This article was originally published in Maclean's Magazine on September 11, 1995
Hotel magnate Isadore Sharp was not entirely surprised when he picked up his telephone in June and heard Paul Reichmann's voice. The two men began a conversation that was to lay the groundwork for a timely but unlikely business alliance. Reichmann wanted to know how Sharp, chairman of Four Seasons Hotels Inc. of Toronto, was getting along with his new business partner, Saudi Arabian Prince al-Waleed bin Talal bin Abdulaziz al-Saud. Eight months earlier, the Saudi prince had rescued Sharp's financially strapped international hotel chain with a capital infusion of $165 million. Not only had the prince come along at a crucial moment, Sharp told Reichmann, but in the months following the deal, Prince al-Waleed had lived up to his promise to provide more money for new projects that would spur the hotel company's growth. Sharp advised Reichmann to go directly to the prince's home in Riyadh and talk to him. "They're both interested in the same kind of long-term quality developments, and they're both highly principled individuals," Sharp told Maclean's last week. "I thought they'd get along extremely well together." And that is how a rich young Saudi prince and the patriarch of an Orthodox Jewish family came to be business partners bidding for one of the world's most ambitious real estate projects, the Canary Wharf office development in London's East End.
The international real estate and banking communities were abuzz last week with talk that Canary Wharf's 11 creditor banks and Reichmann's group of investors were on the verge of closing a deal that would return partial ownership of the lavish London development to the man who dreamed it up almost a decade ago. Neither Reichmann nor the lead bank for the creditors, Lloyds Bank of London, would comment on the state of the negotiations, but others close to the deal sounded confident that it was a matter of when, not if, it would go through. "I certainly don't expect a cheque to be cut this week," said one banker involved in the negotiations last week. "But we're getting close."
Such an arrangement would mark one of the few times in the 1990s that Paul Reichmann has been on the winning team. His plans for grand-scale real estate developments, first in Toronto, then New York City, London and most recently in Mexico City, have fizzled. But now, the prospects for Canary Wharf are turning around as the London real estate market recovers. Even the Canadian banks, which had about $3 billion in loans outstanding when the Reichmann family's real estate development company, Olympia & York Developments Ltd. (O&Y), collapsed in 1992, largely because of Canary Wharf, are pleased with the potential sale. One banker, who specializes in managing what the banks euphemistically refer to as their "special loans," joked about how much the bank was going to recover on its Canary Wharf stake. "Generally," he said, "we aim to get back 100 per cent of what we lent - plus lunch, if we can get it."
If the bankers are right and the Reichmann group succeeds in buying back Canary Wharf, the scene will be quite different from the late 1980s, before an army of creditors laid siege to a deeply indebted O&Y. For one thing, Paul Reichmann will no longer be in sole control. Although neither Reichmann nor other members of his group will discuss their plans, it is assumed that Reichmann, the only one with extensive real estate experience, will oversee the operation of Canary Wharf and any future development plans. But management experience is all Reichmann will bring. Bankers say that most of the $15-billion fortune his family was credited with in the 1980s is gone. Still, some things have not changed. Reichmann, who sheltered from creditors some of his family's financial assets, including the tile-importing business that he and brothers Ralph and Albert founded in 1955, continues to live in the same relatively modest Toronto home. And Paul Reichmann maintains the offices of his new company, Reichmann International lp, in the same location as his old O&Y offices in what was once his flagship Toronto office tower, First Canadian Place, which itself is now under the control of bond holders and creditor banks.
The financing for Reichmann's attempted return to Canary Wharf comes from three partners: Prince al-Waleed, who launched his own bid for Canary Wharf earlier this summer before joining forces with Reichmann; Laurence Tisch, who is chairman of the U.S. entertainment company CBS Inc. and stands to gain $1.2 billion on its proposed sale to Westinghouse Corp.; and Michael Price, a U.S. investment fund manager of Heine Securities Corp. in Short Hills. N.J. Each is a high-profile player. Price owns six per cent of Chase Manhattan Bank Corp., which last week merged with Chemical Banking Corp. of New York to become the biggest bank in the United States. Price, a reported instigator of the deal, will pocket $336 million in profit on his $537-million investment in Chase as a result of the merger.
The three financiers have different investment strategies, but their interests all converged on Canary Wharf. David Mongeau, an investment banker with Wood Gundy Inc. in Toronto, who advised Prince al-Waleed on the Four Seasons deal, says the prince seeks long-term investments in companies that already have proven management. In addition to Four Seasons, the 38-year-old prince recently purchased minority stakes in a variety of other cash-starved high-profile companies, including New York-based Citicorp bank, Euro Disney in France, Saks Fifth Avenue and the Fairmont hotel chain of San Francisco. "He's interested," explained Mongeau, "in businesses that are large consumers of capital."
