2 First Canadian Place
Of the many developers who fell victim to the real estate depression beginning in 1989, none was bigger or more highly respected than Canada's Reichmann brothers, owners of Olympia & York Developments Ltd. (O&Y). Until the market took a turn for the worse in 1989, the Reichmanns enjoyed a career of unbroken and brilliant success, gaining a reputation as financial magicians while assembling the world's largest collection of office buildings and a stock portfolio that included several of Canada's leading corporations. Like most deal makers, however, Paul Reichmann and his brothers were gamblers who kept their interest in the game by continually raising the ante, a strategy that culminated in O&Y's Canary Wharf development in London, the largest office complex ever conceived. Then the real estate market plummeted in 1989. Unable to maintain debt payments, O&Y was forced into Chapter 11 bankruptcy in Canada and the United Kingdom, and its holdings were parceled out among ninety-one lenders who had come to believe the Reichmanns infallible. The final reorganization of assets has not yet been settled, but even if the Reichmanns retain a good chunk of equity their reputation will never be fully repaired.
Albert, Paul, and Ralph Reichmann were born in pre-World War II Vienna to a family headed by Samuel Reichmann, a prosperous merchant. Originally from Hungary, Samuel Reichmann led his family on a series of traumatic escapes from Nazi persecution of Jews, eventually settling in the free port of Tangier, Morocco. There Reichmann built a reputation for wizardry in banking while preparing his children for a life in business. Albert Reichmann, eldest of the three brothers, joined his father's business; Paul Reichmann went on to Talmudic colleges in England. In 1957 Paul joined Ralph Reichmann for another family exodus to Canada, where the two brothers started a tile import business in a Toronto suburb. An ancient Greek culture enthusiast, Ralph named his venture Olympia Floor & Tile Co. Within a few years, the rest of the Reichmann family joined him.
When the prospering tile company needed a new warehouse, the Reichmanns built it themselves for about half of the contractor's bid. They decided to pursue opportunities in suburban real estate, and began by building more warehouses. The strong economy of the early 1960s provided ample room for expansion in the Toronto real estate market, and the Reichmann family soon became known as a leading local builder of high-quality industrial space. The Reichmanns learned early the importance of streamlined construction practices, developing a knack for money-saving innovations that would later prove to be worth many millions of dollars. Their real estate business was organized in several companies. One of them was called York Developments, and in 1969 the three brothers consolidated their various concerns under the name of Olympia & York Developments Ltd.
The Reichmanns already had established a number of operating principles from which they would never deviate. They were scrupulously honest in their negotiating, earning a reputation as people whose handshake was as good as a contract. They built solid structures on time and under budget, maintained excellent relations with tenants, and came up with ingenious financing packages designed to keep ownership of all properties within the family. The brothers paid close attention to the desires of municipal and state government officials, whose cooperation became increasingly important as the size of their projects grew. The Reichmanns remained devoutly Orthodox, stopping all work by sundown every Friday and on Jewish holidays throughout the year.
In 1965 the brothers demonstrated the last ingredient in their formula for success--a willingness to gamble. When U.S. real estate mogul William Zeckendorf fell on hard times, the Reichmanns seized a chance to buy from him 500 acres of land just outside Toronto for $18 million. After selling off a few parcels to reduce debt, the brothers constructed a series of highly successful office buildings on the site. The Reichmanns were able to build the complex office structures with their usual efficiency, advancing from projects on the Zeckendorf purchase to bigger and more profitable ventures in Ottawa, Calgary, and downtown Toronto.
The brothers were still relatively unknown when they acquired a valuable piece of property in the heart of Toronto in 1973 and announced plans to construct the tallest building in Canada, a 72-story office tower called First Canadian Place. The proposal was considered too grand for Toronto's market in some quarters--its 3.5 million square feet represented a 10 percent increase in the city's available office space--but the Reichmann brothers went to work with their customary ingenuity. They devised a new method of construction in which all activity took place within the building; a complicated network of elevators and turntables moved supplies and men to where they were needed. The Reichmanns estimated that the technique saved up to 2.5 hours of labor per worker every day, a saving that became crucial when the building was slow to lease. Despite the leasing problems, the Reichmanns refused to cut their rents and eventually managed to raise them 350 percent during the four years it took to fill the building. First Canadian Place permanently changed the Toronto high-rise market and became the flagship of O&Y's real estate empire.
Having amassed a net worth estimated at US$1 billion by the time First Canadian was finished in 1976, the Reichmanns began to look farther afield for their next project. In New York City, the National Kinney Corporation was trying to sell a block of eight Manhattan office buildings known as the Uris portfolio. At the time, the city was flirting with bankruptcy and its real estate market was severely depressed. It was not clear whether New York would retain its position as the world's most important business center or slide into a decline. The Reichmanns concluded that, unless New York's recession was permanent, the Uris land alone was worth more than the US$320 million asking price, and in 1977 they used the equity built up in First Canadian Place to finance the deal. Within a few years the glut of Manhattan office space had become a shortage as the local economy roared back to health, and the Reichmanns were able to triple rents while still keeping their eight new buildings nearly full. The Uris acquisition proved to be a tremendous coup for the Reichmanns; their investment of US$320 million grew in five years to an estimated value of US$3 billion, providing an equity base sufficient to launch bigger developments.
