BUSINESS WATCH

The death of the Reichmanns’ dream

It was an impossible agenda: to build the world’s largest real estate empire—and run it like a corner general store

Peter C. Newman April 6 1992
BUSINESS WATCH

The death of the Reichmanns’ dream

It was an impossible agenda: to build the world’s largest real estate empire—and run it like a corner general store

Peter C. Newman April 6 1992

The death of the Reichmanns’ dream

BUSINESS WATCH

It was an impossible agenda: to build the world’s largest real estate empire—and run it like a corner general store

PETER C. NEWMAN

The Reichmann companies will survive; the Reichmann family dream is dead.

Theirs was an impossible agenda: to build the world’s largest real estate conglomerate, concentrated in the world’s financial capitals, yet to own and run it like a comer general store. What this otherworldly approach guaranteed them was the most valuable commodity in their lexicon of personal priorities: total privacy. It’s the great irony of their current financial crisis that even though their company will survive, their compulsion for secrecy will not.

To refinance their $23-billion debt, the bankers will extract a commitment from the three brothers that they begin to sell equity in the family firm. That will mean the distribution of quarterly and annual reports—and public access to the Reichmanns’ balance sheets.

They will have to elect real boards of directors instead of relying on family members to fill the seats. Up to now, the Reichmann brothers (Albert, Paul and Ralph) and their wives held all the shares in Olympia & York—and while she was alive, their mother, Renée, chaired the board. (Trevor Eyton, the Bay Street honcho, recalls negotiating a deal with the Reichmanns under which they agreed to share ownership in Trizec, one of Peter Bronfman’s property companies. Whenever an impasse was reached, Paul and Albert would excuse themselves, step outside their office door and come back 30 seconds later with a little smile, saying that they’d just had a board meeting and come to a decision.)

The Reichmann obsession with secrecy was legendary. For the first 15 years after his company became a major player, Paul refused to have his picture taken, so that newspapers and magazines had to do with a 1965 candid grab-shot taken by a Toronto Globe and Mail photographer. When Paul spotted press photographers during a 1981 rally for Israel’s air force chief at Toronto’s Oakdale Golf & Country Club, he spent nearly two hours hiding behind a pillar so he wouldn’t be seen—and at the end of the

event, walked out of the room backwards to avoid passing by any prying lenses.

The idea that outsiders will now own equity in their carefully selected real estate portfolio will devastate the family. They have never believed that publicity was an essential ingredient of their business. And it was their fear of going public with their asset-liability ratios that caused the recent run on their commercial paper. Had they taken the financial community into their confidence, chances are that their immediate cash requirements could have been met. (Though the simultaneous loss of a $265million lawsuit brought against them by investment bank Morgan Stanley in England didn’t help their balance sheet.)

The current restructuring will reveal that even if their financial resources have been stretched beyond normal bounds, the Reichmanns protected their basic holdings by using individually incorporated companies to secure each of their buildings so that any collateral can be seized without bringing down the whole operation. Still, it’s obvious that in this dismal property market, the worth of most of their buildings will turn out to be lower than the book value at which they were listed when the brothers took out the bank loans that financed

their original purchases. There’s nothing very shameful about that, but for the Reichmanns it will be humiliating to have to acknowledge that they are governed by the same laws and business cycles as lesser members of the real estate developers’ breed.

One reason why they were always thought to be special was their religion. Orthodox Jews, the Reichmanns wear yarmulkes and enforce the ritual of the Sabbath at home and at work. All their construction contracts call for sites to be closed from sundown Fridays to sundown Saturdays. Because adherents to their rigid faith are not allowed to operate electrical devices during the Sabbath, the brothers installed a special elevator in their mother’s multi-storeyed Toronto house, which operated every ten minutes without any buttons having to be pushed.

Although they live relatively modestly, the Reichmanns can, on the appropriate occasion, be lavish spenders. At a family wedding reception, the 1,000 guests were greeted by a very special spectacle. At each table was a bouquet of white roses, carefully nurtured so the flowers would burst into full bloom during the party.

The Reichmanns’ climb from financial obscurity was breathtakingly rapid. Their first major breakthrough was the 1974 erection of First Canadian Place, the Bank of Montreal’s 72-floor luxurious head office in the heart of Toronto’s financial district. It was built at a time when the city’s bylaws limited most downtown construction to a height of 45 feet. The building’s quality became a hallmark for future Reichmann projects. (Part of a mountain in Italy—the same one where Michelangelo found the marble for his classic Pieta—was quarried to provide the 16 miles of white stone for the structure’s face and interior.)

Their 1977 purchase (for $50 million down) of eight New York City skyscrapers that shortly afterwards became worth $1.5 billion opened the bank vaults to them so that they gained the enviable status of having virtually unlimited credit lines. That was why they never had to share their personal equity positions; their empire was spawned and expanded entirely by debt—$23 billion of it by last week, when the merry-go-round stopped.

One of the defences the Reichmanns erected to buttress their empire was to diversify into non-real-estate holdings, such as oil (Gulf) and paper (Abitibi). But these economic sectors began to bleed at the same time as their property holdings, so that they dragged down the value of the Reichmann portfolio by as much as $100 million a week during the past two months.

Their biggest mistake was to lend fellow property developer Robert Campeau the equivalent of $525 million and virtually lose it all. The loan was hard to understand since it was Reichmann millions that rescued Royal Trust from Campeau’s grasp in 1980, and they knew what kind of crazy cat he was.

That the mighty Reichmann brothers have had to abandon their cloak of secrecy is a sign of how tough the economic times really are. No one is invincible.