Donald Trump has a situation on Bay Street
EUGEN SAKHNENKO for The Globe and Mail
It may not be top-of-mind right now for the would-be President, but things are no longer "great" at the Trump Tower. In fact Trump and his partners are at each other's throats, writes John Daly
Neil Labatte has met Donald Trump once, in the summer of 2014.
Afterward, "he sent me a picture," Labatte says with a grin. "It says, 'You're the greatest.' So he must think I'm great."
That is surely the case—for Labatte runs the Trump International Hotel
& Tower in downtown Toronto, and anything or anyone associated with Trump is, according to the man himself, "great."
Labatte may or may not be great. But he definitely has a great big problem. The Trump Tower has had a checkered history from day one; Labatte was hired in 2013 to reboot things. But since then, the Trump brand has taken a shellacking, as Trump himself has mutated from huckster to demagogue, making a slow-selling building sell even slower.
Now Trump and his developer, Alex Shnaider, seem headed for a divorce—an ugly one. Shnaider wants to terminate his management agreement with Trump; lawyers for the two sides are headed to mediation in April.
Against this backdrop, Labatte, an affable, aw-shucks kind of guy, still has to come to work every day to promote a beaten-up brand. On his wrist he wears a bracelet of amber beads. "They're Buddhist prayer beads," he explains. "It was given to me by a monk in the most sacred monastery in Tibet, in effect for a donation." Labatte says he finds two tenets of Buddhism appealing: "Make yourself better and your community better, and your life will be better. And if you believe in reincarnation, your next life will be better."
Just about everyone in the Toronto hotel and real estate businesses says the original idea behind the Trump Tower was solid.
The city is the fourth-largest in North America, but in the late 1990s, it had just one hotel run by a top-level international luxury chain: the downtown Four Seasons. And even the Four Seasons brand was encased in a grim 1970s concrete tower.
So in the early 2000s, the Ritz-Carlton, Shangri-La and Four Seasons chains all announced plans to build lavish new projects. Economics, however, dictated that these hotels would have to be newfangled hybrids.
Luxury hotels are very cyclical businesses—using them is one of the easiest expenses for companies to slash during a downturn. No hotelier, no matter how prestigious, could get a lender to advance $300 million or $400 million in construction financing for a pure hotel play.
The solution: Set aside half the building or so for condos and pre-sell them before construction. That wasn't an easy task either, however. Toronto at the turn of the millennium was still smarting from a speculative condo boom and bust in the late 1980s and early 1990s. After that, regulators and banks required condo developers to pre-sell 60% to 70% of their units before they would lend them money for construction.
IAN WILLMS for The Globe and Mail
There seemed to be plenty of market for the hotel-condo concept. A whole generation of wealthy Toronto empty nesters were said to be eager to sell their houses and move to downtown condos with full hotel services. And that's still the thinking today.
"They don't want to live in their big houses in Rosedale or Forest Hill, their kids have just graduated from university, they're spending their time in Florida, Muskoka and wherever, and they want the lifestyle," says Jimmy Molloy of Chestnut Park Real Estate, who is widely considered to be Toronto's champion luxury real estate agent. Conventional wisdom also held that investors from abroad would be attracted by international five-star hotel brands.
The corner lot at Bay and Adelaide streets where the Trump Tower now stands was originally slated for a Ritz-Carlton. In 2000, the chain announced a plan to build a 60-storey hotel-condo. But that proposal blew up the following year, after it emerged that the chairman of the local development company was on the lam from a 1995 embezzlement conviction in the United States. In 2002, Ritz-Carlton pulled out of the project, shifting to a site a few blocks west, where it opened a 53-storey tower in 2011.
Enter Trump and Shnaider. Although the Trump Organization boasts hotels and apartment complexes around the world, it often has no direct stake in them. Rather, it makes its money by licensing the Trump brand to local developers like Shnaider. Extra fees apply if Trump's people help manage the place.
