Condo buyers in Toronto luxury tower The One are stuck despite project’s debt defaults and receivership

Open this photo in gallery:

Buyers of units in The One, a luxury condo project in Toronto that is years behind schedule, cannot walk away with their deposits even though project developer Sam Mizrahi was forced into a court-appointed receivership owing to cost overruns and debt defaults.

While receiver Alvarez & Marsal Canada Inc. took control of the purse strings last Thursday, Mr. Mizrahi is still the developer of the project. That means unit owners cannot get their money back. They are only entitled to deposit refunds if Mizrahi Developments does not complete the downtown Toronto skyscraper by January, 2028, according to a copy of a purchase and sales agreement viewed by The Globe and Mail.

Condo unit deposits are so protected that even a developer’s bankruptcy may not be grounds for getting the money back. “The insolvency of the builder does not qualify for the return of the deposits,” said Mark Morris, Toronto-based real estate lawyer with LegalClosing.ca, adding that builders typically include an “extraordinarily long” completion date to give them enough time to finish the building.

There are precedents in which buyers got their deposits back, which is what transpired with three Toronto condo projects run by Cresford Developments in 2020, but that typically requires selling the project to a new owner. As it stands, The One remains jointly owned by Mr. Mizrahi and road paving magnate Jenny Coco.

The status quo at The One leaves buyers in limbo and fuels uncertainty. Until last week, many of the project’s unit owners were not aware that there were serious construction delays, with completion now not expected until late 2025.

“A significant number of buyers (including my own clients and friends) were unaware of the situation even being so dire,” realtor Rahim Suleman wrote in an e-mail to The Globe. “Those I’ve informed expressed their shock and disbelief as there was no communication from the developer regarding any delays yet in construction.”

The One, which was originally designed to be 85 storeys high with condo units, a hotel and an Apple store on the ground floor, defaulted on multiple payments to its lenders. About 80 per cent, or 346, of The One’s 416 condo units have been sold for total gross proceeds of $675-million, according to the court documents filed in Ontario’s Superior Court of Justice.

Although the development’s construction continues, with the lead lender agreeing to advance another $315-million as part of the receivership, the project now faces a much more challenging construction environment.

Contractor and labour costs have jumped and The One’s debt costs have also risen significantly. When senior lenders were brought on to the project in 2019, The One agreed to a $565-million loan that required it to pay 9 per cent in interest a year. In 2021, the loan size was increased by $67-million, and this additional portion came with a 12.5-per-cent annual interest rate.

The rates on both of these loans have jumped dramatically since. Because The One has not kept certain promises it agreed to when it took out the loans, such as completing construction of the commercial component by March, 2021, the annual interest rate on the $565-million loan, which is in default, is now 21.5 per cent annually, and the annual interest rate on the second portion is now 25 per cent.

The One also borrowed even more money from its senior lenders, with $325-million taken out in a third loan that costs 9 per cent annually. In total, the interest costs on these three debts alone now amount to $167-million a year.

Despite the rising costs, unit owners are not required to put more money in to get the project finished. Developers are not allowed to charge existing condo unitholders more money because of cost overruns, a prohibition that is standard practice in the industry.

“The developer can never go back to a buyer and say ‘Too bad, so sad. You bought in early but our budget’s off and it’s gonna cost us twice as much to build this. Therefore, we’re going to cancel your agreement and resell at a higher price,’” said Debbie Bellinger, partner with Nelligan O’Brien Payne LLP and leader of the law firm’s real estate and development group.

Mr. Morris agreed. “You can’t just willy nilly change the price because of construction increases,” he said.

If the project is ultimately sold, however, the condo sales agreements could be terminated, which would change things. “Whoever takes over the project doesn’t necessarily take on the buyers,” Ms. Bellinger said. When a receiver was appointed for three Cresford projects in 2020, two were sold and buyers ultimately got their deposits back.

The third, meanwhile, filed for protection under the Companies’ Creditors Arrangement Act, and the purchaser of the project gave the buyers the option to either get their deposits back or pay more to keep their units, in return for access to a revenue bonus pool.

The One was expected to be completed in 2022 at a cost of approximately $1.4-billion, according to the court documents. But as of early October, concrete columns and walls had only been poured up to the 40th floor and the borrower now estimates that development costs will top $2-billion, according to the court documents.