You’re considering investing in Whistler real estate. You love to ski. As with every other business judgment, you’ll undoubtedly take into account the overall tourism market at Whistler and the economics of your specific development.
But Whistler real estate is complicated and there are other, less visible, risks you need to be aware of. Because of the way Whistler real estate projects are structured, you’re depending on the City (Resort Municipality of Whistler or RMOW) to administer it’s rules from the outset.
Here’s why: when you buy a Phase 2 unit in Whistler you’re not only buying a piece of real estate, you’re also entering into a contract with the Municipality of Whistler (the “RMOW”), called a restrictive covenant. These covenants set out rules for how much you can use your property, and how projects are supposed to function. They lay out ground rules for the way owners, managers, and guests are all supposed to work together, and as you would expect, they leave a lot of discretion in the RMOW’s hands. When the RMOW is unwilling to honor and enforce its own rules, your investment can be rendered worthless.
Covenants Get Abused
Phase 2 developments balance a number of interests, and therefore, restrictive covenants are important, and generally useful. The intent of Whistler’s Phase 2 covenant is to ensure that investment rental properties are available for use by visitors, not left dark for long periods while an owner is not using the property. This makes sense.
But the covenant assumes that the rental management has been approved by the RMOW and is lawful and proper.
Why Phase 2 Covenants Are Risky
Peter Kosick is an 83 year-old Vancouver retiree who, using a substantial portion of his life savings, purchased two units in the Nita Lake Lodge. As is typical for Whistler Phase 2 projects, he, along with every other unit owner, signed a 25-year contract with a rental manager that set out revenue to be shared with him in return for the use of his units. Peter thought he was on solid ground given Whistler’s reputation as a world class resort and the fact that ultimately he owned a piece of real estate with cash flow. Or so he thought.
After Peter and all the other original unit owners paid to build the project, a professional investor bought a majority of the units and unilaterally took control over management of the project. The other owners sought a neutral bidding process for new management and asked the investor for financial records and a financial model, but instead the investor unilaterally installed himself as manager. In his capacity as manager, this professional investor not only took control of the front desk, but also everyone’s units and their cash flow. He barred unit owners from entering or using their own property and he gave Peter and the other owners no money for more than a year while he rented their units and kept the proceeds.
At one point, the owners got so frustrated that they had the locks changed on their rooms (the RCMP had to be called to ensure access for the locksmith) so they could monitor and prevent unauthorized use by the manager. The manager’s immediate response was to turn off heat and power to owners’ units. Some time later, without telling the owners, the manager secretly removed the locks. The manager subsequently told the owners they could not use their property, removed linens and other personal items from the rooms and ensured the property would be unusable by the owners. Owners remain locked out today. At the same time, in his capacity as an investor, the investor purchased several other units that were pushed into foreclosure.
Meanwhile, Peter and the owners had to pay mortgages, taxes, Tourism Whistler fees, and strata fees, and needed promised cash flow to assist with these payments. Because the manager wouldn’t pay Peter and the other owners, Peter had to declare foreclosure. After purchasing several other units in the project, the manager also bought one of Peter’s units at 20 cents on the dollar – further consolidating his control – and then proceeded to further tighten the screws on other owners. Some time thereafter, he advised other owners that under the cover of the RMOW covenant, he was locking them out of their own property.
To gain control of the entire operation, the professional investor needed to defeat any legal challenges and argue there was no change to existing agreements. He did this by assuming owners’ long-term rental agreements from the previous manager, and then attempted to terminate everyone’s rental agreements. As a result, in his capacity as manager, he rented other owners’ units and kept 100% of the rental proceeds. In addition to locking us out, he repeatedly threatened us with lawsuits and fines under the RMOW’s covenant to get us to agree to his control. He warned us that unless we accept him as the manager, we would not be able to rent or use our own properties and he would see to it that we would be fined by the RMOW.
We took the professional investor to court. And here is where the RMOW covenant became important. The manager used the Whistler covenant to justify his actions. The Whistler Phase 2 covenant says the project must have a “single booking system” that is supposed to be approved by the RMOW and supposed to assure the orderly use of the unit by both the Public and owner. We felt confident it was not intended to protect a manager that as far as we know was never “approved” by the RMOW and quite visibly abused owners’ rights. But it turns out that the courts can’t make that decision because when they hear about a Phase 2 covenant, they look to the RMOW for some explanation of how the RMOW’s rules are supposed to work.
The RMOW refuses to take a position, and by doing so has enabled the manager to hide behind its covenant. The covenant says there should be a single manager, but it does not say the single manager can do whatever it wants. Until the RMOW clarifies what its own rules mean, we remain locked out of our own property. And therein lies the risk.
It’s Their Rule. But The RMOW Hides
We asked the RMOW to take responsibility. In particular, we expected the RMOW to state that it would not impose the covenant in a situation where a third party’s use of the RMOW’s covenant renders a Phase II unit worthless. This is actually quite easy to do. The covenant explicitly states that the RMOW has discretion to choose to not apply in extenuating circumstances. We asked this so that we minority owners could have the latitude to request an independent audit of financials and an independent bidding process for a new manager who would represent the interests of all owners.
The RMOW has refused; they have advised they are intimidated by the manager. We’ve also been told that there are a number of problems at other Phase II projects and that because the whole subject of Whistler covenants is a “Pandora’s box” the RMOW just wants this all to go away. We understand politicians don’t like controversy. Sometimes, though, they are elected to make tough decisions, especially when their inaction jeopardizes a real estate model that is the engine of Whistler’s regional economy . By doing nothing, the RMOW is complicit in the problem. It is sending a message to every Phase 2 investor that Whistler’s real estate model is high risk.
There are other, fundamental issues with the RMOW’s administration of its covenant. For example, the covenant says that a manager has to be “approved.” The RMOW has never approved the manger at our project. Given that they haven’t approved him, we find it curious that they won’t take a stand. We are advised that at many other projects, the RMOW may not have approved managers either. In general, it appears, the covenants may not be well thought out or well managed. In our view, if you’re going to set up covenants that require interpretation, then when it’s time to interpret, you at least have to show up.
The RMOW Won’t Prevent Its Own Contract From Being Abused
We minority owners remain locked out of our units. We pay mortgages, taxes, strata fees, and Tourism Whistler fees for property we can’t use. Our investment is worthless. If this can happen to us, it can happen to you!
This is a risk when you invest in Whistler Phase 2 Real Estate. Buyer beware.