Lease Extension Proposal Summary
Lease Extension & Renewal Proposal Information Session – Video
Lease Extension & Renewal Proposal Information Session – Slides
Memorandum of Understanding – Strata Leaseholders Society – City of Vancouver
Lease Extension and Renewal Proposal One Page Summary
Society Member Information Sessions – Sept 12 and 13 – Slides
Negotiations
The negotiations have now concluded. An agreement was reached regarding the term of lease extensions, rent and rent prepayment, lease end value (also known as LISL or the leaseholders interest in the strata lot) and dispute resolution as set out in the Memorandum of Understanding (MOU) supported by the Board of Directors of the Society and Vancouver City Council. The proposal would give all owners an option to modify their lease and the right to decide on their own to accept the terms of the modifications.
Negotiations have now concluded. Based on the City’s opening position, City Council and City staff’s desire to complete an agreement, and movement on terms during the negotiation, the Society was successful in winning materially better terms for members as a result of the negotiations, the best terms available from the City.
The Society and its predecessor, the Strata Leaseholders Subcommittee, have been in discussions with the City on lease renewal for over 6 years. It is only in the last 12 months that we have had a City Council committed to resolving this issue and directing its staff to work with us to do so in a fair and timely manner. This commitment came after an unprecedented communications campaign from the Society and community support. We believe the MOU we have negotiated is fair to both parties, provides a degree of certainty that existing leases do not, and represents our best chance of moving forward as a community . Attempting to restart negotiations once a new Council is elected, would come with considerable risk and uncertainty.
The Society Board supports bringing the proposal to leaseholders so that each owner will have the right to make decisions for themselves. We’re trying to provide information so that you can be in a position to have options to do so.
The 75% vote threshold | Extraordinary General Meeting (EGM)
The Society members will vote on a resolution to approve the MOU such that lease modifications would be offered as an option to all members for individual consideration. If 75% or more of Society members who attend the meeting and vote or vote by proxy vote for the motion the proposal will move forward to become an offer from the City of Vancouver available as an option to each residential strata leaseholder.
The Memorandum of Understanding (MOU) with the City will lapse. Said differently, the proposal would no longer be valid. This means individual owners will not be given the right to choose for themselves whether they want to accept the terms of this offer.
Then owners will not be given a choice to accept the City’s offer as it will lapse. All the existing leases will remain as written if the MOU is not accepted in the Extraordinary General Meeting. If the MOU is approved by Society members, then each residential strata leaseholder will have the individual right to accept or reject the offer of a lease modification that would arise from the MOU.
If enough Society members vote ‘no’ and the proposal is not approved, an offer will not go forward to any individual strata leaseholders.
No. Voting is limited to Society members (with one vote per strata unit).
No, you are not obligated to do anything if you vote ‘yes’. A ‘yes’ vote is simply agreeing that each owner will be given the option to modify their lease as per the terms of the MOU. Ultimately, if the vote passes each individual strata owner will then receive a lease modification offer and, in your case, you can then determine if you want to accept it – or not. If the proposal goes forward, each owner will have five years within which to exercise acceptance of a lease modification offer at which time prepayment would be required.
Yes, that is correct. The offer will be extended to all strata leaseholders regardless of their membership in the Society. If more than 25% vote not to accept the option, then the MOU will lapse and no owners will have the option to accept the offer.
FAQ Regarding the Terms of the MOU
Please note that the September 21st vote is not to accept the terms of the MOU, but simply to agree to allow each strata owner the right to make the decision to do so for themselves. The FAQ below discusses key elements of the MOU that owners will consider should the society vote in favour of offering this option to all owners.
The MOU and the 5-year option to accept
The MOU is legally non-binding at present. If the MOU is approved by Society members, the City will move to formulate and deliver lease modification offers. Once offers are provided to leaseholders those lease modification offers will be binding on the City for five years, and the MOU itself is no longer relevant. If, as expected, the offers are provided to leaseholders before the new Council takes office in November, then the deal cannot be modified by the new Council.
