LATE DISTRIBUTION FOR COUNCIL JANUARY 20, 2009 RR-2 ADMINISTRATIVE REPORT Reprt Date: January 19, 2009 Cntact: Kenneth Bayne Cntact N.: 604.873.7223 RTS N.: 07877 VanRIMS N.: 08-2000-20 Meeting Date: January 20, 2009 TO: FROM: SUBJECT: Vancuver City Cuncil Directr f Finance Sutheast False Creek Develpment: Financing Update RECOMMENDATION A. THAT, in rder t put in place financial facilities fr the exclusive purpse f ensuring access t the necessary funding fr cmpleting the develpment in Sutheast False Creek Area 2A (the site fr the Olympic Village ), Cuncil authrize the fllwing: the Directr f Finance be authrized t enter int discussins: with pssible lenders t put in place a flexible, revlving bank facility with a term f up t fur years; and with the City's Fiscal Agent t prduce a plan fr issuing the necessary debenture(s) at the best rate, price and ther terms n which such debenture(s) culd be issued by the City; after cnsultatin with and apprval f the Mayr, the Chair f the City Services and Budgets Cmmittee, and the City Manager regarding the prpsed terms and cnditins fr the abve nted financial facilities: the Directr f Legal Services be instructed t bring the necessary bylaws cnfirming these arrangements t Cuncil; and subject t Cuncil apprval f the afrementined bylaws, the Directr f Finance be authrized t execute and deliver all necessary legal dcuments t put in place these financial facilities; and the Directr f Finance t reprt back t Cuncil nt later than March 3, 2009 n the arrangements fr the abve nted financial facilities.
Sutheast False Creek Develpment: Financing Update 2 B. THAT, subject t Recmmendatin C, the City be authrized t fund the February 2009 cnstructin draw (as a prtective advance under the existing cnstructin lan dcuments) fr Millennium s develpment in Sutheast False Creek Area 2A in rder t mitigate any risk f cnstructin delays and prvide cmfrt t the cntactrs n the site; surce f funding t be the apprximately $29 millin depsit prvided by Millennium as security fr its cmmitments under the Lease and Develpment Agreement, all such mnies t be paid back t the City by Millennium with interest. C. THAT Cuncil authrize the City Manager, n behalf f the City, t execute and deliver all necessary legal dcuments t implement Recmmendatins B abve; THAT all such legal dcuments be n terms and cnditins satisfactry t the City Manager and the Directr f Legal Services; and THAT n legal rights r bligatins will be created r arise by Cuncil s adptin f Recmmendatin B abve unless and until such legal dcuments are executed and delivered by the City Manager. CITY MANAGER'S COMMENTS The recmmendatins f this reprt prpse the City cnsider a fundamental change in its relatinship with the develpment f SEFC Area 2A. At the utset, the City prvided cmpletin and payment guarantees but was nt invlved directly in financing the prject. Mre recently, the City has made a direct investment in the prject thrugh a series f prtective advances. This reprt prpses that the City cnsider a mre active rle by putting in place financial instruments that wuld enable the City t directly finance prject cmpletin. Prviding this type f supprt is a highly unusual rle fr the City t play hwever the refusal f the current lender t prvide funding t cmplete the prject suggests that this may be the nly way t ensure prject cmpletin t meet the guarantees given t VANOC. This invlvement des nt cme withut its wn risks, including the pssibility f a diminished credit rating and higher brrwing csts fr ther brrwing undertaken by the city fr the duratin f the Olympic Village lan. Hwever, given the current lack f financing available t the develpment cmmunity in these difficult times, the prject may nt be cmpleted withut the City s invlvement. The City Manager therefre RECOMMENDS the mtins put frward in this reprt nting that final decisins n prceeding with these alternative financing tls will be subject t a reprt back t Cuncil. COUNCIL POLICY Cuncil gets its authrity t issue debentures frm tw surces. Under prvisins f the Vancuver Charter, Cuncil has the authrity t apprve brrwing authrity fr water and sewer purpses. Subject t the fllwing paragraph, fr all ther purpses, Cuncil s authrity t apprve brrwing authrity and t issue debentures fllws frm apprval f the electrs t specific brrwing questins nrmally assciated with the City s capital planning prcess.
