Mondo Condo Makeover P.05
Cleaning Out The Closet
At the Travelodge Toronto Yorkdale the past is as intriguing as the present. The history of this west end Toronto hotel may in fact hold important clues to understanding the strange events that are unfolding there now. It may hold the answers to questions that are looming large on the minds of the hotel's workers. Questions like: Why is a mysterious man claiming to own the hotel when he doesn't? Why is he trying to sell it off unit by unit? Why are the leaders of their union, whose pension fund is a part owner of the hotel, allowing him to do it?
Down Memory Lane
According to Toronto Land Registry documents, the property on which the hotel was built was leased in 1968 from Irving Investments and Irving Ungerman, a Toronto entrepreneur and boxing promoter, by a group of developers that included Yore Developments, Luhur Construction and three limited companies headed by Angelo, Elvio and Leo Delzotto.
In 1972 the Delzotto's leased the land to a company called Deltan Realty. In the mid-1970's the hotel known as "The Triumph" was built. In 1978 Deltan Realty sold the property to York-Hannover Ltd. for $10.5 million.
York-Hannover was a large international real estate business whose interests included hotels, commercial buildings, nursing homes and shopping malls. York-Hannover bought and sold them, financed them and managed them. Its Canadian operations were headed by a man called Karsten von Wersebe who was President of York-Hannover Ltd. at the time of the company purchased the hotel in 1978 right up to its bankruptcy in 1991.
From the beginning, York-Hannover borrowed heavily against the property. In 1978, it borrowed $8.3 million from Deltan towards the purchase of the property. In 1981, it borrowed $7 million from the CIBC and a further $13 million (also from the CIBC) in 1982. What's interesting about this is that it was as lot more money than the property would have been worth. The practice of over-mortgaging the hotel would continue long into the future.
On January 13, 1988, the hotel took out two additional loans on the property from York-Hannover Developments Ltd. - one for $5.5 million and the other for $10,323,878 million. Later that year, on November 23rd, it borrowed a further $10 million from the CIBC.
Around this time substantial renovations were undertaken. An addition to the hotel, which included a conference center, was built at a cost of over $7 million dollars. Other renovations, costing hundreds of thousands of dollars, were also made.
Whatever the total cost of the renovations, it could not have come close to the $25 million that had been borrowed against the property over the course of 12 months. $25 million probably represented more than twice the value of the property.
On January 17, 1989, the two mortgages from York-Hannover Development Ltd. (for $5.5 million and $10,323,878) were transferred to a company called Castor Holdings Limited.
By way of an agreement between the CIBC, York-Hannover and Castor Holdings dated April 10, 1989 all parties agreed that the CIBC was the first creditor and that its $10 million mortgage would have priority ahead of the $15 million mortgage that was transferred to Castor Holdings.
If somebody in the loans department at the large Canadian bank was getting nervous, they had good reason to be.
Hard on the heels of the transfer of the $15 million mortgage to Castor Holdings, the hotel started defaulting on its bills, at least the bigger ones.
A series of construction liens were registered against the property starting early in 1990. These liens related to unpaid portions of various contractors' bills from the major renovations undertaken in the late 1980's. By the time the hotel closed in 1991, the liens would total over a half million dollars. In May 1990, tax arrears of $1.8 million were registered against the property by the City of North York.
Down the Rabbit Hole
In July 1991, the hotel closed abruptly. Workers were called into a meeting and told their workplace was closing and their jobs were gone. The hotel was bankrupt - a victim of tough economic times - or so the story went.
More than a year later, the Triumph would reopen under new management. A budding entrepreneur named Ronald Kelly - a little guy just out of the priesthood and with a hankering for the hotel industry - had scraped together some money and, with a little help from a major union pension fund, was going to give the place a whole new lease on life - or so the story went.
The Howard Johnson Plaza Yorkdale reopened in December 1992 with 150 workers, all of them members of the UFCW by virtue of a voluntary recognition agreement the union received from Kelly after floating him a $7 million dollar loan to buy the place.
Among the newly-hired workers, some of whom had worked at the hotel prior to the 1991 closure, questions lingered about the bankruptcy. Persistent rumours circulated that the closure was more than just a product the recession. There was talk about a theft - about a shady man or men who cleaned out the hotel's accounts and disappeared, forcing the business into bankruptcy.
It sounds far-fetched - on the surface. But while the tough economic times of the early 1990's provided a plausible cover for the hotel's demise, it isn't an entirely convincing one. York Hannover was a big company. It had other hotels in Canada and real estate investments worldwide. If the place was doing so badly, why not sell it? There is nothing that indicates there was any effort to offload the property. Was it really doing so badly? Millions had just been spent on a major renovation and the bills were being paid - until Castor Holdings appeared on the scene.
