When oligarch Alex Shnaider had the bright idea of bankrolling the Trump International Hotel and Tower in Toronto he thought it would help him to enter the public and transparent world of Canadian business. In fact, the project has already seen a big chunk of his fortune go up in smoke…
It was all going so well for Alexander Shnaider. Ten years ago while still in his mid-30s, Forbes magazine puffed him up in a piece headlined ‘Man of Steel’.
The business magazine revealed how Canada’s youngest billionaire would soon be unveiling the first Russian Formula One team in Moscow’s Red Square. President Vladimir Putin would be there, as would Moscow’s mayor Yuri Luzhkov. Thousands of racing fans would gather under a 30,000-square-foot heated tent with the spires of St Basil’s Cathedral as a backdrop.
He became a billionaire in the dimly lit steel mills of eastern Europe but, asked the magazine, how would he handle the glare of the Western world?
The answer, if Shnaider’s well-known investment in the Trump International Hotel & Tower in Toronto is anything to go by, is not very well.
An investigation into Shnaider’s finances reveals that he has lost upwards of US$100 million in the project, his first significant stab at trying to turn a buck in Toronto’s red-hot real estate market.
The project was first mooted by Shnaider to his business partner, Val Levitan, way back in 2002. Just a year later the duo bought the original Ritz-Carlton property at Bay and Adelaide streets in Toronto’s financial district for a shade over $27 million.
They proposed a luxury tower with the shiny Trump name on it. Donald Trump’s company, Trump Hotel Collection, agreed a management contract with Shnaider to operate the hotel and residences, and the development was originally slated to open in 2009.
But it didn’t happen that way. Almost from the start Shnaider and Levitan ran into problems, some of their own making, others such as the global financial crisis, way beyond their control.
Now, all these years later, the full extent of what has become a financial catastrophe can be revealed.
Shnaider invested in the Trump Tower project through two companies, Talon lnternational Development lnc and Talon lnternational lnc. Both Talon companies are now encumbered by a large amount of litigation resulting from disputes with investors. Talon lnternational Development is named in 33 civil claims brought in Toronto, while Talon lnternational is named in an astonishing 108 suits.
It is a reality that has caused Shnaider to seriously regret entering such a public project, and one that could end up costing him hundreds of millions of dollars in legal fees, costs and damages should judgements go against him.
A risk profile for Talon lnternational Development indicates that it has 25 employees and a “moderate to high risk of severe payment delinquency” and “moderate to high risk of severe financial distress.” It is an unusual risk profile for someone who is supposed to be one of Canada’s richest men.
When you talk to business journalists in Toronto about Mr Shnaider, their eyes tend to shoot heavenwards, as they tell you about what a financial black hole the Trump International Hotel and Tower has become.
There is a joke going around among them. Did you hear the one about the billionaire who set out to build Toronto’s highest skyscraper? He’s now a millionaire.
So, how did this situation arise?
In late 2004 a sales centre was opened for the development which started to sell hotel and residential condominium units off-plan at more than $1,000 per square foot, an unheard of price at the time.
By the spring of 2007 enough units had been sold for the development threshold to be reached. This allowed Talon International Development to ink a deal with Austrian bank Raiffeisen Zentralbank Österreich AG to put up some $310 million in construction financing for the Trump International Hotel & Tower.
With the financing in place by October 2007, Talon was finally able to break ground on the project with Trump a minority partner lending his name. The building was projected to cost $500 million at a scaled-back 60 storeys. The company said it was starting construction with $250-$275 million in advance sales.
According to published figures, at the time construction began on the project, half of the 118 residential condos had been sold, as had 191 of the 261 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.
The construction took years to complete and it was not until April 2012 that a ribbon-cutting ceremony attended by Donald Trump formally opened the building. But by then, investor lawsuits were already beginning to trickle in.
One of the reasons Shnaider now finds himself buried under a mountain of litigation is because when it came to marketing the condos for sale in the Tower his companies hugely overestimated the returns that could be made by investors.
The sales literature, with Donald Trump’s smiling face on the front, told potential investors of the condo-hotel units that they could expect to get returns based on room rates of more than $500 per night and occupancy rates of at least 55%. In reality, since the hotel opened occupancy rates have been a fraction of what was promised, leaving investors significantly out of pocket.
Buyers of the condos who have now issued legal proceedings claim the sellers, including the Talon companies, seriously misrepresented the profitability of the enterprise.
By 2013, millions of dollars worth of deals were unravelling for this very reason. A number of condo purchasers tried to back out of agreements that were inked before the global financial crisis dug deep in 2008.
One well-known real estate journalist with a Toronto-based newspaper, who spoke on condition of anonymity, explained the situation: “The sales office made fantastic claims about the Tower’s profitability that anyone with a passing knowledge of real estate investment in Toronto would have known to be false.”
“It became clear from the start that Talon was just intending to download a mound of the costs of running a big hotel onto the condo buyers through stunningly high maintenance fees.”
“Yet, and this is an important point, most of the investors I met were largely first-time investors who didn’t even speak English. There is no doubt that some of them were suckered into investing, swallowing whole the claims made by Shnaider’s aggressive sales people in the marketing suite.”
Another journalist, Leah McLaren, corroborated this view in Toronto Life: “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.”
Another source, who has spoken to people close to the project, says the hotel loses money for 50 weeks of the year, and makes a profit only during the Toronto International Film Festival, which is held over 10 days every September.
So, it is little wonder that the residential side of Shnaider’s business is a financial shambles with only around 20% of the 261 condo units having been paid for.
“Talon is getting killed every month for shelling out for the day-to-day costs of running the rest of the units,” said the source. “That includes maintenance fees averaging well over $3,000 a month per unit and commercial taxes, which are three times the normal residential tax rates.”
Based on these figures, Talon is paying more than $600,000 per month just to cover the maintenance costs on the condo units. Add in taxes to the hotel losses and our source believes that Talon could be haemorrhaging well over $1 million per month — and that doesn’t including interest payments.
It will be years before the dozens of civil claims against Shnaider and his Talon companies are settled. Investing in the Tower has given the oligarch a taste of what putting money into a properly regulated and transparent market is all about. If he can get out with some of his fortune intact the chances are he will not seek such a public investment in the future.