Posted Feb 12, 2009, 1:46 PM
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Join Date: Aug 2008
Location: Vancouver
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Quote:
2010 OLYMPICS: FINANCING CRISIS
Vancouver closes in on $800-million deal to save athletes village
GARY MASON
February 12, 2009
VANCOUVER -- The city of Vancouver is close to concluding new financing arrangements for the Olympic athletes village that could help save the project's developer millions in interest payments.
The Globe and Mail has learned how the deal is shaping up.
The city has reached an understanding with a consortium of Canadian banks to borrow upwards of $800-million at an interest rate of less than 3 per cent. This will allow the city to complete the project and pay off Fortress Investment Group, the New York-based hedge fund that had been financing the project until it stopped advancing money to the developer, Millennium Development Corp., last September, allegedly over concerns it had about cost overruns.
This is when the city had to step in and secretly authorize a $100-million loan to keep the project on track.
Fortress had advanced $317-million of its $750-million loan with Millennium before halting payments. At one point, Fortress was charging Millennium 11-per-cent interest on its money, although that rate had dropped to 9.5 per cent by the middle of last year.
According to sources, the city has reached an agreement in which it would pay Fortress a $4-million penalty to take over financing of the project. This is a far cry from the $25-million to $50-million speculated to be the fee the city would have to pay to break the terms of the loan and send Fortress packing.
The fact that Fortress would settle for so little is interesting, and certainly supports the premise it was anxious to get its $317-million loan back and say goodbye to Vancouver. Fortress has been in financial difficulty for months, with its share price plummeting and investors fleeing in all directions.
With new financing in place and Fortress out of the way, the city's attention next turns to Millennium Development. The city will have to decide what interest rate it will charge Millennium for the money it is lending to complete the project, as well as the amortization period. Millennium needs about $458-million.
The amount of the loan the city negotiated with the banking consortium does not cover the $100-million it advanced Millennium when Fortress stopped making payments. That is supposed to be paid back by the developer separately.
According to sources, there has been a lively discussion among Vision councillors about the direction in which the city should go. Some have apparently suggested the developer be levied the same interest rate that Fortress was more recently charging, while others believe the city should be more reasonable and charge Millennium a percentage point or two above the rate it is getting from the banks.
I think that is the city's best course for a number of reasons.
It can certainly be argued, and has, that it was the city's fault that Millennium had to turn to a New York hedge fund for financing in the first place. No Canadian banks wanted to lend the developer money because it didn't own title to the land - the city insisted on keeping it until the project was finished.
Hedge funds typically finance riskier ventures, charging higher interest rates than commercial banks. That is why Millennium was forced to pay up to 11 per cent on the money it was getting from Fortress, which is a ridiculous sum, especially now, with interest rates at historic lows.
Second, costs on the project were driven up, in part, because of the record-breaking environmental standards the city insisted the project be built to. Yes, the developer knew this going in, but a lot of the materials associated with meeting these standards skyrocketed in price.
Finally, if the city is fair and charges Millennium 4.5 or 5 per cent on its loan, it will allow the developer to hang on to the condominium units until the market rebounds. This way, Millennium might be able to get prices for the units that more closely resemble those that were imagined when the project was conceived and first costed out.
As it stands now, Millennium likely isn't going to be making any money on the village. But the more successful it is, the greater the likelihood the city isn't going to take the financial bath most have predicted.
Despite its problems, Millennium has done a remarkable job on the site, according to most reports. The village is a construction marvel and the quality of the work of exceptional standard. There are developers in the city who are surprised that Millennium hung in there during the past few months - many would have walked. And perhaps the city should take that into account when exacting its pound of flesh for the money it will lend the developer, and when considering how long it will give Millennium to pay the loan back. It is likely to be somewhere between three and five years.
Because of some deft negotiating on the city's part, this project isn't looking like the financial disaster it once was. Taxpayers could still be on the hook for millions, but maybe not the hundreds of millions once thought.
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Source: GARY MASON, Globe and Mail
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