The offer is open for five years, so we’ll want those options to be available to whoever is the owner during those five years. (e.g.) the purchaser would inherit your option during the five years.
Length of Lease Extensions
The extensions are for 20 years across the board, which means:
Those originally ending in 2036 would be extended to 2056,
Those originally ending in 2040 would be extended to 2060 (including Harbour Terrace), and
Those originally ending in 2046 would be extended to 2066.
In the Simple Plan, we were asking for 39 years. City Council never accepted that, and it wasn’t the City’s position going into negotiations. The City’s initial position was to suggest offering 35 years remaining from this year on all existing leases. We successfully secured 20- year extensions across the board, which is significant.
When we made the point that all stratas needed the same length of extension, discussion focussed on 15 years. However, that wouldn’t have granted the 2036 stratas a full mortgage term. For us, it was essential to get up to 20-year extensions.Many other alternatives were discussed (e.g.) 20-year rolling renewals, but none were advanced.
This will be up to the City to consider. It is the lessor’s prerogative under the Strata Property Act.
Lease & Rent Calculations
Our understanding is that buildable square footage (BSF) is based on liveable space or habitable space. The proposal does not show buildable square footage, it shows an aggregate land value for each strata enclave.
An aggregate land value can be determined using the building area (in square feet), multiplied by a land value per buildable square foot. Land value per buildable square foot is the freehold value of unimproved land based on actual developed density and zoning for similar land parcel sizes.
The agreed land value for the benchmark strata (Heather Point) was negotiated down from $570/BSF to $485/BSF, which sets the highest land value for the FCS stratas. Other stratas were benchmarked against this amount, with the lowest land value in FCS being $441/BSF.
The City and SLS disagreed over whether building areas for apartment-style stratas should be grossed up 15% to include common areas. While the City rejected the notion that the area should not be grossed up, this was resolved by reducing the Aggregate Land Value for seven apartment and mixed-form stratas by 15%.
The City removed both square footage and land value per square foot from the MOU. As such, the MOU now refers only to Aggregate Land Value for each strata – and it makes no reference to square footage.
The aggregate land values in the MOU are total amounts in dollars, with no reference to square footage.
Buildable square footage generally excludes patios and balconies.
The allocation of land versus building values as part of the total assessed value put forward by the BC Assessment Authority is arbitrary, according to the Authority, and should not be used to determine lease end value.
Remediation will not be required until the existing building is vacated and demolished. Therefore this is not really a factor in rent for extension.
The initial annual rent is calculated as 2.25% of the Aggregate Land Value. The annual rent escalation rate is 3.5% per year.
It’s by the entire strata. The fact that two stratas might have been on the same ground lease does not matter once they are stratified. It only matters that they have a strata lot lease. Those are unified by a strata plan.
Yes, Mariner Point or any strata with multiple types of units or structures, it doesn’t matter. All of those are in the same basket as far as the aggregate land value is concerned. And then the resulting total rent prepayment is allocated among those units according to the existing lease.
The prepayment amount is for the entire strata and the allocation is based on the current lease, which in many cases is based on the assessed value of your unit as a portion of the total assessed value of the entire strata, or for some stratas by unit entitlement.
There are a few considerations here. Firstly, some buildings started with a higher land value than others. Heather Point and the Lagoons have the highest. All the other buildings had lower land values. Secondly, is whether your rent is distributed by unit entitlement or by BC Assessment value. The BC Assessment value will be affected by many factors, including the location of your unit within your strata. For example, if you’re located at the back of the building versus on the waterfront, your BC Assessment value is likely going to be lower on a per sq ft basis than other units. If your lease provides for rent to be allocated by unit entitlement, the formula is very simple and comes from your Schedule of Unit Entitlement.
No, it doesn’t. The individual unit appraisal applies at lease end and it only applies in determining the payment from the City to each leaseholder at expiry of the lease.
