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Believing in the real-estate market the new sin at city hall

February 19th, 2009 · 17 Comments

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.

Categories: City Hall Talk

  • foo

    You’re right that this is an example of the havoc that bubbles wreak. It causes people to lose sight of what’s economically sound and what isn’t.

    For example, buying a condo assignment in the expectation that real-estate always goes up and you will be able to sell the assignment for a profit without ever having to close on the condo, is havoc-inducing bubble behaviour.

    Buying land that is almost valueless because of city zoning and planning policies, and then, because you’re the very city in charge of zoning and planning policies, re-zoning and changing the plan to make the land more valuable, is a license to print money.

    It’s such a good plan, it would make a Mafia don proud. Pity the bubble has made it hard for people who should know better to see that.

  • Wendy

    The city taking over as the lender will likely turn out to be a brilliant and profit-making move.

    From what I’ve heard, the city will be borrowing at around 3.5% because of it’s AA (or AAA?) rating and re-loaning that to Millenium at around 8%, roughly what Fortress was charging. This is appropriate profit given the risk the city is taking.

    The Vision-dominated council probably wants to downplay the profit making aspect of this restructuring as it might not sit well with some of their supporters. (Kinda like you don’t hear very often how extremely profitable the Vancity credit union is.)

    In fact, this may turn out to be a model that many world cities will look at as they struggle to get various projects built to benefit their overall economies and societies.

  • hohoho

    Good post! Just go over to that condohype blog and you’ll see nothing but pent up resentment. Kerry Jang and his Vision cohorts would feel right at home there.

    I just wonder how the press would have reacted had it been an NPA council who decided, without public consent, to modify the Vancouver Charter in order to borrow hundreds of millions of dollars, then buy out Fortress/Millennium and take on the entire cost of the Olympic Village project? Alex, Allen and Monte would be furiously writing articles full of outrage right about now. So far, mostly silence from the peanut gallery, except for the odd love letter.

    When Gregor first lied to everyone and said that taxpayers were on the hook for $1 billion, there was plenty of outrage all directed at the former NPA mayor and council. Now Gregor says he and his council decided to take on the entire cost of the project, and everyone praises him?? Talk about a double standard!

    I think it’s great that they will save millions in interest, but, how much did it cost to cancel the contract with Fortress? It also seems like Millennium will still profit from this development even though we, the taxpayers, are now literally picking up the entire tab.

    How about a little more delving into the nitty-gritty details before everyone starts congratulating themselves? I’d be very interested to know how much Vision received in campaign donations from Millennium now that they are so gung-ho to finance their development projects.

  • Glissando Remmy

    It’s becoming more and more iNPAsible to COPE with this VENEREAL VISION.
    This sums up the new municipal Government that we contracted by simply CLAPping our hands together ( read applause) not long ago. Remember when everyone was jumping up and down after the November election?
    “We won, we won!”
    No, no, no, you little stupid Grande Long Americano with a hint of chocolate sprinkles Volunteer, you didn’t win anything.
    The guys who organized the voters (and yes I’m talking about you) the $1000 and up a plate fund raising contributors won! Did you think that these guys donated barrels of money to these campaigns out of their good hearts?
    Well, now is pay back time and the Juice poster boy is simply delivering. He has just been adviced to upgrade the “operating system” from an old Robin Hood XP to a very elegant Robin Hood VISTA 2009 only in reverse.
    He simply lets in whoever was left out few years back.
    We live in Vancouver and this keeps us all busy!

  • Michael Phillips

    We have to keep in mind that there’s no free lunch in finance, the City only has the ability to borrow at a low interest rate because it has a great credit rating and it only has a great credit rating because it has never done a deal like this.

    A low interest rate offered to the City reflects lenders’ confidence that the City will pay them back, while the high interest rate offered by the market (years ago) to Millenium reflected the fact that (even then) potential lenders to Millenium knew that they had a comparatively lower chance of getting their money back. Of course it looks like pure profit on the surface to borrow at a low rate and lend at a high rate but it should be clear at this point that in finance we are not that lucky.

