Frances Bula header image 2

The Coles notes on today’s Olympic village episode

January 21st, 2009 · 18 Comments

You can read news stories with complete paragraphs in other media if you want. (My pal Rod Mickleburgh was covering for the Globe today, and pretty much everyone else was there in force.)

Here’s my take on what was new and interesting, beyond the basic news that the city is gearing up to go and borrow whacks of money to finance the Olympic village. (The report discussed at council today, which will be voted on Thursday, gives the city the formal authority to go do all that. If you want to read it, it’s here. Don’t let yourself get scared by the section on the London Inter Bank Offered Rate, or LIBOR.)

1. Millennium had been looking at paying out $178 million in interest costs on the village, out of the $750 total that it borrowed. The rest, $572 million, is the actual construction costs for the for-sale condos, the market condos and the retail space.

2. The city is going to get the money for next month’s construction draw (Feb. 15) by using the $29 million Millennium gave as a down payment on the land, which has been held in trust since 2006.

3. If the city has to go out and borrow a lot of money, that could lower the city’s credit rating and actually then make it slightly more expensive to borrow. Every quarter per cent increase in the cost of borrowing costs $250,000 – $300,000 extra in interest on $100 million.

4. The report seems to indicate Fortress is being unco-operative. It says that Fortress is refusing to lend any more money under the current agreement and is suggesting that any new loan would either be a) at a higher interest rate or b) smaller.

5. Millennium has been looking for alternative financing itself but can’t get it “on its own strength,” the report says tactfully. That means no one wants to lend because they think the company doesn’t have enough assets or possibility of profit to secure the loan, as I read it.

6. If the city borrows the money, it will likely charge Millennium more than the 3.75 – 5.5 per cent interst rate on that loan since, as finance guy Ken Bayne put it, “we’re not in the business of providing money to developers.”

7. The city will also ask Millennium for more security/collateral, which I didn’t quite get because I thought they had locked up pretty much every asset the company has.

Finally, I have to say it was kind of cool to see all of this stuff discussed in public — stuff that we the public were told was so incendiary that it had to be kept to in-camera meetings or the world might explode — with people getting to ask questions about what this or that meant.

And the staff, who have been pretty much invisible for the last month, got to talk. A lot less dramatic than leaked reports here and there and dire warnings about what would happen if details got revealed, but kind of comforting in a way. Okay, we’re in a jam but we’re dealing with it.

Categories: Uncategorized

  • Mark A

    Point 1 doesn’t make much sense – surely the point of borrowing $750 million is to spend all of it on construction and pay the interest on the loan out of the profits. Maybe what’s meant is that they won’t have any profits, so they need to find more money to cover the interest.

    It’s kind of funny for the report to say that the terms Millennium borrowed on were not currently competitive, and then go on to say that Millennium cannot get more commercial financing on any terms at all. It reminds me of the wisecrack on (I think) NPR’s Planet Money, that described LIBOR as “the rate at which banks are currently unable to borrow money from each other.” – which is to say that cheap interest rates are useless if no-one is lending.

    That said, the proposals in the report do make sense, especially if Fortress is taking their ball home.

  • Dawn Steele

    The transparency is certainly refreshing, I agree.

    It’s no surprize that Fortress seems to have retreated and slammed the drawbridge behind them, given the “intensifying” crisis in the global financial system. One question is how easy it will be for the city itself to get that sort of money at that rate today, given the situation? In the UK, they’re now talking openly about just nationalizing all the banks, while in the US, they’re talking about “zombie banks” and “dead banks walking.”

    And if Millenium is in such dire straits, was it considered whether the city should just take over the project entirely, perhaps just relegating Millenium to the role of project managers or builders? I wonder what the pros & cons of that are? How do we know that if we lend them all that money, some won’t end up being diverted to save their other problem projects?

  • T W

    The transparency is indeed refreshing.

    As far as I can tell, the main beneficiary of the cult of secrecy that previously existed was Fortress itself. We should not forget that Fortress is a public company under the regulatory scrutiny of the SEC and there should have been a degree of disclosure to the Fortress shareholders. Was there such disclosure ?

  • LP

    Kudos to current mayor and council for speaking openly and finally it seems without politics.

    That is what some of us have wanted all along.

    I also wish they could have just been this open going back a few weeks, instead of creating all of the panic and hyperbole that they did.

    Meggs, Louie, Robertson (and all you VV/NDP backroom folks) listen up!

    This is all you have to keep doing to earn our votes in 4 months, and then again in 3 years.

    The other stuff was going to bury you, and many of us were already reaching for the shovel.

  • Mark A

    Dawn,

    If the previous leaked city reports are to be believed (which is open to debate) – then the city had in place mechanisms by which they could guarantee that all of the money loaned by Fortress to Millennium was used to “improve city lands” – so it does seem that the city can prevent the developer from just stuffing the money under their mattress.

  • Mark A–

    That ball.

