What once seemed merely plausible now seems increasingly inevitable: Construction of the Olympic athletes village will lead to one of the biggest financial losses in the City of Vancouver's history.
Vancouver now has its own Big Owe.
The new administration at city hall has been able to confirm what was suspected in November when details of a secret, $100-million loan agreement to bail out developer Millennium Development Corp. were first made public by The Globe and Mail: that taxpayers are on the hook for covering the entire cost of construction, now projected to be about $875- million.
The city would recoup some of that money from the sale of condos, to which the athlete suites are being converted after the 2010 Games. But some estimate there could be as much as a $300-million shortfall between what the city puts in and what it might get out in the end.
There is a mad scramble under way to meet increasingly tight Olympic deadlines for the project, a process that was compromised in the fall when Fortress Investment Group, a New York-based hedge fund that is the project's primary funding source stopped advancing money to the developer because of mounting concerns over cost overruns and the overall financial viability of the project amid a deepening worldwide recession.
This forced the previous city council to secretly approve the $100-million loan that was advanced to Millennium in stages over the past few months to keep construction on the site going.
But with that $100-million now used up – the last $21-million is to be forwarded on Thursday – Millennium needs money to finish the project.
The developer has now had to turn back to Fortress in the hopes of getting money to complete construction, which, in turn, has created the most recent crisis.
Fortress doesn't want to advance further funds unless the city guarantees the entire $750-million loan Fortress signed with Millennium. The city originally agreed to guarantee $193-million of the amount.
To this point, Fortress had advanced about $350-million of the total amount of the loan. But since that loan was signed, costs of the project have soared and because of these overruns Millennium needs $458-million to complete the project.
Much of this came out when the scandal first broke last November. But with Fortress now hedging on releasing the balance of the loan unless its new demands are met, the city faces the prospect of assuming financial responsibility for completion of the project.
Earlier, it signed an agreement with the International Olympic Committee committing the city to delivering the keys to the athletes village by October this year.
Options the city is now exploring include negotiating a new loan with Fortress for the balance of the construction costs, which the city would guarantee; structuring a new loan that involves Fortress and other financing partners; or, finally, assembling completely new financing involving other institutions, which would need the support of stakeholders, including the Province of British Columbia.
But here is part of the story that hasn't changed since it broke in November: Given the current and projected market conditions, the economics of the project no longer add up.
After the Olympics, the village will be converted into 1,100 condominium units, only 750 of which are being sold at market price (there is also rental and social housing).
So think about what the average price of those 750 units is going to have to be in order for Millennium – and ultimately the city – to recover construction costs.
Real-estate values dropped 12 to 15 per cent in Vancouver in the past 12 months and, according to some estimates, could drop another 15 to 20 per cent over the next two years. Some inside city hall who have looked at the numbers see Millennium – and the city, by extension – coming up $300-million short of breaking even.
Fortress gets its money first, before anyone else.
Again, the city has advanced $100-million since October to keep construction going and is on the hook for $190-million in loan guarantees it has already made to Fortress. As one Vision Vancouver city councillor said Friday: “What is the likelihood we're going to get that money back? Not likely.”
It will be next week before we know which financing avenue the city chooses to get this project done. But it will probably be years before a final tally of the financial damage incurred by taxpayers to build the Big Owe is ever known.