    The fact is, when we borrow from a bank at a low rate, the rate reflects the fact that we will almost certainly be paying that money back, but when we turn around and give the same money to Millenium, we have a much lower chance of getting this money back. Therefore, there is a distinct chance that we will owe money that we can’t get ahold of and lose a significant portion of this financing. In fact, we may lose every cent, because god only knows what an abyss of debt Millenium is right now and if Millenium has no net worth once this money is spent then that’s all she wrote.

    How are they supposed to roll over their existing debt on the real capital markets when the Olympics are done and we’re not willing to finance them anymore? No one wants to loan them money, not Fortress, and apparently since we had to enter this extremely risky agreement ourselves, not anybody. The market said no, and we said yes, and we’re being told this buyout takes away “extreme risk”, a deal none of the firms that actually know how finance and development work wanted to do? The large ‘profit’ margin on this deal is simply the market reflection of large risk.

    Now I don’t know much about property or bankrupcy law, and so I will hesitantly assume that we really can sweep in and scoop up the entire asset base if Millenium goes broke and everything really will be fine. But what I do know is that these development and finance industry lawyers are bloody well better than our City lawyers are, they are being paid 5 times more than ours are, they went to school longer than ours did, and they’ve been doing this kind of thing a lot longer than we have. How do we know that Millenium isn’t going to take this financing and use it to pay off other bills and then say they need more money or else the Olympics are a bust? If Millenium is really on its last legs do we think they aren’t trying to figure out a way to use our money to keep themselves afloat like this?What if it turns out that previous creditors to Millenium have engineered methods of exerting a claim on assets like these buildings ahead of time and are first in line? Would we really be surprised at this point? Can we be sure that our City lawyers are ready to think of all of these kind of possibilities?

    I hope so much that I’m wrong but it seems to me that hundreds of millions of our dollars depend on our City’s lawyers. I am a big supporter of this City Council but I think there are a few too many PR doctors working this case and that’s putting it as generously as I can think of. In any case they will have their work cut out for them convincing us that the City knows more about risk assessment than the bond rating agencies do if we see what could be a significant credit downgrade.

  • Ideas

    I can’t stand all the people who are saying “a-ha” about the real estate market being a stinker when these are the same people that were falling over themselves to get in (or out) at the height of the market.

    Mr. Jang hasn’t got a crystal ball any more than Mr. Bayne has. What Ken Bayne has done – throughout this process – is provided his best advice based on the best information he has had at the time.

    For pompous know-it-alls to suggest that somehow they would have made different – better – decisions three years ago, when speculators were cleaning up left right and centre on the market and property rich homeowners were driving the market ever upwards – is ridiculous.

  • Jim

    I am not an investor.

    I have only owned 1 home at a time in my lifetime.

    Most of the people I know have only owned 1 home at a time in there lifetimes, with perhaps a summer cottage somewhere.

    I realized early in 2007 that in a global economy real estate is global too.

    So, I went looking for global real estate info and I found plenty of it.

    The bad news just kept filling all these windows on my computer.

    I said to myself, will I ever in my lifetime have another chance to cash out of such an enormous Ponzi scheme again.

    I looked at what was happening around the world and said nope, this is my chance.

    I sold, am now renting and financially it was the best decision I have made in a very long time.

    I never ever asked for this Ponzi scheme of “forever higher real estate prices” and not just higher but obscenely higher. I absolutely find it disgusting and very damaging to society.

    Let me be clear. I am not a disgruntled renter. I made good tax free money selling my home at peak.

    And I am now way better off for it.

    I am sorry to burst your happy bubble Frances but the party for real estate is over.

    You don’t have to believe me one bit.

    But do try to leave your Vancouver bubble for just a bit and read what is happening around the world right now to real estate and assets in general.

    You will be surprise by what you will learn from the most respected, informed business people out there.

    This “downturn” is completely different from anything any of us have seen in our lifetimes.

    #5 (above thread) is correct. There is no free lunch and the citizens of Vancouver have to ask themselves why New York financiers felt it was in their best interest to forgo a very large sum of penalty money and let the citizens of Vancouver now take on all the risk for the Olympic Village project.