Of course, the notion of a theft pushing the place off the edge of a cliff doesn't make a whole lot of sense either. If that's what happened, why didn't anyone call the cops? A whole business going under and over a hundred people thrown out of work because someone made off with some bags of money? Not likely.
The truth, we think, lies somewhere between the plausible story that was put out for public consumption and the sensational rumours about lurking bandits.
Thick as Thieves
Unbeknown to the hotel's workers and to pretty much everyone else then and now, York-Hannover's Karsten von Wersebe was hooked up to a couple of very interesting characters. One was a bank employee who very nearly brought down one of Europe's most venerable financial institutions and the other, a guy who engineered the largest corporate fraud in Canadian history.
In the 1980's Juerg Heer was a credit manager at the Rothschild Bank in Zurich Switzerland. According to a report in the New York Press, Heer was fired in 1992 when:
Rothschild officials accused him of taking what they termed up-front "kickbacks" in exchange for making unsecured and unapproved loans to German-born Canadian real estate magnate Karsten von Wersebe-agreements that ultimately resulted in a $155 million loss to the bank when von Wersebe's house-of-cards property empire toppled in 1991.
Considering that he was getting multi-millions from his buddy Juerg, it's hard to understand how Karsten von Wersebe could have a cash flow problem. The only way that could be is if the Rothschild Bank's millions were only flowing through von Wersebe's businesses en route to somewhere else. Somewhere like, maybe, Castor Holdings - a business von Wersebe helped found.
The collapse of Castor Holdings in 1992 has been likened by many observers to the fall of US energy giant Enron. It is the largest - by a long shot - fraud-related corporate bankruptcy in Canadian history. The Montreal-based real estate lending firm went under it owing more than $1.6 billion, most of it to banks and pension funds that had been suckered into investing their money in the firm by financial statements that were grossly distorted. Among the hardest hit was the Chrysler Canada employees' pension fund which had $176 million invested in Castor.
The Castor bankruptcy spawned a raft of litigation and a lengthy fraud investigation by the RCMP. In 2000, a warrant citing 41 criminal offences, was issued for the arrest of Castor Holding's owner, Wolfgang Stolzenberg. Stolzenberg fled to Germany just days before he was to be questioned by the bankruptcy trustee. Also wanted for questioning in connection with the Castor disaster was von Wersebe.
It seems that Stolzenberg took money from his investors and loaned it out to other companies which he controlled, didn't collect interest on the loans and grossly misstated Castor's financial picture to keep the investors blissfully ignorant and ensure that they kept their money flowing his way. Castor's accounting firm, Coopers and Lybrand, helped in the charade by putting its good name to inflated valuations of the "fair value" of Castor's assets. Over 40 lawsuits were filed against the accounting firm alleging negligence in its preparation of Castor Holdings' financial statements.
In 1990, the last year the privately held company produced audited financial statements, Castor was showing a loan portfolio of $1.7 billion and net earnings of $31.2 million.
But by July 1992, it was in bankruptcy, owing $1.6 billion.
After the collapse it emerged that, in fact, Castor was collecting almost no interest on the money it had lent.
Creditors claim those loans had been made mainly to companies secretly controlled either directly or indirectly by Stolzenberg or Castor itself.
Unpaid interest, creditors say, was capitalized on the books as increases in existing loans or new loans, making Castor look as though it was prospering even though it was really technically insolvent for the three years leading up to its bankruptcy. From Flipside, April 2000
By the time the Triumph Hotel went under in 1991, it was essentially the property of Castor Holdings and the CIBC. The connection between the principals of York-Hannover and Castor Holdings puts the Triumph's bankruptcy in a different light. It wasn't the economy that slammed its doors shut and it wasn't a thief in the night either. The demise of the hotel was part of a much larger, and allegedly criminal, scheme that involved sophisticated international crooks at least one of whom is still out there.
The CBC on Castor Holdings.
Report on Business on cooking the books.
By the summer of 1992 Castor Holdings and York-Hannover were dead. The Triumph Hotel was in the hands of Price Waterhouse, the receiver in bankruptcy, and would reopen later in the year under a new owner. But that was not the end of the high strangeness at what had been the Triumph Hotel.
The Edge of the Cliff
The new owner, Kelloryn Hotels Inc., was a company started by Ronald H. Kelly a former Catholic priest and convicted (and subsequently pardoned) pedophile whose story about how he came to buy the place was almost as implausible as the one about how "the economy" sunk it the year before. An article in the Toronto Sun in 1997 provides some insight into Kelly's hype.
