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Gondek: Calgary Flames ownership intends to ‘pull the plug’ on arena deal over costs

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Ryan Pike
11 months ago
On Tuesday evening, Calgary mayor Jyoti Gondek posted a statement on Twitter regarding the state of the Calgary Flames’ arena deal.
The long and the short? Things don’t look good.
Here’s what she posted (with minor edits):
Today, I spoke with Murray Edwards, primary shareholder of Calgary Sports & Entertainment Corp (CSEC), about the future of the Event Centre project.
He informed me of the Flames intention to pull the plug on the Event Centre deal.
Why? Here’s what I know:
The deal struck in summer of 2019 envisioned a $550 m deal w/costs split equally between CSEC & the City. In addition, the City provided land, 90% demolition of the ‘Dome, excess flood/site remediation, & levies. Total City contribution: $275m + $22.4m = $297.4
Plus the value of the land. I supported that deal. In July 2021, CSEC asked to make changes to the above deal. CMLC removed as devel manager, both parties added $12.5m for potential cost overruns & City added up to $10m in event management costs.
Total value: $307.4 + land
I did not support that deal.
Since I was elected Mayor, Administration & my office have been working with CSEC to mitigate any additional costs. Two costs were identified: climate mitigation of around $4m and road/sidewalk right of way issues of $12.1m
The City came to the table to assist with $6.4m in roadways leaving $9.7m for the Flames. Based on this gap, CSEC informed me they are walking away from our deal.
On a project worth over $650m, to have one party walk away for 1.5% of the value of the deal is staggering.
I wanted Calgarians to be the first to know. I am as disappointed as all of you that this is the way things are ending.
Speaking with sources at City Hall, this is legit.
It’s no secret that Calgary’s city council isn’t exactly flush with cash right now. They’re having operational challenges, budget-wise. There’s not a ton of extra capital money to go around, and any additional funds that are available will likely end up floating over to the Green Line LRT mega-project.
But despite their fiscal challenges, council and the Flames managed to strike a fair deal over the last while – and one that stood up extremely well compared to other arena deals with complicated financial mechanisms and murky responsibilities.
The transportation plan was a major source of anxiety for a lot of folks in city administration when the revised deal was approved by council this past July – the deal that capped the City’s financial responsibilities to the construction of the building proper. They’ve been working very hard to lock down costs, because as the transportation plan as written was a bit amorphous and could have amounted to a blank cheque. As part of the development process, they’ve dug into things and put a price tag on some of the things they’re on the hook for, as well as put a price tag on other items that came up (and were added to the project) during the development permit process.
The additional $4 million in climate mitigation costs includes solar panelling (as required as a condition of the development permit), while the $12.1 million in sidewalk and road costs includes public realm improvements to sidewalks adjacent to the facility, as well as other road work. A detailed breakdown of all of these proposed additional costs weren’t made available.
Depending on how you interpret things, some of the climate mitigation costs could be seen as building construction costs, as could some of the sidewalk and road expenses. That muddiness is probably part of the dispute here. (If you were Flames ownership, you argue that the things added during the development permit process as things the City requested to be added to the design, which based on the agreements would put the City on the hook for them instead. But the Flames agreed to add those things rather than arguing to the planning commission that they weren’t necessary, so you could argue that they were added at mutual agreement as well and that would make them “regular” building expenses which would end up falling to the Flames to cover given the City’s contribution has been capped.)
A 50/50 split of those additional costs would’ve seen each pay just a smidge over $8 million. The City was proposing to pay about 40% of them, after putting up hundreds of millions (just shy of half) of the costs for the arena itself. Under the agreement as written, again, the City would’ve been entirely on the hook for transportation plan related costs. (What portion of the $12.1 million of sidewalk and road costs are part of the transportation plan is unclear, though. Gondek cited $6.4 million in roadway costs in her tweets, but it’s not clear if that’s the entirety of the transportation plan expenses.)
The Flames are going to be on the hook for construction costs overruns. And given the necessity of having the building ready to begin the 2024-25 season, they’ll almost definitely need to spend more than their current $321 million commitment to ensure everything’s done on time. They likely don’t want to spend any more now, knowing additional costs are on the horizon. And the City? Well, they have limited capital reserves and a lot of different needs to meet with them city-wide. They likely feel tapped out and that they’ve already spent what they can on this project.
