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Winter Games Project Hits Snag in Vancouver

By Ian Austen, New York Times published: November 14, 2008

OTTAWA — When Montreal announced that it would be the host of the 1976 Summer Olympics, Mayor Jean Drapeau promised that the Games could “no more have a deficit than a man can have a baby.” Ultimately the Games left behind about $1.5 billion in unexpected debt that was paid off only two years ago.Now, Vancouver residents prepare to vote in a municipal election on Saturday, the freeze in credit markets and a collapse of the city’s real estate market have made the financing of the 2010 Winter Games a critical issue.

Looming over the debate are the fortunes of the Fortress Investment Group, the hedge fund and private equity firm that controls the main Olympic skiing site, Whistler Blackcomb, and is the primary source of financing for a $1 billion athletes’ village now under construction downtown. On Thursday, Fortress reported a third-quarter loss of $20 million, in contrast to earnings of $111 million in the period a year earlier.

Last month, the Vancouver City Council voted at a closed meeting to advance up to 100 million Canadian dollars to cover cost overruns on the village, according to reports based on leaked information. That was in addition to 193 million Canadian dollars in loan guarantees to Fortress previously provided by the city.

Then, according to news reports, Estelle Lo, the city’s director of finance, quit to protest the action. And this week, Mayor Sam Sullivan asked police to investigate the source of the leaks.

When combined with the lack of public information surrounding the relationship among the city, Fortress and Millennium Development, which is developing the village, the situation has been something of a political boon for Gregor Robertson, the leader of Vision Vancouver, a left-center political party, and one of the potential successors to Mr. Sullivan, who is not running for re-election.

“They chose Fortress because of a sense that this was a solid partner,” said Mr. Robertson, a former provincial politician. “It doesn’t look so solid now.”

The first bit of Fortress-related anxiety came in October when the fund had to renegotiate $1.68 billion worth of debt related to its 2006 leveraged buyout of Intrawest, the Canadian ski resort company whose holdings include Whistler.

Fortress reached an agreement with lenders at the last minute, although it has not disclosed the terms. Jackson Turner, an analyst at Argus Research who follows Fortress and rates its shares sell, said he assumed the new financing had come at a higher price.

While Mr. Turner added that it was a positive sign that Fortress was able to borrow at any price in the current market, the problems for Whistler, a premium resort that relies heavily on American and European customers, and the other Intrawest ski properties might be only beginning.

“There’s little chance that things have gotten better at Intrawest since the Oct. 23 loan extension,” Mr. Turner said. “We have been seeing several signs of deterioration in the key resort business since then.”

During a conference call with analysts on Thursday, executives at Fortress made no direct comments about any investments related to the Olympics. The company did not respond to requests for comment.

A greater source of concern for Vancouver, however, has been the Olympic Village project and its potential financial exposure for the city.

The project sits on what is perhaps the most valuable real estate in Canada: about 50 acres of former industrial land in the city’s downtown along an ocean inlet known as False Creek.

Until recently, Vancouver had one of the most vibrant real estate markets in Canada. The market was supported to some extent by absentee owners, including many from Asia, who bought condominiums as investments.

The strength of that market combined with the desirability of the city-owned False Creek site provided the local government with an opportunity to profit from the Olympic Village without the headaches of financing and supervising its construction.

Under the plan struck with Millennium, the developer must complete the village, which will house about 3,000 athletes in several buildings, by November 2009. After the Olympics, Millennium will close a deal to buy the land for 193 million Canadian dollars. If all goes to plan, Millennium will then recover its investment by turning the complex into 1,100 luxury condominiums.

Millennium, however, has run into hard times and is among the companies that have suspended or stopped other real estate projects in Vancouver. Work at a project costing 400 million Canadian dollars in nearby West Vancouver has stopped and that complex is the subject of about 400,000 Canadian dollars in liens from unpaid contractors. With real estate sales down by 55 percent in October, it is not alone. Several condominium projects in the Vancouver area have gone into hibernation.

Valerie Wan, a spokeswoman for Millennium, said the company had no comment about any developments. The city’s vote on a bailout for the village was intended to be secret, but The Globe and Mail, a newspaper in Toronto that publishes a separate edition for British Columbia, reported the news and the apparent resignation of Ms. Lo last week. While other news outlets confirmed the report, city officials, council members and Mr. Sullivan have declined to discuss the specifics of the case or the status of Ms. Lo.

But Mr. Sullivan, who was not picked by his party, the Non-Partisan Association, to run for re-election this year, issued an open letter to the city this week.

In it, he wrote that the city’s council had been appropriately consulted and that the village would be completed on deadline. Citing confidentiality agreements with Fortress and Millennium, however, the mayor offered no comment about the project’s financial state.

Mr. Sullivan did condemn the leak for potentially disrupting “sensitive real estate and business discussions with project stakeholders to ensure we successfully complete this project on time.” While he added that city politicians and staff workers were “legally bound” to keep information about real estate transactions secret, several legal scholars said the city had no such statute.

That leaves the police now looking into the leak few options other than pursuing breach-of-trust charges, which may be difficult to support in court.

Eager not to be seen as the source of the leak in advance of the election Saturday, all members of the Vancouver City Council have volunteered for lie detector tests to clear their names. (Mr. Robertson’s opponents suggest that the leak was intended to deflect attention from reports that he has not paid a 14-month-old fine for trying to travel through two travel zones on the city light rail system on a one-zone fare.)

Even Mr. Robertson, whose chief opponent, Peter Ladner, is a Non-Partisan Association council member who voted for the bailout, believes that the village will be completed on time.

Less easy to forecast, however, is the final financial outcome for the city.

C. Tsuriel Somerville, a professor with the University of British Columbia’s Center for Urban Economics and Real Estate, said that while the deal was sound in structure, politicians misled the public by initially characterizing it as risk-free.

“We’re looking at a very real potential here for some levels of government to pony up more money,” he said. “The alternative would be the Olympic tent city.”

Stan Hamilton, a professor emeritus at the University of British Columbia and a leading expert on Vancouver real estate, foresees two possible outcomes.

“If the market turns around, everyone is going to walk away from this saying: ‘What a fantastic deal,’ ” he said. “If the market goes down some more, somebody is going to be holding some property longer than they would care to.”

A version of this article appeared in print on November 15, 2008, on page B4 of the New York edition.

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