Bloomberg

(Bloomberg) -- Sam Mizrahi, one of Canada’s best-known property developers, was building two luxury condominiums in midtown Toronto last year when he says he received a phone call from someone who demanded millions of dollars, threatened to burn his house down and ruin his reputation.

The person on the other end of the line, Mizrahi said in court filings, was Mahmoud Reza Khavari, former chairman of Iran’s largest state-owned lender, wanted since 2011 for his alleged involvement in the biggest fraud scheme in Iran’s history. He was also the father of Mizrahi’s business partner and a key source of capital for the developer’s two condo projects, according to the documents.

How a real estate tycoon found himself entangled with a wealthy fugitive, who is now the subject of a diplomatic spat between Canada and Iran, is detailed in lawsuits before an Ontario court. The dispute shines a light on the opaque world of private condo funding in one of North America’s hottest housing markets. The allegations haven’t been proven in court and the case is ongoing.

Worked Together

The main lawsuit centers on a deal between Mizrahi and Khashayar Khavari, Mahmoud’s son, to finance and build two luxury condos in Toronto’s Yorkville district, an upscale neighborhood of shops and restaurants. It details how their partnership soured, and ultimately their battle over ownership and profit.

The allegation that Mahmoud made a threatening phone call to Mizrahi is false and distracts from the real case, Khashayar said in court documents. His father is a "mild-mannered" 63-year-old man who never made threats, he said in the documents. He declined in an e-mail to speak about his father. Several requests seeking comment from Mahmoud through his son, son-in-law and lawyers in Toronto, by phone and e-mail, were declined or not returned. Attempts to reach Mahmoud through the phone directory were unsuccessful and no one answered the door at his north Toronto address listed in court documents.

Khashayar and his brother-in-law worked alongside Mizrahi as executives at his company and launched the initial lawsuit. They allege Mizrahi defrauded them: misappropriating funds and failing to properly manage the firm. Khashayar claims he’s owed profit and is seeking damages of at least C$105 million ($81 million), as well as stakes in other projects he claims he worked on with Mizrahi, including The One condo in Toronto, slated to be Canada’s tallest tower.

Original Agreement

Mizrahi said in court filings that Khashayar and his father Mahmoud "in particular" provided capital for the Yorkville projects and are only owed 50 percent of the profit when they are finished, as per their original agreement. The Khavari family had no financial involvement in other projects such as The One, he said. He has also launched a countersuit, seeking at least C$50 million for breach of contract, negligence, intimidation, conspiracy to cause economic harm, and defamation, among other grievances.

“I’m sticking to what the agreement was,” Mizrahi said in a June 8 interview from his office across the street from one of the condos. “I have never deviated from what the agreements were. We just have to finish the project and you can’t come in before a project is finished and expect to get paid out.”

Iranian Connection

Although the two parties disagree on much, they agree on the beginning: Mizrahi first met the Khavaris about six years ago when the family hired him to do some development work on their investment properties. Like the Khavaris, Mizrahi is from Iran, moving to Canada with his family in 1977 when he was six years old. He never attended post-secondary school and describes himself as an entrepreneur, running DoveCorp Enterprises Inc., a high-end dry-cleaning company until 2007 when it filed for restructuring and its assets were sold.

The Khavaris wanted to invest in real estate and Mizrahi, whose companies include Mizrahi Developments, wanted to build. The deal seemed straightforward: Khashayar and his family would supply the financing, Mizrahi would contribute expertise, and they would split ownership and profit in the properties 50-50. The Khavaris contributed at least C$14.2 million to purchase the land for two properties, which would become 133 Hazelton Residences, with three-dozen custom-designed units, and the 68-unit 181 Davenport, according to the court documents.

Private Financing

This type of first-stage funding is crucial for any developer. It’s used for initial overhead and to purchase land, prices for which have skyrocketed to a record in Toronto. Developers usually tap private financing for this portion. When it comes time for the more pricey and time-intensive construction, they approach the banks, which require at least 60 percent of a building to be sold before lending and full disclosure on prior financing.

One of the attractions of working with the Khavaris was that they said they would fund the entire project so Mizrahi wouldn’t have to get bank financing, according to Mizrahi’s court documents. "Khash, with the assistance of his family, would contribute the equity required to purchase the lands for development, as well as the necessary construction financing to move forward with development of the lands," Mizrahi said in the court files.

“They represented they had vast financial resources to fund these projects," Mizrahi said in the interview at his office.

Bank Case

The Khavaris had a different view. “Sam represented to me that he had the resources for development, construction, securing construction financing and raising funds necessary for growth of a development company," Khashayar said in an e-mail through his lawyer on June 14.

As Mizrahi and the Khavaris prepared to market the projects in September 2011, events half a world away threatened the deal. Seven state-owned and private banks in Iran were linked to a $2.6 billion embezzlement case, including Bank Melli Iran Inc., the country’s largest state-owned bank.

