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Questions about the KPMG report

October 7th, 2009 · 18 Comments

Since I posted my story and the city material about the KPMG audit, I have had a few emails and phone conversations with people in the development business who wondered about some of the conclusions drawn.

One was the strange assessment about the weighting of the price in the evaluations among the three bidders. As described by KPMG, the city team originally developed a matrix with 57 factors to assess the three different bids (Millennium, Wall and Concord) and then later added in price, giving it a weight of as much as 14.5 per cent of the total. That change supposedly allowed Millennium to jump ahead of the others and become the winning bidder.

But people in the development industry say that price is always a factor in bids and that it’s not at all unusual to have a weight factor of 25 per cent, which is considerably more than the case here.

Another point raised is the report’s oblique conclusion that Millennium didn’t have the financing capacity for that big a project and that the city would have done better with one of the other two bidders, which had longer tracker records and more financing depth. But, again, I’ve heard from people in the development world that the city’s Olympics project was considered to be unfinanceable as the terms stood — the time frame was insanely short to try to put together a financing package, which in Canada typically involves a syndicate of banks, and the city’s insistence that it retain title to the land was a major deal-breaker for many potential financiers of the project.

If that last is true, it makes it look not so much that the city was wrong to pick Millennium but that Millennium made a mistake by not being more aggressive with the city in changing the terms of the deal. Just a thought, but I’m wondering what you wizards out there think of that information.

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  • FBT

    I believe the only benefit to the exercise of debating “who did what wrong” is for those who want to finger point. Is there a point to any further finger pointing at this stage, 11 months after an election and 24 months before the next one? The answer is no.

    Will this exercise have any bearing on whether or not this project will turn a profit at this stage? The answer is no.

    If the mayor had any true leadership skills, he would have come out yesterday and talked about everything the city has done and will do to turn this around and at least break even if not make a profit. He could have spent his time reassuring the Vancouver taxpayer that since the report was done, much has changed and they’re on best path possible.

    Instead he pointed his finger.

    Last December he had the same opportunity to come out and mitigate the public relations nightmare for the city, and he chose to play the partisan politics card, pointing his finger.

    So to highlight, he’s had two major opportunities
    on this file in 11 months and he’s blown both of them. And yet, somehow we’re supposed to believe that he’s some astute businessman qualified to head to Copenhagen to sell Vancouver as a good place to do business.

    Yeah right!

  • IanS

    Thanks Frances. It’s good to see a little context shed on the debate.

    IMO, the issue is not so much whether it was appropriate to take price into account – clearly it was – but, rather, why it wasn’t taken into account in the first instance. By excluding it from consideration originally, it does give the appearance that the assessment was rearranged to give a pre-determined result. I’d be curious to know why that approach was taken.

    Another criticism which strikes me as unfair, at least in part, relates to the issue of cost overruns. I don’t work in the construction industry, but work with construction clients, and my understanding is that construction costs have been skyrocketing over the last few years, right up to the downturn last year. My timing may be off, but it looks to me like most of the construction for the project took place during the period of rising construction costs, which would have resulted in overruns. Do your development contacts have anything to say about that?

  • T W

    Perhaps the worst part for Vancouver citizens and council, is the impression now fostered globally, of municipal confusion.

    One impression is that council is neither consistent in how it assesses competing bids. Two, international investors might not look favourably on Vancouver and on BC as an investment location when their worst suspicions are realised that there is a substantial risk in any bidding process that it will be inconsistent at best and biased at worst.

    Did this even dawn on the (then) council and staff when they chose this Kafkaesque bidding process ?

  • I have still not had time to read the report, but that won’t stop me from commenting briefly!

    In terms of the selection process, public agencies generally use either a single stage, or two-stage proposal call to select the winning proponent. The latter generally involves a ‘Call for Expressions of Interest’ to PRE-QUALIFY proponents in terms of expertise, financial capability, the proposed consultant team and sometimes a written design concept or approach.

    A short-list of proponents is then expected to do much more work in terms of preparing their detailed bids.

    Now again, after pre-qualification, a public agency has a choice…it can make the selection on the basis of price, or design, or a combination of the two. In other words is this a design competition, or will the winner be the team which offers the most money andcomplies with all of the project requirements.

