The 85-story project at Toronto's Yonge and Bloor, once known as “The One” and considered Canada's tallest residential high-rise, will also likely be known for having one of the longest construction routes to final completion – a timeline that every condo buyer should be concerned about.
Developer Sam Mizrahi bought the property in 2014, and in 2017, pre-sale buyers snapped up units at prices that, in retrospect, look like bargains — even after a condo market that's down about 25 percent in places.
These early risers are now finding out what happens when a megaproject fails.
A court-appointed bankruptcy trustee stepped in to save the $2 billion tower last year after developers ran out of money. Last week, a judge approved a proposal that would wipe out nearly every one of the 329 sales contracts. Alvarez & Marsal, the observer, expects to be able to resell the units for nearly $200 million more than the original shipment, even in today's struggling market.
The goal is not to be fair; It's about getting as much money out of the site as possible to repay the $1.6 billion to creditors.
And some of that will come directly from investors' paper profits, one of the most egregious lessons from the speculation that has failed in Toronto's condo market.
Normally regulators hate cancellations. But a bankruptcy expert with knowledge of the deal says this time buyers were offered a choice: take back your deposit or take back the same unit at a 2025 price you would have laughed at in 2017.
The deposit insurer must now refund every dollar plus interest. But what profits had these buyers made over the past eight years? Gone.
And it's all perfectly legal, all part of the typical fine print in a presales market where “years to complete” can tacitly become “never.”
Pauline Lierman, vice president of research at real estate firm Zonda, puts it bluntly: The 2017 units are selling at a higher price today because developers are still finding buyers for luxury goods, even in this wet market.
Five of eight launches this year were high-end products, she noted.
But the rest of the market? That's where the bruises occur. Last year, around 7,300 unit sales were canceled, often because developers couldn't meet their pre-sale goals.
The pandemic-era peak in the first quarter of 2021, when average prices reached about $1,700 per square foot downtown and $1,200 in the suburbs, is long gone. These days, projects must have a price close to resale, around $1,100 or less, and even then developers offer incentives.
In 2017, presale units downtown cost $600 to $700 per square foot, Lierman said. That was a record year, but before construction costs exploded and layoffs became more common.
Ben Myers, president and owner of Bullpen Research and Consulting Inc., said projects are still falling like dominoes. If the numbers no longer work, the cranes stop. Some projects are quietly turning into rentals. Others are put on hold.
“There aren’t many developers who do a project at a loss,” Myers said.
Demolition of a project falls under the jurisdiction of the Home Construction Regulatory Authority. The reasons for refunding a buyer's deposit are spelled out in the purchase agreement, attorney Bob Aaron said.
“It depends on what the consumer signs, but often there are clauses in the contracts that allow the contractor to terminate,” Aaron said, adding that the Mizrahi project was a different case as the contractor went under.
Before you feel sorry for condo buyers, let's not forget that many buyers are pure investors who are ultimately looking to make a significant profit with a very low initial payment.
For years it was a given: deposit a few percent, watch the market rise and then turn over the paper. Assignment clauses made it easy until the last crash, when regulators and developers tightened the rules. Now assignment fees, percentage sales terms and recourse clauses make a simple exchange not so easy.
But the market was liquid enough to absorb all of the allocated condos. No longer. Note that not every assignment clause is the same and some language allows the developer to defer to the original buyer unless it is an absolute, non-recourse assignment.
One lesson here is to buy from reputable developers, which makes it ironic that Tridel, one of the big names in the industry, was brought in to save the sales program at the newly renamed One Bloor West.
“After successfully delivering over 90,000 homes, the completion of this groundbreaking masterpiece is now entrusted to Toronto’s most trusted and experienced condo builder,” the company boasts in its offer to resell the same units that were pulled from investors this week.
“The rule,” Aaron said, “is to buy from the developer you know. The developer who has built 100 buildings.”
It's a difficult lesson, but one buyer of units in Toronto's now-infamous tower knows it. Getting your deposit back is great, but how would you feel if you had invested in the TSX Composite Index for the last five years and someone got your 80% return back? Because that's exactly what happened.
The gain was real until the moment it wasn't. And so the tower sometimes collapses in the housing market.
• Email: gmarr@postmedia.com