The Tribulations of Trump Tower

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Toronto Life wrote an article earlier this year. The opening paragraph reads:

 “The Trump Tower, downtown’s tallest new condo-hotel, is a monument to excess. And, like its tycoon namesake, it’s surrounded by controversy: 38 investors are suing the hotel for millions.”

Uh oh, it sounds like Donald Trump is out deceiving the poor people of Toronto.

The story focuses on the troubles of one particular Torontonian Sarbjit Singh, who invested $869,000 in a unit at Trump Tower. For this type of investment, Singh needed to give the developer a 20% deposit along with a protracted copy of the Agreement of Purchase and Sale. That’s almost $175,000! This is definitely not an amount just casually sitting around in the bank account of an average Torontonian. To make this deal happen, Singh convinced his own parents of what a colossal opportunity this was. They took out a line of credit on their home for $150,000.

And then the inevitable happened; only it wasn’t inevitable to Singh.

The project was delayed. Apparently the job site was so small that the developer, Talon International, could only employ one crane. Is this a big deal? I don’t think so. The project would have been delayed if they used 12 cranes. That is how it is. Every pre-construction condo project is eventually delayed; nothing ever closes on time in Toronto.

What’s the problem here?

The article blames the change in the real estate climate. The value of the unit was predicted to increase, and then the recession happened. The property hadn’t even closed and was worth less than the $869,000 Singh had already agreed to pay. 

Does this mean Singh is entitled to renege on the contract and get his deposit back? I don’t think so!

In Toronto, there is a cooling period for any pre-construction purchase. Buyers have 10 days to take their documents to a lawyer for review. Should the lawyer find any issue with the development or the papers, the buyer can back out of the deal so long as it’s within those 10 days. It is up to the buyer to do their due diligence before committing to a binding agreement, especially when large sums of money are involved.

I’m not siding with Donald Trump either though. He has nothing to do with this. He isn’t the developer, he isn’t a shareholder, and the sales people were not his employees. He is not involved in this project whatsoever, other than allowing the use of his name on the building and lending his presence at the ribbon cutting ceremony.

I’m more inclined to hold the investors suing the developer responsible for the mess they are in. They are the ones legally obligated to close on a property they can’t afford, and cannot get financing for, because Mortgage Lenders do not give mortgages for properties that don’t pass appraisals. Not to mention properties that qualify as commercial rather than residential, have lower than forecasted occupancy rates and are cash flow negative.

Regardless of the state of the economy, there is no profit to be made in pre-construction. People are still dreaming about flipping condos like it’s 2005. There are increasing numbers of developers, charging outrageous  premiums on vague floor plans while models serve inexperienced buyers champagne to seduce them into signing a 50 page contract. For the last time, it is not cheaper to buy a pre-construction condo than it is to buy a re-sale condo anymore. 

Condo hotels, which in many cases are classified as commercial properties, are an even riskier investment than buying residential condo units. If these speculators, not investors, had done their research, they would have known this wasn’t a lucrative investment, recession or not. The sales team is hired by the developer to sell, sell, sell. They are not licensed Realtors and they do not care about you. Don’t believe what you read in those flashy brochures, hire a lawyer and do your own due diligence.

Now Trump Tower (or Talon International to be more precise), is in the midst of a lawsuit. Troubled investors are suing Talon and Talon is suing troubled investors. The accusations listed are misrepresentation, breach of contract, breach of the Ontario Securities Act, and even conspiracy.

Singh in particular was promised that even at the worst case scenario 55% occupancy rate, he would still make a profit.  Since the Trump Tower opened its doors, his unit is vacant more than half the time. In an effort to lure guests to rent out the suites, the hotel has dropped the price from $600 to $400 per night. The low occupancy rate coupled with high maintenance fees resulted in a huge loss for Singh, who claims he was losing $5,000 per month.

What is the conclusion here? While the outcome of the lawsuit remains unclear, this may be a precedent setting case that may impact the regulations surrounding such properties. However, we’ll have to wait for the battle to be over and see who is left standing. If I were to guess though, I’d say it’s likely that the lawyers will be the profiteers while the developer is left with a bleeding tower and the investors are bankrupt.

Being an educated investor is not the same thing as being a gambler. Singh gambled by investing money he could not afford to lose and by not doing his due diligence on the risks of pre-construction and condo hotel investing. You can’t take a chance on the market and hope for the best, prepare yourself and protect your investment by doing research so you know what to expect. If you dream of making money in real estate you must educate yourself first and this may mean passing on opportunities that sound too good to be true.

 

THE PRECEDING COMMENTARY IS THE OPINION OF HANNA MACDONALD AND DOES NOT REPRESENT THE INTERESTS OR OPINIONS OF RIGHT AT HOME REALTY INC., BROKERAGE OR THE TORONTO REAL ESTATE BOARD. THEREFORE, RIGHT AT HOME REALTY AND THE TORONTO REAL ESTATE BOARD WILL NOT BE HELD RESPONSIBLE AND/OR LIABLE FOR ANY OF THE OPINIONS HEREIN.

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