Trump had been a promoter of the original Ritz-Carlton proposal and hoped to invest in the project. "If I am involved, they know it will be great," he boasted to then Toronto Mayor Mel Lastman on a promotional visit in June, 2001. Later that year, Trump appeared at a ribbon-cutting at the building site, then a parking lot.
After Ritz-Carlton bowed out, Trump announced he would step in. In 2004, Shnaider, a 35-year-old wunderkind who had built his privately owned Midland Group into a global metals trading and industrial conglomerate, signed on as the lead investor and developer. He and his friend, Val Levitan, a Russian-born Canadian who had made his money co-founding JVL Labs (a maker of video slot machines and banknote-validation systems), bemoaned the lack of top-level hotels in Toronto like the ones they often stayed at in New York and Europe.
At the time, Trump's TV reality show, The Apprentice, was topping the ratings, and he appeared to be riding high again after the failure of his New Jersey casino and hotel ventures in the 1990s, which pushed him to the brink of collapse.
Shnaider and Levitan figured Trump would provide the cachet the building needed to stand out in the crowded hotel and condo markets. The pair founded Talon International Development to hold the venture, with Shnaider as chairman and Levitan as CEO.
The building was rebranded as the Trump International Hotel & Tower Toronto; gilded in glitz, it would soar 65 storeys from its cramped footprint. The project, whose cost was pegged at $500 million, would house 261 hotel rooms and suites, and 118 residential condos.
Talon began selling condos. But in a move that would later cause Shnaider and Trump a lot of grief, it began selling hotel rooms and suites to individual investors as well.
The units weren't cheap—priced at $700,000 and up for a 550-square-foot room. But the deal made sense on paper. The Trump Organization would run the reservation system, allocating guest bookings even-handedly for each room type and size. Unit owners would get the revenue, but they would have to pay the hotel monthly fees for administration, housekeeping and other common expenses.
Investing in hotel rooms and short-stay condos was common in the U.S. at the time, but the concept was new to Toronto. To make sales easier, Talon approached the Ontario Securities Commission for an exemption to regulations that are designed to protect investors—especially non-professionals or, in the parlance of the business, investors who are not "sophisticated."
Talon argued it was selling real estate, not securities. The commission agreed, and Talon was relieved of requirements imposed on sellers of stocks and bonds, such as filing a formal prospectus that includes details on how the vendor intends to use the proceeds, as well as all potential risk factors. But the commission also said Talon wasn't allowed to give buyers specific financial projections.
CHARLA JONES/The Globe and Mail
For a while, the units sold briskly. In March, 2007, Talon announced it had secured $310 million in construction financing from an Austrian bank, based on pre-sales of more than $250 million in condos and hotel units.
In October, Trump flew in for the groundbreaking. As cameras flashed, he, Shnaider and four other VIPs sank golden-bladed shovels into dirt with "TRUMP" spelled out on top in white sand. "It's going to be a great building," Trump gushed to a reporter. "Perhaps the greatest building in North America."
The timing was unfortunate. The U.S. sub-prime crisis was reaching its zenith; it triggered the global financial meltdown that began in September, 2008.
In Toronto, the roaring real estate market cooled for several months. Down at Bay and Adelaide, construction at the Trump dragged on longer than expected. A major complication was the small lot, which made it tricky to bring in trucks with concrete and supplies.
Talon originally said the tower would be finished in 2010. As things turned out, the Trump didn't open its doors until January, 2012, around the same time as the competing Ritz-Carlton, Shangri-La and Four Seasons projects.
New headaches—minor and major—cropped up almost immediately.
Early one morning in March, a pane of glass fell to the ground, forcing the closure of the busy Bay and Adelaide intersection for half a day. (Another pane crashed to the street in November; and in March, 2014, the city shut the intersection again because of a dangling glass panel on the roof.)
Cranky local architecture writers and restaurant critics deemed the Trump a monument to bad taste. The 31st-floor restaurant, dubbed Stock and managed by Levitan's wife, served a $26 hotdog and a $32 caesar salad. The ground-floor bar, Suits, featured $20-plus cocktails.
