Small investors face losses on Toronto developer’s debt woes

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A real estate developer who raised tens of millions of dollars from dozens of individual investors bundled into syndicated mortgages to fund Toronto-area condominium buildings is facing an investor revolt on one project and insolvency on another.

Dimitrios (Jim) Neilas, chief executive officer of Storey Living Inc., is facing legal fights on two fronts as projects he has pushed – known as the Adelaide Lofts in downtown Toronto and the OpArt condos in Oakville – are now subject to court actions from creditors seeking to sell land parcels that he had hoped to make into condominium or rental properties. At stake are millions of dollars for small investors whose loans are not registered and not protected in an insolvency process, or in the settlement deals proposed by the debtors.

A review of court documents related to the projects shows that while Mr. Neilas and the syndicated mortgage lender controlled by him – Hi-Rise Capital Ltd. – for years purchased land and bundled small investors into syndicated loans, starting in 2017 his lending business underwent a “freeze” and the funds for his stalled projects dried up.

The cause of the freeze is not outlined, but in 2017 the syndicated mortgage business was attracting more and more scrutiny from regulators as project failures and financial losses related to Fortress Investment Group transfixed markets. In April, 2017, regulatory control of syndicated mortgages was transferred to the Ontario Securities Commission. In 2011, Mr. Neilas received a lifetime ban for dealing securities from the OSC related to real estate investment activities.

Amid the court documents is a scathing report filed by Ontario’s Superintendent of Financial Services: “The Neilas entities have apparently received in excess of $13-million in fees from the funds entrusted to them on a failed project on which construction has not even started,” reads a factum document written by John Finnigan, the lawyer for the Superintendent. “The Adelaide Project and a number of other similar projects were devised, promoted, developed, and administered by a vertically integrated series of companies owned and controlled by Jim Neilas and his family.”

Noor Al-Awqati, the chief operating officer of Hi-Rise Capital Ltd. and principal mortgage broker for the company, denied some of those claims in an April 3, 2019 affidavit, saying Hi-Rise has received no fees from the Adelaide project since at least September, 2017. He admits to the 14 per cent commission paid on the initial investments, but said Hi-Rise transferred 10 or 12 per cent of each commission to third-parties who referred the investors. He also said that after 2017 Hi-Rise was no longer taking in new syndicated investor money.

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The Adelaide project began in in 2012, when Mr. Neilas submitted a rezoning application for 263 Adelaide St. W., Toronto, to put a condo tower on top of a heritage warehouse built in 1915.

On Feb. 18, 2014, a holding company controlled by Mr. Neilas registered a $40-million syndicated mortgage against the property. The syndicated mortgage was amended on July 10, 2015, to increase the authorized principal amount to $60-million. In 2017, the Adelaide Street Lofts proposal was revised to feature a 47-storey tower.

Following the “freeze,” Mr. Neilas engaged the Bank of Montreal in 2017 to find a way out of its various loans, and while he was able to sell a nearby property, Adelaide languished and was removed from the market.

In February, 2018, the trust agreement (or syndicated mortgage) on Adelaide matured, but the 642 individual lenders – who had contributed between $25,000 to $893,000 each – did not receive their principal back, and since that time interest payments have ceased, according to affidavits from the lenders.

Late in 2018, Mr. Neilas and Hi-Rise engaged in a deal to finish the condos in joint-venture agreement with prominent Toronto builder Lanterra Developments that would offer about $73-million for the transaction.

Because the terms of the deal would require substantial losses to the syndicate investors that Hi-Rise’s loan documents do not appear to have foreseen, it needed to obtain permission from the lenders.

In March, Hi-Rise Capital made an application to the Ontario Superior Court of Justice under the Trustee Act, to appoint legal counsel from Miller Thomson LLP for the syndicated lenders in hopes of finding a restructuring deal investors could live with. According to filings, Hi-Rise has loan participation agreements (LPA) and mortgage administration agreements (MAA) with the syndicated investors that are hazy on the subject of how to write-off a chunk of that debt. “The terms of the LPA do not appear to contemplate situations like this where Hi-Rise wishes to discharge the syndicated mortgage even though the proceeds being realized may not be sufficient to repay Investors in full,” the filing from the court-appointed lawyers says.

By early 2019, Hi-Rise claimed the principal on the mortgage stood at $52-million and the unpaid interest owed to investors was $12.9-million. It had also taken out a second mortgage from Meridian Credit Union for $16.4-million. The joint venture deal would fully pay off Meridian, but the non-registered syndicated investors would get only about 60 per cent of their principal back – and none of the interest owed – and even then, not right away (a $15-million no-interest debenture was offered to investors, payable in six years).

The deal preserves a 25-per-cent interest in the site for Mr. Neilas’s company (giving 75 per cent to Lanterra) and could see it receive $22.8-million if the project is finished. Lanterra’s projected profit on a finished building was $66-million.

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Miller Thomson recommended the lenders vote against this deal: “The sale and solicitation process for interest in the property was designed to maximize transaction value for the property, and not to maximize Investor recoveries.”

On Oct. 23, 404 of the investors (61 per cent of the lending pool) were able to cast a vote to accept or decline the deal. Only 29 per cent (representing $10,202,272 in value) voted in favour; 70 per cent (representing $24,542,125 in value) voted against.

Neither Mr. Neilas nor any of the parties in the court documents who The Globe and Mail attempted to contact responded by press time.

In the case of the Oakville project, the failure to make interest payments on a small $2.5-million loan from credit union FirstOntario has resulted in the appointment of MSI Spergel as a receiver on the property.

Insolvency papers filed by Spergel show that in February, 2013, Mr. Neilas’s companies 54 Shepherd Road Inc. and 60 Shepherd Road Inc. borrowed $15-million from Hi-Rise Capital Ltd., and then on May 16 of the same year added a second mortgage of $8-million.

Court records show that the $15-million loan ballooned to $35-million, and the $8-million loan now has a balance of $3.5-million.

The FirstOntario loan came later, but was registered as the primary lender, which means the far larger syndicated mortgage – and the individual investors – are second-in-line for any repayment. That could mean that a sales process may not fully protect the investments of those individual lenders.

So far, excavation on only the Oakville site has begun. That pit is all Mr. Neilas has to show for the millions in loans from small investors, and his hopes of building about 200 condo apartments. Thus far, the Oakville site has not been placed on the market for sale.

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