Romspen Investment Corp., one of Canada’s largest private mortgage lenders, is locked in a court battle with its largest borrower after multiple loan defaults allegedly totalling $333-million – unpaid debt that has hindered its ability to fund investor redemptions.
Romspen has asked the Ontario Superior Court to appoint a receiver to take control of three properties that underpin the distressed loans. If approved, the receiver could sell the properties as it sees fit and the proceeds would allow Romspen to recoup some, or all, of the money it is owed. The three affected properties are located in Toronto: Woodbine Mall and Rexdale Mall, in the city’s northwest corner, and 1500 Birchmount Rd., in the city’s northeast corner.
The borrower, Issa El-Hinn, also known as Chris Hinn, is a commercial real estate investor and businessman. He originally defaulted on multiple Romspen loans in 2018, according to court filings, but signed a forbearance agreement with the lender at the time and has since sold six properties, remitting $222-million worth of proceeds to Romspen. The alleged $333-million still owed to Romspen is over and above the $222-million already remitted.
Of the three properties he has yet to sell, Woodbine Mall is considered the most valuable because it is large and located across the street from a proposed transit hub.
Romspen’s portfolio largely consists of construction and predevelopment loans, and the Toronto-based company lends to borrowers across the United States and Canada. Romspen has been in business for decades, but its primary product, the Romspen Mortgage Investment Fund, grew particularly popular in the aftermath of the 2008 global financial crisis because retail investors were hungry for sizable yields in an era of ultralow interest rates. The fund returned 7 to 10 per cent annually for two decades.
Lately, though, rapidly rising interest rates destabilized the commercial real estate market and Romspen had to freeze investor redemptions last November. At the time, Romspen had $3.2-billion in assets under management, and it attributed the freeze to “suppressed” loan repayments. In a quarterly update to investors late last year, Romspen disclosed that 33 per cent of loans in its flagship fund were “non-performing.”
As a private lender, the composition of Romspen’s loan portfolio is kept confidential and hardly any information on which borrowers have not repaid is publicly available. But in an e-mail to The Globe and Mail, Romspen confirmed that Mr. El-Hinn’s distressed loans were associated with its redemption freeze.
“The decision to defer redemptions, as we communicated to the fund’s investors, was based on an overall assessment of the timetable of the portfolio’s anticipated loan repayments and collateral sales and monetizations, including these loans, and a need to balance the interests of all fund investors when allocating capital,” managing partner Derek Jenkin wrote.
A growing number of private lenders and funds are grappling with elevated redemption requests. In Canada, Ninepoint Partners LP had to restructure its flagship private-debt fund last year after 25 per cent of investors wanted out. More recently, in December, Blackstone Real Estate Investment Trust, one of the world’s largest private real estate investment funds, had to limit redemptions because so many investors wanted their money back.
Private lenders often struggle to fund elevated redemption requests because the very nature of their loans makes it hard to recoup cash quickly. Private loans made to riskier borrowers often cannot be sold easily – and when they are, the sales may be conducted at deep discounts.
In Romspen’s case, it is going another route and trying to appoint a receiver for the properties – not just with Mr. El-Hinn, but also with another distressed loan to a British Columbia developer whose project has stalled.
The B.C. loan was intended to fund the development of a seven tower, mixed-use development in downtown Richmond but Romspen alleges that no substantive work has been done on the project lands since 2020. The borrower also filed for bankruptcy protection in April, 2022. Romspen alleges it is owed $191-million.
The borrower, Alderbridge Way LP, has since countersued, alleging Romspen breached its construction loan agreement.
While court battles are common in private lending because higher-risk borrowers are more likely to default, Romspen’s current fight with Mr. El-Hinn is notable because their business relationship goes back 24 years, according to court filings. Mr. El-Hinn is also Romspen’s largest borrower.
When Mr. El-Hinn originally defaulted, Romspen demanded $136-million in repayment. To resolve the issue, the two parties agreed to what is known as a forbearance agreement, effectively giving Mr. El-Hinn time to come up with the borrowed money. Six properties were sold over three years, but three properties have yet to be sold.
“Given the extensive passage of time since the forbearance agreement was originally signed, Romspen has lost confidence in Mr. Hinn’s ability to successfully complete sales of Woodbine Mall, Rexdale Mall and 1500 Birchmount,” Romspen said in its receiver application.
In his response to Romspen’s request for a receiver, Mr. El-Hinn argued last week that variables such as the COVID-19 pandemic had a major impact on the remaining unsold properties. “Since two of the largest mortgaged properties, including the most valuable asset, Woodbine Mall, were retail malls, their marketability was severely negatively impacted for obvious reasons,” he wrote.
Mr. El-Hinn said he had a deal to sell the 1500 Birchmount property to a major commercial real estate owner, but alleged that the deal broke down when interest rates jumped.
Private lenders usually underwrite short-term loans and Romspen’s public fund data suggest only 2 per cent of all loans in its largest fund have maturities longer than two years. However, the loans to Mr. El-Hinn were made many years ago, with the loan for Rexdale Mall dating back to 2013. Even if they weren’t intended to be long-term loans, the defaults have delayed repayments by many years.
Asked about the lengthy timetable, in his e-mail to The Globe Romspen’s Mr. Jenkin said that “while most loans have medium maturities, term extensions may be negotiated if we remain confident in the value of the underlying collateral.”
Although Mr. El-Hinn originally owed $136-million when he defaulted in 2018, the sum has since grown to $333-million, according to Romspen, for multiple reasons. For one, Romspen bought out other mortgages on the properties to aggregate the debt in one place.
Interest also continues to accrue at 15 per cent annually, according to court filings, and there are additional costs such as protective payments and fees included in the amount owed.
Mr. El-Hinn contests the amount owed, alleging in his court filing that Romspen has miscalculated.