October 28, 2009

DCN FILE PHOTO

Construction on the Olympic Village, shown here this past summer, is nearly complete.

2010 Winter Games construction

Vancouver Olympic Village $132 million over budget

RICHARD GILBERT

staff writer

The Olympic Village project in Vancouver is about $132 million over budget, but this figure could increase due to construction cost escalation and the softening of the condo market, said an audit of the project.

The city hired KPMG to analyze the city’s financial exposure from the development, which will be used as the athletes village for the 2010 Olympic and Paralympic Winter Games and then as condominiums.

“The original budget for Millennium Water (the Olympic village) was $950 million including land for $200 million and financing charges of $190 million,” said the report. “Since then, there have been various revisions to this budget with the latest being provided on January 12, 2009, and reflecting an amount of $1.055 billion.”

However, the estimated costs provided to the auditors reveal that the construction budget could go much higher.

BTY Group and the Altus Group Ltd. were two companies that provided cost data for the audit. They estimated the cost of the project at $1.082 billion and $1.081 billion respectively.

These figures were calculated using data from Nov. 30, 2008.

More importantly, the budget estimates don’t include possible expenses associated with some significant cost drivers.

These include the following factors:

• Professional advisors retained by the city;

• Amounts for hedging, pre-payment, repayment and/or fees payable under the draft modified loan agreement that may be demanded depending upon the strategy that is chosen by Millennium Southeast False Creek Properties (MSEFC) and the city to deal with the loan from Fortress; and

• Additional costs related to holding Millennium Water beyond 2010.

The Fortress Loan Agreement contained a loan facility of $750 million. Fortress has paid out $317 million of the loan.

On Sept 23, 2008, Fortress advised MSEFC that it would not provide any further funding under the agreement.

Vancouver city council approved a $104 million loan in a secret meeting on Oct 14, 2008, in order to cover construction cost overruns, pay contractors and allow construction to continue.

Prior to the secret loan, the city had already advanced close to $25-million to Fortress on behalf of Millennium.

The terms of the Fortress loan include: a maturity date of January 3, 2011; control of the outstanding land purchase price of $171 million due to the city; a payment guarantee of $190 million; and a completion guarantee from the city.

The city arranged its own financing through a syndicate of chartered banks, led by TD Securities, in order to reduce costs and interest payments. With the settlement of the Millennium Water loan amendments in September 2009, the city decided to release the public portion of the KPMG report.

“Currently available estimates indicate that the financing required to fund the balance of Millennium Water is between $435 million and $460 million,” said the report.“

“These estimates do not include payment to the city for its land of $171 million and protective advances (secret loan) made to date or funds that may be required to retire MSEFC’s current indebtedness to Fortress and any associated costs.”

This means that BTY’s budget estimate does not reflect a change in the source of financing from the loan.

Altus has also identified several other concerns, which include the risk of cost increases due to possible acceleration and delay claims, the unusual circumstances by which MSEFC is not releasing an updated budget on a monthly basis and the apparent low rate of contractually committed costs.

KPMG is also uncertain about how much the city might lose when the project is sold on the real estate market.

Millennium Developments, the developer will complete construction on the village and sell off the units.

The city and the developer must realize a selling price above construction and loan costs to turn a profit. However, the rapid decline in Vancouver’s real estate market has threatened the feasibility.

A sales report produced by Rennie Marketing Systems in December 2008 estimates that residential units will produce $1.063 billion in total revenue.

Once revenues from retail and rental apartments are included, this figure increases to $1.137 billion. However, these estimates were based on appraisals from April 2007, before the Vancouver condo market collapsed. On the other side of the equation, costs could increase substantially.

For this reason, the auditors said there is no guarantee that the condos can be sold at a price that will allow the developer and city to realize a profit.

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