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The Trump buildings’s 261 hotel condos are at the centre of a controversy. (Kevin Van Paassen/The Globe and Mail)
The Trump buildings’s 261 hotel condos are at the centre of a controversy. (Kevin Van Paassen/The Globe and Mail)

Why investors have reservations about Trump tower Add to ...

Build it well and they will come.

That appears to be the philosophy of Val Levitan, chief executive officer of Talon International Development Inc., the developer of Toronto’s Trump International Hotel & Tower. He stopped repeatedly as he walked through the ornate building, pointing out the granite, the onyx, the chandeliers.

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“Occupancy is the wrong thing to focus on,” he says. “What’s important to focus on is the customer appreciation for the product. If the customer appreciates the product, then we are convinced we can get the rates that we are aiming for.”

But some of the investors who have bought rooms in the hotel do not want to wait around to find out.

They have received statements showing that rates for rooms and hotel occupancy have both been lower than they had expected, costing them tens of thousands of dollars, and they allege that the developer proffered marketing materials that used financial projections to portray the units as a lucrative investment.

“They went from a position where they thought this was a safe investment with huge returns to a position where they had substantial losses,” said Javad Heydary, a lawyer who is representing four buyers involved in multimillion-dollar lawsuits over their purchases and is talking to dozens more.

If financial projections were given, the sales tactic would appear to break an agreement with the Ontario Securities Commission.

The developer insists that it did not do so and also points to a 36-page disclosure document it says was given to buyers in which it emphasizes that there are no assurances or guarantees when it comes to revenues. The OSC is investigating.

This is only one problem bedevilling the project.

Other buyers have tried to walk away from their purchase and are being sued by the developers. And next Thursday, ownership of the hotel units will be transferred from Talon to the buyers, some of whom say they feel duped, cannot get financing to complete the deal and wish they had never bought them.

Mr. Levitan said he sympathizes on a personal level, but “in the end, what we need to understand is all of us have commitments and all of us need to stick with our agreements. …

“Impatient businessmen will lose money,” he added. “It’s not about investment, it’s about being a businessperson, and a businessperson cannot be in the moment. There’s no stopwatch here. … The revenues will grow, the average daily rate will grow, the occupancy will grow.”

The point was echoed by one of the building’s most high-profile buyers. New Jersey physician Stephen Soloway, who has bought dozens of Trump properties, appeared in a video extolling the development and still believes in its merits.

“A hotel is a product and that product may take time to get moving, to get off the ground,” Dr. Soloway argued. “I do believe that it will receive accolades and I believe that the people who are currently unhappy with the extra costs will be very happy in the future.”

He said he got “no special deals” for appearing in the video. The other buyer featured in the video is reportedly suing the developer and could not be reached.

Talon began selling units in the Trump building in late 2004. The 65-storey tower has 118 regular condominiums and 261 hotel condos, which are at the centre of this controversy.

The proposition was this: Buy a hotel room and stay in it as much as you want. If you choose, sign up for the reservation program. Then, when you are not occupying your room, it will be put into a pool that is available for hotel guests. You will receive revenues based on the hotel rates and pay hotel operating expenses and other costs. Unit owners are responsible for costs ranging from keeping the reception desk going to keeping their unit stocked with toilet paper and slippers.

It’s something that sets the Trump tower apart from other luxury hotel-condo buildings, such as the Ritz-Carlton or the Shangri-La. “Our goal was to provide the opportunity for regular investors – not superwealthy, but regular investors – to invest in the hotel industry,” Mr. Levitan said.

An OSC exemption allowed the developers to market the units with reduced regulatory hassle and the suit alleges that this made it easier to attract novice investors who did not have all the information they needed to make a sound decision.

“Over 90 per cent of them are middle-class with limited resources,” Mr. Heydary said. “By no means are they a sophisticated investor. … Some of them don’t even speak English.”

Among his clients is Ilsan Kim, a 27-year-old who lives in St. Brides, Alta. He heard about the Trump tower in 2007 and contacted a Toronto real-estate agent to look into buying a unit. Now, he is suing Mr. Levitan, Talon, Talon’s billionaire chairman, Alex Shnaider, and Donald Trump.

The suit, filed in the Ontario Superior Court of Justice, claims that a salesperson with the developer provided a PowerPoint presentation containing very specific information about projected returns from the purchase of a hotel unit. A salesperson allegedly said also Mr. Kim would be able to obtain mortgage financing if he put 25 per cent down.

Mr. Kim agreed to buy a $867,000 unit in January, 2007. He took interim occupancy of the unit in February, and since then the fees he has had to pay have outweighed the revenue from the room. A statement he received in October said the quarterly occupancy rate was 30.43 per cent and the average nightly rental rate was $444. His unit was rented out only one night in August.

The net revenue for the three-month period came to $8,865.92 and the occupancy fees were $24,879.90, according to the lawsuit. This adds up to a loss of $16,013.98 – about $175 a day.

Mr. Kim is also struggling to find a mortgage, which he alleges he was told would be readily available from lenders. He has been turned down by the banks and would have to put down 50 per cent to get one because banks have deemed the units to be commercial investments, according to the lawsuit.

The most contentious part of the lawsuit is the allegation that Talon offered specific cash-flow projections – contrary to the OSC exemption – that helped to convince would-be buyers.

The company insists that this did not happen. “We have never given any financial projections. Never,” Mr. Levitan said. “We have never discussed any financial projections.”

A copy of the disclosure document that Talon provided to The Globe and Mail states: “Neither the declarant, the hotel operator nor the sales agents for the hotel condominium make any representation that any hotel unit will be able to be rented at any particular rate or for any particular period of time.”

But the buyers who are suing say marketing materials with return-on-investment estimates – allegedly showing specific cash-flow projections based on projected occupancy levels of 55 to 75 per cent – played a major role in their decision.

In an e-mailed statement, Talon said it does not agree that the marketing materials constituted “a forecast or projection. Further, Talon has complied with the terms of the [OSC] ruling.”

The Ontario Securities Commission exempted the project from having to offer investors a prospectus (an official sales document for substantial and complex investments that is costly to prepare) on the condition that neither Talon, Trump nor any sales agents “will make any representation that any hotel unit will be able to be rented at any particular rate, or for any particular period of time” and that “prospective purchasers of hotel units will not be provided with rental or cash-flow forecasts or guarantees or any other form of financial projection.”

The OSC, which has granted similar exemptions to other condo projects, is probing the allegations. “We are looking into this matter to determine compliance with the order, and will take regulatory action if warranted,” said Carolyn Shaw-Rimmington, a spokeswoman for the regulator.

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