Olympic Village $130 million Over Budget: Audit
Olympic village $130 million over budget: audit
By Miro Cernetig, Vancouver Sun columnist, October 5, 2009
VANCOUVER — If you need any more proof that mayors should stick to potholes, garbage pickup and leave the real-estate business to the professionals, just read on.
In 2002, when everyone in town seemed to be making it rich flipping condos, Vancouver's city hall decided it wanted a piece of the action, too. So it volunteered to build the $1-billion Olympic village, supply the condos for athletes and then, after the 2010 Games were over, dreamed of flipping the units for a profit in the red-hot housing market.
City hall targeted an iconic parcel of city land, down on the False Creek waterfront. It then chose a single developer, Millennium, which offered the most for the land — $200 million.
Now, the city could have demanded that Olympic organizers buy the land and build the Olympic village. But city hall wanted to play developer. How could they lose in Vancouver's market?
Well like all novices who enter into a complicated game they don't really understand, city hall and its staffers grossly underestimated the complexity of the business, overestimated their skills and turned out to be rank amateurs when things went sideways and those big Olympic village profits suddenly started looking like they might be massive losses.
Much of this debacle is outlined in the KPMG audit and a PowerPoint presentation released by city hall Tuesday. City of Vancouver taxpayers should be angry, very angry, about the incompetence here.
And don't fall into the trap of making it a left-right, Non-Partisan Association-versus-Vision blame game, as the local spin doctors hope. This fiasco stretches back a few administrations, touches both civic parties and it isn't over yet.
The key facts are these:
- In its eagerness to get $200 million for its land, the city chose to let its developer, Millennium, deposit only $29 million up front. It has still yet to be paid the remainder. (The deal was that Millennium would lease the land, only getting ownership after the project was completed.)
- Then it allowed Millennium to arrange its own financing, with little more than a rubber stamp from the city. Millennium chose to go to Wall Street, for a $750-million loan from the hedge fund Fortress. Why a hedge fund and not Canadian banks?
Simple. After an early $80-million loan, Canadian banks decided they couldn't finance the deal because the city had opted to only lease the land to Millennium. That meant the banks were in a position of lending to an entity that didn't actually own the land on paper, meaning it couldn't offer it as security.
- Instead, Millennium sought out Wall Street's Fortress Investment Group. But Fortress also realized it was too risky to bankroll a $750-million loan when the developer getting the loan didn't have clear title to the land and had only $29 million invested in the property. So Fortress demanded a $190-million loan guarantee.
At this juncture, with the Olympic clock ticking down, the folks at city hall were beginning to realize they faced massive penalties and career-ending embarrassment if they didn't get the Olympic village built on time. In essence, city hall had put itself in an Olympic vise and had no choice but to ante up the $190 million.
- Then the city's bureaucrats, with little or no experience overseeing a construction project this big, didn't know how to properly monitor the giant project. Left to its own devices, Millennium began falling behind schedule and going overbudget. About $130 million overbudget, according to some of the estimates in the KPMG report, pushing the original cost from the promised $950 million to $1.08 billion, the auditors said.
- Things got worse. Fortress, then being buffeted by the global financial credit crisis last year, was rattled when Millennium began blowing its budget. Fortress also feared the price of condos, which is where the profits are supposed to emerge once the Olympics are over, would plummet. The project didn't look like such a money-maker any longer.
So Fortress froze its loan to Millennium. To keep construction from stopping, someone had to come to the rescue fast or the project would have shut down. You guessed it, city hall was on the hook again. This time it ponied up another $100 million in loans arranged by city councillors in a secret meeting last year.
When that news leaked, it erupted into a full-blown scandal. It ended the political career of then-mayor Sam Sullivan. He and his Non-Partisan Association were swept from office last November by Vision's Gregor Robertson, who has since promised to make things right.
The mayor, now with Vision in control of city hall, hired Penny Ballem, a former deputy minister in the provincial government, to replace city manager Judy Rogers. Ballem's main task was to get the Olympic village costs under control.
And she largely has. In simple terms, she brought in a new team of consultants who took an iron grip over Millennium's construction operation. And, more importantly, Ballem arranged to replace Fortress as the project's lender and negotiated lower interest rate costs through a syndicate — finally — of Canadian banks.
But don't breathe easy yet. Now Vancouver taxpayers are actually backstopping the entire project costs for the Olympic village — about $996 million — which includes $146 million in interest costs to extend the loan. That doesn't include the approximately $200 million the city is also still due for the land the Olympic village stands on.
So where do taxpayers stand today? Well, still exposed to the vagaries of the real estate market, though a little less so.
To get out of this mess, the city of Vancouver must hope Millennium will stay afloat and be able to sell its condos at a price covering the interest on its loans, its original construction budget and the $130 million in cost overruns.
What's the break-even selling point, in terms of square feet? That information hasn't been released. But you can bet the profit margin is lower — perhaps to the tune of hundreds of millions of dollars less than the original business plan this real estate deal was originally based on.
When will this Olympic fiasco finally end? Not for a few years yet.
In hopes of getting the best price possible for its Olympic condos, city hall has arranged for Millennium to unload its units over a longer period, all the way up to the middle of 2013.
If I were Gregor Robertson, I'd be praying for another real estate boom and heed this advice: Stay away from any city hall staffers or pols who think they're the next Donald Trump.