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Questions from a reader about Fortress financing for Olympic village

January 11th, 2009 · 15 Comments

Got this note from a reader, “Andrew,” with some interesting observations on the financing side of the Olympic village. More info to ponder.

After reading different articles over the past couple of days I phoned a friend of mine in who works at an executive level in Canadian Real Estate finance to ask him a couple of questions.

The first thing he told me was that as far as he understood Fortress has absolutely no legal standing to do what they are currently doing. In his opinion Fortress was taking this opportunity to put the screws to the City of Vancouver because (a) they (Fortress) was under such financial stress and was desperate for any opportunity they could get to refinance their current obligations under different terms and (b) Fortress knew that since the City of Vancouver couldn’t take the time to fight it out in court they would have no option but to negotiate because of the deadline associated with the Olympics.

The other thing he mentioned that I thought was most interesting was that as far as he knew (and he would know these things) Fortress had already syndicated $500MM of the $750MM dollar debt facility to a group of Canadian Banks. The way he understood things Fortress was only on the hook for the $250MM of the debt and he was under the understanding that the city had already provided a guarantee on a portion of that.

He figured that Fortress was trying to get the city to guarantee all of the debt that Fortress had not already syndicated to the Canadian Banks. That way they could write that debt obligation on their books up (or maybe not have to right it down).

One way or another he didn’t think Fortress was going to cough up any more money because he didn’t think they could afford to. He also thought Millenium was a poor choice as developer since they had never done anything that size before.

It seems that the city is in a tough position. They need to find another financing source which doesn’t exist in these current market conditions and then sue Fortress for damages but who knows if they will even be around to pay damages.

From my point of view the most interesting part of the whole conversation was the suggestion that a group of Canadian Banks was involved with the $750MM loan syndicate but that we haven’t heard their names mentioned at all.

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  • T W

    If we as taxpayers, courtesy Mr Flaherty, are busy making it easier for banks to lend credit, and the banks are busy profiting from both sides of the Olympic Village deal (ie supporting Fortress and Vancouver at the same time), then it will be a longtime before the federal conservatives or the provincial liberals elect MP’s in Vancouver.

    Mr Flaherty and Mr Hansen: what are you going to do ?

  • I’m shocked!

    Shocked I tell you that a hedge fund may, perhaps, have already done a little (or even a whole lotta) hedging.

    All of which has me wondering if swaps on this baby exist, and if so, who holds ’em….

    .

    .

  • Wagamuffin

    This story is the gift that keeps on giving…more twists and turns than the Sea to Sky Highway…

  • Michael Phillips

    “The first thing he told me was that as far as he understood Fortress has absolutely no legal standing to do what they are currently doing”

    The Mayor didn’t seem to think as expressed in his original statement to the press…

    “Fortress, acting within their rights under that deal, stopped advancing funds to the developer for Olympic Village construction in September 2008”

    I certainly hope the Mayor is confident in his legal conclusion. Admitting the other party’s non-culpability isn’t a great way to start a court case.

    Also (and I ask this question as someone who is not and has never been a high financier, and at 1 in the morning), what was the alternative to a completion guarantee and therefore why is it truly significant?

    Imagine the City had not provided Fortress with a completion guarantee and Millenium simply was not able to complete the project. The project would still have to be completed, if not by law, then by the reality of the impending Olympics. If no other developer and/or financier would step in (the only case in which the City would be “on the hook”) the City, as the only party at that point capable of and interested in the project’s completion, would have to complete it whether this had been agreed upon in advance or not. It seems rather easy to give a completion guarantee for a project that simply must be completed.

    Like I said, this is a question not a conclusion; we’re all being forced to play amateur legal analyst and I don’t think any of us would feel we had enough information even if we had a pdf of the entire agreement.

  • The city’s obligation to the Olympics is to provide housing for athletes during the Games. This is different than an obligation to build Millennium Water. The completion guarantee requires the city to build Millennium Water. And not only does it do that, it requires the city to build it exactly according to the original design specification. This means no scaling back or making modifications to reduce costs. And if this wasn’t bad enough, the completion guarantee seems to restrict the city’s refinancing options so that “penalty fees” kick in if the city borrows money from anyone other than the original lender.

  • Dawn Steele

    Why not just house the Olympic athletes in school gyms like other amateur athletes do, instead of building million-dollar condos for them? (Whose bright idea was that anyway?)

    Or if the security costs are an issue, then why not just close off SFU and/or UBC for a few weeks and house them there? VANOC wanted us to close all the K-12 schools but this wouldn’t present the challenge of finding childcare for 100,000 kids so their parents could work, and it would be nicer than camping out on gym floors.

  • Michael Phillips

    I was aware that the obligation was not to the Olympics but to Fortress for the construction of Millenium Water, but both must equally be completed before the Olympics as a completed Olympic Village nestled in amongst a cluster of hollowed-out concrete condo exo-skeletons is not of course the impression of Vancouver we are trying to relay to the world (although it’s an accurate one at the moment).

    The “penalty fees” aspect is, however, disconcerting, although the obvious question is whether this applies when the need for refinancing arrives due to the lack of the original lender forwarding the financing. In other words, has Fortress lived up to its side of the deal in which case the contract stands and a penalty for refinancing with another firm remains? It would appear to the amateur low-rolling blog-peruser that Fortress hasn’t lived up to their side of the deal, and even “Andrew” seems to agree, however the Mayor already doesn’t seem to believe so as per his original troubling statement. It seems to me that the important information in the Mayor’s media statement was not that there was a completion guarantee, which was framed as the key revelation despite the fact that it was old news, but rather the fact that the principal financier was “within their rights” in holding back its financing, a fact I and Mr. “Andrew” find very strange.