Sutheast False Creek Develpment: Financing Update 3 Amendment t the Vancuver Charter apprved by the Legislature n January 18, 2009, prvides Cuncil authrity t brrw thrugh a range f financial instruments fr the purpses f cmpleting the City s cmmitments in SEFC Area 2A and withut the apprval f the electrs. PURPOSE The purpse f this reprt is t prvide Cuncil an update n the financing ptins available t the City fr the cmpletin f the develpment in Sutheast False Creek Area 2A (Olympic Village); t seek authrity t negtiate the terms fr these facilities and t reprt back t Cuncil nt later than March 3, 2009 with the necessary bylaws t give effect t these ptins. BACKGROUND In September 2007, the City entered int a series f three-party agreements with the develper f Sutheast False Creek (Millennium) and the prject lender (Frtress Capital) t facilitate financing arrangements t cmplete the develpment. These arrangements have been previusly reprted t Cuncil. On January 12, 2009 the City Manager prvided an update t Cuncil n the status f the City s invlvement in the Sutheast False Creek develpment and the financial and ther cmmitments the City had made regarding the prject cmpletin. On January 18, 2009, the prvincial legislature passed Bill 47 which enhances the City s authrity t arrange fr and prvide financing fr the cmpletin f the develpment in Area 2A. This amendment t the Vancuver Charter prvides access t a range f financial tls t ensure that the City s cmmitment t cmplete the village can be achieved and that the City s financial risks are mitigated. DISCUSSION Current Financing Arrangements The current financing arrangements fr Area 2A are dcumented in a cmplex three way agreement between the Develper (the Brrwer), Frtress (the Lender) and the City (the Guarantr). These arrangements were negtiated in a much different envirnment than the current financial markets and by tday s market standards the brrwing csts are nt cmpetitive. Apart frm the sft and hard csts related t cnstructin, the mst significant cmpnent f the cst f the prject is the financing r interest cst. Interest n the lan facility varies each mnth depending n the amunt advanced and the applicable interest rate. The rate has bth a fixed and variable cmpnent: The variable cmpnent is called LIBOR (Lndn Inter Bank Offered Rate) which is the rate at which internatinal banks lend mney t each ther and is cmmnly used as the basis fr cnstructin and ther lans. The fixed cmpnent is a spread ver the LIBOR rate. Each mnth interest is calculated at the current 30 day LIBOR plus 4.5%.
Sutheast False Creek Develpment: Financing Update 4 Hwever, t ensure a minimum return t the lender, the current arrangements call fr a flr r minimum level n LIBOR f apprximately 5.0%. When LIBOR drps belw that flr, the lan rate is effectively frzen at apprximately 9.5% (LIBOR @ 5.0 plus 4.5%). In the early mnths f the lan, LIBOR remained abve the flr. Hwever, since the Fall f 2008, LIBOR has declined t belw 2.0% such that the effective premium n the lan has increased frm 4.5% t 7.5% because the cst f the lan remains at 9.5%. Cmplicating this issue is the fact that the lan is funded t the lender in Canadian dllars, requiring the US funds being pledged t be swapped int Canadian currency. This expses the lan t bth interest rate and currency risks between the tw cuntries (hedging risks). Despite the fact that insurance in the frm f hedges have been taken n these risks, the develper may be expsed t additinal csts in the future. The Lender has indicated t the develper and the City that it will nt fund beynd its current cmmitment ($317 millin) under the current lan terms because f defaults by the develper. The Lender has indicated that ging frward, their invlvement will result in a higher interest csts and/r in a smaller lan facility. As a result, the develper and/r the City will have t identify the balance f the prject financing frm alternative surces. As a result f the current situatin in the wrld financial markets which have had brad affects n the develpment and cnstructin industries, Millennium has been unable t find alternative financing n any terms n its wn strength. The City As Lender One ptin t ensure cmpletin f the prject wuld be fr the City t arrange the necessary financing and becme the prject lender in additin t, r in place f Frtress. The amendment t the Vancuver Charter apprved by the Legislature n January 18. 2009 prvides access t a brad range f financial instruments t enable the City t take the psitin f lender. There are a number f advantages t the City assuming this rle: Prject financing culd be prvided at lwer interest rates than under the current arrangements, reducing the ptential cst f the prject; The currency and interest rate differential (hedging) risks assciated with the US lender wuld be eliminated. The City may be able t take a strnger secured psitin with respect t the prject. The financing risk assciated with the prject wuld be reduced enabling the prject t be cmpleted in time fr the 2010 Games and made market ready. In rder t prvide this financing, the City wuld require access t tw financial tls: 1. a flexible, revlving bank facility fr a perid thrugh the cmpletin f the cnstructin; 2. debenture authrity t raise funds n a mre structured basis and t add brrwing cst security t shrt t medium financial requirements. Recmmendatin A seeks Cuncil authrity fr the Directr f Finance t put these tls in place. Either facility will require Cuncil t apprve apprpriate bylaws nce the arrangements are finalized.