    I all seems to have been so easy doesn’t it.

    Sometimes what is not said or printed is the most telling.

  • jesse

    +1 for Michael Phillips. Great comment.

    Does the city really think they can do better than the “sharks” downtown? Doubtful. At this point its about loss mitigation; it’s not politically palatable to spin this deal into a money making venture because NFW is this deal going to make money before the next election.

    Amazing, isn’t it, that a long term vision is meaningless when the inconvenient question about whether or not money is being efficiently spent comes up.

  • DMJ

    When the thirds shoe drops, with the US lead global meltdown, in 2011, real-estate will cease being an economic generator.

    Real-estate speculation is a ‘mugs’ game played by the rich and powerful, to make huge profits on property, from the public.

    In some cities today, in the US, houses are being sold for less than $50,000 and this is just the beginning – wait till next year.

  • Paul

    This whole attitude is evidence that hype looks the exact same on the way up as it does on the way down.

    Condohype et al are the Rennies of the downturn; pumping as much bad news as they can in an effort to well…..I dunno….just say “I told you so” maybe?

    “Buy now or be priced out forever”

    Has become

    “Don’t buy anything because housing is totally worthless”

    It’s equal BS from both sides.

    Are we in a period of correction? Yes, definitely.

    Is this just the start of our very own sub-prime meltdown/period of epic RE devaluation leading to “The Greater Depression”? No.

    Bob Rennie hyped but he never gloated or hid his identity behind an avatar. I think the smug hypocrisy is much fuller and richer from the chicken-little downturn hypers. And these Vision twits are buying what they’re selling.

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  • foo

    Michael Philips et al are just wrong about Millenium and the financing issues for the OV. You’d think with all the kerfuffle the last few months, the facts would at least be agreed on.

    First of all, Millenium hasn’t actually done anything wrong (other than overpay for the land). They got the contract, arranged the financing under difficult circumstances, controlled the costs as best possible, and just kept on building through all the political wrangling. (BTW, if you think the $125m or so overrun on the OV is a lot, you should dig a little into the costs of the Shangri-la).

    Secondly, the city can get a better deal on financing simply because they own the land. Even Millenium could have gotten better terms on the financing if they had title. The reason they ended up with 11% from a loan shark is that no regular bank would (or legally could) advance them the money without it being secured against the land/buildings.

    Now, the city staff who arranged the deal to have the city keep title of the land probably thought they were doing the best they could to protect the city’s interests, but it turns out that it added considerable risk to the project.

    Fortress has financial difficulties of its own, so it had every incentive to avoid advancing more money to Millenium. All that’s possible to piece together from the few details of the deal that are public is that Millenium had some kind of covenant to sell certain numbers of units in order to keep Fortress advancing cash. When sales fell short of the numbers, Fortress had an out to stop sending money.

    So now we’re at the point where we the citizens of Vancouver really do own the village. Ironically, before this new deal was done, the Mayor’s claim that we were on the hook for $1b was just wrong – we were on the hook to deliver an Olympic Village. That’s not necessarily the same thing. Now, however, we are on the hook for at least $450m.

    As I’ve stated before, I firmly believe that there is going to be a loss on this project in the order of hundreds of millions of dollars. The question is how is it going to be shared between the parties? My guess is Millenium will eat a large chunk, and the city and Fortress will share the rest.

    Consider that we’ve been building social housing recently at prices > $1k/sq foot. If the OV costs the city $450m+$190m in lost revenue from the land, and they turn all 1000 units over to social housing, it would actually be cheaper than what we’ve been doing up to now.

  • Not running for mayor

    Fortress won’t be on the hook for anything, they have been paid off and no longer have anything to do with the project. Should there be a loss it will be eaten up by Millenium and Millenium alone. While not a signifcate amount Millenium does have Millions of it’s own money buried into this project, that will be the first to dissappear should there be a loss. Should that money still not cover the losses incurred the next to go will be the collateral provided by Millenium in the form of hundreds of Millions in property owned them them. The city will not lose anything on this project pending a doomsday scenario that renders all their property worthless. The cost to the city will be having to borrow money and waiting for it to be paid back, so oppurtunity cost, but at the same time they will be able to recover that back by charging a premium on the money lent. Unfortunately the truth is usally is less exciting and sells less papers.

