http://www.businessweek.com/magazine/content/10_11/b4170028317749.htm

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Debt: How Vancouver Heals an Olympic Hangover


With his overtime goal in the Olympic gold medal hockey match, Canada's Sidney Crosby set off a national celebration. Now the question is, can he move some luxury condos?

The party that lifted Canada's spirits also left Vancouver with a debt hangover, most of it in the form of $665 million the city borrowed and extended to the developer of the Millennium Water condominium complex where the Olympic athletes were housed. The city put up that money when financing fell through and now needs to sell the 474 remaining units in the complex, in a former warehouse district on the shores of False Creek, at prices that are expected to range from $580,000 to $9.6 million each. That would recoup the city's investment—raised by selling debentures and commercial paper, and tapping a credit line arranged by Toronto-Dominion Bank (TD)—and avert a cut to its credit rating. Vancouver officials hope the link to celebrity athletes such as Crosby will help juice sales. "The exposure of the Olympics has been the best possible marketing campaign," Mayor Gregor Robertson said just before the close of the Games. "We have a very good chance to see the village sold out within about two years."

Robertson and his team want to avoid a repeat of Canada's last Olympic-financing fiasco. The 1976 Summer Games in Montreal left Québec with $1.4 billion of debt that took three decades to repay. Vancouver's costs may rise depending on how long it takes to sell the units and recover the investment, officials say. The city of 600,000 was forced to step in after New York-based Fortress Investment Group withdrew support in late 2008 when it lost confidence in the developer, Millennium Development, amid cost overruns and the downturn.

As post-Olympics headaches go, this one is relatively mild. The Games, summer and winter, almost never cover their public costs. Vanoc, the local Olympics organizing committee, remains confident the final tab will fit within the $1.7 billion operating budget. But that doesn't include the province of British Columbia's share of subsidies, such as $579 million to upgrade the Sea-to-Sky highway between Vancouver and Whistler, B.C., where skiers competed, and nearly $2 billion to build a transit line between Vancouver's airport and downtown.

The picture isn't unremittingly bleak. Canada's gross domestic product grew by 5% in the fourth quarter and consumers are spending again, though unemployment remains high at 8.3%. As exports pick up, Vancouver—Canada's largest port—should benefit.

While the area's real estate values have rebounded from last year's lows, not everyone thinks the remaining condo units will cover the city's costs. Cameron McNeill, president of MAC Marketing Solutions, a Vancouver-based condo marketer, said units may need to sell for an average of $1,062 per square foot—steep even for a town with some of Canada's priciest properties. "It's kind of like having a car lot full of Ferraris," said McNeill, who represents a nearby rival development. "It's not like the car is bad. But there's a limited market for Ferraris and Lamborghinis."

The debt market remains wary. "Until they start selling these units, the risks will remain," says Alex Bellefleur, an analyst at Moody's (MCO), which has a negative outlook on the city's debt. Officials are counting on the afterglow of Canada's 14 gold medals to help clear the bill. Says Bob Rennie, whose Rennie Marketing Systems leads the sales effort: "In a perfect world, we'd love to have the athletes' signatures beside each front door."

Fournier is a reporter for Bloomberg News.
Donville is a reporter for Bloomberg News.

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