Taxpayers beware of millions more in Olympic Athletes' Village loans
Vancouverites could be on the hook for hundreds of millions to guarantee Olympic Village loan
By Miro Cernetig, Vancouver Sun columnistJanuary 8, 2009
Vancouver's Olympic Village under construction.
Photograph by: Steve Bosch, Vancouver SunThe news from Vancouver’s Olympic Village is becoming dire. And next Thursday is the day this billion-dollar financial minefield could blow up for the world to see.
That’s when the companies that are building Vancouver’s billion-dollar Olympic Village hope to access more of a $750-million construction loan from Wall Street, to keep constructing the crown jewel of Canada’s 2010 Winter Olympics.
But suddenly, there’s a problem in getting that money. The city might have to offer as much as half a billion dollars in loan guarantees as security, significantly more than the $100 million it has already put up to keep the Olympic Village construction going.
The project’s main, U.S. financier, Wall Street’s formidable Fortress Investment Group, has toughened conditions for accessing its loan. Fortress is asking the City of Vancouver to guarantee most of the $750-million loan it has offered to build the $1.2-billion Olympic Village.
That borrowed money is the primary source of funds for the work crews and developers, working on an increasingly tight — and tenuous — schedule to get the Olympic Athletes’ Village built by this October.
But with its own share price in a slump, the global banking crisis still unwinding and a falling real estate market in Vancouver, Fortress essentially wants a guarantee from the City of Vancouver and its taxpayers that it will be paid. It wants the city to make good on the project’s loan and interest costs if the Olympic Village fails as a real estate venture.
In short, the profitability of the Olympic Village, whose condos were supposed to be sold to the public at great profit after being used by Olympic athletes, is no longer viewed as such a sure thing. In fact, those close to the deal — now watching condo prices drop dramatically — wonder if the deal will ever make a profit.
So here’s what Vancouver Mayor Gregor Robertson is facing. You’ll be hearing it in the next few days, when he makes it public:
The Wall Street financial firm is saying it will continue to lend the money to build the Olympic Village — on the condition Vancouverites absorb most of the future risk. The money will be loaned until 2010, as promised, under contract, if the city guarantees repayment of the loans to Fortress.
Here’s the financial — and political — challenge to Mayor Robertson, and why he’s got to find another way to get the village built.
First, the rates of Fortress’ loans, negotiated long before he took office, are high by today’s standards: about eight per cent (or more) per annum, roughly $50 million a year or more for the project, according those I spoke to close to the deal. That is eroding the project’s profitability. It’s also about double the rates that might be negotiated if a similar loan were renegotiated today, with the city’s backing and solid credit rating.
Secondly, it no longer seems the Olympic Village condos can be quickly sold off by 2010, as was expected. That was what made this deal work.
The local real estate market has slowed dramatically. Only 250 of the 750 Olympic Village condos have been sold. The new plan — a prudent one — is to delay the sale of the others until the market rebounds and avoid fire-sale prices at taxpayers’ expense.
But that prudence comes at a cost, too. It means loan financing costs won’t end on the Olympic Village by 2010. Instead, they could drag on for years, until all the units are sold.
That means the loans to carry the project will need to be extended, perhaps for years. That will entails tens of millions of dollars in added carrying costs a year, too.
But the Olympic Village’s red ink might deepen even further. There is no guarantee — if the real estate market sags longer than expected — that the Olympic condos will ever be sold at prices high enough to recoup the original investment and carrying costs.
So what’s the focus of the Gregor Robertson administration these days? It’s the only one left: Refinance, as soon as possible.
Mayor Robertson and his advisers hope to find alternative sources of financing for the Olympic Village project, to reduce loan costs for the city and the developers building the project. That might enable them to renegotiate the Fortress loan, using the leverage of the Triple A ratings of the provincial and federal governments.
So far, those governments aren’t saying much. The province, in fact, continues to say this is the city’s problem, not theirs. But that’s a mistake. This is the moment when the West Coast’s biggest city needs the help of the bigger boys at the negotiating table. The city’s past administrations messed up badly.
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