Canary Wharf certainly fits that description. At the moment, the $3.1-billion collection of offices, shops, pubs and restaurants consists of 10 office buildings, including the 50-storey 1 Canada Square, Britain's tallest building. But Reichmann's original plans called for an $8-billion development, including at least 20 office towers with 13 million square feet of leasable space. In all, he envisioned a development housing about 50,000 workers in luxury office towers whose stark modern exteriors would change the skyline of London and rejuvenate the derelict docklands on which the project was built.
To date, Reichmann's vision has only been partially realized. Canada Tower is now fully occupied to the 31st floor, leased at rates that observers believe are lower than quoted rates of $34 to $52 per square foot. But the top floors, the most expensive to rent, are still vacant. Of the 4.5 million square feet of leasable space in the development, about one million square feet are still vacant. Vacancies are expected to fall further next year, when a new subway line is scheduled for completion, connecting the remote site to the rest of London's business district four kilometres away.
But even now, Canary Wharf does have a great deal to offer. In London's main financial district, known as the City, businesses are housed in old, cramped buildings. Few have the deep floor spaces required to run the network of computer wires and telecommunications cables now commonplace in North American office buildings. Also, Canary Wharf's towers are air-conditioned, a rare feature in London, and one that has been welcome this year as London sweltered through an unusually hot summer. While some tenants, including Conrad Black, owner of London's Daily Telegraph newspaper, are fans of the project, others are less enthusiastic. Several newspapers have relocated to the site and journalists are among its most vocal critics. "It's the most pleasant open prison in the world," says Andrew Keenan, a reporter from the Daily Mirror. "There are good pubs and restaurants and pretty good shops. But it still feels like a prison because it's in the middle of the East End with nothing around it, so you're stuck in one place."
Canary Wharf is now owned by 11 banks, including the Toronto-based Canadian Imperial Bank of Commerce, and Montreal-based Royal Bank of Canada and National Bank. The banks had initially suggested that it might be a decade or more before the market would recover enough to sell Canary Wharf. But early this year, the bankers decided to put the docklands development up for sale. Explained one banker involved in the negotiations: "There's no question that the London market came back much sooner than we originally anticipated."
Although bankers were upset with Paul Reichmann for, in their view, misleading them about the state of O&Y's finances in the years leading up to its collapse in 1993, they claim that the current negotiations are untainted by bad feelings. In May, 1992, just after O&Y's collapse, one unidentified banker angrily told a newspaper: "Paul Reichmann is finished. The Reichmann myth has completely exploded and there is a lot of anger and resentment directed towards them from many quarters." But three years later, the bankers are in a less vindictive mood. "This is an economic transaction," said one banker last week. "If it makes good sense to the bank, we don't care about anything else."
Of course, the sale of Canary Wharf will also mean an immediate boost in bank profits. In 1992 and 1993, the banks wrote off billions of dollars in loans to Olympia & York. Any recovery on those loans now would go straight to their bottom lines.
Although Canary Wharf is by far the single largest former O&Y asset, the company also had many other properties in Canada and the United States. Court-appointed administrators are overseeing the refinancing of these buildings and have already made a number of sales. In the United States, two major office towers in New York and all the properties in Los Angeles have been sold. Still on the block are several office buildings, including the lavish World Financial Center, a three-building complex that is one of New York's most sought-after business addresses. Two groups, one led by Hong Kong magnate Li Ka-shing and the other by New York real estate investor Leon Black, are now bidding for them.
In Canada, Robert Lowe, an accountant who is acting for the administrator, Coopers & Lybrand Inc., says that the large and complex task of cleaning up the O&Y assets is wrapping up. A number of Canadian buildings have been sold, including the Aetna Canada Centre in Toronto and Gulf Canada Square in Calgary. Says Lowe: "I think all of the essential issues will be resolved in the next year." But one banker from a creditor bank says that sales to date have been unspectacular, reflecting the lack of recovery in Canada's real estate market. "I tend to have a negative view about the long-term outlook for office towers," he added. "By 2010 or 2015, we could all be working out of our homes, and there would be little need for all these downtown office buildings."
But clearly, Paul Reichmann does not share that view. His ambition to build great buildings still burns. Until the collapse of the Mexican peso at the beginning of the year, Reichmann planned to construct a 30-building mega-development in Mexico City. That $1.4-billion project was put on hold because of Mexico's currency troubles and cold feet on the part of Reichmann's key financial partner, U.S. billionaire George Soros. If the Canary Wharf deal goes through, Reichmann will be back in the real estate business, accompanied by deep-pocketed partners. For years, bankers and a host of other naysayers ridiculed his grand real-estate dreams. If nothing else, Reichmann's return to Canary Wharf would prove that his faith in a brighter economic future was not misplaced.
Maclean's September 11, 1995