Vancouver’s Olympic Village project—once touted as a development with no financial risk to taxpayers—has become the subject of intense scrutiny as city council grapples with mounting costs and complex financial arrangements that have left many residents questioning what they were promised versus what they’re getting.
The appointment of KPMG to conduct a comprehensive review represents a critical juncture for the troubled $1-billion development that will house athletes during the 2010 Winter Olympics before being converted into market housing. The review comes as the global financial crisis has wreaked havoc on development financing and left the city far more exposed financially than originally anticipated.
Scope of the KPMG Investigation
According to Councillor Geoff Meggs, the newly elected Vision Vancouver representative who has taken point on the Olympic Village file, the KPMG review will be far more comprehensive than a simple financial audit. The firm will examine not only the city’s financial arrangements with developer Millennium Development Corp., but also evaluate fundamental questions about project management and governance.
“KPMG will be looking at two things,” Meggs explained. “One is further decisions about the management of the project. The other is what we can tell the public to give as much information as possible.” This broad mandate suggests the review could recommend dramatic changes to how the project proceeds, potentially including a complete takeover by the city.
The timing of the review is crucial, coming after council’s controversial decision to approve a loan of up to $100 million to cover construction cost overruns—a development that caught many councilors and residents off guard given original promises that the project would carry no financial risk for taxpayers.
Complex Legal Arrangements Under Scrutiny
At the heart of the Olympic Village controversy lies a labyrinthine legal structure that few understood when the project was first approved. Unlike typical development agreements, the city retained ownership of the land while creating a complex lease-back arrangement with Millennium that was designed to satisfy Olympic requirements while transferring risk to the private sector.
Under the 373-page agreement, the city leased the land to Millennium for construction, then would lease it back during the Olympics, before making a final sale after the Games. This structure, crafted by the city’s legal team, was intended to ensure Vancouver could fulfill its obligation to deliver an athletes’ village to the Vancouver Organizing Committee by October 2009.
However, this arrangement also created unexpected financial exposure. The city provided a $193-million loan guarantee—equal to the land value—for Millennium’s $750-million construction loan from U.S. hedge fund Fortress Investment Group. Many council members and residents were unaware of this guarantee until controversy erupted in recent months.
Questions About Developer Performance
The KPMG review will also examine whether Millennium has met its contractual obligations, including crucial milestone deadlines. The agreement contains provisions that could allow the city to terminate the lease and take possession of the development if the company is found to be in “material default.”
“The auditor will look at where we stand and what the options are to go forward,” Meggs said, carefully avoiding speculation about whether such drastic action might be necessary. However, the very fact that project management is under review suggests concerns about Millennium’s performance amid the challenging financial climate.
Public Transparency Demands
Meggs has been particularly vocal about the need for greater public transparency regarding the city’s financial exposure. He acknowledged that the loan guarantee was “reported quietly” in the city’s financial statements more than a year after it was agreed to, leaving most residents unaware of the commitment until recent controversies brought it to light.
“There was no sense at all originally that there would be a loan guarantee,” Meggs emphasized. “There was never any discussion at the time of selection for a loan guarantee. So that was a significant change in what people thought would happen.”
The councillor has called for “much more explicit and direct information” about Vancouver’s risk exposure, reflecting growing public concern about how the project evolved from a supposedly risk-free development into one requiring substantial municipal financial backing.
Financial Crisis Impact
The 2008 global financial crisis has fundamentally altered the project’s trajectory, with traditional development financing becoming scarce and construction costs escalating. The involvement of Fortress Investment Group, a U.S. hedge fund, rather than a traditional Canadian bank, reflects the challenging financing environment that has complicated the development.
The KPMG review will help determine whether current arrangements remain viable or if more dramatic intervention is required to ensure the Olympic Village is completed on time and within reasonable cost parameters for Vancouver taxpayers.
