The Auditor General’s Report, Part 3: Therme

The current post looks at what we might expect of Therme’s development, based on new information provided in the Auditor General’s report.

While the Auditor General’s report has described the Call for Development process for Ontario Place as “not fair, transparent or accountable to all participants,” the government has held steadfast to its plans. Public management professor emeritus Sandford Borins has summed this up in a post he entitled “Ford to Auditor-General: Drop Dead.” “It is clear,” writes Borins, “that the Government is going to ignore the report.”

So if it’s full speed ahead for the Ontario Place redevelopment and for Therme’s waterpark, what can we expect to see in the months and years ahead?

Acceleration of work, early handover to Therme

Based on a review of e-mail correspondence, the Auditor General found that Infrastructure Ontario has been in active discussions since early 2024 to move the handover date up by 11 months, to May 31, 2025, from the original hand-off date of April 30, 2026.

“If the site is handed over to the tenant earlier, once Therme has obtained its excavation permit, it would eliminate the Province’s ability to terminate the lease for convenience,” notes the Auditor General. Pulling out of the lease before the handover will carry a $30 million penalty. However, after the excavation permit is issued, pulling out would be near-impossible—the Province would be required to provide a five-year notice period after 10 years of operations, and pay for the demolition and rebuilding of Therme’s facility at a different provincial site agreeable to the Austrian company.

While the government apparently gave Infrastructure Ontario direction “to terminate the exploration of early site handoff” on November 4, 2024, the work has likely already been completed to secure an early hand-off. Demolition on the West Island was sole-sourced, at an added expense of some $10 million or more—the demolition cost $40.4 million, compared to initial estimates of $5 to $10 million and a later estimate of $31.5 million for this work.

The work may arguably have been accelerated to close Therme’s window to end the lease agreement. If interim utility services are not provided by December 31, 2024, Therme could exercise a right to terminate the lease, and, if the government did not have the site ready to hand over in 180 days, Therme could pull out from the project and charge the government $30 million in liquidated damages.

Will Therme’s Facility be a white elephant?

Public management professor emeritus Sandford Borins, whose analysis I referred to earlier, believes the Therme facility may “turn out to be a classic white elephant.”

This is based in part on the Auditor General’s notes that the proponent was selected with little scrutiny. Red flags were raised by a senior advisor at Infrastructure Ontario that Therme Group was “not cash flow positive” and prior to December 31, 2019, had an equity value of less than one million euros. These concerns were not addressed before the lease was signed, 12 days later. In its submission, Therme presented six projects as evidence of its track record. No due diligence was done by Infrastructure Ontario—if it was, it would have revealed that five of those six projects were not actually owned and operated by Therme.

The amount of rent that the Province will receive—some $1.1 billion over 95 years, or a more paltry $163 million in today’s dollars, accounting for inflation—is tied to the success of the project. The Province accepted Therme’s estimates of the number of visitors it expected—1.6 million visitors in Year 1, and up to 2.7 million visitors in Year 10 (some 7,400 visitors per day)—without any attempt at independent verification. The Auditor General estimates that Therme will break even on the project after 21 years, which Borins notes “is a long time.”

What will Therme really spend on the project?

Therme’s capital investment in the project may, in fact, be less than expected. When the lease was made public, a press release from the Province stated that Therme would be making $700 million in capital investments, including $500 million to build the waterpark and spa facility, and $200 million going towards creating 16 acres of public space. This includes a $25 million contribution by the Province to the bill for work on Therme’s shoreline and public realm.

But in previous documents from 2019 to April 2024, Therme’s investment was expected to be half that amount—$340 million on the facility, and only $10 million on the public realm, for a total of $350 million. Infrastructure Ontario says that the day before the lease details were released, Therme confirmed the doubling of the overall estimate to $700 million—an increase of 2000% on the public realm costs, and 147% on the facility costs. But as the Auditor General notes, there is no contractual obligation with the government for Therme to invest any specific amount in the project, let alone $700 million.

While Therme’s 297-page lease is explicit about the amount it must spend in advertising ($7.5 million during its first six years of operation), it does not stipulate a minimum amount of capital investment that Therme must make in the project itself. “This contrasts with the Province’s lease agreement with Live Nation, which specifies a dollar amount as the minimum capital investment to be made by Live Nation,” the Auditor General notes.

Moreover, Infrastructure Ontario’s ability to monitor the build is undercut by the Rebuilding Ontario Place Act, one facet of which removes requirements for municipal permitting.

The number of jobs that Therme is expected to create has already gone down from 2022 estimates, from 3,290 to 2,000 during construction, and from 848 to 800 during operations. As Borins has noted, in Ontario’s current strong economy, these job numbers are, in any case, an illusion: “If people weren’t employed building and operating the spa, they would be employed doing other things.”

A “commercial village” in Therme-built public areas?

The public areas that Therme is constructing aren’t entirely public: the lease gives Therme the exclusive right to conduct commercial activity and programming on up to 30% of these lands. Journalist John Lorinc has noted that the document gives Therme “considerable latitude to commercialize these areas beyond the walls of the spa building” and notes that “the province has thoughtfully indemnified Therme for anything that happens in these public areas that results in a lawsuit.”

The Auditor General’s report provides a hint at what these areas might end up looking like. In 2023, the Minister of Infrastructure’s Office direction Infrastructure Ontario directed Infrastructure Ontario to enter negotiations with Ontario Live, despite concerns about an earlier submission by the group, which has close links to Premier Doug Ford. These negotiations identified Ontario Live as the preferred partner for establishing food and beverage services, people-moving infrastructure, and other amenities on the East Island. While contract discussions with Ontario Live were curtailed this July—possibly because of the upcoming Auditor General’s report—there is nothing to prevent the group reappearing as an operator of commercial spaces in Therme’s public areas.

It is plausible to imagine Ontario Live, or another group, constructing something similar to what Ontario Live originally proposed for the East Island, but now in the areas around Therme. In its draft term sheet for a project agreement, presented to Infrastructure Ontario in July 2023, Ontario Live wrote that they would “develop the proposed commercial areas that will include the creation of a commercial village that will add value to and support the proposed park and other public amenity spaces. The commercial village will include constructing twelve restaurants, office space, and a marketplace, in addition to creating programming for special events.”

Next week, I will examine what the Auditor General’s report reveals about further privatization plans for Ontario Place, and the continued planning for the relocation of the Ontario Science Centre.

The Auditor General’s Report, Part 1: The cost of privatizing Ontario Place

The Auditor General’s Report, Part 2: The billion dollar question of parking

The post The Auditor General’s Report, Part 3: Therme appeared first on Canadian Architect.