Lawsuits against SkyCity tower developer allege land overvaluation

The developer planning to build Winnipeg's tallest tower faces three proposed multimillion-dollar lawsuits in Ontario that allege overvaluation of the land backing its projects.

Fortress Real Developments faces 3 proposed class-action lawsuits in Ontario

Fortress Real Developments plans to build a 45-storey, 388-unit condo tower on this Winnipeg parking lot. It also has projects in Ontario. (Bartley Kives/CBC News)

The developer planning to build Winnipeg's tallest tower faces three proposed multimillion-dollar class-action lawsuits that allege overvaluation of land used to back projects in Ontario.

Fortress Real Developments, based in the Toronto suburb of Richmond Hill, is in the process of raising money to build SkyCity, a 45-storey, 388-unit condo tower planned for a surface parking lot at Graham Avenue and Smith Street, where the Winnipeg Tribune once stood.

The firm said it has lined up construction company Ellis Don to build the $200-million project and says almost half the condos have been pre-sold. Construction is slated to begin next year.

One of the ways Fortress raises money is through investment vehicles called syndicated mortgages, which are sold by mortgage brokers. These are pooled investments that allow several small investors to spend as little as $30,000 to buy a piece of a project and then bundle their money to form a larger mortgage.

Since August, Fortress projects in Ontario have spawned three class-action lawsuits filed on behalf of investors in syndicated mortgages. 

Plaintiffs are seeking tens of millions in damages in suits that lay out a series of complaints against Fortress and the companies involved in the sale of syndicated mortgages that promise roughly 8 per cent returns to investors. 

A conceptual drawing of SkyCity, which Fortress Real Developments plans to build at the corner of Graham Avenue and Smith Street. (Fortress Real Developments)
Those lawsuits allege investors in Fortress were led to believe condo projects in Toronto, Barrie, Ont., and Burlington, Ont., were secure investments backed by the value of the land where they going to be built. The lawsuits allege the land in question was overvalued and the plaintiffs were misled in a variety of ways.

In the Toronto project, plaintiffs allege syndicated mortgages were marketed "as safe and secure investments when they knew or ought to have known they were risky investments unsuitable for investors with a lower to moderate risk profile."

The lawsuits have been commenced by representative plaintiffs that bring the case forward on behalf of a larger group of investors. They must still be certified by a court before they proceed.

The allegations have not been proven in court and no statement of defence has been filed. Fortress spokeswoman Natasha Alibhai said in a statement this week the firm intends "to vigorously defend these actions, which are being initiated and pursued by someone that seems to have an ax to grind against Fortress."

Fortress says more than half of the 388 units in SkyCity Centre have been pre-sold. (CBC News)
Two of the brokers who sell syndicated mortgages for Fortress projects spell out on their marketing materials why the underlying value of the land is critical.

"Since you're secured against the land [or] property, the value of that asset is key in the event of any problem with the project; the asset can be sold to help recover your principal investment," FDS Broker Services and FFM Capital state.

All three of the proposed class action lawsuits filed in the Ontario Superior Court of Justice against Fortress and a long list of other companies claim damages because the value of the land was overstated.

"Investors are provided with an inflated current value for the real estate investment. Ordinarily, appraisals are not carried out to determine the current value; if they are, the 'current' value is arrived at based on a hypothetical future value dependent on certain milestones not yet achieved," according to the court document filed in the Ontario Superior Court of Justice in September against Fortress and its affiliates.

Court documents also claim, "The combination of the inflated property values and the second mortgage position are marketed by Fortress as putting the investors in a strong and secure lending position."

Regulator issues warning to investors

The Financial Services Commission of Ontario, which regulates syndicated mortgages, recently warned investors to be careful when it comes to the value of property.

"You want to ensure the appraiser has valued the property in its current state without any assumptions concerning the successful completion of the property," FSCO stated on its website in August. "If the appraiser has made such assumptions, the sale price of the undeveloped property would likely be lower than the value indicated in the appraisal. This would create more risk in terms of recovering your investment."

In Winnipeg, Fortress paid $9.5 million in 2013 for the 1.1-acre parcel of land where SkyCity Centre is slated to rise. Fortress bought the land from Oggi Investments, owned by entrepreneurs Sabino Tummillo and John Garcea, which paid $5 million to acquire the land in 2012 from Huntingdon Capital Corporation.

Fortress is still in the process of finding financial backing. In 2015, the project was approved for $14.5-million worth of government grants — $6.5 million from the city and $8 million from the province — under an old downtown-housing stimulus program. Under that program, the funds do not flow until the project is complete.

In March, Fortress informed the City of Winnipeg it will not be able to meet the construction deadline that was one of the conditions of the grant. Fortress said the project is not feasible without the grants.

In order to access the money under the old program, SkyCity must be complete by January 2019. After Fortress said it could not meet that deadline, the city offered a $6.5-million economic incentive grant that would be paid out over 10 years instead of in one lump sum when the project is complete.

Fortress declined the offer and is now in talks with the city about a compromise grant, council property committee chair John Orlikow (River Heights-Fort Garry) said this week.

Fortress confirmed talks are ongoing.

"Fortress has committed to obtaining a third-party report to show the impact of the 10-year payment structure versus the lump sum payment," Alibhai said in a statement.

Left to right: Winnipeg Mayor Brian Bowman, Fortress CEO Jawad Rathore, Fortress COO Vince Petrozza and Winnipeg CAO Doug McNeil meet in the mayor's office in this undated photo. A meeting Bowman and Fortress officials took place Dec. 15, 2015, according to the schedule the mayor's office posted online. (Twitter)
Mayor Brian Bowman said he is aware of the discussions and expects to receive a new report about the grant. Any decision about the funding would be made in public, at an executive policy committee meeting, he pledged.

The mayor said he could not speak to the class-action lawsuits against Fortress in Ontario or the way its syndicated mortgages are marketed.

"The relationship between developers and any private-sector business and their investors is one between them," he said. "That's not something the City of Winnipeg would weigh in on."

Fortress has not made any request to the province for a new grant to replace the $8 million offered under the old housing-stimulus program, Municipal and Indigenous Relations Minister Eileen Clarke said in a statement.

As recently as last week, marketing materials for SkyCity syndicated mortgages told investors the grants were approved.