Another council day, another smackdown of city staff.
On the whole, all the councillors tried to play nice and praise city staff yesterday for all their hard work on negotiating the buy-out of the Fortress loan that was announced yesterday. (For more details than I provided, read Rod Mickleburgh’s story in the Globe today here.)
But as you can read in the last line of Rod’s story, the city’s manager of business planning, Ken Bayne, made the fatal error of saying the following about the city’s use of $400 million of its current working capital reserves as a loan for the Fortress project:
“In fact, it may actually benefit our operating budget, because of a higher return than we normally get on our investment projects.”
Councillor Kerry Jang rose to reprimand him. “That’s a pretty dangerous point,” he said. “We have to make sure we are not into real-estate speculation. I don’t think we as a city are into real-estate speculation.”
Ken then had to apologize, I’m sorry if I appeared to be making light of the situation blah blah blah. Very squirm inducing.
Actually, Mr. Bayne was, I believe, saying that the city might get a greater return on its money by charging the Olympic village developer an interest rate for the loan that’s higher than what it makes on its current investments. That’s actually banking, not speculating in real estate.
But the fascinating part of Councillor Jang’s remarks for me was the realization that it’s now bad at city hall to make any kind of assumption that real estate might gain in value. That ought to have the old real-estate division in a knot. After all, the entire presumption behind the division, which manages the city’s something-billion-dollar property endowment fund (hard to tell its value these days with the market the way it is), is that property gains in value.
The whole purpose of the city acquiring the land at Southeast False Creek, where two-thirds of the property remains to be developed (or more accurately, sold to private developers to be built), was that the city would be the one to gain by developing the land, rezoning it and then selling off the improved land to developers.
As former real-estate division head Bruce Maitland (now retired) told me recently, that was the policy the division pursued as a way of continuing to grow the city’s assets. The city didn’t want to get into development itself. But by acquiring strategic pieces of land and then doing the preparatory rezoning work itself, it got to capture some of the profits as the land gained in value. Now other cities are seeking his advice on setting up property endowment funds so they can do the same thing.
However, as I’ve seen in recent posts in this blog, there’s so much pent-up resentment about the havoc that real-estate development and bubbles have wrought in this city that it’s now politically incorrect to say that you think the market will recover and even start to generate profits again.