership with a 3rd

party, and lease them to users. The land and buildings would revert to the City at the end of the lease. By adopting this model, the biotech lease would no longer be used as it is unlikely the land would be purchased by an outside party.

EEDC responsible for ERP programsThe EEDC would run the incubation programs and manage other programs at the ERP.

Land and buildings revert to the CityAt the end of the lease term, the land and buildings would revert to the City, which could then be re-leased or re-developed as required.


Recommended Land Roles and Responsibilities

JV Partner

City of Edmonton

EEDC

LAND

occupies

leases land to

ownership reverts to

builds on

leases space to

JVs with

CONVENANT

complies with

Users

Although we are recommending the land be leased to EEDC, it is important to note that there are advantages and disadvantages to a lease in contrast to transferring the land to EEDC.

Land lease vs land transfer to EEDC


Land Lease Advantages• Longer lease terms can mimic value of land

transfer• City administration retains input on future

developments

Land Transfer Advantages• Full value of the land available to EEDC to

leverage• EEDC board could approve developments quicker• EEDC could realizes gains on land value appreciation

Land Lease Disadvantages• Increases in land valuation would be trapped

during the term of the lease• JV partners’ exit strategies are more limited• Relies heavily on EEDC’s ability to get approvals from

City Council in a timely manner

Land Transfer Disadvantages• No input by City administration• Difficulty in setting price• Relies heavily on the capabilities of the current

iteration of EEDC

Land lease rates are tied to interest rates with terms ranging from 50-99 years. The owner typically approves a development plan as pre-condition to executing the lease and any subsequent improvements require approval by the owner.

Land lease rates and term

Land lease ratesRates for land leases are typically denominated in percentage points as a percentage of the land value. Because of the maintenance-free and depreciation-free nature of land leases, they are often tied to long term bond rates. Current long term (30 year) Government of Canada bond rates are around 2.35%. Given the credit worthiness of EEDC we would expect land lease rates to be in the 2.35%-2.5%range.

Land lease termDue to the long term nature of land leases, terms typically range from 50-99 years with a reversionary clause. The reversionary clause allows the owner of the land to take possession of any improvements at the end of the lease term. The length of the lease directly effects the present value of the lease, with longer leases corresponding to higher values. Due to the extremely low interest/land lease rates in the market at this time, a longer lease will not significantly increase the value of the leasehold. A 50 year land lease should be sufficient for EEDC to partner with a developer and obtain financing for construction.

Approval of all developmentsThe land would only be leased to EEDC after the approval of a development plan by the City. This would allow the City to have a significant amount of control over what is built at the ERP. The disadvantage is that it may take the City a long time to approve developments at the ERP. The City could rely on the advisory committee to give advice in this regard in order to speed up the process as well as get expert input into the proposed developments.


Modify restrictions on land and change zoningModifying the restrictive covenant will unlock significant value at the ERP. Mixed zoning and higher densities will further enhance value.

Restrictive covenantThe end result of the restrictive covenant is that it restricts many companies from operating in the ERP and significantly reduces the value of the land in the ERP. In its current form, it does not support the goals and objective of the ERP.

Further, the restrictive covenant is a significant deterrent to lenders, as the lenders interest could be wiped out by the land owner enforcing the restrictive covenant and taking possession of a non-compliant building.

Our recommendation is to modify the restrictive covenant in a way that does not deter lenders but still protects the integrity of the ERP. The parties have indicated that the restrictive covenant is easier to change than the zoning. Based on this, we recommend that the restrictive covenant be modified as quickly as possible while working on changing the zoning in parallel.

Guiding PrincipalsAn additional mechanism to ensure that the ERP is developed in line with the City’s vision, is to give the advisory committee a set of guiding principals. These principals would be broad and would never change. This would allow the advisory committee to alter its vision and mission to align with the economic and technological realties of the time while still staying true to the guiding principals.


ZoningThe ERP was originally zoned to maintain a low level of density and small building footprints to maintain the natural setting of the ERP. However, leading research shows that high densities and critical mass are of great significance to the success of a research park. Zoning that allows for higher floor area ratios (FARs) and more lot coverage will allow for higher densities. Higher densities could result in the 4 vacant lots being subdivided into more lots.

