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The Trump tower, downtown’s tallest new condo-hotel, is a monument to excess. And, like its tycoon namesake, it’s surrounded by controversy: 38 investors are suing the hotel for millions. Lessons from a post-crash real estate market

By Leah McLaren

At the Trump Toronto opening: Trump executive Jim Petrus and Talon chairman Alex Shnaider, with Donald, Ivanka, Donald Jr. and Eric Trump (Image: newswire.ca/CNW Group)

In the city’s new five-star hotel landscape, the Ritz represents elegant European classicism, the Shangri-La cool, Asian chic, and the Trump unfettered American pomp. Like its loud-mouthed namesake, the Trump is brash, proud and full of bluster. Stock, the hotel’s restaurant and bar, is outfitted with shiny tufted black leather seating and silver accents. Its lobby, a shimmering expanse of marble and mirrors, seems sprung, fully formed, from the imagination of Joan Collins.

The hotel’s developer, Talon International, is run by Val Levitan and Alex Shnaider, two Russian-Canadian entrepreneurs. Levitan made his fortune manufacturing slot machines and creating bank note validation technology, and Shnaider earned his in the post-glasnost steel trade. The Trump is their first Toronto real estate venture. In 2002, during a meeting in Shnaider’s office at Dufferin and Finch, they agreed on a plan to build the city’s biggest, fanciest, five-starriest hotel. They both travel frequently for work and agreed that Toronto’s hotels lacked the quality of the ones they stayed at in London, New York and Moscow. Back then, Toronto’s swankiest option was the old Four Seasons, a dour brutalist tower in Yorkville. But the city was emerging as a major North American financial centre, a place where serious players were coming to do big international deals. These titans were in need of boardrooms in which to meet, bloody steaks to consume, and high-thread-count sheets to sleep between.

In 2004, Talon bought a site at the corner of Bay and Adelaide for $27.4 million. The location was perfect—smack in the centre of the business district. This was before the cultural revitalization of the city’s downtown core, but Levitan and Shnaider could see the signs: the revamping of the Bay’s flagship department store, the plans for the new Bell Lightbox, not to mention a phalanx of condos and restaurants springing up in the city centre. By the time the hotel was completed, it would be the anchor point of a tourist-friendly downtown.

The luxury hotel required a famous brand, which is how the pair ended up approaching Donald Trump. At the time, Trump’s reality show The Apprentice was riding high in the ratings, and the Trump brand was associated with luxury, success and business prowess, not with headline-making Twitter spats and an aborted Republican leadership bid. They worked out a deal to license the Trump name.

They planned a 65-storey mixed-use building consisting of a restaurant and bar, a day spa, 118 condos—some as large as 4,400 square feet and selling for up to $9.1 million—and 261 “condo-hotel suites,” traditional hotel rooms that Talon intended to sell as residential real estate investments. The condo-hotel set-up was unusual in Toronto. It’s an attractive model for developers because it allows them to raise capital up front from investors.

Donald Trump is a shareholder in other Trump developments in Chicago, New York and Las Vegas, but not in Toronto. The hotel would bear his name and his style, and an affiliate of his management company would run the day-to-day hotel service. According to the early marketing brochures, it would be a model for “Manhattan-style luxury living in Toronto.”

By the time the Trump opened in 2012, ten years after the plan was hatched and more than two years later than originally scheduled, the financial climate had, of course, drastically changed. The hotel now felt like a throwback to a cockier, pre-recession era, back when hedge fund managers ruled the world and Bernie Madoff was a respected financial guru. A group of buyers now regret their investment in the building, and millions of dollars in deals between them and Talon are on the verge of collapsing. The group claims their condo-hotel units often sit empty, and they’ve launched a series of lawsuits alleging the Trump sales team misrepresented how much profit they’d make. The defendants say the lawsuits have no merit, that no misrepresentations were made. The claims have yet to be heard in court.

The Trump investors believed they’d bought into a get-rich-quick scheme. How did something so promising go so wrong?

Before there was the Trump Tower, there was the Trump tower sales office, a glass-fronted box that stood on the same prime corner from which the hotel would eventually rise. A polished young sales team sold a steady stream of units, over the phone, online and in person, to a diverse cross-section of buyers—including elderly Korean pensioners, wealthy Nigerians and a now-defunct U.K. company called WorldWide Properties, which bought four floors of hotel units with the intention of flipping them.