  • foo

    NRFM, you’re right. Fortress is off the hook.

    Now maybe someone can do the math here. The city paid $330m out of working capital to get rid of Fortress. Now it has to raise $400m in the financial markets for the rest.

    But total financing requirements remaining are $690m. But also, we’re told the costs on the project were $875m.

    So, why does the city need to raise $400m when $690-$330=$360? Also, where did that $185m (875-690) difference go? Is the ~$133m that’s been advanced for construction loans since last year included? Are the cost overruns for the social housing part of the $875m?

    This whole thing is no more transparent now than it was when the evil NPA were running things.

  • jesse

    “Secondly, the city can get a better deal on financing simply because they own the land.”

    Really? Did they put it up as collateral for this latest loan? Usually the City gets good interest rates on debts because they can repay the debt from property taxes, which are a very steady income stream.

    The collateral of the land is almost certainly a secondary concern for the lenders and may not even be part of the loan agreement.

    What Vancouverites should be asking is what is the opportunity cost of this latest round of financing. They could have equally taken out the same debt and funded other more worthwhile projects but that’s forgotten when the OV blinders are engaged.

  • A. G. Tsakumis

    Oh dear…where to begin…

    Firstly, I am flattered that there are NPA lapdogs that are able to comprehend that some of us are supportive of a good Mayor. It’s my job, hohoho, to print what I see, not what you think I should see.
    My column on the original kerfuffle over the Mayor’s handling of the announcement is hardly a “love letter”. It ‘s fact…something your short of.. specifically…

    1) The Mayor DID NOT ever say that we were on the hook for $1Billion. This is a statement that originated from a Gary Mason line in his story breaking column of that same week. The rest of the media went with it, because, as is the case sometimes, laziness sets in, and, truth be told, had the Mayor actually said that, it would be a fantasmagorical boner, worthy of front page ridicule.

    What Gregor said was (and I just reviewed the clip): “Citizens of Vancouver should know that we are on the hook to deliver an almost billion dollar project on False Creek”.

    I suppose you could argue that this was not messaged as best as possible, but it is what it is…

    2) Yes, I assume Monte, Allen and I might well crave up the NPA if they were to have sought to carry the financing, but only because it was the NPA to foolishly followed EVERYTHING that staff laid before them, instead of asking questions like some Vision councillors wanted to do. It was the NPA who laid the guarantee at the feet of the taxpayer, without one even sideways glance at another option. You don’t understand this because your too busy somewhere between the NPA’s exhaust and intake and are largely stuck between sucking and/or blowing. That’s not my problem, please learn to read.

    3) Ken Bayne and Kerry (who otherwise has been one of the better performers of this council) are BOTH WRONG: Bayne for not being more clear in his original comment, that, as Frances points out, the higher rate will indeed benefit the city. How then, hohoho. do you account for favoritism towards Millennium by Vision??? They’re just about ready to charge them more coin.

    4) Why don’t you go back to taking orders from citycaucus on what to write on this blog and on what issues.

    It the only plausible explanation for your nutty, incoherent, illogical blather.

    Vision are doing a pretty good job so far, largely because of some very refreshing, principled, centered leadership by the Mayor.

    Eat it.

  • Michael Phillips

    This is exactly what I was talking about:

    Vancouver takes credit hit over Olympic costs

    “The rating action is the result of the recent announcement by the city that it has started drawing on a credit facility recently set up to address the financial problems of the Vancouver Olympic Village, which is expected to boost debt substantially, along with significant uncertainty regarding the financial outcome of the project,” the Toronto-based rating agency said.

    They shouldn’t be telling us this deal is “good news” and then two days later the experts in risk and financial health look at the deal and lower our credit rating.

    I’m sure the deal was the best we could get and that the Mayor and Council are really trying to make the most of the situation they inherited but the Olympic Village issue is being sold like you would sell soap.