Miro Cernetig
Sun
The City of Vancouver is quietly approaching the federal and provincial governments for assistance in refinancing the city’s Olympic Village. It needs a bailout.
And those more senior governments had better come to the table to help rescue Canada‘s third largest city. If they don’t, this could quickly spiral into something far costlier than taxpayers are being told.
Could it be as embarrassing and debilitating as Montreal‘s 1976 Olympic debt, measured in the billions, which took Montrealers a generation to pay off? Perhaps not in dollar terms. But on a per capita basis, things could get just as ugly.
Do some basic numbers and you can see Vancouver‘s Olympic exposure — already about $1 billion — soaring by hundreds of millions of dollars.
Here’s the scary scenario Mayor Gregor Robertson is facing. (Warning: there are lots of numbers. But it’s your money, so it pays to pay attention.)
The new mayor wants to get out of — or at least renegotiate — the Olympic Village’s $750-million loan with Fortress Investment Group, the Wall Street financial firm. For good reason. Interest costs are 11 per cent a year — about triple the current interest rates. That’s about $83 million a year.
Unless Fortress suddenly gets generous, the penalties for refinancing will be, as people close to the negotiations tell me, “huge.” Penalties and interest owed could be $100 million or more.
That move would bring a smidgen of good news, though. Renegotiated interest rates — with federal and provincial backstopping — might fall to about four per cent.
Still, even that deal is sobering — sort of like going down the Olympic luge. It’s slow at first but things soon get fast and scary.
If the city takes over Olympic Village financing — assuming $875 million in debt, made up of the $750 million in loans and $125 million in cost overruns — the annual interest payments would still be $35 million. This would be the annual payment for 2009 and 2010 on $875 million.
So, let’s add it up. Refinancing the Fortress Olympic loans for the years of 2009 and 2010 brings total costs to $170 million. (That’s the forementioned $100 million on refinancing plus $70 million for two years of interest.)
But there’s more. The value of condos are falling — by the start of 2010, they could be down more than 20 per cent. So the city — reacting like any speculator caught in a falling market — will want to delay the sales, waiting for better prices when the market rebounds.
Let’s be optimistic and say that happens over three or four years — from 2011 to 2014. That would mean carrying the Olympic Village debt longer than the original business plan.
I’ll give the project a break and assume 250 Olympic condo units already spoken for are sold, offering up $250 million. So trim the Olympic Village’s debt to $625 million. At a rate of four per cent a year, that might mean interest payments of $25 million each year — or $100 million over four years.
Time for another subtotal: We’re now at $270 million. (The forementioned $170 million plus $100 million in interest for delaying condo sales.)
What I’m leaving out, you might forget, is the cost of the city land at False Creek, on which the Olympic Village sits. Taxpayers are supposed to get $200 million for that. I’ve yet to hear a business plan that guarantees taxpayers will recoup that investment by 2010.
This city is facing perhaps its biggest financial crisis in history. At city hall today, Vancouver‘s mayor will begin to fill in more details and outline possible rescue plans. He needs the help of other governments to make sure the Olympic Village is built on time, with as few additional costs as possible.
But to retain credibility, one of Mayor Robertson’s promises needs to be this: City hall will stick to the business of zoning, selling city property and collecting taxes. City bureaucrats and councillors will never again use other people’s money to dabble like amateurs in a condo boom.
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