Statement on Behalf of Fortress: December 2018
Saturday December 15, 2018
With respect to questions raised by the Globe and Mail and real estate reporter Janet Mcfarland, Fortress maintains that neither Fortress nor its principals committed any criminal conduct in conducting the business affairs of Fortress, including any involvement in the marketing of syndicated mortgage-backed real estate development projects or the referral of potential lenders to licensed mortgage brokers for the purpose of the entering into syndicated mortgage loans respecting Fortress supported real estate development projects.
Over the past 10 years, Fortress has completed numerous real estate development projects throughout Canada using syndicated mortgages to finance early pre-construction or ‘soft’ costs, in which stakeholders, including syndicated mortgage investors have been repaid. Fortress has assisted in delivering over 2,000 residential units (almost 2 million square feet) with another 4.1 million square feet currently under construction. In multiple projects where Fortress has completed its role, stakeholders have substantially benefitted from value created. Fortress has already completed more than 30 successful projects, resulting in the repayment of approximately $250M to syndicated mortgage investors. Beyond any question, these statistics reflect a track record of considerable success by Fortress in a competitive industry. Senior lenders, including banks and credit unions, have also been repaid another $500M.
Importantly, in all of these projects the syndicated mortgage investors were apprised, orally and in writing, of all of the material risks involved in the projects by the licensed mortgage brokers with whom they dealt. Often the disclosure of risks was set out in bold and block print in the documents that the mortgage brokers supplied to the investors. It is simply a fiction to suggest that the risks of investing were not robustly disclosed. The RCMP, however, avoided telling the justices in the search warrant applications of the material risks properly disclosed by the mortgage brokers to the clients. In doing so, the RCMP presented a misleading narrative to justify its searches. The RCMP are also labouring under fundamental misconceptions of the most basic workings of syndicated mortgages.
For example, all investors were fully advised in writing of the assumptions and methodologies used by respected industry valuators in the development-based “opinions of value” for the projects as opposed to bare “as is” appraisals as incorrectly alleged by the RCMP. Further, the actual opinions of value were provided to the investors. Those valuations expressly state that they were not “as is appraisals”. Thus, it was misleading for the RCMP to allege that investors were tricked into believing the opinions of value were “as is appraisals”. They were not.
As far as the RRSP eligibility issue is concerned, for each syndicated mortgage loan, a legal opinion was obtained from a respected tax partner at a well-respected national law firm opining that the syndicated investment was RRSP eligible. The RCMP have countered this by relying on the musings of a police constable based on things he read on the Internet.
Further, investors on all of the syndicated mortgages were appropriately informed by the licenced mortgage brokers with whom they directly dealt, of the range of fees, commissions and/or potential profit participation by Fortress and other entities, all in accordance with the relevant disclosure rules in place under the Mortgage Brokers Lenders and Administrators Act (“MBLAA”). Notably, the MBLAA was amended from time to time to update those disclosure requirements. Fortress at all times assisted the mortgage brokerages in adapting their disclosure practices to ensure they remained current with changing regulatory standards.
Fortress was not a licenced mortgage broker, brokerage or administrator regulated under the MBLAA. While Fortress worked with the various brokerages, it is a fact that the licenced mortgage brokerages, brokers, lenders and administrators were separate legal entities and independent of Fortress. All decisions made by the brokers regarding the suitability of the syndicated mortgage investors to invest were based on the “know your client” screenings conducted by the brokers in accordance with MBLAA standards. The brokers ‘KYC’ forms were duly completed and retained in the brokers’ files.
Investors were also provided with independent legal advice by reputable legal counsel whose conduct has not, to Fortress’ knowledge, ever been impugned by either the RCMP or any regulatory body.
As far as the Brookdale and Collier projects are concerned, both projects were taken over when the previous owner, Mady Developments, became insolvent. Fortress stepped in and made substantial investments into each project to save them for the benefit of the syndicate. Fortress remains one of, if not, the largest unsecured investors on each project with substantial financial exposure. Brookdale was already on the fourth floor of six. It was sold when a bond group scuttled a construction financing that would have completed the building and resulted in healthy returns to all participants. The Collier project suffered a variety of setbacks after closing, including the loss of anchor tenants on the commercial development and significant cost overruns while Ellis Don completed the residential portion.
Finally, Fortress is challenging the administrative monetary penalty (“AMP”) unilaterally imposed by FSCO without a hearing or evidence. A hearing on the merits is likely to scheduled likely sometime in 2019.
Scott K. Fenton
Fenton Smith, Barristers