[Following his exit from the priesthood] He chose to run a consulting company from his tiny Brampton condo. Putting his church experience to work, Kelly advised funeral homes and cemeteries on business plans and raised funds for education projects. Almost by accident, he began helping struggling companies. While driving to meetings across Metro, he often found himself on Keele St., viewing the grandiose Skyline-Triumph hotel, shut down amid financial troubles.
He risked everything -- his life savings, his inheritance, his condo. Family matched his $200,000 stake and he pulled together financing from banks and pension funds.
"It was a leap of faith (and) luck. I don't think anybody comes out of university or out of the priesthood and makes a miracle in real estate," he muses.
[He] Scraped together $400,000 in savings and loans from friends and bought closed-down 380-room Skyline Triumph hotel for $9.5 million. Conference center alone had cost $10 million. Ex-Priest Up >From Depths; Now Huge Success In Business, Alan Cairns and Robert Benzie, The Toronto Sun, July 20, 1997.
Kelly had spent much of the past decade shmoozing the crème de la crème of Canadian society. After being sprung from a Catholic facility for wayward priests in the early 1980's, Kelly landed on his feet in a Toronto area parish and worked his way up the church hierarchy. He used his position to ingratiate himself with movers and shakers in the business community (Canadian media mogul Doug Bassett called him a "fabulous person"). He fled the priesthood in 1990, after his name came up in a Commission of Enquiry into widespread sexual abuse of children at the notorious Mount Cashel orphanage in eastern Canada and began peddling his wares as a consultant.
The purchase of the former Triumph Hotel was the beginning of Ron Kelly's real estate empire, one that within a few years would be valued at about $500 million. According to Cairns and Benzie's piece in the Sun, Kelly's meteoric ascent from graveyard consultant to accommodation industry tycoon began when he hooked up with Stephen Phillips, a hotel industry executive.
Enter Stephen Phillips, now president of the 500-hotel U.S.-based Howard Johnson reservation chain. At the time, Phillips was trying to rejuvenate HoJo's image under his Accomodex Franchise Management (AFM) company. After he offered Kelly a franchise, Phillips told Kelly of an emerging upswing in hotel management; Kelly saw his chance in property. With consultant Ed McConnell, they brought seven hotels under the Howard Johnson banner. Most were picked up under power of sale. They bought a former Red Oak Inn on Windsor's main drag, a hotel on Yonge St. in Aurora, the Empire Hotel and Conference Center in North Bay, as well as hotels in Morrisburg, Ottawa and Edmonton, Alta. In December 1993, Kelly bought the Royal Connaught in Hamilton under power of sale from Montreal Trust for $4.2 million.
But Kelly wasn't fresh out of university or the priesthood - not exactly anyway. He was an ex-con who fled the priesthood a year earlier under a dark cloud. His entry into the hotel biz was no miracle. The idea that Kelly just took a leap of faith after driving past the not-very-grandiose hotel is beyond cheesy. He didn't just scrape together the $9 million dollars he needed to buy the hotel. He got the money from UFCW Canada's pension plan CCWIPP. And the HoJo's Stephen Phillips didn't just offer him a franchise. Kelly himself was involved in the creation of Accomodex which acquired HoJo's Canadian franchising rights in 1991. Like Kelly's Kelloryn Hotels and the various other companies he would create, Accomodex (which became AFM Hospitality Corporation in 1994) relied heavily on financing from CCWIPP.
True, Kelly did borrow $7,000,000 from the CIBC just before he slapped down $9 million for the hotel but he also borrowed $7 million for CCWIPP on the same day. He paid off the bank right on schedule in May 1993 and borrowed another $8 million from CCWIPP the same day. He would go on to borrow many more millions over the next few years, against this hotel and other ventures.
So the notion of the little guy who scraped together some cash and went out on a limb, isn't real. Kelly orchestrated a sophisticated scheme that would allow him to prosper by buying up hotels with CCWIPP's pension money, selling them to another company that was also financed by CCWIPP and using even more CCWIPP dough to finance a ballooning portfolio of real estate acquisitions.
CCWIPP's confidence in Kelly, the small time graveyard consultant (about the only part of Kelly's cover story that is plausible) was absolutely stunning. Its willingness to help him get rich allowed Kelly to take risks without the worrisome aspects of borrowing large piles of cash. Kelly never went out on a limb - CCWIPP did. In fact, CCWIPP's involvement with Kelly would lead it to the edge of a cliff.