Sutheast False Creek Develpment: Financing Update 5 Based n current interest rates these arrangements culd reduce the cst f prject financing frm the current and prpsed 9.5% t 11.5% range t less than 5.0%, significantly reducing prject csts and the City s financial expsure. The extent f this benefit will depend n hw much City financing is used under these arrangements and the hw the financial instruments are used in cmbinatin. Credit Rating and Brrwing Cst Risks t the City There culd be implicatins t the City f taking n the rle f Lender and increasing the ttal amunt f debt held. The degree f risk will depend n the structure f the financing that is dne, including the term. Based n ur discussins t date, the City s rating agencies have indicated that a dwngrading f the City s culd result fr the perid in which any financings are utstanding. This culd result in higher relative interest csts n City debt issued during a dwngrade including interest n the nrmal capital brrwing prgram - and ptentially in the City s access t the large institutinal investrs wh nrmally purchase ur bnds. Withut actually prceeding t market, it is difficult t determine the premium that wuld be required n a single-step rating dwngrade (e.g. AA+ t AA). Hwever, it might be anticipated the market wuld expect an additinal 25 t 30 basis pints in interest which wuld add $250,000 - $300,000 annually fr each $100 millin f debt issued in the Canadian public markets. As debenture requirements related t the Olympic Village prject have nt been determined, the actual premium cannt be calculated beynd the guidelines abve. Hwever, fr the City s nrmal capital expenditure prgram this culd add $0.75 t $1.0 millin annually t the brrwing prgram ver the next few years depending n the timing f meeting thse requirements and f the restratin f the City s current credit rating. Impacts n the Millennium Relatinship The analysis abve is based n the csts assciated with the City arranging financing fr the prject as cmpared t cntinuing with the current Lender. Hwever, given the City s risk in the prject, it is anticipated that any financing prvided by the City t Millennium wuld cme at a premium ver the City s cst f brrwing. In ther wrds, the City wuld expect t recver its csts as identified abve and an apprpriate interest premium recgnizing the financing risks being assumed and the expsure f the funds the City has already invested in the prject thrugh Prtective Advances and thrugh the sale f the land. The City wuld expect t recver its financing and ther csts and premiums frm Millennium befre the prject prvided a return t the develper. The February Cnstructin Draw If Cuncil supprts the prcess prpsed in Recmmendatin A, putting the necessary financing tls in place will take sme time. It is prpsed that the Directr f Finance reprt back by March 3 earlier if pssible - with the details f these arrangements. In the meantime, it is imprtant t prvide certainty fr the general cntractrs, subcntractrs and cnsultants wrking n the site that their January expenses will be cvered in a February draw. As a result, Recmmendatin B prpsed that the City cmmit t ensuring that the February payments are made. The surce f funding fr this payment wuld be the apprximately $29 millin paid by Millennium as a depsit against the cmmitments in the Lease and Develpment Agreement fr the prject. These funds are held in the Prperty Endwment Fund.
Sutheast False Creek Develpment: Financing Update 6 CONCLUSION In rder t meet the City s cmmitments t cmplete the Area 2A fr the 2010 Games and then t market ready, Cuncil has the ptin f the City taking n the financing fr the develpment. This ptin has the advantage f reducing verall prject csts and the expsure f the advances made by the City since Octber and f the balance f the purchase price wed by Millennium when the prject cmpletes. Tw financial instruments available t the City under recent Vancuver Charter amendments will be sught frm a cnsrtium f Canadian banks with funds prvided t Millennium after executin f apprpriate agreements which prvide security t the City. * * * * *