Dispute over $42M in Kingsgate Mall rent owed to Vancouver School Board

Dispute over $42 million in Kingsgate Mall rent deemed owed to Vancouver School Board

Exterior of Kingsgate Mall in Vancouver. (Beedie)

Local real estate developer Beedie has been granted leave to appeal a previous arbitration award decision that deemed the company owed about $42 million in back rent to the Vancouver School Board (VSB).

Earlier this month, Justice Stephens of the Supreme Court of British Columbia sided with Beedie’s request to open the process of having the court reconsider the amount owed to the school board, based on Beedie’s long-term lease agreement with VSB over Kingsgate Mall, which is owned by the school board.

The arbitration decision in January 2022 declared the market value of the 3.2-acre mall property — located at the southeast corner of the intersection of East Broadway and Kingsway — to be $116.5 million.

This is based on their interpretation of the valuation as of 2017, when the current lease term began; the market value on the lands, determined by the existing zoning’s redevelopment potential of a floor area ratio (FAR) density of 3.0 FAR, is the highest and best use. A total floor area size that is three times the size of the land area means the usable building floor area can reach up to over 400,000 sq ft.

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Beedie has a 99-year lease over Kingsgate Mall, which first began in 1972 under a different entity called Royal Oak Holdings. The first 25-year term with Royal Oak Holdings ended in 1997, at which point the lease provided seven 10-year renewal options and a final four-year option. So far, the first three 10-year renewal options have been exercised.

Beedie took over the lease from Royal Oak Holdings in 2005.

The purpose of the 2022 arbitration was to determine the market value of the lands for calculating the basic rent of the third renewal term that began in November 2017.

Exterior of Kingsgate Mall in Vancouver. (Beedie)

The formula for the basic rent is described as: “…eight and one-quarter (8-1/4%) percent of the market value of the said lands at the date which shall be six (6) months before the expiration of the term or the renewal term next preceding the renewal term in respect of which the basic rent has not been agreed upon, as the said lands would be valued at that time if vacant and ready for immediate development to their highest and best lawful use by a person or persons ready, willing and able to purchase and develop the said lands for that immediate use and such market value of the said lands shall be determined by arbitration as provided in Article XXIV.”

But in his ruling, Justice Stephens says that in his view, the 2022 arbitration made an error in not accounting for the precedents established by a previous 1999 arbitration decision between Royal Oak Holdings and VSB. The previous arbitration found that the “discretionary conditional use” did not come from the concept of “immediate development or ‘that immediate use'” and that the market value is based on a density of 1.0 FAR for “outright approval use” by the City of Vancouver.

In the January 2022 arbitration decision, the majority of two arbitrators deemed the lease amount owed to VSB since November 2017 to be about $42 million, based on a value of $116.5 million. A single dissenting arbitrator deemed the market value to be $20 million, which would result in a canyon-wide difference when inputted into the rent formula.

Beedie also argued that the request to transfer about $42 million to VSB would “cause severe hardship to their operating business” as they would either have to divert a substantial amount of capital that would otherwise go towards funding ongoing developments and acquiring properties, sell an asset, and/or restructure debt.

Exterior of Kingsgate Mall in Vancouver. (Beedie)

Instead of paying VSB at this time, the developer has proposed to use valuable real estate property they own to essentially serve the purpose of collateral.

Justice Stephens notes their proposal to “post as security certain real property” is owned by other two corporate entities as nominees — agent and bare trustee for Beedie — and currently leased to another entity for 20 years. The location of the property is not disclosed.

He adds that the property is currently tied up with a substantial mortgage, and Beedie has proposed to not sell or further encumber that property.

The approval for setting forth in motion the appeal process is subject to conditions that Beedie post security for the appeal, as they have proposed, and that the terms be agreed to by both parties.

“Having decided that leave to appeal should be granted, I find that for the purposes of s. 31(3) that a just condition to the granting of leave to appeal is that the petitioners post security for the disputed amounts pending the resolution of their appeal. The petitioners have been granted leave to appeal and have demonstrated arguable merit to the questions of law raised in their proposed appeal,” he wrote.

“I am satisfied on the evidence before me that the equity in the identified real property of which Beedie is the beneficial owner exceeds the amount in dispute in back rent and interest flowing from the 2022 majority award.”

Justice Stephens emphasizes that his comments are based on a preliminary review of the dispute, and should not be taken as binding. The appeal judge will ultimately hear the case at a later date.

Inside Kingsgate Mall in Vancouver. (Beedie)

Kingsgate Mall in Vancouver’s Mount Pleasant area. (Google Maps)

On Friday, Daily Hive Urbanized reached out to both Beedie and VSB for comment on this dispute.

According to BC Assessment’s latest roll, as of July 2022, Kingsgate Mall is worth $247.3 million, including $246.96 million for the land and $267,000 for the structure. This is up from $171.5 million in July 2021, representing a 44% year-over-year increase following Vancouver City Council’s June 2022 approval of the Broadway Plan.

BC Assessment pegged the property’s value at $118.5 million in July 2017 and $45.6 million in July 2013.

The Broadway Plan identifies Kingsgate Mall as one of the “Large and Unique Sites” in the area plan that require special attention due to their large-scale lot redevelopment potential.

It prescribes towers up to between 25 and 30 storeys, with the tallest buildings located closer to Kingsway.

The existing amount of retail/service space found in the mall should be retained in a redevelopment that does not result in any net loss of such commercial spaces. As well, residential uses should include either secured market and below-market rental housing or social housing. Specific public benefits should include a plaza or small park, as well as possible arts/cultural spaces or childcare.

With SkyTrain’s future Mount Pleasant Station located just to the west at the intersection of Main Street and Broadway, this is considered a prime transit-oriented development site.

Kingsgate Mall’s 1980-built structure spans a floor area of over 138,000 sq ft, including 115,000 sq ft of gross leasable area. Its largest retailers are Buy Low Foods, Shoppers Drug Mart, and BC Liquor Store.

Beedie has made comments in the past declaring its interest in pursuing redevelopment of the property, which has gained some local notoriety.

In 2018, a VSB staff report suggested the air rights for redevelopment could potentially eventually be sold, with the revenue generated directed towards funding school equipment and infrastructure improvements.

The “Large and Unique Sites” designation of Kingsgate Mall in the Broadway Plan. (City of Vancouver)

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