In April, Trump flew in yet again for a splashy official opening, with daughter Ivanka and sons Eric and Donald Jr. in tow. The Trumps and Shnaider cut a red ribbon using golden scissors as a beaming Mayor Rob Ford looked on.
Trump brushed aside suggestions from reporters that the post-crisis economy was still too shaky to support such a pricey venue.
"The best time to build is in a terrible market, because then the market gets good by the time you're finished," he said. "It's a great time to buy at the Trump International in Toronto."
KEVIN VAN PAASSEN/The Globe and Mail
Kevin Van Paassen/The Globe and Mail
For the critics, the project was a handy punching bag, a metaphor for the decadence of the 1%.
But the hotel-unit investors didn't look like the 1% at all. Rather, many were members of Toronto's hard-working suburban immigrant cohort, people like warehouse supervisor Sarbjit Singh and Se Na Lee, the stay-at-home wife of Andrew Lee, a mortgage agent.
Singh and the Lees all visited the Trump Tower's sales office in the parking lot at Bay and Adelaide. A sales rep showed them a 41-slide PowerPoint presentation and gave them promotional DVDs.
Like many other buyers, the three were far from being sophisticated investors. Singh was earning about $55,000 a year, and his real estate experience was limited to buying a family home in 2003. The Lees both had RRSPs with about $25,000 in them, and Andrew Lee had bought some stocks before.
Singh and the Lees were dazzled by the Trump name. "To purchase an apartment or a hotel suite is something very special. I would view this as one of the really good investments," Trump said in a promotional clip (which has been posted on YouTube). "I won't put my name on any building unless it's the best. I have a brand and a name that's the most important thing I have."
Singh and the Lees were also impressed by charts in the slide show that laid out what was called the "estimated return on investment" for four types of units. Whoever prepared the charts, no doubt mindful of the OSC restriction, added wording that the figures were "for discussion purposes only" and "this is not a guaranteed investment program."
For an $804,000 unit that would rent out for $550 a night, the monthly revenue would be about $9,200 if the unit were occupied just 55% of the time. At 75% occupancy, the monthly revenue would climb to about $12,500, and monthly common expenses and housekeeping fees would be $3,194. Assuming a 25% cash down payment, and adding mortgage payments and property taxes to buyers' costs, the annual return on cash invested would range from 6.9% to 24.6%.
Singh bought a 571-square-foot unit for $869,000 in December, 2006, and Lee, with her husband, purchased a 653-square-foot corner suite for $857,000 in April, 2007.
But when the hotel opened in January, 2012, it didn't come anywhere close to meeting the targets in the estimates. Occupancy was less than 55%, prompting discounts in room rates—lots of them showed up on travel websites for under $400. Expenses were higher than expected. As the final closing date for purchases loomed that December, many buyers were suffering heavy losses. Unable to get mortgages, most were resigned to simply walking away from their deposits.
Some of them, however, asked the OSC to investigate. The OSC declined, without giving specific reasons.
Singh, the Lees and other buyers sued Trump, Shnaider and Talon, seeking to rescind the purchase agreements. Both Singh and the Lees had borrowed heavily from family to pay deposits of about $170,000. Se Na Lee later said in a court filing that the purchase was "a disaster for our family."
Their action, which involves 21 other buyers, is a test case launched by Toronto lawyer Mitchell Wine. Suits from other aggrieved buyers are in the offing.
Even though the case was fast-tracked under provisions meant to avoid long and costly trials, Singh et al. didn't get a hearing in the Ontario Superior Court of Justice until last summer.
When Judge Paul Perell issued his decision last July, the buyers received some sympathy but no relief. He declared the hotel-room revenue and cost estimates were "deceptive documents" that were "replete with misrepresentations of commission, of omission and of half-truth."
But he ruled that Trump and Talon hadn't done anything illegal. Trump was not in charge of sales—Talon was—and Perell upheld the exemption that the OSC granted to Talon in 2004. The units were real estate purchases regulated under the province's Condominium Act, not investments governed by the Securities Act. Nor did Talon violate the exemption by giving buyers revenue and cost estimates. "Whatever they were," Perell wrote, "they were not rental guarantees, cash flow guarantees or a type of financial commitment."
