Real Estate Receiverships: The Increasing Trend in Canada's Construction Industry

CEO Khai Intela
From towering condominiums to vast stretches of land, residential development projects across Canada are experiencing a surge in receiverships. This rise is primarily attributed to elevated interest rates, construction costs, delays, and a slower real...

From towering condominiums to vast stretches of land, residential development projects across Canada are experiencing a surge in receiverships. This rise is primarily attributed to elevated interest rates, construction costs, delays, and a slower real estate market. According to experts, these factors are all contributing to the growing financial distress faced by numerous projects.

The Escalating Frequency of Receiverships

Over the past year, the frequency of receiverships has steadily increased. What was once an occasional occurrence has now become a weekly phenomenon, as indicated by Mike Czestochowski, vice-chair of CBRE's land services group. Receiverships serve as a means for secured lenders to appoint individuals who can take control of a property, with the objective of maximizing its value through liquidation or other methods.

Although receiverships are typically seen as a last resort, they have become more commonplace in larger construction projects that involve multiple mortgages and parties. Lauren White, executive vice-president of CBRE's land services group, explains that rising construction costs have drained the finances of these projects, leading to financial instability.

For instance, the Elevate Condominiums project in Kitchener, Ontario, faced receivership when it ran out of funds, leaving the construction site 80 percent complete but lacking proper weather sealing. Similarly, creditors filed for receivership for a planned 55-storey condo tower in downtown Vancouver, seeking repayment of over $82 million in loans. Even completed projects, like the Mizrahi Inc. condo in Toronto, are not immune to financial difficulties, with creditors seeking repayment of a $16-million loan.

Challenges for Smaller Developers

While larger developers still manage to secure funding, smaller ones face increasing difficulties in acquiring additional capital. Second-tier lenders, which are often relied upon by smaller developers, have become more cautious in extending loans. This cautious approach makes it harder for developers to finance their projects as their debts become due.

Although Ontario has seen the majority of receiverships in recent months, the trend extends to other regions of Canada. From a historic bank building in Saint John, New Brunswick, to a fire-plagued apartment in Winnipeg, receiverships have affected various types of properties. However, high-rise developments are particularly prone to financial stress due to their inherent challenges and the potential for significant delays.

The Role of Receivership in Recouping Debts

Receivership serves as an option for secured creditors seeking to recover their funds when borrowers default. Its primary objective is to maximize the value of the property. In some cases, this may involve completing the project with the existing developer, as seen in The One project in Toronto. Alternatively, a receiver might opt to sell the property as-is.

Lenders typically work with borrowers, allowing for multiple missed payments before resorting to receivership, which is considered an extreme legal relief. However, not all receivership applications are approved, as seen in a recent case involving Coromandel Group. Despite having approximately $700 million in secured debts across 16 properties, the application for receivership was denied.

When receivership is approved, the appointed receiver assesses the cost of completing the project and compares it to the expected revenue from the sale of units. If the costs outweigh the projected revenue due to unforeseen expenses, drastic measures may be necessary. This could include cancelling pre-sale condo purchase agreements or potentially even changing the project concept to better align with market demands.

The Impact on Buyers and Developers

Buyers caught in the midst of a receivership face challenging decisions. They may be given the option to pay more for their units, but some buyers may no longer qualify for a mortgage at the increased price. As a result, developers find themselves attempting to resell units in a slower market. However, reselling entire projects proves difficult, as many developers are concentrating on completing their existing ventures.

Despite the challenges, there are still buyers in the market who are seeking deals. CBRE's Lauren White acknowledges that buyers are cautious and looking to time the market's bottom, even though predicting market fluctuations is nearly impossible. While the current receivership trend mirrors the early 1990s, the overall real estate market remains active, with interest persisting in potential receivership sales.

Although recovery is on the horizon, experts, such as Lauren White, believe it will take at least another six months for the market to stabilize and the frequency of receiverships to diminish. As the industry adjusts to these fluctuations, developers and buyers alike must navigate the changing landscape of Canada's real estate market.

The One is located at the corner of Yonge and Bloor streets in Toronto. The One is located at the corner of Yonge and Bloor streets in Toronto.

Experts say high-rise buildings in particular face troubles with funding given the potential for delays. Experts say high-rise buildings in particular face troubles with funding given the potential for delays.

Coromandel has 16 active real estate projects in Vancouver, B.C., including a townhome development on Oak Street at West 52nd Avenue. Its application to be put into receivership was denied. Coromandel has 16 active real estate projects in Vancouver, B.C., including a townhome development on Oak Street at West 52nd Avenue. Its application to be put into receivership was denied.

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