CCWIPP had been dabbling real estate for a couple of years by the time its investment committee hooked up with Kelly. Its investments in Kelly's hotel were the beginning of a much grander strategy that would see the pension fund cough up hundreds of millions of dollars to finance hotels, resorts, shopping malls, conference centers and office buildings. To this day, these investments appear to have accomplished little for the pension fund except to drive it to the brink of disaster.
CCWIPP's loans to Ron Kelly were not simple transactions or arm's length investments managed by detached professionals. They involved the creation of a myriad of single-purpose subsidiary companies - investment corporations - through which funds would flow to Kelly's businesses. In some instances CCWIPP officials were directors of both the subsidiary companies and the businesses that received the funds. In some instances the subsidiaries would buy back and operate Kelly's underperforming properties.
Various CCWIPP associates worked their asses off to help Kelly get started. The following is a brief description of the frenzy of activity on the part of CCWIPP officials to facilitate Kelly's buy of the former Triumph Hotel in 1992:
- July 1991: The Triumph Hotel goes bankrupt and closes.
- September 1991: CCWIPP investment corporation I.F. Propco Holdings Ontario 14 Ltd. is incorporated. Its Directors are Cliff Evans (Chairman of CCWIPP's Investment Committee, recently retired Director of UFCW Canada and UFCW International Vice President), Alexander Ahee (a lawyer who did work for CCWIPP), Howard Preston (a member of CCWIPP's Investment Committee and CCWIPP Trustee), Bernard Christophe (a CCWIPP Trustee and President of UFCW Local 832 in Manitoba) and Victor Pinchin, (CCWIPP Trustee and senior executive of Safeway Corporation).
- August 1992: Kelloryn Hotels Inc. is incorporated by Ron Kelly. Propco 14 and Propco 16 (also incorporated around this time) became its major shareholders (the two Propcos hold 70,000 shares in Kelloryn. Kelly holds 30,000).
- October 7, 1992, Kelly gets a $7 million loan from Propco 14 and a $7 million loan from the CIBC.
- October 9, 1992, Kelly buys the former Triumph Hotel from Price-Waterhouse (the receiver in bankruptcy) for $9,150,000.
- In October and November, 1992, the officers and directors of Kelloryn were altered to include a number of CCWIPP-associated big shots.
- In October Alexander Ahee was appointed Assistant Treasurer of the Kelloryn.
- In November Ahee was also appointed a director of the company, along with five others - Edward McConnell, Clifford Evans, Howard Preston, Ronald Kelly and Hubert Kelly. (McConnell was an investment advisor to CCWIPP, Hubert Kelly was Ron Kelly's brother, the others we've already identified).
- Voluntary recognition agreement between Kelloryn and UFCW Local 206 signed off.
- December 1992: Hotel reopens.
- May 12, 1993: Kelly pays off the $7 million he owes the CIBC and gets an $8 million loan from Propco 16.
That was a lot of activity on the part of a lot of people to help some shmuck buy a hotel on their nickel. But it was only the beginning. In the years that followed, CCWIPP would pour millions more into the hotel and into Kelly's other ventures. Another pattern developed as well: Based on Land Registry documents it appears that by the mid-1990's the hotel was as over-mortgaged as it had been in the 1980's when Karsten von Wersebe was running the show - with a little help from his pals Juerg Heer at the Rothschild Bank and Wolfgang Stolzenberg at Castor Holdings.
When Ron Kelly sold the place in 1998 - half to Royal Host REIT and half to another one of his companies (Chimo Hotels), CCWIPP even loaned him twice as much as he needed to buy his half interest ($10 million for a 50% interest in a property that he sold for $11 million).
They made it all look good on paper too. We've discussed the flaming hoops through which the pension fund has jumped for Kelly at some length in our Full Disclosure series. According to its financial statement for 2001, CCWIPP had poured in excess of $250 million into his businesses by then. We know now that that number is probably considerably higher. ($200 million alone is floating around a Bahamas resort that shut its doors earlier this month). Apart from that however, CCWIPP also swallowed Kelly's underperforming ventures, tucking them away in special subsidiary corporations. It "capitalized" unpaid interest in its financial statements making it appear that it was just loaning out more money. It overstated the real value of its investments in his - and other - enterprises making it appear that the fair value of the investments was about equal to what it had poured into them.
For example, its financial statement for 2001 shows the cost CCWIPP's investment in the Travelodge Hotel as about $22 million and the fair value as approximately $25,000,000. That's a stretch considering that the hotel sold for $10 million in 1978, $9 million in 1992 and $11 million in 1998.