When the Trump broke ground, half of the residential condos had sold, as had 191 of the condo-hotel units, which ranged in price from $736,000 to $3.8 million. The suites could be rented out as part of the hotel, providing extra income to buyers. In the Trump system, occupancies are organized in a strict, computerized rotation, which ensures that the least rented room jumps to the front of the queue. The hotel charges service fees for maintenance (linens, towels, cleaning, etc.) and management, but the rest of the rental profit goes to the owner of the room. The promotional material declared that “investing in hotel suites is a trend that’s sweeping the United States… The reason? Great cash flows, no concern for maintenance and reasonable cash requirements as a down payment. Leverage is key, especially in these times of low interest rates.”

Promotions featured an airbrushed picture of Trump, along with a personal endorsement: “We’re going to do something very special in Toronto.” Trump himself, the ad said, “has an undeniably keen eye for a deal.” The ad neglected to mention that Trump wasn’t the project’s developer, just its smiling face.

Sarbjit Singh, a 49-year-old warehouse supervisor from Milton, was one of the early buyers. Singh first heard about the Trump in October 2006 from a real estate agent who told him it was a great investment opportunity. He and his wife, Kimberly, had recently bought a house and just had their second daughter. He didn’t have the money to buy another property. “I was only making between $50,000 and $60,000 a year,” he says. “I’m a regular person, not rich.”

But the prospect of getting his own piece of Trump magic proved too tempting. He claims the agents at the Trump sales centre told him he couldn’t possibly lose money since the “absolute worst case scenario” was that the hotel ended up at 55 per cent occupancy, and even then the projected returns were healthy. “I asked them a long list of questions,” he recalls. Who was going to arrange the mortgages? What would the interest rate be? Would the property be categorized as commercial or residential (commercial properties come with much higher interest rates). He alleges the sales associate assured him he had nothing to worry about. According to Singh, they said Talon was already working on financing with lenders, and it would all go smoothly. The units would qualify for residential mortgages. Singh then asked at what point he could flip the unit, and the agent told him directly after closing. “You’ll make a lot of money,” he remembers the agent telling him. “Even if you don’t sell, you’ll be making lots of money from the reservation program.”

Armed with Talon’s projection sheet, his head dancing with trust funds for his daughters, Singh went to his mother and father, who are retired and living on a pension. He convinced them to take out a $150,000 line of credit on their house, which they owned outright, so he could put down a deposit of $173,400 on an $869,000 suite. He believed, like many other investors I spoke to, that he was buying a piece of real estate directly from Donald Trump and that he couldn’t lose. “I bought it on the strength of his name alone. He’s Donald Trump—hotels and real estate are his business, not mine. I trusted that it would work.”

Construction of the Trump Tower got off to an inauspicious start. It took two years to receive planning permission from the city, and there were more delays after Talon broke ground in late 2007. Because of the site’s small footprint—15,000 square feet—only one crane could be employed at a time. Shnaider admitted it was a bit of a nightmare. “I wouldn’t do such a project again in Toronto,” he said.
More significantly for investors, the economic reality changed. As Levitan put it, “It was a very complicated project that became delayed, and in that time the economy fell apart. How can I control that?” In the new market, the projection sheets Talon had distributed with the initial sales package weren’t worth the creamy stationery they were printed on.

In March 2012, Sarbjit Singh took possession of his unit and started paying monthly fees of $8,207, which covered realty taxes, common fees and interest. He expected his rental profits to more than offset the fees, but when the first revenue statements came in, he knew something was wrong: in four months, his unit had been rented 49 times—roughly a 40 per cent occupancy rate and lower than the “absolute worst case scenario” the agent had discussed with him. Singh’s room was running at a loss. When he called hotel management, they told him the bad news: because of the dampened hotel market, they’d been renting his room out at a discounted rate. (Rooms at the Trump that were forecast to cost $550 to $600 per night have been available for $400 on Expedia.) Singh was losing approximately $5,000 a month.

His problems didn’t end there. He visited several major banks and was told the property was commercial, not residential, and thus he’d need a commercial mortgage, for which he’d need to put 50 per cent down—money he didn’t have. Even if he could find the down payment, the commercial interest rates would raise his mortgage payments beyond what he could afford to carry.