It is the current (2022) annual rent, subject to escalation at 3.5% per year.
Prepayments
The table can be seen here.
The rent prepayment for your unit is determined in a method involving several steps:
- Determine the annual rent that would be payable for the entire building if the lease extension started “now.”
- Determine the annual rent payable for the entire building for the actual lease extension period (e.g., 2036 to 2056) by applying an annual rent escalation of 3.5% to the annual rent determined in 1, above.
- Determine the net present value in 2022 of the rent prepayment owing for the entire building for the extension using an annual discount rate of 5%.
- Individual strata unit rent prepayments are then determined using the unit entitlement or BC Assessment value of a unit as a percentage of the total assessed value of all units.
The discount rate represents the cost of money over time. Given that we are being asked to prepay for a benefit that will only start in 2036, 2040 or 2046 when the lease extension begins, the amount to be paid now is discounted at five percent per year.
How is the five percent discount rate used in calculations? I’m not sure what ‘discount rate’ means.
A dollar in the future is worth less than a dollar today. Future rent cost must be discounted because you’re paying for the rent many years in advance of when you receive the benefit. Calculating future money in today’s dollars is a mathematical exercise. For each year of rent that you’re prepaying, the number of years between now and when it’s applicable is discounted by five percent per year. The benefit to you is a lower prepayment today; the benefit to the City is that they get your money earlier. Discounted future money will naturally gain value each month it comes closer to the present, as less discounting can be applied to it. Therefore, the calculated prepayment amount for each strata unit will be more expensive with each year an owner delays a decision to make a prepayment. The prepayment amount due (when an individual owner accepts the lease modification with the City) will increase by five percent after the first year and then monthly at the equivalent of five percent per year after that, to reflect fewer years or months of discounting.
The five percent discount rate is what the City has recently been using and we’ve been advised that it is reasonable, based on long-term bond rates.
Yes, that’s correct. To obtain the lease extension, the owner must agree to all of the lease modifications that would arise from the MOU.
The prepayment is for the period of the extension, so from 2036 to 2056, 2040 to 2060 or 2046 to 2066.
The offer will be available for 5 years from the Effective Date. Payment will be due on acceptance of the lease modification offer – or within a matter of weeks of that acceptance. After acceptance, strata owners and the City will have to sort out any additional paperwork, such as filing in the land title office or mortgages, etc., and that could likely take between two and five weeks. It will also depend on the number of acceptances the City is processing at any one time (i.e.) if there is a backlog.
Said differently, if you exercise a lease modification, the rent is payable then for a benefit that will start to be received in 2036, 2040 or 2046.
Keep in mind that the offer, which is non-binding, is open for five years. Once a strata owner accepts the lease modification offer, the agreement becomes binding and prepayment is due.
It depends on the agreement between the two entities: the Society and the City. It is likely to be the earliest date on which any of the lease modification offers are available to go out, which could be as early as October 2022.
Offers made by the City will remain open for acceptance until the fifth anniversary of the Effective Date.
For all strata enclaves, except for those who have already prepaid for 10 years at Harbour Terrace (see the section on Harbour Terrace), prepayment is due for the entire 20 years at once.
These are lump sum payments at the time of acceptance of the lease modification. To clarify, the only prepayment option is by lump sum.
The proposal is for the 20-year extension. It does not apply to your current lease payment requirements.
We all have transparency by strata, and we’ll also have the prepayment amounts unit-by- unit. The City doesn’t allocate within each strata; the fairness is driven by the conditions for allocation of rent in the existing leases.
We are distributing the City’s determination of the prepayment amounts for each strata enclave and each strata unit within each enclave to all members in each strata. We need to ensure every member has this information before the September 21 Extraordinary General Meeting.
Either at an information session at your strata, or from your Society director.
For renewal rent calculation, the City has agreed that the Effective Date will be October 1, 2022, even if lease modification offers are not presented until somewhat later (this will be very slightly to the benefit of leaseholders). It is expected that the period for leaseholders to accept their lease modification offers will be five years from the date when lease modification offers are presented to the leaseholders, whenever that may be.