    Based on my experience with many such calls, I prefer to place the emphasis on one criterion, or the other, rather than both. However, if the project is complex, such as this one, it is not unreasonable to evaluate a range of criteria. However, it is normally expected practice that the issuing agency will advise the short-listed proponents of the selection framework in advance, with a clear indication of the relative weighting of criteria.

    While proponents may not be told the precise weighting for design concept, price offered, construction methods and time frame, special features, other financial considerations (eg: timing of payments, proposed profit sharing, etc.) etc. etc. it would be normal practice, in my opinion, that the relative weighting of criteria be pre-determined by the evaluation committee BEFORE the evaluation process begins.

    Let me add, that in a two stage call, when proponents have been pre-qualified, it would be most unusual to disqualify a team because of lack of financial capability or expertise, unless there had been a significant change in its circumstances from the time the initial short-list was prepared.

    Now many have asked why the city didn’t ask for a financing commitment before the selection. Answer…. because it was impossible. No lender would give a firm commitment until it had seen the detailed proposal including design drawings, cost estimates, appraisals, geotechnical reports, etc, etc. Instead, all it could offer is ‘a letter of comfort’ saying it knows developer x and is willing to provide the necessary funding provided the developer submits satisfactory documentation….etc….etc.

    And as noted, in this case there was the added complication of the city’s desire to retain title to the land until after completion, because of the Olympics obligations. The significance of this requirement cannot be understated.

    In terms of cost over-runs, they are more likely to occur on a ‘fast-tracked’ project which starts construction before all the plans and building details have been finalized and all the fixed prices have been received for the structure, windows interior finishes, etc. And that’s what happened here. Furthermore, as others have noted, this project was undertaken during a period of unprecedented construction price increases.

    Some additional thoughts:

    In considering this proposal call, which if I remember correctly was a two stage call, it is worth reflecting on the earlier Woodwards proposal call which was also managed by the city.

    In this case 4 teams were shortlisted including Millennium. After short-listing, two of the four teams combined resulting in three proposals…while I do not know pretend to know all the details of the bids, I do know that the highest financial offer came from Millennium…however, they were proposing a high-rise tower which was considered less desirable than the much lower, and much ‘greener’ form of development by the Westbank team. Westbank won, and then built a very high tower!

    In this case, I understand that Millennium’s bid was significantly higher than the other bids….perhaps in the order of $50 million more, when one considers a variety of factors. Now, if the city had accepted one of the other bids, and Lehman Brothers hadn’t collapsed, and Fortress hadn’t got into difficulty, how many of us would have questioned why the city left SO MUCH MONEY ON THE TABLE?

    I have to comment on a recent article by Miro Cernetig, a highly respected Vancouver columnist who chastised the city for pretending to be a condo developer with the intention of building these units and then flipping them after the games for a profit. NOTHING COULD BE FURTHER FROM THE TRUTH.

    The city got into this project decades ago with the intention of re-creating the success of the earlier phases of the South Shore of False Creek redevelopment, but this time with an even more sustainable, model community. It never set out to develop condominiums. Rather it set out to convert derelict industrial land into a new community.

    The city did the overall plan, and committed to building a new seawall and parks and necessary services. It was always intended that the serviced development parcels would be offered to private and non-profit developers who would build the housing. This is what happened back in the 70’s and this was always the plan.

    The city’s situation changed however, when the city staff decided to seek one developer, rather than a number of developers, and the one developer it selected could not get financing because the city would not transfer title to the land.

    I repeat, that’s when the city’s situation changed from what had happened in the past, and what has happened in literally hundreds of similar proposal calls on public land around the world.

    Because the city would not transfer title, the lender wanted the city to provide a guarantee to the lender essentially equal to the proposed value of the land (less the deposit). AT THIS POINT, THE CITY CHANGED FROM BEING A LAND DEVELOPER, TO A PARTNER IN THE DEVELOPMENT. Did they do this because they wanted to be a developer of condos and flip them for a profit after the games? Of course not.

    The situation further changed when the lender decided not to make further advances, and the city had the choice of either seeing construction stop, or paying for construction to continue. We all know what happened. (I certainly remember because once the council’s ‘secret’ decision became public, many of my potential voters decided to stay at home!)