  • Larry Campbell

    Gee … ,aybe Geoff Meggs and I should have been more careful when we put the bid book together, but hey, even Vision makes mistakes …

  • Larry Campbell

    Gee … maybe Geoff Meggs and I should have been more careful when we put the bid book together, but hey, even our Holy Vision/CUPE alliance makes mistakes …

  • Ian

    I don’t think your reader is necessarily right that Fortress has “absolutely no legal standing to do what they are currently doing.” On the contrary, there’s every reason to believe that Millennium is in default under the terms of the financing, in which case Fortress would be within its rights to take more extreme measures than they have to date. Where a borrower is in default (failure to meet timelines, stay within budget, etc…) financing terms normally allow a lender to hold back further advances, at least until the default is cured. I’m not coming to Fortress’s defense, but rather pointing out that Fortress, in this instance, really should not be painted as the villain. Imprudent decision-making and reckless risk-taking on behalf of the City and Millennium are really to blame

    The biggest reason why Millennium got the project is that they offered to pay substantially more than any of the other bidders. I work for a large local developer and, while Concord and another group made strong bids, Millennium’s bid was widely considered in the development community (or at least among my colleagues) as very risky – even reckless. While the method of phasing the development was obviously a factor, price was the trump card. This was the city’s chance to make a killing in the condo craze.

    Frankly (and this is obviously an observation made far too late), the biggest mistake in all this was to try to force the build out of a large swath of scarce and expensive waterfront land on an aggressive schedule, during the biggest runup in real estate values in history for the purpose of housing athletes for 2 weeks. It was always completely plausible that this could go very badly for the City.

    The Olympic Village should simply have been built elsewhere – for example in inexpensive, green ‘prefab’ housing on the false creek flats. In the end, the lure of real estate profits clouded sound decision making.

  • T W

    One thing I am curious about is whether Fortress, with all their business activities in BC (eg Whistler, Olympic Village) was obliged to register or seek an exemption from the various provincial and federal securities and financial regulators. After all, as I understand it, the SEC regulates Fortress and it would be peculiar, but not entirely unexpected, that a NY hedge fund would be able to function in Canada with no Canadian regulatory control whatsoever. If it is regulated in Canada or has an exemption, where is that disclosed ?

    I have no idea and seek the views of the intrepid bloggers.

  • Michael Phillips

    Nice post Ian, do you agree that the completion guarantee isn’t really the main issue then?

  • CJ

    Ian wrote:

    “The biggest reason why Millennium got the project is that they offered to pay substantially more than any of the other bidders. I work for a large local developer and, while Concord and another group made strong bids, Millennium’s bid was widely considered in the development community (or at least among my colleagues) as very risky – even reckless. While the method of phasing the development was obviously a factor, price was the trump card. This was the city’s chance to make a killing in the condo craze.”

    That’s exactly the same way it was explained to me. It reminds me of the stock market adage, “Bulls make money, bears make money, pigs get slaughtered”. The city’s getting slaughtered on this one.

    There’s some good comment on here, but it doesn’t seem to me that people really understand (yet) just how badly real estate, particularly condos, is crashing. The market is dead in the water NOW, and we’re about to have a tidal wave of new condos come on to the market. Nobody’s buying now, and we haven’t even begun to feel the job losses, particularly from construction, that are imminent. It’s like Wile E. Coyote running off a cliff but staying airborne until he looks down. There are a thousand two bedroom apartments for rent on Vancouver Craigslist even now. Think about that when somebody starts talking about affordable housing. It’s getting more affordable by the day.

  • Ian

    TW, Fortress was merely a lender on this project, and not selling securities, so securities regulation does not apply. In this case, they are no different than BMO or RBC, albeit they are (or were previously) willing to take on riskier developments and they charge higher interest rates.

    Michael, regarding the completion guarantee, I believe that was something the City required from Millenium in order to ensure delivery in time for the Olympics. Certainly, the fact that every trade and consultant in the city knew Millenium had a drop-dead timeline ensured that they would have to pay top-dollar for labour and materials. At this point, the completion guarantee is just the hard reality that theCity needs to step in to ensure athletes have a place to stay when they get here next year.

    CJ, you also raise the final kicker, which is that the inherent value of the real estate has declined substantially since this deal was struck. Certainly, this is still valuable real estate (relatively, in any event – it is waterfront), but there’s no telling at this point how much prices would need to be slashed to sell off the units post-Olympics. Suffice it to say, it will be substantial. The alternative will be for the City to hold and rent the units until the market recovers sufficiently to unload them into the market at a decent price. The downside of that is that the product that’s being unloaded has depreciated through use. Either way, I don’t see the City coming out of this other than in the red. Only time will tell the extent.

  • Ian

    Further on the completion guarantee, it seems that it was a condition of Fortress’s financing to Millennium that the city would step in and complete the project if Millennium could not. However, I would assume, based on similar deals I have seen, that Millennium cannot insist that the City take that step, on one hand, and refuse to fund the balance of the loan on the other.

    Of course, the City would prefer to find some cheaper money to complete the project if they’re going to have to step in, so the negotiations between the City and Fortress will go along way towards determining the true extent of the City’s ultimate liability here.