Last November, Singh ran out of reserve cash. He stopped paying his fees and is now working in the evenings and on weekends in an effort to pay his parents’ line of credit. He recently missed a mortgage payment. He has no idea how he’ll get out of debt.

Singh retained the Toronto law firm Heydary Hamil­ton last November and filed a suit against the developers. Another 37 buyers have also filed suits. A Heydary lawyer named Mitchell Wine, one of the team of 14 lawyers and articling students working on the Trump cases, told me purchasers and representatives of more than 100 units have contacted his office. The firm has filed statements of claim detailing each of the investors’ stories and accusing Talon and other named parties of misrepresentation, breaches of the Ontario Securities Act, breach of contract, breach of the Condominium Act and conspiracy. Each claimant is asking for well over a million dollars in damages, plus their deposit money back with interest. Pleadings are being finalized, and preliminary motions were scheduled to be heard just after this issue went to press. In response, Talon is seeking to have the action by investors dismissed.

The investors’ suits name Trump Toronto Hotel Management Group and Talon International Inc., as well as Trump, Shnaider and Levitan personally. They allege that the defendants misled investors about the units by providing financial projections that overstated how much they would earn, and by understating expenses (such as occupancy fees). According to the investors’ statements of claim, Talon breached the Ontario Securities Act by selling the units as investment products.

The plaintiffs’ cases centre on a 2004 OSC ruling, which required Talon to market the units as mainly for occupancy, not as investments. Talon was also prohibited from forecasting or guaranteeing profits from the reservation program. And yet, included in the Trump’s original sales package are several charts entitled Estimated Return on Investment, which show detailed breakdowns of the income buyers could expect from their condo-hotel suites. They describe projected common expense fees, housekeeping expenses, estimated taxes and a mortgage projected at six per cent interest. The rental income, in turn, is projected at hotel occupancy rates of 75, 65 and 55 per cent.

Late last year, the OSC investigated the Trump deal to determine whether regulatory action was needed. They met with purchasers and Talon’s lawyers, read over all the documents, and in early December announced they would not be pursuing regulatory action on the matter. When I asked for an explanation, the OSC refused to provide one. The investors’ suits will proceed regardless of the December decision.

The fact is, Talon did warn the Trump buyers about the risks involved in buying condo-hotel units in its disclosure. “A real estate investment is, by its nature, speculative,” the document states. “If a purchaser is purchasing the real estate as an investment, the purchaser should be aware that this investment has not only the usual risks when purchasing real estate, but also those risks that are inherent to the nature of real estate securities.”

A disclaimer in the Trump disclosure lists a series of variables, many of which might seem alarmist if they hadn’t come to pass. These include, but are not limited to, “cyclical downturns arising from real changes in general and local economic conditions; varying levels of demand for rooms and related services caused by changes in travel patterns; the financial condition of the airline industry and the resulting impact on air travel…contagious illness outbreaks, natural disasters, extreme weather conditions, labour shortages, work stoppages or disputes.” There is also a clause, as required by the Condominium Act, stating that each buyer, upon receiving and reading the disclosure document, has 10 days to back out of the deal. According to Levitan, five people did just that.

Investors like Singh claim they didn’t take the warnings about risks seriously because they’d been completely convinced that the investment was a sure bet. It’s a bit like your trusted GP prescribing you a medication and then rattling off the side effects in a super-fast radio ad voice as you leave the office. If what these buyers say is true, the Trump sales team underplayed the risks and overplayed the benefits of buying their condo-hotel units. But sales pitches are hyperbolic by design.

Talon’s statement of defence denies all wrongdoing, including the allegations of misrepresentation and breaching an OSC ruling, and demands the investors forfeit their deposits and pay individual damages of $750,000 each. Levitan says they have a good case for further damages, due to all the bad press the case has received, but they are still “hoping for an amicable solution.”