    A final thought. As I noted, a major problem was the law department’s insistence that the city not transfer title of the land until after completion. As I said, this deterred all Canadian banks from getting involved, and Millennium was forced to seek financing from a more expensive lender willing to accept higher risks.

    It also resulted in the city having to give a guarantee and then assume direct financing. In many respects, this was the major factor in the current situation….rather than the decisions of Cope, NPA, or Vision Councillors or most staff, in my opinion.

    If the law department hadn’t required that the city retain title, the project would have been financed by RBC or CIBC or HSBC and even though the cost over-runs would still have occurred, one can reasonably assume that the lender would have continued to finance the project since it too would not want to see Canada embarrassed by not finishing the housing on time and…..

    And this is an important point that keeps getting forgotten, A private lender would also know that it COULD CALL ON PERSONAL GUARANTEES AND OTHER ASSETS that were pledged as security, if the developer defaulted.

    While some have questioned whether these assets have value, I suspect they do. Just go over to West Vancouver and see what Millennium is doing there. (I don’t know the extent of mortgages, but I do know that there is usually a higher equity in land holdings than other forms of property.

    I’ll be curious to know how KPMG evaluated these assets, recognizing that they are worth significantly more today than they were last December. In other words, in determining the city’s exposure, how much did they assume could be recovered from corporate assets and other security? How much could be recovered today?

    So to conclude, there are lots of people one could try to blame, but in reality, the situation changed because of the desire to seek one developer, rather than a few; legal requirements imposed by cautious lawyers; the collapse of Lehman Brothers and the major shift in world financial circumstances; undue optimism by Millennium and its advisors and perhaps questionable judgment in accepting a price for the land that seemed too high (you may remember that I told this to Jeff Lee at the time, although to be fair, I thought Millennium had over-paid for other sites and they ended up doing very well, thank you),

    It’s a complex story, but in my opinion it is difficult to say that any councillors acted recklessly or improperly; similarly I can’t say the staff were stupid or irresponsible….

    Finally,I believe the current Council and administration have done a good job in trying to address the problems that have occurred in the past. However, as we move forward I do hope they will stop blaming Kim Capri and Elizabeth Ball and other NPA councillors because as I have tried to explain, this is not a simple matter. It is definitely not their fault!

    And let’s not forget that the Fairmont condominiums that are just being completed were sold at an average price in excess of $1500 a square foot…and in my opinion, many of the condominiums in the Olympic Village are better than many of the condominiums in this building. So even if the costs end up at $1100 a square foot or whatever, it is not out of the question that the eventual revenues will be sufficient for Millennium to repay the loan to the city, and still make a small profit.

    I could be wrong….I’ve been wrong many times before when trying to anticipate the price of housing…but it’s not out of the question.

  • spartikus

    Thanks for the thoughtful comment, Michael. Of the many points raised, this stuck out for me:

    The city’s situation changed however, when the city staff decided to seek one developer, rather than a number of developers

  • Michael Phillips

    Thanks for the comment Michael! What a good blog.

  • IanS

    Thanks Micheal. Very interesting. The more one learns of the process and the context of such projects generally, the less there seems to be to criticize.

  • I suggest the City should have paid more attention to the history of Millennium and its principals in other projects. Did they have a record of delivering on promises or not? How many earlier development agreements resulted in lawsuits? Reputations are usually well earned and they can be examined.

  • Gassy Jack’s Ghost

    “Just go over to West Vancouver and see what Millennium is doing there.”

    Hmmn, Millennium bullied West Van council into a project very few of their neighbours wanted, clearcut part of a hillside on an uber-busy traffic corridor, erected a sales building with Arthur Erikson’s name plastered all over it, then promptly stopped work, leaving an unsightly blight on the landscape. People in West Van are outraged about this project!

    In the spirit of Hoarse Whisperer, I am willing to offer a triple-O and a shake to the person who can answer this bit of trivia that may or may not have anything to do with the bidding process for the OV:

    What man served as both the President of the NPA and the President of Millenium’s parent company in the years just prior to the award of the Olympic Village contract to Millennium?