The Trump Organization's executive vice-president and general counsel, Alan Garten, crowed, telling a reporter it was "a vindication of my client and the company. The judge made it pretty clear that he has no liability to any of these buyers and was named just because his name is on the building." Labatte said Shnaider and Talon had been "vindicated by Judge Perell's ruling and will continue to move forward to make this property one of the world's most acclaimed addresses."
Wine is appealing, however, and the Ontario Court of Appeal is scheduled to hear the case in June (owing to the appeal, Wine said neither he nor his clients could comment on the case).
Meanwhile, that notorious name is still on the building, and what to do about it is the sort of conundrum business-school case studies are made of.
EUGEN SAKHNENKO for The Globe and Mail
Levitan had guided the Trump Tower through development, but as the sales process dragged on, it was clear to Shnaider that he needed an industry pro in the CEO job—not just to reignite unit sales but also to boost business at the hotel's venues.
Labatte, now 58, was an obvious fit. Born and raised in the Toronto suburb of Don Mills, he played pro hockey for five years with the St. Louis Blues and a farm team in the late 1970s and early 1980s. He then earned bachelor's and master's degrees in finance, and spent 15 years in the hotel and real estate businesses in the U.S. and Mexico.
In 1997, Labatte returned to Toronto to become CEO of Legacy Hotels Real Estate Investment Trust and an executive with Fairmont Hotels, Legacy's largest shareholder. That assignment lasted 10 years and included overseeing Fairmont's Royal York hotel, two blocks south of the Trump site.
In the wake of the buyer lawsuits at the Trump, Talon decided to stop selling hotel rooms and suites, leaving it holding 209 of the 261 units. As before, day-to-day operations at the hotel were split: The Trump Organization runs the reservations system and the housekeeping; Talon is responsible for the food and beverage side.
About half of the 118 condos were still unsold as well. Hanging on to so much of the building itself is a millstone for Talon. As John Andrew, a professor of real estate at Queen's University, explains, hefty pre-sales allow a developer to minimize its own investment: "Even if [developers] have more equity they can put in, they typically don't want to, because they make their money on leverage." The corollary is that the developer is on the hook when condos don't sell.
EUGEN SAKHNENKO for The Globe and Mail
To fix the entertainment side of the business, Labatte brought in some of Toronto's top names in the game.
Restaurateurs Oliver & Bonacini and nightlife impresario Charles Khabouth's Ink Entertainment took over the restaurant and downstairs bar, respectively. Designers Studio Munge redid the restaurant and bar, which were rechristened as America and Calvin.
Out were Stock's overpriced hotdogs and alpha-male black leather furniture, in were colourful lights, paintings and fabrics. The food didn't win universal raves, but the fun quotient had certainly been upped.
Then Trump had to go and run for president.
Last summer he cast another pall over the building with his infamous campaign comments about illegal Mexican immigrants: "They're bringing drugs. They're bringing crime. They're rapists and some, I assume, are good people."
Lucrative bookings for parties and events springing from the Toronto International Film Festival plunged from more than 20 in 2014 to just a handful last year. The union for about 100 hotel workers, many of them immigrants, staged a street protest with a mariachi band.
But even before Trump began dropping daily campaign bombshells, his brand was problematic. Andrew says it just doesn't measure up to Four Seasons, Shangri-La or Ritz-Carlton. "Commercial real estate people in Canada do not hold Donald Trump in high regard," he says.
Trump casino and hotel ventures in Atlantic City have filed for Chapter 11 bankruptcy protection four times since 1991. "His father, Fred, was a brilliant real estate man," Andrew says, "but Donald has almost certainly lost more money for people than he's ever made in real estate."
The quickest way to excise the Trump factor is pretty obvious: Sell the hotel portion of the building to another luxury hotel chain, and put its name on top. "Hotels are complicated beasts, and they change affiliations a lot," says Andrew. "It can be a Hilton brand name, operated by company B yet owned by company C."
