On Wednesday, I took a look at the pre-construction condominium market in Toronto and how prices and those sweet builder “incentives” look this fall.
Today, I want to continue the pre-con theme and present you with a story that I’ve been holding on to for about a month now.
This has been in my queue for a while, and upon reading the story two more times today, it’s even more shocking than it was in October when I flagged it.
Maybe some of you have already read this.
But for those who haven’t, or even for those who have, I think a discussion is warranted.
First, what in the world is TARION?
We’ve heard of it. We know it has something to do with builders.
But directly from the horse’s mouth itself:
We are a not-for-profit consumer protection organization established by the Ontario government to administer the province’s new home warranty program.
Per their website, TARION’s vision and mission is:
For over 45 years Tarion has served new home buyers and owners by ensuring that one of their life’s biggest investments is protected. Our vision is that all new home buyers in Ontario have peace of mind that they are getting the home they were promised. Our mission is to give Ontario home buyers consumer protection and confidence that their new homes are properly built. We do this through fair issues resolution, education, and outreach. We want homeowners to receive excellent customer service and the best new home warranty program in Canada.
Alright, so they’re a regulator, licenser, administrator, and watchdog.
What do they do? Again, directly from their website:
By law, all new homes built in Ontario are provided with a warranty by the builder. Tarion’s role is to ensure that buyers of these homes receive the coverage they are entitled to under their builder’s warranty.
Effective February 1, 2021, Tarion’s previous licensing responsibilities have been transitioned to the Home Construction Regulatory Authority. The HCRA is now responsible for regulating new home builders and vendors in the province. To learn more about the HCRA, visit www.hcraontario.ca.
This is complicated.
By law, all new homes in Ontario are provided with a warranty – by the builder.
This is true.
But what constitutes a “new” home has always been a moving target, hence all those “substantial renovations” we saw in the 1990’s and 2000’s where the builder tore down an existing house – save for the two side walls, and call it a “substantial renovation” to dodge GST as well as the liability of a warranty.
Not only that, all builders must provide a warranty, but not all builders must provide a TARION warranty.
In any event, “Joe the flipper” may not be registered with TARION, but any large developer is. Not only that, developers selling pre-construction homes and condos most certainly are registered with TARION and must have approval in order to pre-sell properties.
This is where one of the most shocking stories I’ve seen in years comes into play.
When I saw the headline, I assumed this was creative wordplay. I assumed that there was some sort of catch and that the headline couldn’t be taken at face value.
Have a look:
“An Ontario Developer Sold Hundreds Of Homes Without The Necessary Approvals. It Was Just One Of The Warning Signs Of The Company’s Impending Downfall”
Toronto Star
October 27th, 2023
But after reading the article, I remained stunned.
There was no wordplay here. There was no catch.
This developer actually sold hundreds of pre-construction townhouses when they weren’t allowed to do so, and then folded like a t-shirt on a plastic board at The Gap.
From the article:
Karim Teja got an urgent call from his real estate agent. It was August 2021, and the pre-construction townhouses in Markham he’d been eyeing were “flying off the shelves.”
Teja pulled the trigger on a $900,000 townhome with a large rooftop patio. It would be where he and his family would move from their highrise condo in midtown Toronto.
For two years, the developer — StateView Homes — held Teja’s $120,000 deposit as he waited for his future home that has still not been built.
It turns out the developer was never authorized to sell to him the Markham house in the first place.
StateView never obtained the required approval from Tarion — Ontario’s new-home buyer protection organization — to sell the townhomes in its Minu Towns project.
A Star investigation has found StateView collected tens of millions of dollars in deposits for more than 450 homes that it did not have authorization to sell.
“How did this one get past it? Where’s the oversight?” Teja asked.
It’s among several red flags that went unnoticed or unheeded by regulators as StateView grew from a modest homebuilder to an industry upstart, on its way to a spectacular collapse that has left hundreds of homebuyers in a lurch.
The company was led by brothers Carlo and Dino Taurasi, who solicited deposits for unbuilt homes on land that in at least one case they did not yet own as they rapidly took on more debt to promote more housing developments.
In recent months, StateView has been ensnared in court proceedings, accused by a bank of writing bad cheques as part of a “highly sophisticated” fraud to gain tens of millions of dollars. Eight of StateView’s developments — including the Minu Towns that Teja bought into — have been put under court-ordered receivership after defaulting on hundreds of millions of debt.
–
Good for The Star.
They investigated months after the initial story broke in the spring and added some much needed context.
The developer essentially blamed TARION, but the regulator shot back.
From the article:
“At no point did Tarion communicate or suggest to me or StateView that StateView lacked the appropriate … approvals for any project,” Carlo said.
A Tarion spokesperson said it’s the obligation of developers to advise Tarion of their sales plan and to obtain the necessary approvals before putting houses on the market — not the other way around.
“StateView’s response has it backwards,” Tarion’s Andrew Donnachie said.
Regardless, I’m left wondering: how the hell did it get to this point?
TARION and the HCRA (home construction regulatory authority) both failed. Massively.
Rules are useless if they’re not enforced. Consumer protection doesn’t exist if developers aren’t policed.
From the article:
Before a builder can sell a new home in Ontario, it must obtain a licence from Ontario’s Home Construction Regulatory Authority (HCRA) and receive approval from Tarion in what’s known as a Qualification for Enrolment (QFE).
