Olympic Athlete's Village and Debt

By Miro Cernetig, columnist, Vancouver Sun, January 4, 2009

It’s built on Vancouver’s valuable waterfront real estate. How could taxpayers ever get soaked building a glittering, billion-dollar athletes’ village for the Olympics?

Easier than you might think.

Thinking it couldn’t lose in the real-estate big leagues, a few years ago the City of Vancouver guaranteed the world it could build the Olympic Village for 2010 — and even make a profit. Now the global financial crisis has turned a supposedly sure thing into a high-stakes gamble.

The dilemma is the local condo market has turned. The Olympic condo units, which were supposed to be occupied by athletes during the Games and then turned over to new owners, are probably worth 10-to-20-per-cent less than initially expected.

Even worse, the prospect of fast sales — most were expected to sell by 2010 — has evaporated. If they don’t want to sell at fire-sale prices, city officials now realize sales will probably need to be delayed until the market rebounds, whenever that might be.

Holding off on selling in a falling market is, of course, what any savvy real estate holder would do. But there’s a problem: The Olympic Village is built on a mountain of borrowed money.

Putting off sales will certainly mean extending hundreds of millions of dollars in construction loans well beyond 2010. And that comes at a high price.

Vancouver city officials, and its new administration, continue to keep the details of the Olympic Village finances under a cone of secrecy. But here’s what they are looking at.

The biggest loan to construct the Olympic Village is $750 million from Fortress Investment, a Wall Street financial firm. Another emergency loan of up to $100 million was recently approved by the city. Then there’s another $160 million still owed to the City of Vancouver for the sale of the waterfront land where the Olympic Village sits.

Now the assets: There are about 750 Olympic condo units that will go on the market. So far, about 250 of the lower-price condos have been sold at an average price of about $800,000, or $200 million.

Now do the math.

Let’s assume building the Olympic Village entails the developer drawing down the full amount of the loans. That means $850 million left to pay. Another $160 million must also be paid back to the City of Vancouver, for its land. Total project liabilities: about $1 billion.

Now, let’s optimistically assume all those 250 condos already purchased (mostly on deposit) complete their deals. At an average of $800,000 apiece, that would generate $200 million. That brings total liabilities down to about $800 million.

A year ago, paying off that didn’t seem problematic. The remaining 500 units — with prices as high as $6 million — would surely earn enough to put the project solidly in the black after 2010.

Now, with nobody lining up for condos, quick repayment is unlikely. So that means you’ve got to extend the terms of the loans, possibly by years. What’s that going to cost?
It’s hard to say without seeing the books. But a conservative bet is that in the tight credit market, interest would be about six per cent a year on $800 million in liabilities. (That includes the $160-million the city is still owed, which would likely earn six per cent, too, if it were in hand and shrewdly invested.)

That means carrying costs of that $800 million are about $48 million a year. Add in management costs and deferred property taxes, because most of the Olympic Village is empty, and it’s a cost of about $1-million a week to hold onto those Olympic condos.

We can remain hopeful that Mayor Gregor Robertson and his administration will find a creative way out of this scary scenario. The market might improve. More units might be sold.

But Vancouverites should stay alert. If things go sour, they will be on the hook. City hall has guaranteed hundreds of millions of dollars of those Olympic Village loans.

mcernetig@vancouversun.com
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