Robert Renger

10 • 1201
Lameyʼs Mill Road
Vancouver, B.C. Canada
V6H 3S8 Telephone / FAX • 604-731-9989
______________________________________________________________________

Date: May 15, 2000

To: Neil Goldie, Manager
Municipal Financial Services
Local Government Department
Ministry of Municipal Affairs
Victoria, BC
cc: Terry Corrigan, CA
Director of Financial Services
City of Vancouver
cc: Ian Thompson, CA
Acting Manager of Accounting Services
City of Vancouver
Subject: City of Vancouver Financial Statements:
Valuation of Leased PEF Lands

Number of pages including this page: 10

______________________________________________________________________

Dear Mr.Goldie:
I recently spoke with you regarding my concern that the City of Vancouverʼs Financial
Statements seriously overstate the value to the City of the leased property assets held
by the Property Endowment Fund (PEF). As discussed, I am writing to you with the
details. I am a strata leaseholder on City land in False Creek South.
Hopefully, you will be able to advise me and Mr.Corrigan (with whom I have discussed
my concerns) whether or not the Cityʼs current lessor accounting policies are in
accordance with generally accepted accounting principles, and also how the Cityʼs
policies compare with those used by other public bodies.
Attached is a summary of how the PEFʼs leased properties are valued in the Financial
Statements. There are also two specific examples, which I believe clearly show how the
PEFʼs leased property assets and equity are systematically overstated, especially in the
case of leasehold strata lots. These accounting policies also make it difficult to judge the
financial performance of the PEF from year to year.
Mr.Corrigan and Mr.Thompson have reviewed my write-up of the two examples I cite,
and their comments are attached for information. I have corrected the error regarding
the Southampton property which they pointed out. They stated, however, that they could
not verify or confirm my estimates of the Cityʼs current interest as lessor in the subject
properties, nor the amount by which the Cityʼs interest is overstated in the Financial
Statements.
There are two basic problems with the way the Cityʼs lessorʼs interest in leased strata
properties is being valued.
1. The value of much of the lesseesʼ improvements is included in the Cityʼs
interest
The Cityʼs accounting policy is to take the “Land” portion of BC Assessmentʼs Assessed
Values including those for Leasehold Strata Lots (minus the “unearned” portion of any
prepaid rent) as its lessorʼs interest in ground leases. The City considers that the
“Building” portion of BC Assessmentʼs Assessed Values for Leasehold Strata Lots (plus
the unearned portion of any prepaid rent) represents the lesseesʼ interest in a
Leasehold Strata development.
The attached Southampton example clearly showed the unfairness of the Cityʼs
approach. The City is using the Land / Building assessment split for an inappropriate
purpose not intended by BC Assessment. I have discussed this issue with David
Highfield, the Assessor for Vancouver. Attached is a copy of a letter in which he
confirms that “The split between “Land” and “Building” values on the Assessment
Roll does not constitute a judgement regarding the lessorʼs and lesseeʼs
interests in the properties.”
2. All increases in land value for leased property are included in the Cityʼs
interest.
This issue relates to long-term prepaid leases (and also to leases where future rents are
fixed for a long period).
Once the City sells a developer a 99-year prepaid lease for a property, it receives no
further income from the property for 99 years. The cityʼs interest in the land consists
solely of the reversionary interest, which is defined as the present value of the
anticipated future value of the land at the end of the prepaid lease term. In the
early years of a prepaid lease, this is only a small percentage of the current freehold
value of the property. If the value of the land increases during the early years of the
lease term, most of the increased land value actually increases the lesseeʼs interest in
the property; only a small percentage of the increased land value increases the lessorʼs
interest. Under the Cityʼs accounting policies, however, all the increase in the value of
the leased land shows up as an increase in the PEFʼs property assets.
The attached example of the 99-year prepaid leases in Champlain Heights, which the
City sold between 1978 and 1983, demonstrates how this results in the value of the
PEFʼs property assets being overstated by many millions of dollars.
Why Strata Leaseholders are Concerned
Strata leaseholders in particular are concerned regarding the PEF accounting policies
for the following reasons:
1. They greatly understate the lesseesʼ interest in Leasehold Strata Lots (by including
much of their interest in the Property Endowment Fundʼs equity).
2. They create misunderstanding regarding the payments by the City that will be
required to buy out the lesseesʼ interests in Leasehold Strata Lots at the termination
of the lease.
3. They foster overly high land rent expectations at rent review.
4. They may biase the Real Estate department against sale of the Cityʼs interests in
Leasehold Strata Lots to the lessees (freehold conversion) because of their greatly
overstated value as a property asset in the Property Endowment Fund. (For example,
one Councillor discussing this option told the press he'd like to know what effect
freehold conversion would have on the PEF.)
Lessor Accounting Policies in Another Municipality
For comparison, the following is an excerpt from page 14 of West Vancouverʼs 1998
Financial Statements, which shows a different approach to lessor accounting than that
used by Vancouver:
“9. Long Term Leases The District has entered into agreements for the
lease of District owned property for periods from 60 to 99 years. The
agreements provide for a substantial portion of the lease proceeds to
be received at or near the beginning of the lease with smaller amounts
to be received over the term of the lease. Since these transactions are
similar in nature to a sale, the District considers that it is most
meaningful to record the lease proceeds as received as opposed to
deferring a portion to be recognized over the term of the lease.”
Under this approach the full increasing value of a leased property would not be included
in the PEFʼs property assets during the term of the prepaid lease.
Conclusion
Mr.Terry Corrigan, the Cityʼs Director of Financial Services, has indicated that the Cityʼs
accounting policies which are in question might possibly be changed for the year 2000
Financial Statements.
In the meantime, unfortunately, the 1999 Financial Statements are even less
transparent than all previous years regarding the valuation of the PEFʼs leased
properties. For the first time (possibly in response to the concerns I have expressed to
Mr.Corrigan) the 1999 Financial Statements (on page 49) do not disclose the value of
the leased lands included in the total land value ($976 million) shown for the PEF. I
enclose the same table from the 1998 Financial Statements (which showed this value)
for comparison.
I hope to receive an early response explaining how you intend to deal with the concerns
I have expressed.

Sincerely,
Robert Renger