In Talon’s specific response to Singh’s claim, the company denies that the Trump sales agents promised he could get a residential mortgage or guaranteed a rate of return from the reservation program. It also denies that any promotional material he received breached the OSC ruling. In Levitan’s view, the buyers’ lawsuits are purely opportunistic and won’t stand up in court. Normally, if buyers want to walk away from a deal, a developer will buy back their investment. But the Trump units were sold at the peak of the market. As Levitan points out, “Everything has changed.” Given this reality, Talon is not eager to buy back the units it sold off for millions in the middle of the condo boom. That’s how people—and developers—make money: buying low and selling high. Why should they absorb the cost of others’ bad financial timing?

The group of disgruntled buyers, Levitan says, is primarily composed of people who did not attempt to rescind the deal in the allotted time frame, then realized they couldn’t secure financing and decided to file suit. The fact that they don’t have the money to close only shows that they probably shouldn’t have taken the risk in the first place. “Instead they claim that they thought they were buying from Donald Trump and we promised them a rose garden,” Levitan says with a snort. “It’s a pure form of extortion.”

He says he’s sad for the people who got in over their heads. He’d prefer “the world to be a rosy place in which people are always happy with their investments,” but that didn’t happen with Trump. “So what am I supposed to do?” he says. “Go to the drywall contractor and say, ‘Sorry, but I can’t pay you because 30 investors aren’t paying me?’ ”

Raymond Diep, a Toronto real estate lawyer at the firm Aaron & Aaron, which handled a number of the Trump condo-hotel closings, said his firm’s clients weren’t happy about losing money each month, but they chose to take a long-term view on the investment. “They realized that things might be negative now, but in the end the market would go up again.”

None of Aaron & Aaron’s clients were going to go personally bankrupt on the Trump deal; they absorbed their losses and decided to wait it out. Diep believes the Heydary lawyers are cashing in on private desperation. “They’re making it look like a shady investment, but it’s not really like that. The investors had high expectations. It was the height of the market. Now that it’s slowed down, they’re having regrets about it. It’s that simple.”

Sarbjit Singh, who is in no position to close in cash, says that Talon should have said that only investors of high net worth need apply. Instead, the Trump project was sold as a great investment for people of modest means, like himself. “If you need to be a millionaire to close, they should have targeted millionaires.”

Donald Trump declined to speak with me, but Ivanka, his daughter, agreed. The 32-year-old is vice-president of development and acquisitions for the Trump Organization. When I reached her, she was in the back of a chauffeur-driven car on the way to the airport. “It was very important to me to give you some time,” she said the moment she got on the phone. Ivanka is a glamorous blond jewellery designer and former model with a business degree from Wharton. Over the years, her father has used her as the new face of Trump, trotting her out at public events and even appointing her as a judge on The Apprentice.

Ivanka is an excellent human shield for her father, who is no stranger to lawsuits. He has been sued by investors on several hotel projects and has launched his own litany of suits against a long list of perceived offenders, including an unauthorized biographer, a former Miss U.S.A. contestant, Deutsche Bank and the comedian Bill Maher, who offered, on The Tonight Show, to pay Trump $5 million if he could prove his father was not an orangutan. Trump sent him a copy of his birth certificate, but Maher did not pay up.

Ivanka said she is staggered by the investors’ claims that they believed they were buying their units directly from Trump.

“I don’t know of many people who wouldn’t retain a lawyer to explain to them how this relationship works,” she says. “It’s articulated exactly in the purchase documents… We’re just like the Ritz or the Four Seasons. It’s not different in any way.”

She says the claims against her father and his company are completely without merit. When I point out that people were led to believe they would make money and now they are losing it—and, similarly, that they would be able to secure financing where now they cannot—Ivanka bridles, her voice rising in the controlled manner of one who is used to conflict but not to having her authority questioned. She points out, quite rightly, that with any investment, whatever the asset class, and especially with real estate, those who approach things with a long-term perspective tend to do best. She says the unhappy buyers in the Trump Toronto case are suffering from a severe case of buyer’s remorse—which is nobody’s problem but their own.

She objects to the implication that the investors were misled in any way, and each time I try to suggest that perhaps the sales tactics were overly aggressive, she jumps in and loudly talks over me, extolling what she calls “the beauty of the asset,” by which she means the hotel itself.

“I wish that everyone could be happy, but sometimes these things can be a challenge,” she says airily. “It’s important to remember that the lawsuit doesn’t relate to us in any way. We have no contracts with these people, and we didn’t sell them real estate.” With that, she declares she must go, says a quick goodbye and hangs up.

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