    The one Fortress is taking home.

    Is it Real or….

    Is it Memorex?

    ____
    And I agree with Frances that #7 is somewhat puzzling given all we’ve been told….Perhaps Mr. Mason could go back to Mr. Malek for a follow-up?

    .

  • foo

    My understanding was that the city had ~$200m of Millenium assets as security. Now, it’s quite possible that Millenium has only $200m in assets (or even less), but that’s another story….

    I’ve never seen any official document that said the city had ALL of Millenium’s assets tied up in collateral, that just seems to be the press’s opinion.

    Note also, that the main reason that Millenium can’t get financing for the project is that they can’t use it for collateral themselves, since the city retains title.

    It seems to me that Millenium is not exactly the smartest nail in the development toolbox, but they’ve been subjected to quite a lot of “conception events” themselves…

  • Archie’s Dad

    Frances, check this out:

    Fortress Passes Hat to Dodge Margin Calls

    January 21, 2009

    Fortress Investment asked investors in two buyout funds to put up more capital in November as it sought to avoid margin calls from Goldman Sachs.

    In each case, Fortress had already drawn down most or all of the capital initially committed by limited partners in the vehicles. But in its appeals for more money, the New York firm said it would benefit those players to put up even more cash. The reason: so it could retire loans on publicly traded companies in the entities’ portfolios before drops in their share prices prompted Goldman to demand repayment or the posting of additional collateral — a troubling prospect given the vehicles’ inability to conduct further capital calls.

    In one of the instances, the $1.3 billion Fortress Investment 2 needed $146 million to repay a loan backed by shares in Brookdale Senior Living, the largest U.S. operator of retirement communities. Word is that most of the fund’s backers agreed to fork over more money, and that those who didn’t probably stand to recover little from what remains of the Brookdale investment.

    At the same time, Fortress said it needed $179 million to pay off a loan that its $2.2 billion Fortress Investment 3 took out on Gagfah, a Luxembourg-based operator of residential properties in Germany. However, Fortress later told that fund’s limited partners that it wouldn’t require the money, as it had already taken undisclosed steps to avoid that margin call from Goldman.

    Fortress Investment 2 held its final close in 2002. Fund 3 closed in 2004. There’s no firm indication of why Fortress acted so urgently to prevent margin calls, but it’s possible that the firm was worried it might not be able to move quickly enough if Goldman sought repayment. Either way, its maneuverings underscore just one of the many ways that falling stock prices and tightening by suppliers of leverage have placed investment shops under pressure lately.

    Silver Lake Partners also called $106 million from investors in one of its funds late last year to pay off a loan from Morgan Stanley, rather than wait for a margin call. Apollo Management and Guggenheim Partners have also taken steps to retire margin debt.

    Fortress gave a choice to investors who aided it in paying off the Brookdale loan: contribute cash, or replace their portions of the debt with borrowings from another lender at current, and presumably higher, interest rates. Those who opted not to participate faced heavy losses on the Brookdale position, as Fortress said it would sell their corresponding shares in the Chicago company to help retire the loan. “They said if we don’t pay a loan to Goldman, then we will lose it all. This fund didn’t have capital to call, that’s why it was a big deal,” one Fund 2 investor said. “I can tell you LPs weren’t really happy about it, but it’s not like they had any choice.”

    Paying up is looking like a better deal in the short term, as Brookdale’s stock has bounced back from a 52-week low of $3.03 on Nov. 20 to $5.70 yesterday. But it’s still well below its 52-week high of $27.22. Fortress had taken Brookdale private in 2000 before going public with the company in 2005 at $19 per share.

  • fbula

    Isn’t it great that we get to participate so intimately in a worldwide financial disaster?

  • tommi

    Hmmm. I recall hearing some NPA councillors saying in late October that all the details of the Olympic Village project would be made public within a few months (right around now?), once all the negotiations have been finalized.

    So, it’s nice to see that Vision is finally doing what the NPA said it would do all along, after the despicable blame-game and scaring taxapayers with a billion dollar invoice.

    Also, could a lot of this problem have been avoided had the City given title of the land to Millennium with conditions? It seems that most of the financial problems stem from that decision due to the lack of collateral for such a large project.

  • Andrews and Rogers Should Have Been Shown The Door

    Interesting article by Jeff Lee in Jan 17 Vancouver Sun (http://www.vancouversun.com/opinion/unews/Millennium+favoured+city+hall+managers/1189142/story.html)

    The confidential reports show that in the infamous in-camera meeting Oct. 18 when council agreed to provide up to $100 million in interim financing, staff argued not to “take out” the developer and that the project remained financially viable.

    That report, written by former deputy city manager Jody Andrews, the village’s project manager, pointed out that Millennium was suffering from modest cost increases of between six and 10 per cent, or $60 million to $100 million because of global and local market pressures.

    Despite that, he said, the company had “performed well” and was on schedule with only 13 months to completion.

