Financial Losses Resulting from LRT Construction

Introduction

Some days it seems like you can’t go anywhere in Ontario without running into a light rail transit (“LRT”) project. Projects are either underway or imminent in Toronto, Hamilton, Ottawa and right here in Mississauga along Hurontario Drive. While these projects are intended to provide long-term benefits to residents of these cities, they can also create severe operational and financial difficulties for businesses located along the planned routes.

Fortunately for business owners, the Ontario Expropriations Act provides a variety of financial remedies for both land owners as well as tenants. Some remedies apply in situations where the entire property of a business is expropriated; other remedies apply if even only a small portion of the business’s property is expropriated, while still others may apply even if no land is taken at all. The Act also requires the government authority to compensate claimants for their “reasonable costs” incurred in quantifying their claims.

Our firm of business valuators and accountants has been involved in the quantification of financial remedies in numerous cases involving these types of situations. In the following article, we provide an overview of the types of losses businesses may experience, and a list of information that is helpful to gather to support a claim for business loss.

Types of Losses

In the event a business is completely expropriated, it will likely suffer a loss of intangible value or “goodwill”, as well as a loss of value related to certain of its physical assets that cannot be easily removed to a new location (e.g. leasehold improvements). It may also incur temporary lost profits or moving costs, depending on whether or not it is able to relocate to another location.
Even if a business is not completely expropriated, it may incur a variety of negative impacts associated with partial takings of land or adjacent construction work. These may include:

• Decline in sales (e.g. due to temporary or permanent decrease in pedestrian or vehicle accessibility)
• Loss of gross margin on actual sales (e.g. due to discounts offered to encourage customers)
• Increased operating costs (e.g. additional advertising costs)

The types of losses incurred will vary depending on the type of business. For example, a retail business that is more dependent on walk-in customers may be more impacted than a dental clinic that has long-time patients. Similarly, some businesses may start to feel the effects of the impending construction before it even begins; for example, landlords who are seeking tenants to commit to a five- or ten-year lease may be forced to offer lower rates in the years prior to the start of construction in order to entice tenants who know that they will eventually be dealing with the disruption of construction.

Information to Gather

In our experience, the more detailed the information base available, the more compelling the calculation of the business’s financial losses. The following is a non-exhaustive list of information we typically request:

• Annual financial statements
• Monthly revenue summaries
• Annual payroll records
• General ledger details for any unusual revenue or expense items
• Copies of key contracts (e.g. lease agreements, sales agreements)
• Chronologies of all construction work performed adjacent to the affected property, including details of lane closures, road closures etc., along with related videos or photographs

Conclusion

Public works projects can create significant pain for business owners. The Expropriations Act contains provisions to help alleviate that pain.

Ephraim Stulberg, CPA, CA, CBV, CFF (estulberg@mdd.com, 416-366-4968 ext. 138) is a partner with MDD, a firm of expert professional accountants and business valuators with 11 offices across Canada.