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How to Sign a Lease With Your Parent Company

Cadillac Fairview Brings in Teachers' Pension Plan for New $800 Million Tower, Solves Problem of Lead Tenant
June 14, 2018
Pictured: John Sullivan, chief executive of Cadillac Fairview.

Cadillac Fairview had a pretty good idea for a lead tenant for its latest office tower in Toronto - a 46-storey, 1.2 million-square-foot high-rise set for the fall of 2022.

There was one little hitch: negotiating a deal with the company’s parent corporation, the Ontario Teachers’ Pension Plan, which is taking nine floors - or about 20 to 25 percent - of the building.

"[Teachers' signing a lease] was obviously a key factor in us pursuing this [and going ahead with construction]," said John Sullivan, chief executive of Toronto-based Cadillac, which is the real estate arm of the $189.5 billion Teachers’ fund but has its own portfolio worth about $29 billion spread over 37 million square feet.

So how exactly does one negotiate a lease with its parent corporation? Who represents whom? The deal is even a little more complicated because Cadillac teamed with Investment Management Corp. of Ontario, which has 30 percent of the $800 million project.

"There's no yelling and screaming," joked Sullivan. "We do have to remember we also have a partner. We are 70 percent. There has to be some distance, a third party."

Sullivan wouldn’t describe the lease terms, but said Teachers' paid "market rent," and had some people to advise them. "It was a good negotiation, but an effective negotiation," he said.

Cushman & Wakefield acknowledged in a social media posting that it had been brought in to represent Teachers' on what it said was a 260,000-square-foot lease.

One of the major attractions of the deal for Cadillac is the company didn't give up naming rights on the building at 160 Front Street to Teachers - leaving it some leverage as it tries to fill up the remaining 75 to 80 percent.

"We could give up the building signage or name the building after another tenant," Sullivan said.

Teachers' will be moving all of its staff at 5650 Yonge Street in the north end of the city to the new downtown location.

"Toronto is a vibrant and international city, and the downtown core is a major hub of finance. We believe this is the right time to plan our move closer to our partners and the pool of talent we will need to see us into the future," said Ron Mock, president and chief executive of the Ontario Teachers' Pension Plan, in a statement.

Sullivan said this is just the latest example of what is happening in the Toronto office market where more and more companies continue to relocate downtown.

"In order to attract the kind of workforce that wants to be close to amenities, downtown Toronto is the place to be," said the Cadillac CEO.

Avison Young noted in its first-quarter report on the Toronto office market that the downtown vacancy rate hit a historic low of 2.5 percent. "Today's announcement by the Ontario Teachers’ Pension Plan is a testament to Toronto’s burgeoning downtown office market," said Bill Argeropoulos, principal and practice leader of research in Canada for the real estate company. "OTPP joins a long roster of tenants that have relocated, consolidated or expanded in downtown Toronto, which has added an average of 1.2 million square feet of new office space annually since 2009. Who’s next? Stay tuned!"

Cadillac, which will break ground on 160 Front Street in January 2019, is also teaming up with IMCO on a 33-storey, 870,000-square-foot building at 16 York Street. First National inked a deal for that location, and Sullivan said Cadillac is poised to announce some other tenants.

Garry Marr, Toronto Market Reporter  CoStar Group   
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