  • jesse

    @Michael Geller: “Did they do this because they wanted to be a developer of condos and flip them for a profit after the games? Of course not.”

    Well that’s effectively what happened. I agree that saying the mindset of the decision makers were the same as “flippers” is likely not accurate. Saying they were speculating is, in my mind, completely accurate. Whether or not greed played a role is not necessary to make poor initial assumptions. They ran the risk of becoming “reluctant flippers” from day one.

  • Frothingham

    @gassy jack : good work on the linkages. 000 and fries. / Paul Barbeau

  • Yes, Millenium has also walked away from their commitment to build the Nanaimo Convention Centre Hotel, leaving a very unattractive, fenced off equipment dump just were tourist are likely to see it.

    Needless to say, I am not impressed!

    But there is much more to consider, than OV sales, when I read Michael Geller’s very up-beat prognosis: indeed he is not alone. Notwithstanding this Fries flippancy, if I did not know MG to be a very decent well meaning fellow I would be inclined to suspect his integrity.

    Of significant importance for our immediate future . . .

    Our major trading partner to the south is in serious trouble:

    Canada will not escape unscathed . . . and affecting the world’s, and implicitly, Canada’s economic well being.

    I would feel much more comfortable for my young family’s future if the political community, particularly the local political community would take our situation more seriously.

    Ovulating over our, once very unpopular Prime Minister, because he sings with “What Would You do . . . “, . . . with YoYo Ma

    just doesn’t cut it . . . Huh, I know what I would do . . .

  • MB

    I would like to thank Michael Geller for his insight, and for Frances for writing a balanced G&M piece and providing this forum. As a Vancouver taxpayer and voter I now have a greater understanding of the project and it’s project management flaws as a result, and also more hope that the project will break even, or at least that the losses won’t be exorbitant.

    I also think that the current and future Vancouver administrations will be wiser from this experience.

    Miro Cernetig’s Sun article by comparison was over the top and I suspect that’s because he failed to adequately consult all the important parties. Further, he seems to lowering his standard to basic blaming, rather than providing a neutral analysis of the project history and outlining its logical conclusions.

  • Allow me to concede. MG is far more experienced and wise in the wiles of local development than I, stating:

    ” . . . let’s not forget that the Fairmont condominiums that are just being completed were sold at an average price in excess of $1500 a square foot…and in my opinion, many of the condominiums in the Olympic Village are better than many of the condominiums in this building. So even if the costs end up at $1100 a square foot . . . ”

    However . . .

    In my limited experience financing of such projects is not granted until the project has a capital pre-subscription of some percentage of the total expected loan . . . in the order of upwards to 75%.

    In this order, therefore, successful marketing of Fairmont must have concluded at least two years ago, maybe more: well before approvals, contract documents construction etc., during the heady time of C$1,500/ft!

    The market is different today and circumstance augers ill of the future . . .

    Accordingly, to me, MG’s optimism rings more of the ubiquitous burnt umber proboscis than good judgment.

    And despite blue sweaters and upper crust politicos deigning to kick a ball around with the hoi polio we must curb our “irrational exuberance” lest we are disappointed.

  • PS . . . of course “hoi polloi” Blame spell-check!

    . . . and oh just one more point . . . since the heady day for Fairmont @ C$1,500 it must expect at least some defaults . . . hopefully not too many . . .

    Sorry to be casandra on these beautilful fall days . . . frivolous fries anyone?

  • Thanks folks…out of respect for your questions, a few responses:

    To Norman who asked whether Millennium had a record of delivering on promises or not? How many earlier development agreements resulted in lawsuits?

    Millennium was the successful bidder on two city sites that I know of, and followed through on promises, most recently and notably L’Hermitage. They also purchased a site from me at SFU and followed through with a very beautiful development. Frances wrote a profile of them in Vancouver Magazine, and did reference challenges and lawsuits, but to be fair, lawsuits are not uncommon in the development and construction business.

    To Gassy Jack’s Ghost who wrote: “Hmmn, Millennium bullied West Van council into a project very few of their neighbours wanted, clearcut part of a hillside on an uber-busy traffic corridor, erected a sales building with Arthur Erikson’s name plastered all over it, then promptly stopped work, leaving an unsightly blight on the landscape. People in West Van are outraged about this project!”

