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The site at the corner of Yonge and Bloor streets has been cleared and waits for a revised development plan from new owner Great Gulf Homes. (Fred Lum/Fred Lum/THE GLOBE AND MAIL)
The site at the corner of Yonge and Bloor streets has been cleared and waits for a revised development plan from new owner Great Gulf Homes. (Fred Lum/Fred Lum/THE GLOBE AND MAIL)

The High Life

How the plan to build Canada's tallest condo fell apart Add to ...

The chunk of downtown Toronto many call the best address in Canada - 1 Bloor - got a new owner this week as Bazis International handed the deed over to Great Gulf Homes. Behind that transaction is a tale of legal stick handling seldom (if ever) seen in Canadian real estate.

The men who brokered the deal and salvaged what they could for Bazis are a pair of real estate legal whizzes from Robins Appleby & Taub LLP: Leor Margulies and Sheldon Goodman. They co-chair the firm's real estate advisory group and have been Bazis' lawyers since the company's first solo project about four years ago.

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Last week they walked me through a truly fascinating transaction.

But before getting into details of what happened during the past few years and the demise of what was slated to be Canada's tallest residential tower we should note where things stand.

First, the 490 people who bought suites at 1 Bloor will get their deposits back, plus interest, the lawyers say. The paperwork has been mailed; most buyers have responded and cheques are being cut, they say.

Second, Bazis' other projects are unaffected, say Mr. Margulies and Mr. Goodman. Crystal Blu on nearby Balmuto Street is nearing completion and Emerald Park at Yonge and Finch is 86 per cent sold and waiting for rezoning approval, a process delayed by the recent strike by City of Toronto employees.

While construction loan financing remains tight, the lawyers are confident Bazis will find a lender so it can proceed with Emerald Park.

Yes, Bazis has to swallow a hefty multimillion-dollar loss (some estimate it to be in the $30-million range) but the price paid by Great Gulf (according to the Ontario Land Registry Office it was $53-million, though none of the parties have made that public yet) clears the mortgage on the land plus a bit extra, the lawyers say, adding that Bazis also retains an unspecified participation in whatever Great Gulf builds on the site.

Third, Great Gulf Homes now owns the site and is working on plans for a mixed use condo-commercial project.

And finally the trio of canny real-estate veterans - more on them later - who tried to snap up the site through the back door by buying the $45-million in mortgages on it from Société Général of France are to get a cheque to pay off the loan plus $242,823 in interest arrears. (They asked for $2-million, but a judge dismissed that claim saying it would have represented a 35 per cent interest rate.)

That's the situation now. Here's the story of how the original plan to build an 80-storey condo tower at 1 Bloor came together - and fell apart.

Bazis came to Toronto in the early years of this decade. The Canadian company has three local partners - Michael Gold, who handles financing, his wife Veronika Belovich, director of sales and marketing, whose father owns the parent company in Kazakhstan, and architect Roy Varacalli, who is director of design and construction.

They started with joint-venture venturing projects and then launched Crystal Blu as their first maiden solo enterpriseproject. The parent company had made its name by creating huge signature projects in Eastern Europe and Mr. Gold wanted something of a similar scale here.

He learned that the southeast corner of Bloor and Yonge might be available. It was owned by the Kolter Group Developments and three private investors through a numbered company. Kolter decided to sell off all its commercial properties because chief executive officer company president Robert Julien had his eye on developing condos in Palm Beach, Fla.

A deal was struck in December, 2006. Kolter bought out its partners and Bazis, through a 50-50 partnership with U.S. mega merchant bank Lehman Brothers. It bought that property, plus another one abutting it to the south and owned by Bank of Nova Scotia for a total of $78-million.

Société Générale of France provided two mortgages totalling $45-million on the land on condition it also got the construction financing. Bazis and Lehman then went on to spend about $20-million more in development costs. Tenants were told to vacate properties on the site in February, 2007 and demolition started early in 2008.

In the meantime, Bazis attracted lineups of would-be buyers, who even slept on the sidewalk for their chance to pick up a condo in the sky.

Then almost exactly a year ago two unforeseen events kicked the props out from under the project. The U.S. mortgage-backed securities industry crumbled and Lehman Brothers was one of the first victims. It lost billions through investing in near worthless mortgage-backed securities and was forced into bankruptcy on Sept. 15 last year.

Bazis could no longer count on its partner to share the financial load; it struggled but was able to keep mortgage payments current, the lawyers say. Then Société Générale suffered massive reversals of its own. It too suffered huge losses from investments in mortgage-backed securities, and to make matters infinitely worse it discovered a rogue trader on its staff had lost the company $7.9 billion (U.S.).

The head office in France ordered its North American representative to get out of the real-estate market as quickly as he could by selling off investments and loans.

"Bazis could probably have gotten through the loss of Lehman Brothers but it just could not handle the loss of Société Générale as well," says Mr. Margulies.

"We were able to negotiate an extension of the loan until the end of March and Bazis was able to keep payments current while Michael Gold looked for other sources of construction financing, part of which would pay off the land loan," adds Mr. Goodman.

Then without informing Bazis, Société Générale sold the loan to a numbered company, owned by the three of Canada's smartest real estate players: Alan Greenberg of Minto Group, Jon Love of KingSett Capital Inc. and mezzanine lending financier Gary Berman of Tricon Capital Group Inc.

The trio then set about acquiring the property by foreclosing on the mortgage when it started to fall into arrears in April. The strategy they used, however, was one used more in corporate bankruptcies that in real estate transactions, says Mr. Goodman. In real estate a lender who seeks to foreclose on a loan must have a receiver or the court sell the property to an unrelated third party and the proceeds of that sale is applied to the loan and accrued interest.

The trio, however, asked for Ernst & Young to be named receiver and also submitted a bid from a numbered company for $55-million saying that if the receiver could not find a better offerbuyer for more than that, the property should be sold to the numbered company, which they controlled.

"It was unheard of in a real-estate foreclosure case," says Mr. Goodman.

Then began a series of court hearings, which ran through June and July. Bazis was given until June 26 to find construction financing to pay off the existing land mortgage. Mr. Gold came back with a $195-million commitment from BTA bank in Kazakistan. On June 29 the trio refused to accept it saying that BTA bank was under investigation for alleged fraud.

The parties went back to court July 4 and Bazis was given until July 20 to find a joint venture partner, new financing or a buyer.

"All through the late spring and early summer we were discussing joint ventures with various parties," says Mr. Margulies. "Great Gulf seemed the most serious so negotiations were started in earnest in July."

When the parties returned to court on July 20, Bazis had a buyer, the court accepted the solution and the paperwork was started to transfer ownership and pay out the three-would be owners.

Are there any hard feelings? Not on the part of the lawyers, says Mr. Margulies. "Goodmans LLP, the trio's lawyers, came up with an innovative strategy to get their clients the land. It was just our job to come up with an even better one to defeat it."

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