The current zoning on ERP land is Industrial Business which allows for FARs of 1.2. The ERP would benefit greatly from a zoning designation that would allow significantly higher FARs like Commercial Office Zone which allows for FARs of 4.0 and a greater range of permitted and discretionary uses. Further discussion with the relevant stakeholder groups will be required before deciding on an appropriate zoning for the ERP.

Innovation is often characterized by chance encounters. In fact, one of the key concepts of a research park is to put small innovative businesses in close proximity with large businesses and allow them to interact with one another. Under the current zoning and restrictive covenant, no retail or support services are allowed to take residence in the ERP. A change in zoning would allow for the development of coffee shops, restaurants and other public spaces where people can meet, socialize, and innovate.

Programs should be enhanced and run by EEDCEEDC has access to and has helped develop some very successful initiatives within the innovation community. We recommend that EEDC leverage these affiliations to enhance programs and services at the ERP.

The innovation ecosystem in Edmonton is well establishedEEDC has a number of subsidiaries that provide services to the innovation community. Our recommendations will allow EEDC to stop using resources to maintain and manage ERP infrastructure and allow it to focus on what it does best: create and implement world class services for the innovation community.

Additional programming, combined with increased density and new development are all important to increase the desirability of the ERP.


Actualize the vision

47

ERP advisory committeeSouthlands


We recommend the formation of an advisory committee where all stakeholders can have a voice.

ERP advisory committee

Advisory committee functionsThe advisory committee would be an informal group where the various stakeholders of the ERP could meet and discuss common issues. The advisory committee could then advise both the City and EEDC on those issues. Examples could include:

(a) Guidelines for new tenants;(b) Providing guidance on ERP programs and services required;(c) Recommendations around communications and branding of the ERP; and(d) Providing recommendations on design and architectural guidelines.


EEDCCity of Edmonton Province

Investment Representative

ERP Occupant R/E Development Advisor

Industry Representative

Clear Mandate & VisionInnovation Representative

Community Member

Recommended Advisory Committee Members

The Government of Alberta needs to be engaged regarding the potential integration of the Southlands into the ERP. Upon integration, the size and scope of the Southlands may warrant the formation of a separate entity to guide and steward the development of a new ERP.

The Southlands

The SouthlandsThe Southlands refer to a large a piece of land on the southern side of the ERP. It is home to Alberta Innovates: Technology Futures (AITF) but remains largely vacant. The integration of this land into the greater ERP could provide significant opportunity to create additional density and create a further affiliation with the Government of Alberta (GoA).

An alternate model to develop the SouthlandsWith only 4 vacant lots, there is limited development potential to capitalize on in the ERP at present. If and when the Southlands are integrated, it may be prudent to examine a different model in which the Southlands are placed into a separate entity that integrates the ERP with the Southlands and provides coordinated programs and services. This entity would develop the new ERP with a focus on building a sustainable research park that would support the innovation community in perpetuity.


Southlands


AITF

Reasons for a separate entityThe Southlands provides both opportunities and challenges in developing a greater ERP. We recommend that the possibility of a separate entity be explored to tackle the scope and complexity involved in the integration of the Southlands.

Separate entityOur research indicates that there is significant benefit to using a separate entity to develop a research park. In its current state however, the ERP does not have enough development potential to warrant the costs (in terms of both time and money) associated with the formation and ongoing management of a separate entity.

The integration of the Southlands would provide a unique opportunity to build an innovative research park from the ground up that would include the existing ERP lands.

A single entity focused on the development of the ERP would provide a number of important benefits:

1. a single point of communications for the new ERP;2. the potential to develop a more robust brand;3. leverage that brand to attract companies to Edmonton; and4. a closed loop system that would keep the value of the ERP in

the ERP.


ERP-wide programs and servicesThe new entity would work closely with EEDC, with EEDC continuing to provide city wide programs and services, and the new entity taking responsibility for more geographically sensitive programs and services. Examples of services provided by either EEDC and the new entity could include:

1. coordinated programs and services with other incubation and technology commercialization services such as: TEC Edmonton, Startup Edmonton, and Alberta Innovates;

2. direct connections to University campus’ such as MacEwanUniversity, NAIT and the University of Alberta with specific focus on relevant departments such as computer science, agricultural, engineering, health & medical and energy programs;

3. a robust financing program with direct links to government (e.g. IRAP, WED, etc.) and private financing;

4. close ties and connections to industry associations and industry specific commercialization organizations (CanMet, FoodtechCanada, EETP, etc.) that are related to cluster focuses at the ERP;

5. Specific programs designed to reach out to the community and beyond to attract tenants and owners including industry sector focus; and,

6. a well-managed infrastructure program that provides high quality, industry-leading infrastructure and facilities to ERP tenants.

