Seldom, if ever before, has a real estate deal attracted more controversy than the recent sale of 11,000 Toronto apartment units by the Bronfman-owned Cadillac Fairview Corp. to a series of mysterious buyers whose public reputations may not match their private sources of funds.
Leonard (Lenny) Rosenberg, the primary mover in the affair, has not been a major real estate player in the past. His main company, Greymac Credit Corp., confined itself mostly to second-mortgage financing and the kind of financial “flips” that were so popular in the 1970s. His buy-out of the Cadillac Fairview apartments (at a discounted $25,000 per unit) was negotiated at a time when interest rates were still in the stratosphere (18 per cent) and hardly anyone was buying anything. It was profitable for him to make the purchase because of an anomaly in then existing Ontario laws, according to which rents could be reviewed upward when properties change hands to take into account costs of the new financing involved. It is understood that Rosenberg gave Cadillac Fairview about $40 million as a cash downpayment, then started looking around for buyers. At this point foreign sources of funds entered the picture. They were willing to make the purchase at a considerable profit to Rosenberg but only through the facilities of a recognized Canadian financial institution.
Enter the Crown Trust Company. Crown, with assets of more than $1.7 billion under administration, ranks as Canada’s 12th-largest trust company. Founded as the Trusts and Guarantee Company in 1897, it later became a private bank for administration of the estate of John McMartin, one of Canadian mining’s early giants. Control was eventually acquired by Bud McDougald and was moved into the orbit of his Argus Corp. It is a peculiar irony that Crown, once the most austere of Canada’s trust companies, should end up in such colorful hands. Crown’s annual meetings used to be stuffy affairs in Bud McDougald’s day. He once actually kicked out two shareholders because he thought their hair was too long. In those days Crown was a kind of merchant bank to the upper crust of Canada’s establishment, its board decorated by the most circumspect, most lugubrious and most pompous blue-chip directors available. Times change. In
1975 an eastern Canadian syndicate headed by Reuben Cohen of Moncton, N.B., purchased a 25-per-cent interest in Crown, which eventually grew to 34 per cent. As part of his bid to acquire control of Argus, Conrad Black took over control of Crown (for $34 a share) in 1978 and a year later flipped the company (for $44 a share) to CanWest Capital Corp., the Winnipeg investment firm headed by I.H. Asper and Gerry Schwartz.
Asper and Schwartz were having dinner with John Shortly (chairman of their executive committee) at Winston’s
in Toronto on Sept. 29, when Lyon Wexler, one of Greymac’s vice-presidents, unexpectedly telephoned that he had an urgent matter to discuss about Crown Trust. Shortly agreed to have breakfast with him the following morning, when Wexler made an offer for CanWest’s controlling interest (54 per cent) in Crown at $50 a share. (At the time, Crown shares were selling for $17 a share on the TSE.)
Schwartz met Rosenberg on the evening of Sept. 30 and eventually negotiated the price up to $62 per share, providing a follow-up offer be made to the general public and that the purchase be unconditional. Rosenberg agreed, and the deal was closed on Oct. 7.
The reason Crown was such an attractive asset for Rosenberg is that it gave him a much bigger balance sheet.
The company also had plenty of manoeuvring room in its “basket clause” to buy real estate equities. (The hidden advantage of owning trust companies is that they are allowed to invest as much as 10 per cent of their total assets in real estate subsidiaries.) Some of the money paid out at the Crown closing actually came from Seaway Trust, a mysterious entity that also provided some of the financing in the deal.
One complicating factor in the whole property equation was that a Toronto financier named Joseph Burnett had, some weeks previous, made a firm agreement to buy the Cohen shares of Crown at $34.50 each, but the Ontario Securities Commission prevented the sale from going through, and the deal had to be closed in escrow. Rosenberg is understood to have also purchased these shares at a healthy profit to Burnett. (The OSC actually launched two probes of Burnett. One was concerned specifically with his Crown bid; the other was on a general violation of securities laws. Hearings in this second case continue.) It is not at all clear why Burnett would have wanted to buy the Cohen minority holding in the first place. At one point, before Rosenberg came on the scene, he flew out to see Asper in Winnipeg aboard his private jet without giving his name to the CanWest offices in advance. He made an offer for the Crown stock but was turned down flat.
There is much conjecture in Canada’s investment community about the extent of Swiss involvement in some of these complicated transactions. That country has become a world centre for Arabs seeking conduits for recycling their funds in relatively safe, long-term North American investments. At the same time, its banks with numbered accounts have become a haven for shy North American money seeking alternate outlets. By making a huge Canadian purchase (such as that involving the Cadillac apartments) at an inordinate profit ($230 million) and paying taxes on it, the balance of the funds involved became a mobile asset.
The bizarre series of events has raised a great deal of speculation: is there really a Saudi syndicate behind the Cadillac Fairview purchase, or was the notion of control having been acquired by Arab investors such an obvious answer to the deal’s many loose ends that it was designed to be the one way of camouflaging the actual source of the funds involved?
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