    More importantly, he noted, costs were now “crystallized” because 100 per cent of the major building trades were contracted, as were 90 per cent of the sub-trades. As a result, the city and the lender had certainty over the remaining costs.

    With this level of incompetency City should have got rid of Andrews and Rogers sooner….

  • foo

    #11, what exactly is incorrect about the report? What level of incompetency did it reveal?

  • Rebecca

    Yes, I would like the answer to that question myself!

  • Listen Close

    sorry tommi, have to agree to disagree.

    The information on the Olympic Village is not “naturally” coming out. It was not inevitable. Rather, it is from the deliberate direction of Robertson and Co. to have staff report out publicly on the finances. All part of the 30-day promise.

    At this point, I think very few people buy the argument that information ever needed to be kept secret because of “negotiations.” We just had a massive public release of information in the past month, but as everyone who is following this story knows, negotiations with Fortress are going on right now, and have been for some time.

    As for fear mongering, one man’s fear mongering is another man’s public accountability around a full-risk market completion guarantee that the public didn’t know about.

  • There’s a Bee on You! – Part 1

    I propose seeing the protective advances like a big “tarp” over the Village which had sprung a serious leak. The Oct. 14 meeting was the time for City Staff to advise Council about the problem which was brought on by a bad, bad storm (ie the financial markets/construction costs). Options were presented… (a) putting a tarp on for now and waiting out the continued bad weather, (b) repairing the roof whilst under the tarp (c) putting on a brand new roof.

    Okay, so everyone votes that the tarp is a good idea but need time to consider the other options. I need to emphasize, everyone. The problem with the tarp is that as a rule people get really nervous when they hear that a tarp is going up on a project. “What’s going on? (endless speculation). So, City Staff say to the political folks…Okay, if we go with the tarp, its not wise to draw attention to it, right? Everyone agrees. Except at some point in the meeting some people think… hey, we could get a lot of mileage on the political front pointing out this big tarp. Hence…big expose. Not good. What to do next? Do you stay under the tarp, hoping it doesn’t get blown off and get on with construction and let the experts/consultants sort out the problem or do you just rip the roof off in the midst of the bad weather and start again?
    Tough choice.

  • Wagamuffin

    God, I wish I could keep up with all of this…this damn working for a living is seriously cutting into my political sideshow viewing time.

    Got anything shorter than Cole’s notes, Frances? 😉

  • There’s a Bee on You! – Part II

    I think the big difference of opinion came when management felt confident that waiting out the storm under the tarp was the best thing until the and the new City political regime thought, heck no, we need a new roof! I suspect then there was some real attempts at patching/consulting – to sort out the differences between the lender and the developer, but the new regime felt really strongly that the only solution was the new roof. Off they went to get the permits…
    A couple of important points I will get to now. (1) the tarp had to go up or significant damage to the project would have been done (2) the attention brought to the fact that the tarp was going up by the politicos was a very silly move and put the City in serious jeopardy (3) City staff should not have been chastised/fired for getting the tarp up as it was vital to protecting the project. (4) History will be the only judge whether the new roof was needed, or if City staff were right to quietly get under the tarp and get things fixed.

    Lastly, the reality is the Village is a hybrid of left and right politically. Its inception and completion is happening over the most tumultuous time in Vancouver’s political history. This gives it a unique complexity that certainly allowed for paradoxes that were unforeseen.

    On the issue of transparency, I don’t fault the left for wanting give the public info. I do feel very strongly that making a big deal about the protective advances showed a lack of judgment as it put the project & the City at risk by harnessing the nervousness of the financial markets and feeding it out into the public. Its like telling someone “there’s a bee on you!”. Is it wise to flail around and get them all panicky, drawing more people over to see it, increasing the likelihood of getting stung or better to quietly flick the bug off & keep them calm. Now some would argue that maybe it wasn’t just a single bee… there were worries that the person was standing too close to the hive with this big nasty bee on their shoulder, and that’s why they panicked. Personally, I still would vote for the calm approach and keeping more people away and out of danger.

    Okay, its a little long but I couldn’t help myself. Be gentle with me!

  • Wagamuffin

    I found this column from Vaughn Palmer, Jan 18/09

    http://www.vancouversun.com/opinion/unews/record+city+exposure+risk+there+read/1188960/story.html

    Apparently all anyone had to do was read the report from last April ’08 to see what was going on. The one that all councillors would have seen.

    To paraphrase Vaughn, gee, I guess they ALL couldn’t read the bottom line. Or they weren’t paying attention. Certianly if the VV had recognized that this was a problem they would have raised a hue and cry 8 months prior to the election…wouldn’t they? Politics or imcompetency—take your pick.

    I guess tht’s why the staff are now being trotted out (finally). The VV councillors who were there at the time this was issued have some ‘splainin’ to do…why, it’s now so quiet now re: the blame game at City Hall, you can almost hear the next shoe drop.