Toronto –
From one of Canada's tallest apartment towers to bare land, housing development projects across Canada are increasingly coming under administration.
Rising interest rates, construction costs and delays, and a weak real estate market are leading to an increase in the frequency of projects under financial stress, experts say.
“A year ago we were probably getting calls once a month, once every two months, and now we're getting calls once a week,” said CBRE's Land Services Group Deputy. Chairman Mike Czestochowski said.
Receivership is a way for secured lenders to have the court appoint someone to manage the estate and either liquidate it or maximize the value of the assets.
Although CBRE is often thought of as a last resort, receiverships are on the rise as large construction projects involving multiple mortgages and parties begin to run into trouble.
“These projects that are being built are priced so high that they're running out of money,” said Lauren White, executive vice president of the company's land services group.
A similar case occurred in Kitchener, Ont., where creditors filed for receivership against the owners of the Elevate condominium project, which is planned as a four-tower project.
By the time the application was filed in October, construction crews had already left the site and the work was 80% complete but not completely weatherproof. A December report found that the owners had just $300 in the bank at the time the recipient's order was completed and had more than $100 million in debt.
Other projects haven't progressed that far.
Creditors of a 55-storey condo tower planned for downtown Vancouver filed for receivership in mid-January, including BMO, seeking repayment of more than $82 million in loans.
Troubles occur on some projects even after construction is nearly complete. Duca Financial Services Credit Union Ltd. filed on January 19 for repayment of a $16 million loan against Mizrahi's condominium project at 128 Hazelton Avenue in Toronto.
While the largest developers still typically have access to funding, smaller developers are more likely to rely on them because the second-tier lenders they often rely on are becoming more cautious, Częstochovski said. It is said that it is becoming difficult to raise a lot of funds.
“So when the debt comes due, it gets a little harder.”
Most receiverships have gone up in Ontario in recent months, but in the past year the process has affected everything from a historic bank building in Saint John, New Bruns to a fire-ravaged apartment complex in Winnipeg. Applied.
White said construction of high-rise buildings is particularly on the rise, given all the challenges and potential delays these projects pose.
“A lot of it was due to mismanagement, not recognizing the length and complexity of the development process,” she says.
The One, an 84-storey building under construction in Toronto that Mizrahi is also developing, is perhaps the most high-profile project facing receivership in recent years.
The developer is $1.7 billion in debt, and construction is expected to be completed more than two years late and more than $600 million over budget, according to court documents filed in October.
In other notable developments, creditors in November sought to place at least five Van Dyke Properties projects covering more than 1,700 units in the Greater Toronto Area into receivership, with some Already under construction, the debt charged exceeds $200 million.
A receivership is a means by which secured creditors may be able to recover funds if a borrower begins to default.
Dan Wootton, partner in the restructuring practice at Grant Thornton, says the focus of the process is to maximize value, which is why he chooses to complete projects with existing developers, as was the case with The One. That could mean, or it could simply mean trying to sell something like this: teeth.
Lenders typically try to work with borrowers, but they often miss multiple payments before that route is taken, Wootton said.
“Receivership is considered a fairly extreme legal remedy.”
Not all applications will be approved.
In December, a British Columbia judge rejected a request to place Coromandel Group, which has about $700 million in secured debt on 16 properties, into receivership. The decision to refuse was based in part on the fact that some properties were already under its own control.
Once approved, the recipient evaluates the cost to complete the project and compares it to the amount the developer can expect to sell the units for. If there is a shortage because costs are higher than expected, drastic action may be necessary.
“Unfortunately, it's possible that all pre-sale condo purchase agreements will be terminated, so it's almost like a reset,” Wootton said.
“Maybe the project itself needs to be changed… instead of condos, it could be a retirement home, or a student dormitory,” he said.
Buyers may be given the option to increase the unit price, but buyers will not be able to qualify for a mortgage at a higher price, developers will be forced to resell into a quiet market, and the project will be difficult. I'm falling into this.
Wootton said it's also difficult to try to resell entire projects in this market, as many are focused on unique projects.
“I'm hearing that large developers aren't taking on as many new projects right now. They're focused on finishing what they have.”
CBRE's White said there are still buyers, but he's not in a rush to make a deal.
“A lot of people are looking for contracts. They're trying to time the bottom of the market, and no one can do that,” she said.
He said the last time receiverships were this bad was probably in the early 1990s, but the overall market is at least more active then and there is still interest in potential receivership sales.
But White said the market still has some way to go before it recovers.
“I think it will be at least another six months, but the number of calls continues to increase unabated.”
This report by The Canadian Press was first published Feb. 1, 2024.
