Winnipeg Free Press - PRINT EDITION

SkyCity bonds 'speculative'

Analyst dissects financing plan for tallest building on Prairies

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A plan to build a 55-storey tower in downtown Winnipeg requires the proponents to secure tens of millions in equity through a bond offering rated "highly speculative" by an independent analyst.

Since 2013, Toronto-area firms Fortress Real Developments and Mady Development Corp. have been working toward the construction of SkyCity, a $188-million mixed-use building proposed for the surface-parking lot at the northeast corner of Graham Avenue and Smith Street.

The firms reportedly paid more than $9 million for the half-hectare property. They intend to build a tower that will feature a full-service grocery store, 700-stall parkade and commercial space within a wide 10-storey podium at the bottom of the building, 36 storeys of condominium units within a narrower tower and a nine-storey, glass-enclosed multi-purpose space at the top.

Fortress and Mady have raised about $10 million toward the project through an earlier offering. Under the banner of LiveWorkPlay Winnipeg Developments Ltd., they've also issued a $30-million bond offering to ordinary investors, offering eight per cent annual returns.

According to a December 2013 analysis by Vancouver's Fundamental Research Corp., LiveWorkPlay estimated they'll need to secure $47 million in equity through the two bond offerings to obtain the construction financing necessary for the project to proceed.

The analyst's report noted Fortress is offering profits from bonds instead of an equity position in the development. This makes it more difficult for the project to proceed, as the firm must fork over money from the project before it has any cash flow.

"In order to do this, Fortress maintains an interest reserve from the total capital raised. The impact of this is that a lower percentage of the gross funds raised goes into project development," the analyst wrote.

When fees are taken into account, only 37 per cent of the cash raised through the bond offering will be devoted to the actual development, the analyst estimated, adding Fortress and Mady have not invested any of their own funds in the bond offering.

LiveWorkPlay intends to loan the invested funds to the numbered company that owns the surface-parking lot. Although Fortress and Mady own that company, this structure means "there is limited recourse for investors in the event of default," the analyst noted.

The analyst also stated investors might not be able to get all their principal and interest back if the property has to be liquidated.

Overall, the report rated the eight per cent LiveWorkPlay bond offering "highly speculative" from a risk perspective and stated it offers a weak return in comparison to the risk.

Fortress CEO Jawad Rathore said he isn't bothered by the rating and downplayed the importance of the bond offering in the grand scheme of the project.

"We're not concerned about that," Rathore said in a telephone interview from his Richmond Hill, Ont., office.

Pre-sales of condominium units and commitments from retailers will determine whether the tower proceeds, he said, adding Fortress partners with a major developer on all of its projects.

Fortress has started 31 projects to date, according to the analyst's report. No less than 15 of those projects are either finished, under construction or about to enter the construction phase, Rathore said.

Completed Fortress projects include larger structures such as the 17-storey Gotham tower in Ottawa and the Collier Centre complex in Barrie, Ont.

SkyCity, which would be Fortress and Mady's entry into the Winnipeg market, would be the tallest structure of any sort between Toronto and Edmonton. Rathore said his firm has spent approximately $500,000 to date on the project's design and planning.

Winnipeggers need to get past their skepticism about major developments, he said.

"That's one word for it," he said of the Winnipeg attitude toward development. "I almost want to come over there and hug you."

Republished from the Winnipeg Free Press print edition May 23, 2014 B1


Updated on Monday, May 26, 2014 at 7:03 PM CDT: couple of tweaks to the story

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