The controversial Port Tower project in Port Dalhousie has dragged on for over a decade. Many greeted the announcement of a new developer and new site plan this past June with a sigh of relief. In St. Catharines, the feeling could be summed up as “we don’t care what it looks like, or what it is, just build the thing.” Years of empty lots and empty promises will do that. You could forgive people for wanting to simply move on to the next phase: a condominium project in the area once occupied by bars like Jailhouse, My Cottage and Rum Jungle. The community was done with the divisive controversies and ready to embrace a new vision of developer Fortress Real. A vision they call “Union Waterfront”. While the design received a communal thumbs up, it may not be all smooth sailing just yet.
Investors have launched a proposed class action against a high-profile Toronto-area condo development firm, with projects across Canada, that raises millions from mom-and-pop investors through risky pooled mortgage products—many of which are advertised as safe and “secure.”
The suit, filed earlier this month in Ontario Superior Court, claims $27.5 million in damages, as well as the return of any profits, in relation to a troubled condo project in Barrie, Ont., which was marketed to investors by Fortress Real Developments, Fortress Real Capital and their various affiliates. It also accuses the Financial Services Commission of Ontario (FSCO) of failing to properly regulate the sector, dubbed by critics as a wild west of lending. “They were aware of the issues we’re complaining about in the suit for many years, but have done nothing to protect the public,” says Kevin Sherkin, the lawyer acting on behalf of two investors who hope to become representative plaintiffs if the suit is certified as a class action.
The allegations, which have yet to be proven in court, accuse Fortress and its principals—CEO Jawad Rathore and COO Vince Petrozza—of misleading investors by suggesting they were putting money into a relatively safe product, called a syndicated mortgage, that offered exposure to Canada’s booming condominium market and promised eight per cent annual returns, plus more if the projects performed well. The suit focuses on a condo project in Barrie called the Collier Centre that was forced into bankruptcy protection last year.
That, from an article from Maclean’s called “Lawsuit targets Ontario’s $4-billion syndicated mortgage industry” (http://www.macleans.ca/economy/angry-investors-seek-class-action-against-high-profile-seller-of-risky-syndicated-mortgages/).
More from that story:
Rathore and Petrozza founded Fortress in 2008, according to the suit, after previously working in the province’s securities market. In fact, the pair received a 15-year ban from the Ontario Securities Commission, or OSC, as part of a $3-million settlement agreement they signed in 2011. The agreement said the pair, along with another colleague, “engaged in conduct contrary to the public interest” when they sold shares of two companies later implicated in a B.C. stock scam to clients of their debt management business. However, the ban did not include “mortgage instruments,” which fall outside of the OSC’s jurisdiction.
Though sold like securities, syndicated mortgages are loans made by group of investors to a developer. They are typically used to fund the “soft costs” of condo projects—like building a sales centre or commissioning drawings. In exchange, investors are promised regular interest payments on their loan—generally around eight per cent annually—and may be entitled to receive more once the project is completed. In addition, the loans are secured against the property in the form of a mortgage, which is why the marketing for many syndicated mortgage products often touts them as safe or “secure.” (For more on the industry and Fortress, read Maclean’sstory from last April here).
In reality, however, such investments are quite risky. The loans made by syndicated mortgage investors are usually subordinate to a project’s main bank lenders, making the chance of getting one’s money back if something goes wrong—and there’s plenty that can go wrong in a large, complex commercial development—highly unlikely. Hence the attractive eight per cent interest rates offered.
It should be noted that Fortress adamantly denies the lawsuit’s claims and that, even if true, the implications for the Port Dalhousie development are not clear.
But, for Niagarans who have waited a decade for this project to come good, another shade of controversy will be an unwelcome sight. It’s safe to say that the developer, and the proposal, are now firmly under the microscope.
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