Companies affiliated with Fortress Real Developments Inc. misled syndicated mortgage lenders about the value of land earmarked for real estate development projects, putting investors at risk of losing their money if the loans could not be repaid, the RCMP alleged in a search-warrant application filed in court in April.
In the Collier Centre condominium development in Barrie, Ont., the RCMP allege investors were told in 2012 that the “as is” value of the land was $21.9-million, but the RCMP believe the land was worth only about $7-million, according to the application.
Syndicated mortgage lenders provided $16.9-million in financing for the project, believing the amount was fully secured by the value of the land.
“As a result of the inflated current as-is land valuations, investigators believe that there are currently millions of investors’ dollars, including retirement savings, where the amount of mortgages on the property exceed the current value of the property,” RCMP Constable Martin Williamson said in an affidavit accompanying the search-warrant application.
A redacted version of the search warrant application was unsealed by Ontario Superior Court Justice Robert Goldstein last week after the CBC filed an application. The search warrant lays out the initial findings of an RCMP investigation into alleged fraud by Fortress and affiliated companies that helped raise funds for projects.
The RCMP searched Fortress’s head office and a satellite office, as well as the offices of four affiliated companies that worked with Fortress, during the morning of April 30.
The allegations in the search-warrant application have not been proven or tested in court, and no charges have been laid as a result of the investigation.
Fortress spokesman Scott Davidson said on Monday the company relied on others to provide accurate information to investors about the projects.
"Fortress relies on mortgage brokers and agents to provide accurate, reliable and regulatory compliant information that the projects and the lenders can rely upon,” he said in an e-mailed statement.
“This includes market studies and reports on sales trends, appraisals and valuations of land, and advice from experts.”
Mr. Davidson also said Fortress is co-operating with law-enforcement authorities. “Fortress believes it will be vindicated and looks forward to moving all projects ahead,” he said.
Fortress, a privately owned real estate developer run by founders Jawad Rathore and Vince Petrozza, developed condominium projects and helped other developers raise syndicated mortgage funds for their projects through affiliated mortgage brokerage Building and Development Mortgages Canada Inc. (BDMC).
BDMC, located at the same address as Fortress’s head office in Richmond Hill, north of Toronto, raised more than $560-million from more than 11,000 investors between 2012 and 2017 to help finance 44 development projects. A court-appointed receiver took control of BDMC in May and warned in a June report that some of the projects are under “considerable stress” and lenders could face “significant losses.”
The search-warrant application said the RCMP have examined four cases where it believes investors received inflated land valuations, including the Collier Centre project. The inflated valuations allowed developers to borrow far more mortgage money than would otherwise have been possible.
Investors in Fortress’s Sky City condominium project in Winnipeg were told the land was worth $18-million in 2013 – and $37.3-million by 2015 – but RCMP estimate the land was worth between $4.4-million and $11-million in 2013.
The RCMP said investors were told land earmarked for a project in Keswick, Ont., known as Crates Landing, was valued at $22.6-million on an “as-is” basis in 2015. But that valuation was based on the “extraordinary assumption” that the project was not only built and completed, but that a second phase of the project, which had not received regulatory approvals, was also completed, the search warrant said.
“This value should not have been regarded as ‘as-is,’” Constable Williamson said in the search-warrant application.
The RCMP also alleged investors were improperly told their loans were RRSP-eligible, but tax rules do not allow RRSP funds to be used for syndicated mortgage loans if the mortgage exceeds the value of the property.
The application said investors “could be subject to adverse taxation” by the Canada Revenue Agency as a result.
Fortress allegedly used money raised from investors for purposes that were not disclosed to investors, the RCMP also alleged in the search-warrant application.
For example, the RCMP alleged Fortress Real Capital Inc. signed a confidential agreement that gave the company 35 per cent of the syndicated loans raised for the Harmony Village Sheppard real estate development in Toronto, as “advanced payment of anticipated profits,” before any profits on the project were earned. The RCMP alleged the confidential commitment letter was not provided to investors.
The RCMP said only $10.66-million of the $16.9-million raised from syndicated mortgage investors for Collier Centre was advanced to developer Mady Development Corp., and RCMP believe the rest “was used for purposes other than what was disclosed to the investors.”
The RCMP launched its investigation – dubbed Project Odynasty – in October, 2016, after receiving a complaint from lawyer David Franklin, whose clients had lost money in Fortress investments.