The city of Vancouver's hope of recouping its $1-billion-plus investment in the Olympic athletes' village project was always dependent on a thriving real estate market. If it crashed or stalled, the city's massive outlay in the deal was going to be at significant risk.
As things stand today, the project is shaping up to be a financial disaster for Vancouver taxpayers, with losses totalling in the tens, possibly hundreds of millions of dollars.
The math is simple.
Millennium Development Corp., the company that built the condominium complex that housed Olympic athletes during the 2010 Winter Games, still owes the city of Vancouver $731-million.
The city was forced to back the project when the original lender, Fortress Investment Group, a New York hedge fund, pulled out.
Millennium has so far sold only 257 units - it has 480 remaining to be unloaded. Some are the most luxurious units in the complex, with beautiful views of False Creek and the North Shore mountains. Still, the developer would have to get an average of $1.5-million per condo to raise $731-million.
The project was built to the highest environmental standards in the world, which significantly added to costs. Originally, the units were going to be sold for an average of $950 a square foot - which sounded reasonable when there seemed no chance of the red-hot Vancouver real estate market cooling off.
Today, Millennium could probably sell its units for an average of between $750 and $800 a square foot, according to several real estate experts. In fact, nearby new projects, admittedly not built to the same costly environmental standards, are selling for $700 a square foot.
The developer also has some retail space, as well as 119 rental units in the complex that it could sell to raise cash.
Millennium has 500,000 square feet of condominium units yet to sell. If it gets $800 a square foot per unit that still only gives it $400-million - $331 million short of what it owes the city. There's not a chance that would be made up by the sale of the retail space and rental units.
The project's problems have been compounded by the introduction of the HST, which added to costs for new-home purchasers. With the future of the tax in B.C. now up in the air, potential buyers are keeping their hands in their pockets until the matter is resolved. That could take a year or more.
Geoff Meggs, a Vision Vancouver councillor who has the Olympic Village file, would not speculate on how much the city could lose ultimately in this deal but said ominously: "Our job is to get as much money back for taxpayers as we possibly can."
One source close to the project said the best case for the city is a loss of $50-million; the worst case a number north of $150-million.
The city is said to be considering a range of options, including hanging on to the remaining units and renting them out until the market turns around. The problem with that plan is there is almost no market for luxury rental.
There is a saying in the development business: "Your first loss is the best loss." Which, translated, means get whatever money you can when you can. Going the rental route is a mug's game.
The people at city hall couldn't help but notice what is going on in the condo market just south of the border in Seattle, one of the most prosperous cities in the United States and one that avoided the worst impacts of the recession. There was a fire sale of luxury condos there recently, with units atop the new Hyatt hotel going for a staggering $455 a square foot, a 30-per-cent discount from the previous asking price.
With the future of the Canadian economy in some doubt, Vancouver would be foolish to gamble on a turnaround and risk exacerbating its losses.
Given the dimension of the financial bath the city is likely to take, Mayor Gregor Robertson needs to address this matter publicly. The time for petty recriminations and blaming this mess on a previous city council has long since passed. While the mayor may have been dealt a bad hand here, the problem is now his. He must own it and own up to the massive scope of this debacle.
He should become a pitchman for this project, promoting the value that will soon be available in the reduced prices there. If I were him, I'd be asking Premier Gordon Campbell about getting an HST amnesty on the project, which wouldn't cost the provincial coffers much.
These Olympics were a joint production of the B.C. and federal governments. They should be pitching in to help bail out a development that went off the rails, in part, because of Olympic-related deadlines and other pressures.
Mostly, however, the mayor needs to come clean with Vancouver taxpayers, his shareholders. They have the right to know exactly what is happening to their money.
Gary Mason