    Owners of single family properties are often outraged when new forms of development are proposed in their neighbourhoods. My point was that this was a very substantial land assembly and development project. Yes, it stalled, for reasons we can all understand. But it is now underway and could be a significant asset if the city should ever have to make a claim against the company’s guarantees. I also think it will provide a much needed housing choice in West Van…now did the developer bully the Council? I wasn’t there but maybe someone else will want to respond.

    To Jesse who wrote: “Saying they (the city) were speculating is, in my mind, completely accurate.”

    The city did not issue the loan guarantee and advance funds because they were speculating in the sense of hoping to sell the condominiums for more money. They did this TO KEEP THE PROJECT GOING. Otherwise, it would not have been finished in time for the Olympics. Yes, one might say they were speculating that the project would get finished and they would get their money back. But to reduce the risk, I am told they did seek additional security from the developer.

    And to the always fascinating (albeit sometimes confusing) Urbanismo, yes you are right, Fairmont Estates was sold some time ago; however, as we are all reading in the papers, in the last 6 months the market has recovered surprisingly well and is approaching or reaching previous highs.

    “The market is different today and circumstance augers ill of the future . . . ”

    While I’m not sure I fully understand this, the high end market is not significantly different. As proof, I would note that very few people walked away from sales in Shangri-la and Woodwards. Similarly, many other projects around the region are closing sales from two years ago. I do agree the market is very different than it was at the end of last year.

    To conclude, I am the first to admit my post was a ‘half-full’ rather than ‘half-empty” response. However, I was reacting to those who thought the city (Council and staff) had acted improperly from day one and grossly mis-managed the file. I don’t think this is the case. Yes, there were many things myself and others might have done differently. But as Frances and others have pointed out since I posted my comments, the project is starting to look pretty good and it will also be a special community.

    Whether all the units can sell at sufficient prices to cover all the very hight costs. I won’t bet on it. But as I said, it’s not out of the question.

  • The Watcher

    Said it before, say it again: those that talk about the need to “avoid blame” and “stop politicizing” the Olympic Village continue to ignore that the decision to choose Fortress Investments as the financial backer – and bringing it with it the dreaded ‘completion guarantee’ – was a vote that split down party lines, with the NPA voting in support, and VV and COPE opposed.

    Had the NPA council in June 07 decided to do what the VV council did in December 08, which was to seek a new financing agreement involving a consortium of Canadian banks – and much lower interest rates – we could have avoided many of the problems of the past year.

    But I guess it’s just easier to say that everything just ‘happened’.

  • Gassy Jack’s Ghost

    Froth wins! My apparition will be at 13th and Cambie on Tuesday night if you’d like to claim your prize. And if Mr. Barbeau would like to join us, there are certainly a lot of questions I’d like to ask of him that no one else seems to want to ask. I’ll be sitting at the bar from 7-8, but don’t be surprised if you can’t see me; I am, after all, a ghost.

    And I apologize for sounding frivolous about this issue, Urbanismo, I know it is serious business. One question I do have is pretty basic and the developer crowd should be able to answer fairly easily: did labour and material costs jump by over 100% in 2 years? It seems to me if people are going to justify massive over-runs on that scale, you better be able to tie it to some hard data that is at least relatively close to the actual rise in inflation. I have yet to see anyone demonstrate clearly that the monstrous over-runs at the OV, the Convention Centre and the Canada Line were even in the ballpark of real inflation.

    And now all that FRIVOLOUS debt is being offloaded by the Liberals onto charities, non-profits, school PACs, people waiting for surgery, stalled housing projects, programs for deformed children, etc. etc., all for a two week party? That’s the trickle down? That’s the Olympic legacy? The glass may look half full for rich folks, who seem to be the last remaining boosters. But for anyone poor or in a low tax bracket, or working in the cultural or social sectors who are now being asked to pay the brunt of this ultra-expensive party, it has become a bloody sickening exercise in financial mismanagement and dehumanizing governance. No wonder the Libs and VANOC refuse to be transparent.

    The only economic spin-off I can see resulting from the Olympics is that real estate prices will likely re-inflate, making the cost of living in Vancouver even less affordable than it already has become.