Use a separate entity to develop the SouthlandsOur research indicates that a separate entity supported by a wholly owned private development could be a good structure to develop the Southlands.

Based on our research, we believe that a some type of non-profit or charitable entity would be an effective structure to manage the development of the Southlands.

The benefits of a non-profit/charitable entity1. It could raise money from other sources to develop the ERP;2. The amount of land and development would allow for a

sustainable entity that could cycle money back into the ERP and the greater innovation community in perpetuity; and

3. It would have singularly focused vision and mandate to develop the ERP, which from our research is an integral component to successful parks around the world.

The ERP advisory committee could transition or help select a board of directors for the entity.

The entity could own a separate Development Corporation that would focus on building out ERP lands through partnerships with private developers. This structure allows the Development Corporation to monetize ERP assets and generate profits on behalf of the entity using a variety of financing and JV structures only available to private corporations.


ERP DevCo

ERP EntityBOD

DevCoBOD

EEDCCity of Edmonton

Other Stakeholders

ERP Entity Structure

Next steps


Executive summary: Next stepsThe implementation of our recommendations requires a number of processes to be started, some potentially, in parallel.

There are a number of steps that need to be taken in order to implement the recommendations contained in this report. It is expected that many of these actions can be started in parallel.

1. Bolster current stateThese are a number of items that need to be implemented at the very minimum to allow the ERP to continue operations in an efficient manner that protects the interests of all parties. The first step will be to quantify and allocate costs related to deferred maintenance, ongoing capital reserve contributions, and ongoing operating costs for all 3 buildings.

2. Enhance valueThese action items will allow the City and the other owners in the ERP realize additional value from their assets and should also lead to additional development over time by the owners in the ERP.

3. Actualize the visionThese steps speak to the desire to create a more connected community in the ERP and to increase the footprint of the ERP by integrating nearby vacant lands.


Bolster the current state• Identify and allocate funding for the ERP• Draft and sign building leases for ATC and RC1• Implement repairs to ATC and RC1.• Draft the land lease between the City and EEDC• Explore options surrounding BBDC

• Subsequently implement repairs to BBDC

Enhance value• Modify the restrictive covenant on ERP lands• Propose and implement new zoning on ERP lands• Integrate additional programs and services through EEDC• Optimize the tenant mix at the ATC and RC1

Actualize the vision• Engage stakeholders by creating an advisory committee• Enhance programs to attract more tenants/owners to the ERP• Explore the possibility of integrating nearby vacant land

Appendix

54

Appendix ARestrictions

Appendix BCase studies and best practices

Appendix CMethodology


Appendix A: Restrictions


Restrictions

• This report relies on information provided by City administration and EEDC management. We have not audited or otherwise verified the information provided to us.

• This report is limited to the items noted under our “Scope of Engagement” section and we have not performed any independent review of this information.

• We do not assume any responsibility or liability for losses incurred by the City of Edmonton or Edmonton Economic Development Corporation or by any other parties as a result of the circulation, publication, reproduction or use of this report, contrary to the provisions of this paragraph.

• We provide no assurance and express no opinion on any forward-looking information or projections. Projections are based on specific assumptions and actual results will differ. These differences may be material.

• See Certain Terms of Engagement at the conclusion of our report for further limitations regarding the use of our report.


Appendix B:Case studies and best practices


AURP Consensus

58

Alignment with Universities is an important success factor for research parks.

UNIVERSITY AFFILIATION

FOCUSED CLUSTERSThe top research parks have specific industry focuses that usually match the local university or industries close by.INDUSTRY SUPPORT

Close partnerships with industry associations and companies are key to building a successful research park.

ALL LEVELS OF GOVTThe best research parks have alignment and affiliation with all 3 level of government.

CLEAR VISIONAbove all a research park needs a clear vision and mandate.