The tower itself is a very attractive property, says Robin McLuskie, a vice-president of Colliers International Hotels. It is just steps from the city's business hub at King and Bay (many executive travellers are wary of having to walk even a few blocks west to the Shangri-La or the Ritz-Carlton). For corporate bookers of rooms and events, "Toronto is also seen as so cheap right now, with the low dollar," she says.
EUGEN SAKHNENKO for The Globe and Mail
Last December, the Trump Organization filed a lawsuit claiming Talon is indeed plotting just such an exit.
The suit says Talon has "evinced a firm and unequivocal intention" to sever its management agreement with Trump without going through proper legal mediation and arbitration, and claims it is trying to orchestrate a bulk sale of the hotel rooms and suites.
Talon hadn't filed a detailed response as of mid-February, presumably because Judge Sean Dunphy set the application aside, citing the fact that the parties were scheduled for mediation. Shnaider declined to be interviewed for this story. But the lawyer representing the company, Symon Zucker, says it is indeed fed up with Trump and wants to ditch him.
"They're not happy with us, but mostly we're not happy with Donald," says Zucker, of Toronto-based Danson & Zucker. "He's put his brand behind his presidential campaign." However, Zucker adds that "this suggestion that there is a bulk sale in the offing is just not true." Zucker says Talon will co-operate with the mediation process, although "our preference is to get out of the agreement."
Those are fighting words to Trump counsel Alan Garten. He says his company wants to keep managing the Trump Toronto and that the Trump brand is still gold in every respect.
"Not only have we done a great job managing the hotel, but it receives every possible accolade out there," he declares. "Every hospitality organization rates it as one of the top hotels in Toronto. It's always in the top one, two or three on TripAdvisor."
Talon is the problem, according to Garten. "They haven't sold sufficient condominiums. They're looking to scapegoat everyone and anyone possible."
Labatte declines to say how many condos are still unsold. "That's not publicly disclosed," he says. "As with any condominiums, you never really say what's available." But Zucker acknowledges that only "about half are sold and occupied."
EUGEN SAKHNENKO for The Globe and Mail
The tower's website advertises a full range of sizes. The units are pricey: The cheapest one-bedroom is listed at $1.8 million. At the top is probably the most spectacular apartment in Canada—certainly the most expensive.
It's an 11,755-square-foot, three-floor "Super Penthouse," yours for only $37.9 million. The unit is unfinished—bare concrete floors and unpainted wallboard—because any buyer would almost certainly have their own interior designer in tow.
On the third floor, twin arched windows curve up to the corner of a quarter-dome ceiling, topped outside by a Manhattan-style spire. You get a free Rolls-Royce if you buy.
Overall, however, the average asking price at the Trump is about $1,100 per square foot, which is high by Toronto standards but not outrageous.
The condos have now been on the market so long that they are much larger than the newer generation of shoebox-size units in more plebeian projects nearby. For $1.8 million at the Trump, you'll get 1,300 square feet, with 10-foot ceilings and excellent finishes.
Labatte says he'd like to sell the remaining condos by the end of 2017. Even if he meets his target, however, that will be awfully late, says Andrew. "Most condominiums wouldn't have even been built without 80% pre-sales."
Four Seasons and Ritz-Carlton opened their doors at about the same time as the Trump, and both are sold out. The Shangri-La has just a few of its biggest and most expensive condos available—often the last to go in any development.
A brand transplant would certainly help Labatte.
Consider Four Seasons. Molloy sold condos in the company's new building for $2,000 a square foot. The 9,038-square-foot penthouse went for $28 million in 2011—about $3,000 a square foot, the high-water mark to date for a condo in Canada. Molloy says local and international luxury real estate buyers are looking, first and foremost, for stable investments.
The prospect of Trump's outbursts continuing until the U.S. presidential election in November, and quite possibly beyond, does not augur well for his skyscraping tower at Adelaide and Bay (never mind the rest of the world).
Compare Trump with Issy Sharp, Four Seasons's polished and always-cordial founder, says Molloy. "From Canada, he brought excellent service to the world."