It is a provincial offence to sell a home without both authorizations.
When approving a QFE, Tarion looks at the estimated number of homes to be built, the type of houses and the estimated price range, as well as assesses the developer’s construction experience and financial position.
Obtaining a QFE approval is crucial for Tarion as it allows the agency to assess the risks of the proposed development.
It was back in April when the story first broke:
“Ontario Home Developer Accused Of $37 Million Cheque Kiting Fraud Scheme”
CBC News
April 27th, 2023
Every accused person is innocent until proven guilty. Right?
In the Toronto Star article above, the developers both seem to plead ignorance to the fact that they weren’t permitted to pre-sell houses, but it doesn’t address the financial problems that already existed.
From the CBC News story:
A major Ontario home developer is facing startling allegations from one of the big five banks that it orchestrated a “highly sophisticated,” year-long fraud totalling over $37 million.
TD alleges the defendants wrote thousands of bad cheques for large sums of money from both corporate and personal accounts at other banks, according to its statement of claim, filed in the Ontario Superior Court of Justice in Toronto.
TD alleges the defendants would cash the cheques into TD accounts and TD would conditionally release the money before the cheque cleared. The bank says the defendants would quickly withdraw the funds and then cancel the cheque to prevent the money from actually being transferred to the TD account.
Over the course of the year, that left TD being owed $37,028,055.73 plus interest, the bank claims.
“Review of the account histories revealed what appears to be a highly sophisticated cheque kiting fraud spanning about 12 months and dozens of accounts, implicating multiple financial institutions,” the bank says in its claim.
To avoid detection, the defendants were routinely doing these “sham transactions” across 22 accounts to create the illusion of fresh funds coming in, TD alleges.
This is unbelievable.
However, more unbelievable (or entirely believable, perhaps), is this:
While StateView did not file a statement of defence, it appears to have a proposed settlement agreement with TD to pay back all the money by July.
If a tree falls in the woods, but no one is around to hear it, does it make a sound?
By the same logic, if a massive cheque-kiting scheme is uncovered, but the money is paid back, then does the illegal offense simply disappear?
Then again, it’s not just the $37 Million that’s in question.
From the article:
Three other lenders are also suing — to get back nearly $200 million they loaned StateView for developments in King City and Markham, Ont.
This has the makings of a movie. Probably not a good one, and likely “straight to video,” as they used to be in the 1990’s, but a movie nonetheless.
And all I keep thinking is: how in the world did this happen?
Sure, there have been all kinds of financial scandals that took a long, long time to uncover. Bernie Madoff did it for decades without being caught.
But I feel as though this should have been flagged.
Had TARION or HCRA known that a developer was pre-selling houses without the authority to do so, it never would have gone this far…
JF007
at 9:15 am
ENFORCEMENT or the LACK of IT in Ontario is my biggest bugbear David…be it consumer protection, housing, road safety, traffic…lack of enforcement is so glaring that i sometimes wonder how there are not many more such incidents everyday..
I came to Canada as an immigrant from US about 12 years ago after having spent about 6-7 years down south and before that grew up in SE Asia…and if i compare my experience between the 3 countries i have lived in Canada in terms of enforcement is closer to SE Asia IMO…While US to me felt like a police state at times but the sheer lack of rules being followed or enforced makes me wonder where we are headed in Canada…
Derek
at 12:46 pm
I wonder when the HCRA or Tarion would have first had notice or the opportunity for notice of this rogue operator to trigger any “enforcement”.
I wonder why TD or the other lenders to the rogue operator did not confirm whether it was licensed by HCRA in the first place, before permitting millions in loans and bank transactions to go through.
I wonder how the various municipalities mentioned in the news article approved the work by the rogue operator at the partially built-out sites.
TD became an even worse place to transact business in the days after this story came out in terms of dealing with the tellers every day.
Ace Goodheart
at 1:38 pm
Enforcement against financial crimes in Canada is an internationally known joke.
It is worse in the securities markets.
Many folks who work in Canadian Finance eventually head down to the USA (where the really big money is) and then get themselves in trouble with the SEC for doing things that they were getting away with in Canada due to lack of enforcement.
Their excuse is always the same “we did this back home and no one cared”.
It is known in US financial circles as “the Canadian defence”.
Adrian
at 9:17 am
There must have been some collusion from someone working for the lenders on these transactions. There’s no way $37mm goes “missing” before anyone notices none of their cheques are clearing… Similarly, checking tarion registration status is a common condition to be satisfied prior to funding. I’ll admit that the proof of registration could have been faked by stateview alone but the overdraft of $37mm I just can’t get my head around…
QuietBard
at 6:26 pm
I’m surprised that someone with as much experience in the real estate industry as you would be so shocked by this. All rules and systems have tiny cracks in them and its not unusual for slimy beings to squeeze through those cracks. Granted it doesnt happen very often (as there are lots of rules and enforcement in this country) but I would think they still happen nonetheless.
Alan
at 11:30 am
As a victim of this scandal I can not believe this could have happened here in Canada. It is shameful these guys are not are in jail and walking free with our money.
Sean
at 9:12 am
I worked for this company. I was a handyman for them. I saw this coming years before!!! Crooks!!!!!
They didn’t even file our taxes!