AVAILABLE FUNDINGOne of the most important functions of a research park is to help connect companies with money. Both government and private.

The Association of University Research Parks brought together the top experts in research park development from around the world and published a report describing best practices and case studies


We found 3 research parks that represent 3 different models of ownership and governance. We focused on parks that shared some similarities with Edmonton in terms of age and size.

Governance and ownership models

Pittsburgh Technology Center (PTC)The PTC is wholly owned and operated by the Urban Renewal Authority of Pittsburgh (URA). The URA is a municipal development corporation wholly owned by the City of Pittsburgh and through partnerships with development companies and universities has inject over $100M into the PTC and created over 1000 jobs since purchasing the land in 1981.

Research Park at the University of Illinois (RPUI)The RPUI is managed by Illinois Research Park LLC. The LLC leases the land to a single developer and takes and equity position indevelopments by injecting capital. The land is leased on a rolling basis depending on the developers pace of construction which is mandated by an agreement. Each piece of land is lease on a 50 year term at which time the LLC will retake possession of the land along with any buildings on it. Land is leased at market rates. They are developing the park in stages and hope to complete development by 2060.

Discovery ParksDiscovery Parks in British Columbia is a for-profit real estate company owned by a foundation with a self-selecting board. It is a closed loop system that allows the foundation to extract value from real estate and then inject it into the innovation community. They have activated 80 acres of land through land sales and the development of buildings and have taken that money and turned it into 7 on-campus developments that have since been turned over to their University partners. They have been self-sustaining since 1990.


Pittsburgh Technology CenterThe PTC has not been successful. The City has sunk over $100M dollars into the park, and much of the land remains vacant

Command & ControlCity controls development through zoning and sells the land to owner/users

• Pros: City line of sight and control

• Cons: Zoning changes hard to implement, one-time cash grab, no focus on development of the park, expensive

60

Established 198348 Acres9/16 vacant lots7 buildings684,000 SF

City of Pittsburgh

URA City planning department

Responsible for servicing and selling land

Responsible for zoning and master planning

Developers

Owner/users

complies with

builds on

LAND

MASTER PLAN

sells to

occupies


RPUIThe RPUI is on track to meet their development targets and objectives. Although there is some strife between the developer and the University, they recently agreed to extend the partnership for a further 10 years

Partner with private developer(s)University retains ownership of all lands and leases to a single development partner who subleases to users

• Pros: Ownership of land and buildings revert to the University at the end of the 50 year lease term, developers *know* what the market wants

• Cons: Not always easy for the University to get the developer to build what they want, developer extracts some of the value of the park

61

Established 1999200 Acres75% vacant land14 buildings623,000 SFIncubator rent: $18/SF

University of Illinois

IRP LLC

retains ownership of all land, cooperates with developer to market land and buildings

Fox/Atkins (Developer)

Users

LANDbuilds on

sub leases to

occupies

50 year lease to

ownership reverts


Discovery ParksDiscover Parks has been immensely successful, but has not retained any interest in the park. Now that the park lands are fully activated Discovery Parks is focused on other types of investments in order to generate returns. The CEO of Discovery Parks stated that he would have liked to retain the land & buildings they had constructed so that they would now have a steady stream of income

Seed new foundation/developerLand given to Discovery Parks to develop and market. Fully leased properties sold to REITs and other investors. Cash cycled into University and the innovation community through the foundation.

• Pros: Extracts the most value from the land, sustainably funds the innovation community

• Cons: No control by the City, land eventually owned by investors, requires a strong/experience development company

62

Established 197980 Acres1 vacant lot10 buildings1.5M SFIncubator rent: $0/SF

LAND

City of Burnaby

puts lands in trust

Discovery Parks Realty

builds on

leases to

Usersoccupies

REITs & Investors

sells land & building to

Universities

Innovation Community

Discovery Foundation

money to donates to


Appendix C: Methodology


We collected a list of goals and objectives of the ERP, and added our research of industry best practices compiled from various sources including the Association of University Research Park’s Symposium Report on Best Practices as well as interviews with various research parks. (See Appendix B for more details).

