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Two Examples of How the Cityʼs Financial Statements Overstate

the PEFʼs Leased Property Assets


The City’s 1998 Financial Statements show
• $1,070,714,808 total property assets held in the PEF (Property Endowment Fund)
• $ 385,695,703 leased lands included in the above total
• $ 609,096,326 lands for sale, lease or development included in the above total
• $ 130,790,960 deferred income (unearned portion of prepaid rent for leased lands)
The value of the leased lands held by the PEF has been shown in the City’s Financial Statements every
year, increasing from $138 million in 1985 to $386 million in 1998. Leasehold strata developments in
False Creek and Champlain Heights lands account for much of this value.
The 1999 Financial Statements, for the first time, do not disclose the value of the leased lands included
in the $976 million total land value shown for the PEF. This omission is presumably in response to
concerns which have been raised regarding the valuation of the City’s interest in the leased lands. The
valuation methodology itself has not been changed, however, and overvalued leased lands still account
for approximately 40% of the PEF’s property assets.
The following two examples illustrate how the City’s lessor accounting policies greatly overstate the
PEF’s leased property assets, by including much of the lessees’ equity as lessor’s equity.
99-Year Prepaid Lease of the Southampton Site - LMS 3758
Sale of Lease
• $3.9 million paid to the City in 1997 for a 99-year prepaid lease; the PEF will receive
no further income from this property until the lease ends in 2096.
Current Undeveloped Freehold Value of the Leased Property
• $4.3 million (estimate)
Cityʼs Current Interest as Lessor (Reversionary Interest) in the Property
• $0.4 million (estimate)
PEF Property Asset Value for this Property
• $3.8 million in the 1998 Financial Statements
• $8.1 million in the 1999 Financial Statements
(because lessee has improved and strata-titled the property)
Deferred Income Liability for this Property
• ($3.84 million) in the 1998 Financial Statements
• ($3.80 million) in the 1999 Financial Statements
• represents unearned portion of prepaid rent
Amount by which the Cityʼs Interest in the Property is Overstated
• not overstated in the 1998 Financial Statements
• $3.9 million overstatement in the 1999 Financial Statements
(lesseesʼ interest included as lessorʼs interest)
Fifteen 99-Year Prepaid Leases in Champlain Heights
Sale of Leases
• $13.4 million total paid to the City for fifteen 99-year prepaid leases
sold between 1978 and 1983; the PEF will receive no further income
from these properties until the leases end in 2077 to 2083.
Current Undeveloped Freehold Value of the Leased Properties
• $60 million (estimate)
Cityʼs Current Interest as Lessor (Reversionary Interest) in the Properties
• $9 million (estimate)
PEF Property Asset Values in the 1998 Financial Statements for
these Properties
• $114 million
Deferred Income Liability in the 1998 Financial Statements for
these Properties
• ($10.9 million) represents unearned portion of prepaid rent
Amount by which the Cityʼs Interest in the Properties is
Overstated in the 1998 Financial Statements
• $94 million (lesseesʼ interest included as lessorʼs interest)

Notes:
• the conclusions outlined above are my own; the Cityʼs accounting staff do not
necessarily agree.
• background information for the Cityʼs 1998 (but not 1999) Financial Statements has
been reviewed; however, not all requested information has been provided by City
staff.
• the 1999 values indicated for the Southampton property are based on information
from Mr.Terry Corrigan, Director of Financial Services, that the Cityʼs lessor
accounting policies have not changed for the 1999 Financial Statements.

Robert Renger
April 29, 2000