Mahmoud resigned from his position as chairman and managing director of the Tehran-based lender, saying in his resignation letter he was doing so “to respect public opinion" and left for Canada, where he has dual citizenship, according to Iranian state media. Iran sought his location and arrest for allegedly “aiding and abetting embezzlement and fraud, bribe-taking, illegal acquisition of illicit property through the bank systems," according to the Interpol red notice issued at the time. The notice has since been removed.

Necessary Cooperation

Other alleged participants in the Iran bank fraud have been sentenced to death, life imprisonment, and flogging, according to local media reports. Canada doesn’t extradite a person to a country where they could face the death penalty and doesn’t have diplomatic ties or an extradition agreement with Iran.

"As a result of my father’s previous career, there are those who would wish to physically harm him, particularly religious and political extremists," Khashayar said in the court documents.

Despite Canada being a member of the United Nations convention against corruption, it hasn’t cooperated on returning Mahmoud to Iran, Mostafa Pour Mohammadi, the country’s justice minister, said June 8 in Tehran, according to local media. "Unfortunately many countries just like to talk and don’t provide the necessary cooperation or commitment and so far they haven’t cooperated," Pour Mohammadi is quoted as saying.

Family Gathering

Several calls, e-mails and faxes seeking comment from the judicial authority of Iran, and Bank Melli weren’t returned. A representative of Interpol declined to comment on Khavari, referring questions to Iranian authorities.

“The government can’t comment on whether it has received an extradition request with respect to any particular person unless and until that person is arrested pursuant to the Extradition Act, due to the confidential nature of state-to-state communications," Ian McLeod, spokesman for Canada’s Department of Justice, said in a June 15 e-mail. The parliamentary secretary for consular affairs in Ottawa didn’t respond to requests seeking comment.

As the news of Mahmoud’s move made Canadian headlines in October 2011, Mizrahi met the family at their home in Toronto, according to both parties. Mizrahi said he sought to end the relationship because of the family’s lack of funds after their bank accounts in Canada were frozen, according to the court documents. The Khavaris deny their accounts were frozen and said the meeting was an intimate family gathering, according to court documents. They continued working together.

Unprecedented Growth

Mizrahi and Khavari say they hammered out new terms according to court files: that Mizrahi would take full control of the properties and associated companies and the Khavaris would be paid 50 percent of the profit, the files say. Khashayar said his interest in the companies was to be held in trust.

Because Mizrahi couldn’t get access to the funds, he said he had to unexpectedly borrow C$88 million from banks to build the two Yorkville condos at interest rates as high as 20 percent, the court files show.

Business continued as usual amid a year of unprecedented growth in the city’s high-rise market. In 2011, more than 28,000 new condo units were sold, a record. In 2012, construction was started on a record 24,388 units in Canada’s biggest city. Khashayar and his brother-in-law continued to work as executives at Mizrahi’s company, attending presentations and being privy to conversations with lenders for several projects including The One, according to e-mails filed in court. Mizrahi said in court files the family only participated because they wanted to learn about real-estate development, and didn’t contribute financially to the other projects.

Suits Filed

Khashayar alleges in the court documents he began to notice funds missing from certain accounts, questionable transactions, and that at one point, Mizrahi admitted he had mismanaged the projects. When Khashayar demanded his equity stake back last year, Mizrahi locked him and his brother-in-law out of the office and cut ties, they said.

That’s when Khashayar filed a lawsuit. He hired PricewaterhouseCoopers, which laid out in a report filed in court that Mizrahi withdrew money from project accounts which he ultimately used to buy an executive jet, pay tuition for one of his children, and pay C$1.9 million for his custom-designed cottage. 

Mizrahi said in court files that all allegations he used money for improper purposes is completely untrue. He asked to see the data used in the report and questioned the impartiality of the researcher, according to court documents. He declined to comment further on the report in the interview.

Condos Filled

Mizrahi outlined a different story. He alleges in an affidavit that on June 30 last year Mahmoud called and said he would "burn down my house and everything that I hold dear if I did not allow his family to cash the checks." He changed the locks and updated the security at the office and at his home. He said the Khavaris still participated in the business.

“These accusations are false and in any event they are entirely irrelevant to these proceedings," Khashayar said in the documents.

In an attempt to fast-track the case this year, Khashayar filed a motion on a legal question -- the definition of their initial agreement. An Ontario judge dismissed the suit on March 24 and sent all parties back to the main lawsuit with a hearing on July 29.

While the legal battle continues, buyers have moved into one of the Yorkville projects and the other sold-out building is nearing completion. Mizrahi also intends to start marketing the 80-story, 416-unit tower at the corner of Yonge and Bloor Streets, which has more than 2,000 people on a waiting list, including for a C$30 million penthouse.

“You learn what not to do from every experience -- or you try to,” Mizrahi said. “I learned what not to do from this experience. I’m moving forward."

--With assistance from Ladane Nasseri Golnar Motevalli and Scott Deveau To contact the reporter on this story: Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net. To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net, Jacqueline Thorpe

©2016 Bloomberg L.P.

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