O&Y moved on to the World Financial Center at Manhattan's extreme southern tip. The Battery Park site, adjacent to the World Trade Center, had been entangled in political and financial difficulties since it was created out of landfill. In 1980 Olympia joined 11 other bidders in a competition to gain approval for construction and eventually emerged as the winner. World Financial Center was a gigantic project: six buildings with two-thirds as much space as the towering World Trade Center next door, 250,000 square feet of shops and restaurants, and four acres of well-designed public spaces. The project, in which the Reichmanns poured US$300 million of their own money, also provided for the construction of low-cost public housing in the area. The Reichmanns were able to do all of this with money borrowed below prime rate against their Uris properties, and by implementing the same highly efficient construction methods as they had used at First Canadian Place. At the same time, they were erecting another US$750 million of office towers in other U.S. cities, all during a period of severe recession. To land the prestigious tenants the World Financial project needed to assure its success, the Reichmanns took the unusual step of buying the buildings housing the tenants' previous offices in exchange for long-term lease commitments. In this way both American Express Company and City Investing Company agreed to take large blocks of space.
The Reichmanns also had begun buying stock in major industrial corporations. In 1981 the brothers paid C$618 million, most of it, again, borrowed against the Uris properties, for about 90 percent of the stock in Abitibi-Price, the world's largest manufacturer of newsprint paper. They soon added large pieces of MacMillan Bloedel Ltd., another forest-products company; Hiram Walker Resources Ltd., the liquor giant; and also bought into a number of other important Canadian real estate developers. In 1983 the brothers joined forces with Canada's Bronfman family, taking a 13 percent interest in the Bronfman's Trilon Financial Corporation, a fast-growing diversified marketer of financial services. During the next few years the Reichmanns increased their holdings in Hiram Walker to 49 percent, but in 1986 they lost a bidding war for control of the company and traded their stake for US$360 million in cash and a 10 percent share of its new owner, Allied-Lyons plc of the United Kingdom. More successful was a 1985 bid for Chevron Corporation's 60 percent interest in Gulf Canada Ltd., one of the country's leading oil producers; O&Y's US$2.1 billion offer was accepted, and the brothers have since increased their stake to nearly 75 percent. Finally, in 1987, they took part in a restructuring of Santa Fe Southern Pacific Corporation, buying 19.6 percent of the enormous rail, oil, and real estate concern.
While these were sizable acquisitions by any standard, O&Y's stock portfolio remained secondary to its real estate business, which continued to grow apace as the boom decade of the 1980s drew to an end. Real estate was the premier investment for lenders in the 1980s, and with money readily available new skyscrapers were constructed worldwide at an unprecedented rate. Although many economists predicted that this bull market would soon exhaust itself, the world's most experienced lenders and developers continued building ever larger and more expensive projects. In 1987 the Reichmanns became interested in London's vast Canary Wharf development, a municipal initiative whose goal was the transformation of former docks east of the city into a new corporate office center intended to rival the city's centuries-old business district. Canary Wharf called for the eventual construction of twenty-four buildings containing twelve million square feet of office space to be connected to the city center by new rail and subway links. However, lack of financing halted construction until the Reichmanns agreed in 1987 to pump several billion dollars of their own money into the project and serve as its managing partners. The Reichmanns' reputation as savants reassured other lenders, and development of Canary Wharf finally proceeded, promising no less than a restructuring of London's commercial office market and the possible formation of a new center for business throughout Europe.
The Reichmanns' most lucrative deals had occurred in the middle of real estate recessions (the Uris purchase in 1977 and the World Financial Center in 1980), prompting many observers to admire their courage and foresight when the market strengthened and their projects became gold mines. Canary Wharf, on the other hand, was initiated at the height of a real estate boom which had already enjoyed five years of solid growth. When the bottom fell out in 1989, the Reichmanns found themselves in serious trouble along with the ninety-odd banks and other lenders who had put their faith in the Reichmann mystique. To make matters worse, O&Y was also completing work on 55 Water Street in New York City, the world's largest single office building as measured by square footage, and the brothers had become entangled in the decline of Campeau Corporation, the Canadian retailing conglomerate in which the Reichmanns were major shareholders.
Because O&Y was a private company, the Reichmanns were able to conceal the situation until late 1991, when the company admitted that it could not raise enough cash to "roll over" its commercial borrowings. The vacancy rate on its total holdings of forty-five million square feet was estimated at 17.7 percent, and in April 1992 O&Y called a meeting of its lenders to negotiate a reorganization of debt. In May its Canadian corporation went into Chapter 11 bankruptcy, followed shortly by the UK subsidiary in charge of Canary Wharf. (O&Y's American subsidiary did not enter bankruptcy, however.) Creditors of O&Y Canada (the firm's chief holding company) agreed in January 1993 to a five-year rescheduling of debt payments in exchange for about 80 percent of the company's equity. In effect, its creditors decided that O&Y was worth more as a going concern with the Reichmanns as managers than would be its buildings if sold off piecemeal in a down market. The family would thus retain some equity and limited control of its tattered empire, but with the real estate glut predicted by some to extend past the year 2000, it remained to be seen whether the Reichmanns' slice of the pie would have any tangible value.