Friday, February 11, 2011

Olympic Village: A response to the Receiver's Report

Earlier this week I was invited by Global TV to comment on whether the City should consider a bulk sale of the Olympic Village units to the Aquilini family. I suggested that this was an old story, since I was told Rennie would soon be announcing a new marketing program. Nonetheless, we did the interview and I said the City should not entertain a bulk sale, but instead sell the units itself, notwithstanding the holding costs.

The next day, I had a call from CTV who had learned that there would be a forthcoming announcement regarding a new sales program. Would I comment? Of course I would.

However, I regretted this decision when Shannon Paterson asked me on camera how much the discount would have to be. Thinking about the earlier prices, and the prices at the nearby Wall project and Onni's downtown projects, I blurted out 30%. Later that evening, my wife asked me why I would say that. Did I know something, or was I just making it up. I told her I was just making it up. But given the context, and my experience, I thought it was a reasonable number.

Yesterday, the receiver issued his lengthy report. After retaining three real estate consulting firms...Burgess Cawley Sullivan, Altus, Urban Analytics, and working with Rennie Marketing Systems, they came up with a recommended strategy to put 230 units on the market at a discount.....yes, 30% discount and hold off selling the very high end units until perhaps next year. They also recommended renting up to 127 units priced under $1 million.

While I obviously agree with the recommended 30% discount and deferring some sales of high end units till later, I am disturbed by the receiver’s recommendation to rent up to 127 units…

If all 127 units are rented, this triggers an upfront HST payment in the order of $10 million. It will also result in thousands of dollars in monthly losses, no property tax recoveries, and potential for significant downstream costs and losses.

As we all know, when you drive a car off the lot, the value goes down….the same holds true for high end condos that are rented out…

Yes, it creates some market rental, and could result in more body heat, but let’s not forget that to date only 87 of the 119 Millennium rental units were leased up, with some tenants paying under the $2.30 a foot the city hopes to get for these units.

(As an aside, the larger a unit, the lower the rent on a square foot basis…so a $800,000 two bedroom and den unit will require a $96,000 up front HST payment, followed by thousands in monthly subsidies.) Guess who’s paying those subsidies.

I can’t understand how this can be a fiscally prudent approach, especially since there are better alternatives. For example, the city could sell these units with creative financing packages that would defer a portion of the initial price to a later date with a ‘silent second mortgage”’. This approach is used extensively in other cities and countries, but it does not seem to have been even considered at all by the receiver. By putting certain conditions in place, these units could be differentiated from the other units being offered for sale. (ie: they cannot be rented out, priority to city emergency workers, etc.)

In a similar vein, the receiver doesn’t seem to have considered my earlier suggestion that the Millennium rental units be strata-titled so that they can eventually be sold off over time. This could help reduce our losses by tens of millions of dollars.

Now I hope you better understand why I was so insistant that the social/rental housing units be sold last year to recover $110 million spent, and why I thought the City should have agreed last year to reduce prices when the program was launched in May 2010.

Prices haven’t dropped 30% since May 2010. As Bob Rennie has eloquently stated, the pricing was wrong in May….he knew it, most industry experts knew it….but sadly the City chose not to allow a reduction in prices during 2010. That was a costly mistake.

I know that many real estate experts share my concerns with the receiver's recommended strategy…I therefore hope the receiver and city administration will be willing to meet with us and explore further how best to minimize the losses which today I estimate to be at least $150 million.

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