Lease End Value
The lease modification would set the method for calculating the amount paid to a leaseholder as at the date of lease end as:
A = B – C – D, where:
A is the amount to be paid as at the date of lease end
B is the appraised fair market value in fee simple (i.e.) the value of the strata unit as if it was a freehold unit
C is the strata lot’s share of the fair market freehold value of the underlying land, vacant and unimproved for as-built density (B-C calculates the value of the improvements, by subtracting the value of the bare unimproved land)
D is any value of any alterations, repairs or replacements effected by the City of Vancouver apportioned to the strata unit (only applies if the City has stepped in and done work on the strata building)
To estimate the lease end value so far in the future would be a difficult exercise. You might consider estimating what it might be if it was calculated today (knowing it will not be calculated until lease end). To do so you would need to estimate the freehold value of your unit (“B”) today and then you could subtract off the appraised value of the land using the 2022 range of $441 to $485 per buildable square foot identified for your strata (“C). As an arithmetic example (using meaningless values not based on any data), if the appraised value as freehold today was $150,000 “B” would equal $150,000. If it was a 1,000 buildable square foot unit and the appraised land value was $60/buildable square foot, “C” would equal $60,000. Assuming “D” is $0, “B” – “C” – “D” would be $150,000 – $60,000 – $0 or $90,000.
The existing leases call for dispute resolution by arbitration which is a slow and expensive process with an uncertain potential outcome. Consequently, arbitration is only really available to those who can afford to pay the costs and wait for the outcome – it’s not a helpful process for anyone who needs to see their LISL payment promptly.
The negotiations focussed on providing a method to calculate LISL, not to change the existing wording.
The proposal is separate from the existing lease. If the proposal becomes an offer and a leaseholder does not accept that offer, the leaseholder will remain under their current lease.
At lease end.
The BC Assessment Authority generate a value for taxation as if it were freehold. Lease modifications outlined in the MOU will not affect any of that. Lease end value will be based on appraisals, not these assessments.
The clause has never been arbitrated or litigated as no strata lot lease has yet expired in B.C. There are competing views on how that clause would be interpreted in a legal proceeding. We were focused on displacing the clause, and providing certainty.
Per the MOU, it will be the “New South Wales” methodology. Information regarding the methodology is set out in the overheads used for the August information meetings and in the FAQ, both available online.
Modifications Logistics
If the Society members’ approval is obtained, specific lease modification agreements will be prepared for all the residential strata leases in False Creek South reflecting the terms in the MOU as further developed. The City will offer the modifications to the individual leaseholders for acceptance by them and registration in the Land Title Office. If the MOU is approved by the SLS Membership, the Society and the City will agree on an Effective Date at which time modifications will be offered.
The City is hoping to finalize the lease modifications and begin processing agreements to those modifications in 2022.
You will remain under the terms of your current lease.
If you don’t do anything, at the end of the existing lease term, disposition is at the discretion of the City. They will decide whether they wish to extend your lease, and for how long, and the renewal rent will be subject to arbitration based on the provisions of the existing lease. There is no change there. Or, the City may opt not to extend, and your lease will then expire at which point your unit may become a rental unit in the hands of the City.
That will be entirely up to the City. If they want to keep you on your lease, they’ll give you an additional extension and you’ll pay rent based on the current lease, or you’ll get LISL per the old lease terms, or you may stay on as a tenant of the City on a rental basis.
Leaseholders who do not accept lease modification offers will carry on under the terms of their existing lease. The City recognizes that not all leaseholders may wish to accept the modifications and will take possession of a strata unit at its eventual lease end, modified or not.
Other Topics
Yes, leasehold strata owners can join. Information as to how to join is available at: http://www.falsecreeksouth.org/replan/agency-2/
Miller Thomson LLP, the firm used by the Society, can provide legal advice to the Society, but not to individual strata owners. However, the advice and information provided to Society may be helpful for individual strata owners to share with their lawyers or notaries.
