Real Estate Foreclosures Rise as Projects Stall

From one of Canada’s tallest condo towers to bare lots, residential development projects across the country are increasingly failing.

Experts say high interest rates, construction costs and delays and a slower real estate market are contributing to the increasing frequency of projects that are under financial stress.

“A year ago it was maybe one call a month, one call every two months, and now it’s one call a week,” said Mike Czestochowski, vice president of CBRE’s land services group.

Receiverships are a way for secured lenders to have the court appoint someone to take control of the property and liquidate it or maximize the value of the assets.

Although often considered a last resort, CBRE has seen an increase in receiverships as larger construction projects with multiple mortgages and parties involved begin to run into problems.

“These projects that are under construction have seen such an increase in prices that they are simply running out of money,” said Lauren White, executive vice president of the company’s land services group.

That was the case in Kitchener, Ont., where creditors filed for bankruptcy against the owners of the Elevate Condominiums project, planned as four towers.

When the application was submitted in October, construction crews had already abandoned the site, leaving it 80 percent complete, but not weather-sealed. A December report found the owners had just $300 in the bank when the court order was passed and owed more than $100 million.

Other projects are not going as far.

Creditors of a planned 55-story condo tower in downtown Vancouver filed for bankruptcy in mid-January, including BMO, which is seeking repayment of more than $82 million in loans.

Some projects run into problems even after construction is virtually complete. Duca Financial Services Credit Union Ltd. filed an application on Jan. 19 against a Mizrahi Inc. condo project at 128 Hazelton Ave. in Toronto, seeking repayment of its $16 million loan.

While larger developers can generally still get financing, smaller ones are finding it difficult to get more money as the second-tier lenders they often rely on become more cautious, Czestochowski said.

“So when the debt comes due, it’s a little bit more difficult.”

Ontario has seen the most receiverships in recent months, but over the past year, the process has been applied to everything from a historic bank building in Saint John, N.B., to a fire-plagued apartment in Winnipeg.

Skyscrapers especially are seeing a surge, White said, given all the challenges these projects present and the potential for delays.

“A lot of this is due to poor management, not realizing the length and complexities of the development process,” he said.

The One, an 84-story building under construction in Toronto that Mizrahi Inc. is also developing, is probably the highest-profile project to recently face a default.

Filed in October, court documents showed the developer is $1.7 billion in debt and expects construction to finish more than two years behind schedule and more than $600 million over budget.

Other notable developments include creditors pushing in November for receiverships to be placed on at least five Vandyke Properties projects covering more than 1,700 units in the Greater Toronto Area, some already under construction, with claimed debts exceeding 200 millions of dollars.

Receivership is something available to secured creditors as a way to potentially get their money back when borrowers begin to default.

The focus of the process is to maximize value, said Dan Wootton, a partner in Grant Thornton’s restructuring practice, so it could mean completing the project with the existing developer, as is the case with The One, or simply trying to sell it as such. is.

Lenders will generally try to work with borrowers, and often there will be more than one late payment before they take the route, Wootton said.

“Receivership is seen as a pretty extreme legal relief.”

Not all applications are approved.

In December, a British Columbia judge denied a request to put Coromandel Group, with about $700 million in debt secured on 16 properties, into bankruptcy. The decision to deny was based in part on some of the properties already being in their own receiverships.

When approved, a trustee will evaluate how much it would cost to complete the project and compare it to how much a developer can expect to earn from the sale of units. When this proves insufficient due to higher than anticipated costs, drastic measures are sometimes necessary.

“What unfortunately can happen is that all of those pre-sale condo purchase agreements can be terminated. It’s almost like a reboot,” Wootton said.

“Maybe it will even be necessary to change the project itself… instead of a condo, maybe it will become a retirement home, or a student residence,” he said.

Buyers are sometimes given the option of paying more for the units, although projects are also having problems because buyers can no longer qualify for a mortgage at the higher price, forcing developers to try to resell them at a lower price. quieter market.

Trying to resell completed projects is also difficult in this market, as many focus on their own projects, Wootton said.

“We’re hearing that larger developers aren’t taking on as many new projects right now. “They are concentrating on finishing what they have.”

There are still buyers out there, but they aren’t rushing to close deals, CBRE’s White said.

“Many people are looking for an agreement. They are trying to time the bottom of the market, something no one can do,” she said.

The last time receiverships were this bad was probably in the early 1990s, he said, but the overall market is at least even more active than back then and there is still interest in potential receivership sales.

However, the market still has a ways to go before a recovery, White said.

“I think we have another, at least six months, you know, where calls will increase, not decrease.”

This report by The Canadian Press was first published Feb. 1, 2024.

Leave a Comment