Good morning. We dig into one of the largest real estate collapses in Canadian history – more on that below, along with Canada’s kickoff to the Olympics. But first:
Today’s headlines
- Israel vows to make Hezbollah pay after a rocket strike kills 12 children
- In the wildfire’s wake, the scope of devastation in Jasper starts to emerge
- President Nicolas Maduro and the opposition each claim victory in Venezuela’s election
A not-quite-flipped house in Timmins, Ont.Marc Durocher/The Globe and Mail
Real Estate
House of cards
Here’s an acronym to add to your long list of investment abbreviations: BRRRR. A form of real estate investing, BRRRR stands for Buy (a property), Renovate (to jack up its rents), Rent (to increase its value), Refinance (to take out equity) and Repeat (by using that equity to buy the next place). BRRRR boomed at the start of the pandemic, when rates were low and the market was on fire. And real estate investing has retained its popularity – in the first part of last year, investors accounted for 30 per cent of all home buying in Canada.
Of course, buyers still need to cough up a lot of liquid cash for a property’s down payment. Mortgage lenders – even private ones, which can ignore federally mandated stress tests – aren’t comfortable lending 100 per cent of the cost of a home. And that’s where another acronym comes in handy for those short on funds: OPM, or Other People’s Money. Individual lenders help bridge the gap between the property cost and the mortgage, with loans that can fetch interest rates as high as 20 per cent.
But when BRRRR goes wrong, the fallout can be catastrophic, especially for the small lenders who invested their savings or retirement funds. For months, Globe and Mail real estate reporter Shane Dingman has followed the collapse of what court documents call “Balboa, et al.,” a syndicate of companies run by former YTV child actor Robby Clark. In his new report, Dingman speaks with Clark in an exclusive interview in order to dig into one of the largest real estate lending insolvencies in Canadian history – where a reckless buying spree of more than 600 Ontario homes has left hundreds of people on the hook for a mountain of bad debt.
On borrowed time
Back in 2018 at a networking event, Clark – best known for his role in the early-aughts YTV show The Zack Files – met Clare Drage, a Guelph, Ont.-based mortgage broker who arranged private financing through her company Lion’s Share. According to Clark, Drage (who declined repeated requests from The Globe for an interview) suggested the solution that would let him scale his real estate profile: use short-term loans from individual lenders called promissory notes. For a fee, Lion’s Share could connect lenders with Clark.
These “prom notes” fuelled a buying frenzy. Balboa purchased some 40 houses in 2019, then up to 90 in 2020, then at least another 450 over the next three years. But that speed and scale made it harder for Clark to execute BRRRR’s all-important third R: refinancing. “It became clear you can’t just, you know, throw 100 or 200 residential properties at a bank,” Clark said. “It got more difficult.”
Robby Clark.The Globe and Mail
As early as 2021, Clark said his company found itself low on cash; renovations were going over budget, which required more prom notes. In March, 2022, for the first time in four years, the Bank of Canada raised interest rates – then did so nine more times through July 2023, pumping the brakes on the real estate market. Clark took out more and more prom notes, sometimes using the money to pay the interest on an old prom note or mortgage. Between 2019 and 2024, according to court-appointed monitor KSV Consulting Inc, Balboa spent at least $24.6-million just on interest and carrying costs.
‘It’s a guarantee of nothing, of air’
The problem with prom notes is they exist in a grey area of lax oversight and permissive regulations, Dingman explains. While lenders said that Lion Share’s Drage would refer to these notes as a “legal IOU,” there’s no way for individuals to get their money back if a buyer defaults – unlike a mortgage, a prom note isn’t registered against a property, so the lender can’t attach a lien to a house and recoup their loan as a proceed of its sale.
Harold Geller, a lawyer who focuses on investment losses, told Dingman that prom notes are “a guarantee of nothing, of air. That is akin to a pyramid scheme: It all works until it doesn’t.”
And it was done working by February, 2024. Balboa’s debt burden – compounded by lavish personal spending and millions in money transfers to Clark and his partners – came to $144-million. Drage fired off a frantic e-mail to her lenders, telling them their investment was in a bad way. Lawsuits flooded in and Drage declared bankruptcy in April. Provincial regulators launched investigations that are still going on.
Balboa owes $43-million in roughly 1,000 prom notes to 450 individual lenders, and Clark claims he intends to pay that money back, though it’s not clear how. In his interview with The Globe, Clark chalked up the whole affair to a “learning experience.” Perhaps one of the lessons is this: A select few can go pretty far spending Other People’s Money. But when their scheme goes bust, it becomes everyone’s problem.
Paris 2024
‘When I found out sword fighting was in the Olympics, I was like, I’m going to the Olympics in sword fighting.’
Eleanor Harvey of Canada (left) and Alice Volpi of Italy compete in the women's foil individual fencing bronze medal match.Christinne Muschi/The Canadian Press
Yesterday, Eleanor Harvey claimed Canada’s first Olympics medal in fencing by defeating Italy’s Alice Volpi in the bronze-medal match. This morning, divers Rylan Wiens and Nathan Zsombor-Murray nabbed their own bronze in the men’s synchronized 10-metre platform event. And this afternoon, Summer McIntosh – who got the Games rolling with a silver in the 400-metre freestyle – will swim for a medal in the 400-metre individual medley. Also, women’s soccer coach Bev Priestman apologized for the whole drone-spying business, but the federal government says it plans to hold back some of the coaching salaries. (Canada defeated France 2-1 yesterday and plays Colombia on Wednesday.) For all our Olympics coverage, go to tgam.ca/olympics-daily.
The Week
What else we’re following
Tomorrow: Kamala Harris and J.D. Vance each hit up a different U.S. swing state, as she rallies Georgia voters in Atlanta and he speaks to Nevada crowds in Henderson and Reno.
Thursday: Montreal’s Pride festival starts 10 days of street parties, concerts and performances, wrapping up with the Pride parade on Aug. 11.
Thursday: The European Union’s first-of-its-kind AI Act formally goes into effect, aimed at ensuring ethical use of the technology.
Saturday: Kenya’s new finance minister, John Mbadi, will appear before lawmakers for vetting, weeks after police opened fire on Kenyans marching to the parliament to oppose a tax-raising finance bill.