The Impact of the Athletes Village on The Market

The City of Vancouver disclosed this week that is has provided a financial program, which is called a "$100 million loan guarantee", to Millennium Development Group, developers of the 2010 Olympic Athletes Village.

The details of the program have not been released.

Supporters of the program claim that the city and its taxpayers are protected in the case that Millennium is unable to pay back the "loan".

Those supporters are referring only to the direct risk of a loan default. If Millennium can't pay back the loan, then Vancouver recovers by way of taking back property. Its called realizing on the security. "No risk," those supporters claim.

Wrong.

The total financial deal for both land and buildings has a book value of $1.1 billion. Most of the financing was provided by Fortress Investment Group, through its lending subsidiary Fortress Capital, by way of a $750 million loan. The supporters of the $100 million loan have conveniently ignored that Fortress must be paid back the $750 million BEFORE the city can realize on its security, which are the land and buildings. In addition, part of the security are buildings and land the city was going to get anyway - at least 100 units of affordable housing plus green space.

So there is a direct risk to the city of Vancouver. The risk is that the $1.1 billion dollar project is worth only $750 million at completion, a very real risk, and after Fortress gets paid, the city gets nothing. In addition, as part of the original deal, the city is on the hook for up to $190 million in shortfalls to the $750 million Fortress is owed. So if after everything is sold, Fortress gets only $600 million, then the city kicks in $150 million more, and loses the other $100 million.

But there are also two indirect risks to Vancouver taxpayers and investors that have yet to be disclosed.

First, only 265 out of 700 condo units have been presold. The total number of condo units eventually available for sale appears to be about 1,000. Those 265 pre-sales must be considered a VERY low number in a real estate market which is stagnant. Even more worrisome is that we are convinced that at least 50-75 of those pre-sales were likely made to what are called "related parties", such as sub-contractors. Those sales were conditions of the sub-contracting agreements, in some cases sweeteners to agreements because the contractors figured they could flip the property for a quick profit. Those sales must be considered very soft with little likelihood of closing. So the city of Vancouver may well realize on security, but simply get 3 empty condo buildings. And cities aren't good at managing such assets.

The second risk is to investors and home owners. If the city realizes on security and gets 600 empty condo units to sell, it will have to sell them at fire sale prices. It will take a year or more, with huge downward pressure on prices.

Millennium Water will be a work out project in about two years. Similar work outs take anywhere from 2-5 years. We recommend a pass on this project, at this time.