Billed as Canada’s tallest residential tower, the 85-storey project at Yonge and Bloor in Toronto, once known as The One, will likely also be famous for having one of the longest construction runways to final completion, a time frame that every condo buyer should be concerned about.
Developer Sam Mizrahi bought the land in 2014, and by 2017, pre-sale buyers were snapping up units at prices that, in retrospect, look like bargains, even after a condo market that’s down about 25 percent in some places.
Those early risers are now finding out what happens when a megaproject goes wrong.
A court-appointed receiver intervened last year to rescue the $2 billion tower after developers ran out of money. Last week, a judge approved a proposal that will eliminate almost all of the 329 purchase contracts. Alvarez & Marsal, the monitor, estimates it can resell the units for nearly $200 million more than the initial haul, even in the current weakened market.
The goal is not to be fair; It’s about extracting as much money as possible from the site to help pay creditors’ $1.6 billion bill.
And some of that will come directly out of investors’ paper profits, one of the most egregious lessons of speculation gone wrong in the Toronto condo market.
Regulators generally hate cancellations. But an insolvency expert with knowledge of the deal says this time buyers were offered a choice: withdraw their deposit or take back the same unit at a 2025 price they would have laughed at in 2017.
The deposit insurer now has to repay every dollar, plus interest. But the profits those buyers had accumulated over the past eight years? Missing.
And it’s all perfectly legal, all part of the typical fine print in a pre-sale market where “years to completion” can quietly become “never.”
Pauline Lierman, vice president of research at real estate firm Zonda, is blunt: Those 2017 units will sell for more today because developers are still finding buyers for luxury, even in this soggy market.
Five of the eight launches this year have been high-end, he noted.
But the rest of the market? That’s where bruising happens. About 7,300 unit sales were canceled last year, often because developers couldn’t hit their pre-sales 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, has passed. Today, projects must be priced close to resale, about $1,100 or less, and even then, developers offer incentives.
In 2017, pre-sale units downtown were $600 to $700 a square foot, Lierman said. That was a record year, but before construction costs skyrocketed and cancellation notices became more common.
Ben Myers, president and owner of Bullpen Research and Consulting Inc., said projects continue to fall like dominoes. When the numbers stop working, the cranes stop moving. Some projects are quietly transformed into rentals. Others are archived.
“There aren’t many developers who will do a project at a loss,” Myers said.
The cancellation of a project is covered by the Housing Construction Regulatory Authority. The reasons for returning the buyer’s deposit are outlined in the purchase agreement, attorney Bob Aaron said.
“It depends on what the consumer signs, but often there are clauses in the agreements that allow the builder to terminate the project,” Aaron said, adding that the Mizrahi project is a different case because the builder went under.
Before we feel sorry for condo buyers, let’s not forget that many buyers are pure investors and are ultimately looking to make a sizeable profit with a very low down payment.
For years, it was a no-brainer: deposit a small percentage, watch the market rise, and then turn the tables. Assignment clauses made it easy, until the latest collapse, when regulators and developers tightened the rules. Now, assignment fees, percentage-of-sale conditions, and recourse clauses make a simple change not so simple.
But the market had enough liquidity to absorb all the assigned condos. Not anymore. Please note that not all assignment clauses are created equal and some have language that allows the developer to pursue the original purchaser unless it is an absolute assignment without recourse.
One lesson here is buying from big-name builders, which makes it ironic that Tridel, one of the biggest names in the business, was hired to rescue the sales program for the recently renamed One Bloor West.
“With the successful delivery of more than 90,000 homes, the completion of this historic masterpiece is now entrusted to Toronto’s most trusted and successful condo builder,” the company boasts in its proposal to resell the same retired units to investors this week.
“The rule,” Aaron said, “is to buy from the developer you already know. The developer who has built 100 buildings.”
It’s a tough lesson, but buyers of units in Toronto’s now-infamous tower know it. Getting your deposit back is great, but how would you feel if you had invested in the TSX Composite Index for the past five years and someone got back your 80 percent return? Because that’s what happened.
The benefit was real until the moment it stopped being real. And that, in the condo market, is how the tower sometimes falls.
• Email: gmarr@postmedia.com