Goals and objectives





paniesIn

dust

ry b

est p

ract

ices

CSF Category Description

Activation of Southlands Affiliations The Southlands are key to graining critical mass at the ERP

Good Anchor Tenants Affiliations Good anchors can stimulate the culture and opportunities at the ERP

Increased Alignment with Government Affiliations Govt. programs on the federal and provincial level need to be integrated

Industry Variety Affiliations A good mix of Health, ICT, Energy, and Agriculture companies at the ERP

International Collaboration Affiliations Collaborate with companies, parks, governments, internationally

Buildings Maintained Infrastructure Companies require well maintained spaces

Multi-tenant space Infrastructure There is a demand for smaller flexible spaces. Also allows for synergies

State of the Art Infrastructure Infrastructure Lab fit-out and tech infrastructure needs to be top of the line

Ability to Move Quickly Operational Need to react quickly to changing market conditions and opportunities

Flexible Leases Operational Companies need to be able to change spaces or get out of leases

Ability to lever assets Operational The ability to lever the ERP’s assets will greatly enhance the ROA

Marketing Program Operational The ERP needs to be well marketed to attract a steady stream of tenants

Strong Board of Directors Organizational A board can help direct the ERP and make the right connections

Defined Vision & Business Plan Organizational The ERP needs a well defined visions and an actionable business plan

Defined Roles & Ownership Organizational The roles and responsibilities in the ERP need to be defined

Measurement & Accountability Organizational Someone needs to be accountable for the ERP’s success or failure

Remove Restrictive Covenant Policy & Regulation The covenant needs to be removed

Mixed Use Zoning Policy & Regulation Mixed used zoning will foster greater demand in the ERP

Zoning Support for Density Policy & Regulation Higher density will increase the value of the ERP

Closed Loop Community of Innovation Policy & Regulation Value from the ERP needs to cycle back to the innovation community

Critical success factors (CSFs)We collected CSFs from interviews with the City, EEDC, and other interested stakeholder and divided them into categories


Quantified CSFsWe quantified the success factors into 5 dimensions, and chose 1 factor in each dimension to have a higher weight than the others (indicated in bold)

66

Strong Board of DirectorsDefined Vision & Business PlanMeasurement & AccountabilityDefined Roles & Ownership

Buildings MaintainedMulti-tenant space

State of the Art Infrastructure

Ability to Move QuicklyFlexible Leases

Ability to lever assetsMarketing Program

Activation of SouthlandsGood Anchor TenantsIncreased Alignment with Government Industry VarietyInternational Collaboration

Remove Restrictive CovenantClosed Loop Community of Innovation

Mixed Use ZoningZoning Support for Density


Key performance indicators (KPIs)Through the interview process we also collected KPIs and mapped them into 4 quadrants

67

Financial

Rental ratesProperty taxesDeferred maintenanceVacancy ratesROA

Revenue growthCapital raisedAnchor tenants

IP/Patents registeredEmployment createdImage/reputationBest & brightest peopleNumber of new companies

Waiting listTenant qualityTenant turnoverBuild out %Demand from retail/supportTenant mix

Real Estate Innovation

Non-financial


Scoring of CSFsWe assigned 4 points to be distributed to the top ranked CSF in each category and 3 points to be distributed to each other CSF.


CSF Category Category Rank City Owned EEDC OwnedActivation of Southlands Affiliations 1 1 3Good Anchor Tenants Affiliations 2 1 2Increased Alignment with Government Affiliations 3 1 2Industry Variety Affiliations 4 1 2International Collaboration Affiliations 5 1 2Buildings Maintained Infrastructure 1 4 0Multi-tenant space Infrastructure 2 1 2State of the Art Infrastructure Infrastructure 3 1 2Ability to Move Quickly Operational 1 1 3Flexible Leases Operational 2 1 2Ability to lever assets Operational 3 2 1Marketing Program Operational 4 1 2Strong Board of Directors Organizational 1 2 2Defined Vision & Business Plan Organizational 2 1 2Defined Roles & Ownership Organizational 3 1 2Measurement & Accountability Organizational 4 2 1Remove Restrictive Covenant Policy & Regulation 1 3 1Mixed Use Zoning Policy & Regulation 2 2 1Zoning Support for Density Policy & Regulation 3 2 1Closed Loop Community of Innovation Policy & Regulation 4 1 2

erp governance and ownership final

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