Daily Commercial News
Changing bank rules hit signature condo project in Toronto
Pace of large projects may slow down
July 30, 2009
IAN HARVEY, correspondent
Creditors have reached a deal to buy time for the developer of a luxury 80-storey condominium development at a prestigious Yonge and Bloor location to secure the financing to get the project off the ground.
“We anticipate paying off that debt obligation and successfully resolving what has been a challenging situation for Bazis, a large number of buyers and commercial and retail leases at 1 Bloor,” says Michael Gold, head of developer Bazis International.
The fate of the venture, however, is far from certain and serves as a dramatic example of how the credit meltdown has impacted the sector and, as high-profile realtor and developer Brad Lamb put it,“how the rules were changed by the banks halfway through the game.”
And that may hit construction as the pace of large condo and hotel construction slows as a side effect of the financial sector meltdown.
At the heart of the battle is a one-acre site at Bloor and Yonge streets where Bazis International is planning to building a luxury condo with high-end shops and luxury hotel. The conflict revolves around $46 million in loans advanced to Bazis on which no payments have been made since December 2008. Both sides will be back in court August 18.
Bazis is developing properties around the world, including one other condo project in Toronto, Crystal Blu. For One Bloor, Bazis borrowed $46 million from Paris-based Société Générale for the land purchase but the bank hit the rocks in the current meltdown.
Negotiations to extend the loan went south and at the same time Bazis was hit hard when Lehman Brothers, with whom it had been talking about a construction loan, went into bankruptcy last year.
A group led by financier Gary Berman, managing director at Tricon Capital Group, with the Minto Group, a high-profile builder led by the Greenberg family and KingSett Capital, a leading private equity real estate business, bought the debt from Société Générale.
The companies have since called the loan and are looking to foreclose and appoint a receiver to sell off assets.
The three parties involved in that loan are probably the biggest developers in Toronto, Lamb says.
“They didn’t buy the debt for the return — they bought it to control the development,” he says. “They smelled blood in the water. It’s the trifecta with the deep pockets. Tricon is the probably the biggest equity fund in North America for condos. They will be able to get the $500 million to proceed.”
He says, there’s no way to know if Bazis will still have a stake in the project when the dust settles and the shovels start to dig.
“The problem many developers are facing like this is that the rules of the game were changed halfway through,” says Lamb.
“In any development, there are three tiers of financing. The first is your equity, how much of your own money you’re putting up, the second is your land loan and then the third is the construction loan. Generally speaking, it used to be enough to have equity plus 70 per cent of units sold with 15 per cent deposits from buyers to get the construction loan. But the banks have been unfair by changing the rules half way through the game. Now they want more.”
He said his one of his own current projects would have cost him four-and-a-half times as much of his own money under the new reality imposed by lenders.
Banks are nervous and have ducked for cover and aren’t willing to put up $500 million on projects like One Bloor, he says.
“Right now they should be lending because there isn’t a lot of competition out there and they can cherry pick the deals. But they won’t. They’ll sit out until the fall when things pick up and everyone gets back into the market,” Lamb says.
“The irony is that there are buyers out there and they’re real, not speculators, people who want and need a place to live,” says Jeanhy Shim, of Thinkbuild Consulting, a condo market research firm.
“But for developers it’s a challenge because the banks’ criteria has changed. You can’t get financing under the same terms. They’re looking at smaller projects, less than 100 units and eight storeys, where the loans needed are maybe $10 million or so, but they won’t look at the big projects.”
http://www.dcnonl.com/article/id34752