The Society will provide an overview of the lease modifications, but it is always recommended to seek a legal review before executing a lease document. Costs for a review will vary.
Rental provisions will continue to be up to the strata corporation at individual stratas.
Property transfer tax is payable on a lease modification agreement, according to a formula in
the Property Transfer Tax regulation.
It may be best to speak with a realtor about any impacts on the market and your own property.
We are not involved in any discussions regarding the co-ops.
No.
Harbour Terrace
All HT owners were given a unilateral 10-year extension by the City. And an offer to prepay the extension if they accepted modifications to LISL. To our knowledge, only 2 owners have accepted the rent pre-payment offer to date and as such, the lease modifications.
Rent prepayment for the 10–year extension is an option for the HT owners. The base rent for the HT rent prepayment offer is repriced each year in addition to having an ever- increasing net present value as the years pass. The current proposal for a 20-year extension to the original lease sets the rent in 2022 subject to an agreed to escalation rate.
Acceptance of the rent pre-payment offer requires acceptance of the NSW formula for LISL and the alternative LISL dispute resolution method. The present proposal includes a 20-year extension that can only be received by accepting the rent-prepayment, the NSW formula for LISL, and the alternative LISL dispute resolution method. The dispute resolution is the same, using 2 or 3 appraisers to determine values rather than arbitration
This is best answered at the Harbour Terrace strata-specific meeting. The City is working on how to manage and roll that previous extension into the current lease extension. We expect to have a clearer explanation in the next week or so.
If individual owners accept the lease modification of the current proposal;, they will have to pay at that time. However, the offer is open for five years. The earliest time for payment is expected to be October of this year and that latest is the Fall of 2027. The amount owing will scale up by five percent after the first year and then monthly at the equivalent of five percent per year after that.
The original offer is still in place, subject to what the City may decide to do going forward. Part of how we got the five-year offer period to remain open was to give everybody a good long while to think about things, figure out what they might want to do, sell, refinance, etc.
The rent and subsequent prepayment calculations for the latter were based on another method used by the arbitrator in rent prepayment disputes some years ago.
The City is considering all of this now. We expect that if you’re in Harbour Terrace and you accept the new modification offer, you’ll receive another 10 years. What will be in discussion is how you get credit for the 10 years if you have already prepaid. If you didn’t take the previous prepaid offer, you’ll be in discussions about which may be more attractive: a 10-year prepayment on the previous offer, or the new 20-year modification or some combination of the two.
Our focus in negotiations was that nobody in Harbour Terrace would be worse off than people in other stratas.
As far as we understand, yes.
All of the leases for the strata units at Harbour Terrace were unilaterally extended by the City by 10 years from 2040 to 2050. The existing offer for prepayment for those 10 years regards prepayment if the leaseholder agrees to modifications about lease end value.
Assessed value.
At lease end.
Yes, as follows:
“The City will offer a modified 10 year pre-payment amount (calculated using same assumptions of land value, rent escalation rate, discount rate as the 20 year extension prepayment, other than length of term which is amended to 10 years) for the existing harbour Terrace Program for the 10 year lease extension.
For Harbour terrace leaseholders who wish to extend their lease term for an additional 10 years who have not already prepaid, the prepaid amount is calculated as indicated in the COV & SLS False Creek South MOU Prepayment Schedule dated August 4th 2022 calculated as a prepayment amount for an aggregate 20 year lease extension (10 (existing extension) plus 10 yr additional extension).
For any leaseholder that has already prepaid the ten year lease extension under existing prepayment Program who wishes to extend lease for a further 10 years, that prepayment will be credited against a total prepayment amount for an aggregate 20 year lease extension as indicated in the COV & SLS False Creek South MOU Prepayment Schedule dated August 4th 2022.”
Unanswered Questions
Can we approach a financial institution to see if we could group together to seek individual financing for our prepayment costs?