Lawyer suspended for allegedly giving investors inflated values for fire-damaged Winnipeg hotel project

A lawyer involved in the financing of a downtown Winnipeg hotel project — badly damaged by a recent fire — has been suspended by the Law Society of Ontario for allegedly providing inflated property appraisals to investors.

In 2017, Ontario's law society tribunal suspended John Paul Fletcher of Locust Hill, Ont., on an interim basis after the society investigated his work on four real-estate projects, including the conversion of the Keewayden Block, on Portage Avenue E., into a Hyatt Place hotel.

The interim suspension followed a request by the law society and is pending a final hearing, which has been adjourned because Fletcher's poor health has impaired his ability to mount a defence. An interlocutory suspension — essentially, a provisional suspension — followed in 2018.

The Keewayden Block, a seven-storey heritage building constructed in 1909, suffered extensive damage to its roof and elevator shaft on Sept. 29 due to a fire that took 10 hours to put out. 

The Hyatt hotel chain's website says the building is slated to become a Hyatt Place hotel in 2020. The developer on the project is a Toronto company named No. 16 Hospitality, which has completed interior demolition within the Keewayden Block and has roughed out three rooms, said Harry Christakis, a Toronto architect who is one of No. 16 Hospitality's principals.

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In 2016, Christakis paid $2.55 million for the Keewayden Block through a company he directs called Zhabba Inc., the legal owner of the building.

No. 16 Hospitality attempted to raise $5 million to finance the $27-million project through a syndicated mortgage, its marketing materials say. Syndicated mortgages are investments where a developer finds more than one private lender to invest money in a property, instead of going through a bank.

The Hyatt Place syndicated mortgage offering advertised a 10-per-cent annual return on the investment, "secured against land and building." According to the mortgage offering, lawyer John Paul Fletcher served as the trustee for the investors, whose money would be placed in escrow in an account managed by Fletcher.

In its interim suspension case against Fletcher in 2017, the Law Society of Ontario claimed the lawyer represented seven lenders who invested a total of $2.8 million in the syndicated mortgage.

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The law society claimed Fletcher provided five of those lenders with an inflated value for the property, which had been appraised by a Winnipeg firm at $2.925 million.

The society claimed those five clients, who invested a total of $1.8 million, were provided with financial disclosure statements that "falsely reported the 'as is' appraised value of the property" at $17.7 million, or six times more than the actual appraised value.

"There had been no such appraisal," the society claimed.

"Mr. Fletcher told the Law Society that the inflated appraisal figure was an error by the mortgage broker and came to his attention only when the Law Society wrote to him. He claims that the erroneous appraisal had been provided only to one client. However, Mr. Fletcher's file materials indicate that it was provided to five clients."

The Law Society also claimed about three-quarters of the investment had been disbursed for reasons that were unclear. 

"Although some of the project documentation suggests that there would be monitoring of loan advances, there is no evidence of a quality surveyor or anyone having assumed a similar role," the law society stated.

Susan Tonkin, a spokesperson for the Law Society of Ontario, said in a statement Thursday that the society directed the Toronto Police Service to the public information about this case.

Toronto police have no record of an investigation into Fletcher, Const. Jenifferjit Sidhu said in a statement.

The Financial Services Commission of Ontario has also been asked to comment.

The Law Society of Ontario said Fletcher "adamantly denies allegations that he gave financial advice to clients and pressured clients to invest" in any real-estate project.

The law society said Fletcher is in ill health and has not had the opportunity to fully defend himself against the allegations.

Fletcher was removed as the trustee on the syndicated mortgages in 2017, said Christakis, adding he could not comment on the law-society case against the lawyer.

Fletcher's legal counsel, Ontario lawyer Derek Freeman, said in an interview that he could not comment on the case against his client or the syndicated mortgage.

Since the interim decision in 2017, work on the Keewayden Block has continued, according to the City of Winnipeg, which has made four inspections since 2018, spokesperson Kalen Qually said in a statement on Sept. 29.

Scaffolding was also erected at the rear of the building, while interior demolition work was in progress as of the most recent inspection in April of this year, Qually said. 

Neighbouring business owner Les Bester, who monitors a series of security cameras, said he has not witnessed substantial work at the Keewayden Block since late 2018. 

Work was on hold because local costs were coming in higher than anticipated "and we were working with the local trades to find ways to bring it closer to our targeted pricing," Christakis said in a statement.

"In a difficult Winnipeg construction market and given the difficult nature of this project, we have been dealt many hurdles and we are working diligently with many good contractors to redesign and bring this project to a successful conclusion," Christakis said.

"This project, when completed, will be a significant benefit to the City of Winnipeg."

Bester also has complained about squatters climbing the building and entering the Keewayden Block.

The building has an alarm, Christakis said.

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According to property records for the Keewayden Block, a total of $7.925-million worth of mortgages are listed on the title for the property, of which $5.925 million of the mortgages listed on the title are syndicated.

The City of Winnipeg assesses the property at a value of $3.1 million.

Syndicated mortgages are regulated by the Financial Services Commission of Ontario, which requires brokers to disclose the current as-is value of the land to syndicated-mortgage investors because, the commission states on its website, "security is only as good as the value of the property."  

Christakis said the full amount of the syndicated mortgages for the Hyatt Place project has not been advanced. The mortgages will be advanced in stages, he said.

"At no time has the actual amount advanced exceeded the improved value of the project," he said.

Attached to the land title on the Keewayden Block is also a notice exercising power of sale, dated January 2019, as well as several construction liens against the property.

The Hyatt hotel chain said in a statement it is aware of the fire at the Keewayden Block and the Law Society case alleging inflated property valuations.

"Hyatt is always concerned about its reputation," Chicago-based spokesperson Sian Rylander said in a Thursday statement, adding the chain has been in contact with Zhabba Inc.

"Hyatt is in active discussions with this owner, but does not disclose the details of its private discussions with the owners and developers of its Hyatt hotels."

Heritage Winnipeg director Cindy Tugwell said she's concerned about the due diligence on plans to revitalize heritage buildings.

"We've had it happen before, with the St. Regis Hotel," she said, referring to a former plan by Fortress Real Developments to revitalize a Smith Street property and build a new tower next door. 

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"It was supposed to go forward. They gutted the hotel and then subsequently everything halted because there was no financial backing for the project," Tugwell said. "The first thing that comes is caution for large projects like this."

Financing for the Hyatt Place project will depend on the final construction budget, Christakis said.