Crunch Time for Real Estate Titan

WILL the world's largest private landlord be forced into bankruptcy?

That is the question being asked as Olympia & York Developments Ltd., the Toronto-based real estate and development giant, struggles to restructure $12 billion (US) in debt and save its property empire.

In Toronto, negotiations are under way to sell parts of that empire to help keep the rest of it together. Analysts say the Exchange Tower and Scotia Plaza could soon have new owners as Olympia & York tries to hold off 100 creditor banks and obtain enough money to complete the $7 billion Canary Wharf project in London.

Banks have been wary of extending fresh loans to the troubled company, and O&Y said May 4 that it was "pursuing other alternatives," including asset sales, to survive its cash-flow crisis. Plans may be announced within days, said the company, which has large equity stakes in other corporations in addition to its vast real estate holdings.

The same day Olympia & York missed a $14.5 million bond payment on First Canadian Place in Toronto. This follows a missed payment on Aetna Centre, also in Toronto. Prudential Insurance of America, which holds the $155 million first mortgage on Aetna Centre, recently told tenants there to make out May rent checks to Prudential and not O&Y because the company had slipped into arrears. But the insurer backed away from seizing the rents and is negotiating with O&Y.

The company is also in default on $200 million in commercial paper - short-term debt.

"The situation is deteriorating," says one Toronto banker. "But a lot of my colleagues think it's amazing O&Y has lasted this far."

Olympia & York is facing what it calls a "liquidity crisis" caused by a falling return from its real estate empire, based principally in Toronto, London, and New York. Those cities have felt the brunt of the downturn of the early 1990s.

The Reichmann brothers, O&Y's owners, are the biggest landlords in Manhattan and in Toronto, Canada's financial capital. And they are developing Europe's largest real estate project, Canary Wharf in London's East End.

The project aims to attract the British business establishment from the City, as London's financial district is known, and transplant it to the Docklands, the old port of London. It is also an attempt to offer London business people a much better class of building than they are used to.

Canary Wharf's first main building - at 50 stories the tallest in Europe - has opened. Although the new tenants gripe over the inconvenient location, they do marvel at climate controls, elevators, and electronic support gear.

"This is a hard place to get to and it is far away from the center of things," said one new arrival at the new tower who wants to remain anonymous because one of the Reichmanns is on the board of his firm.

The initial showdown for O&Y came in mid-April at a meeting in Toronto with about 100 banks from around the world.

"There is every reason to expect that the company will quickly recover its footing and continue forward," Steve Miller, chief financial adviser to O&Y, said at the time. "The main thing is to get relief from the liquidity problem." But even the company admitted that disgruntled lenders - even a small bank - could push it over the edge.

Eleven Canary Wharf creditors met in London May 5 to discuss whether to lend Olympia & York $53 million to continue construction for the next month. The bankers recently advanced $9 million - enough to keep Canary Wharf going for a few days.

Salomon Brothers, the New York investment house, describes Olympia & York's plight as "the first truly multinational real estate workout, with properties, lenders, and documentation subject to different legal systems, business traditions, and bank regulatory practices. The potential for cross-cultural clashes ... seems to us to be high."

Canada's federal government and the Ontario government have ruled out any help for Olympia & York.

"We think that's clearly a private-sector matter and it can be best resolved in the private sector," said Donald Mazankowski, Canada's minister of finance.

What Olympia & York Owns: Major properties Square feet (million) Vacancy rate New York City

World Financial Center 5.5 * 55 Water Street 3.6 10% One Liberty Plaza 2.1 * 2 Broadway 1.6 40% 237 Park Avenue 1.1 * 59 Maiden Lane 1.0 * 60 Broad Street 1.0 62% 320 Park Avenue** 0.7 98% (**O&Y's US headquarters, under redevelopment) Toronto

First Canadian Place 2.5 28% Scotia Plaza 1.5 15% Exchange Tower 1.0 15% Aetna Place 0.5 18% London

Canary Wharf, phase 1 4.3 40% Canary Wharf, phase 2 5.5 (completion uncertain) * Not available Source: East Shore Partners Inc.