But either way, we’re in the short strokes and both sides are squabbling about clause interpretation and about 1.5% of the overall cost of the capital project and a few million dollars in either direction.
The arena deal is not dead. Not yet. But it’s definitely on life support. Time will tell if it recovers.
Update: Calgary Sports and Entertainment Corporation (CSEC), the Flames parent corporation, has released the following statement:
CSEC’s primary objective in pursuing the Event Centre Project has been to provide Calgarians a first class facility with an entertainment experience, not only for hockey, but for other events including concerts, comparable to other major cities. However, at this point, it is clear that the City and CSEC have been unable to resolve a number of issues relating to the escalating costs of the Project.
Accordingly, as the City and CSEC have been unable to resolve these issues, CSEC has determined that there is no viable path to complete the Event Centre Project.
When the agreements were first executed back in December 2019 the parties agreed to a cost sharing arrangement of 50%/50% with respect to the design and construction of the new Event Centre. In July 2021, with these costs increasing to $608.5 million, the City informed CSEC they were not able to fund their 50% share which, under the terms of the Project Framework Agreement, would have resulted in termination at that time. Instead CSEC agreed to fund a disproportionate share ($321 million to City’s $287.5 million) and agreed to accept the risk of reasonable future design and construction cost increases related to the Event Centre in spite of our original 50%/50% agreement.
The most recent cost estimates place the total cost of the Event Centre at $634 million which means CSEC would be responsible for an additional $25.5 million of cost. The resulting cost sharing would have been $346.5 million for CSEC and $287.5 million for the City and, CSEC would continue to be responsible for further cost increases related to the construction of the Event Centre. Unfortunately, there are now $19 million of new cost items related to infrastructure and climate being insisted upon by the City for which they are seeking an additional $10 million in funding from CSEC.
While CSEC was prepared to move forward in the face of escalating construction costs and assume the unknown future cost risks, CSEC was not prepared to fund the infrastructure and climate costs that were introduced by the City following our July agreement and were not included in the $608.5 million and are not included in the current cost estimate of $634 million.
The failure of the City and CSEC to find a viable path forward was not based upon simply the “the last dollar” on the table; but rather was based upon the accumulated increase in CSEC’s share of the costs, including the infrastructure and climate costs, the overall risk factors related to the Project and the inability of CSEC and the City to find a path forward that would work for both parties.
In summary, the primary reasons for this difficult decision include:
1) Introduction by the City of significant infrastructure costs ($15 million) and climate mitigation costs ($4 million); costs not previously identified as project costs by CMLC or the City nor included in the $608.5 million target budget in July 2021.
2) Continued cost escalation experienced since the approved budget of $608.5 million in July 2021. It has since grown to $634 million based upon design development that was completed in October 2021.
3) High level of risk associated with future project cost increases in part due to supply chain issues and commodity price escalation as a result of the impact of COVID.
While not ideal for Calgarians nor competitively for the Flames, the people of Calgary should understand that nevertheless CSEC’s intentions are to remain in the Scotiabank Saddledome.
We are deeply disappointed with the outcome.
A few things worth noting:
  • The Mayor’s statement cites $16.1 million in additional costs (largely attributed to development permit conditions at her press conference), with the City taking on $6.4 million (and CSEC the other $9.7 million). CSEC’s statement identifies $19 million, with the City taking on $9 million (and CSEC the other $10 million). It’s unclear what the $2.9 million difference between the two additional cost figures comes from.
  • CSEC’s statement identifies $634 million in total project costs (escalating by $25.5 million from the July 2021 budget of $608.5 million , which the $19 million of “additional costs” would be on top of. It’s not quite clear what the cause is of the $25.5 million increase since July, aside from “design development.” (Adding the additional $19 million to the $634 million “new” budget gives you a $653 million total project cost.)
  • Yeah, there’s a pretty high potential for price escalation between now and when the proposed build would be complete given the state of the supply chain related to construction projects these days. (This potential existed in July when the new budget was put together, so it’s not quite clear why it wasn’t baked into the budget at that point, but it’s also not clear how much of a contingency factor you can bake into a budget of this type.)
 

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