CCWIPP's financial statements up to 1995 stated that it did not record its investments at market value, even though the statements show "fair values" for each investment. In 1996, CCWIPP changed its accounting policy to show fair value prospectively (looking ahead) rather than retroactively (based on the actual market values for the year being reported).
In 1999, the Alberta Pension Commission warned the pension fund about its methods of reporting the value of its real estate investments stating that it was "misleading" and that "once market value adjustments are taken into account, it does not show that the real estate portion has very low yields and negative returns."
Undaunted by accounting rules and meddling pension regulators, CCWIPP has displayed a particularly slavish allegiance to Kelly and now, with his empire sinking fast, another unlikely tycoon - the mysterious Joe Ieradi whose cover story we discussed in Part 4 of this series - has turned up on the scene with his own implausible hype and access (if he's serious about his plan to convert the hotel to a condo) financial backers with a lot of cash at their disposal.
Cleaning Out the Closet
We're not suggesting that Ron Kelly or the investment gurus at CCWIPP are Wolfgang Stolzenberg's proxies - or his stooges - running his game in Canada while he cools his heels in Germany.
We're not suggesting that Wolfgang Stolzenberg and Karsten von Wersebe still have their fingers in the hotel, but just in case they do, we will add to our growing list of questions:
- Was the man behind Canada's biggest corporate fraud involved in the demise of this workplace over a decade ago? Is he now just a skeleton in the closet or is he still a player, managing events by remote control from his hiding place thousands of miles away?
- Is there a connection between Wolfgang Stolzenberg formerly of the wealthy Westmount area of Montreal and the Westmount Condos" - the condominiums that Joe Ieradi and whoever-is-backing-him plan to turn the hotel into if they have their way? (The name of the project has been the source of much speculation as there's nothing about the solidly working class neighbourhood in which the hotel is located that is reminiscent of Montreal's upper-crusty Westmount.)
No, no, it couldn't be. That's just too far-fetched - the stuff of movies not docudrama. But put in perspective, events post-1991 make us wonder. The similarities between Castor Holdings' and Ron Kelly's MO's are quite striking as is Kelly's showing up when he did, where he did and that he did what he did. Joe Ieradi's "triumphant return" to the hotel reeks of the same cheap hype as Kelly's "miraculous" manifestation a decade earlier. CCWIPP's slavish allegiance to Kelly despite the negative returns his investments were generating is as disturbing as its confidence in Mr. Ieradi despite the economic hardship his scheme will impose on more than 100 hardworking UFCW members.
Maybe it's all just wild coincidence or, more likely, it's just the way that these things get done. Find a business opportunity you can squeeze some money out of. Find a wealthy backer who'll commit to you and cut you all the slack you want. Take his money and use it to finance your self-serving schemes. Once you've bled him dry, leave him scrambling to cover up his losses and move on to the next opportunity.
Maybe during his years of sucking up to the luminaries of the Canadian business community Ron Kelly was picking up pointers. He is said, by some who were close to him, to have been a fan of Enron's Ken Lay during the period in the late 80's and early 90's when Lay was making Enron what it is today.
Wolfgang Stolzenberg's methods were not unique. He wasn't the first guy to put pretend money on the books and he wasn't the last. Enron's Ken Lay did that too only he called it "mark-to-market" accounting.
Mark-to-market, prospective accounting, forward-looking valuations - it all means the same thing: What some guy, using whatever methodology suits his purpose, thinks something might be worth at some point in the future. It's not good business practice and, from what we can see, eventually leads to a predictable end. The predictable end in this case, is the unemployment line for a 150 union members and an insolvent pension fund for 180,000 workers and retirees.
A lot working people got hurt in 1991 because of the predictable outcomes of some scheming business guys who just couldn't get enough - and their hapless investors who just couldn't give them enough. There is still time to prevent a similar disaster but time is running out.
Whatever the real story, what's happening at this hotel is cause for alarm and further investigation. There's too much at stake for too many citizens - too many members of the public. The workers know a lot more than they knew in 1991. So do the regulators. And the pension fund trustees? They must know the whole story - they helped write it. If they fail to act in their members interests' now, wipe the floor with them.
There is no business reason that we can see, why this hotel can't make money - as a hotel (rather than a ten-story ATM for international financeers) . It has a location, great staff, and now even a colourful history. The place is loaded with potential. There's no reason why it can't succeed in the accommodation industry and no reason that it can't continue to employ its dedicated complement of staff. To be fair to its other owners, we want to make it clear that we have uncovered nothing at all that links Royal Host REIT (which owns 50% of the property) to any of the strange goings-on described in this article. Maybe they can help clean out the closet and get this business back on its feet.
Our series will continue until the story is over.