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Developers are staggering under the double blow of higher costs and weaker demand — a trend industry experts say will get worse

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To passersby, the construction site at Yonge and Bloor in downtown Toronto where The One, an 85-storey mixed-use development is slowly taking shape, looks just like any other, albeit on a grander scale. Workers are making progress, pushing up past the 50th storey as the building’s facade begins to take shape.

Behind the scenes, however, it has been anything but business as usual.

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The project, launched by developer Sam Mizrahi and partner Jenny Coco nine years ago, was forced into receivership in October after a key lender grew impatient with delays, rising debt and ballooning costs. Last month, Mizrahi’s firm was removed as construction manager.

While The One’s struggles are drawing attention due to its $2-billion price tag, it is not alone. Facing a dangerous combination of higher interest rates and rising construction costs, an increasing number of residential construction projects have been forced into receivership over the past 12 months, a trend that industry watchers say is likely to get worse, even as Canada faces a severe shortage of residential housing.

“Receiverships are probably going to continue to be an issue for developers this year because of the elevated interest rates,” said Marlon Bray, a cost consultant at global real estate advisory firm Altus Group.

Higher rates, he said, can deal a double blow to developers, eroding demand for units while driving up financing costs, especially when delays hit.

It’s almost impossible to come back from receivership these days, or extremely difficult

Marlon Bray of Altus Group

Though he notes former U.S. president Donald Trump is often cited as an example of a developer who was able to successfully navigate the receivership process, most don’t fare so well.

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“Receivership is a nightmare scenario,” Bray said. “It’s almost impossible to come back from receivership these days, or extremely difficult.”

Sam Mizrahi, president of Mizrahi Development, poses in the showroom of The One, billed as Canada's tallest condo tower in November, 2017.
Sam Mizrahi, president of Mizrahi Development, poses in the showroom of The One, billed as Canada’s tallest condo tower in November, 2017. Photo by Tyler Anderson/National Post

Technically, receivership is a legal option available to secured lenders when a borrower defaults on payments. It allows the lenders to seek a court-appointed “receiver” to take control of a project or property with the goal of either liquidating its assets or maximizing their value for the benefit of the lenders. Once in control, the receiver may secure additional funding, oversee construction and decide the best course of action, which could include selling the project.

The receiver does not own the project but acts as a fiduciary to manage and oversee it on behalf of creditors. Typically, it is a specialized firm with expertise in managing distressed assets. The receiver has the authority to make operational decisions, but their primary focus is ensuring the debt is repaid as much as possible. The receiver’s actions are subject to court approval and oversight, and they must act in the best interests of all creditors.

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According to Sam Billard, a partner at business law firm Aird & Berlis LLP, creditors sometimes pursue more adaptable strategies to recover their funds before resorting to appointing a receiver.

“Creditors might go for a Companies’ Creditors Arrangement Act (CCAA) proceeding, which is sort of a court monitored process where creditors try to work out some kind of deal to keep the project alive,” Billard said.

The CCAA is a federal law that allows insolvent companies owing more than $5 million to restructure their debts under the supervision of the court. It provides a framework for a company to propose a plan of arrangement to its creditors, which can include renegotiating the terms of the debt, selling assets, or other measures to address the company’s financial issues.

While a receivership is focused on eventually liquidating assets for the benefit of creditors, the CCAA process aims to restructure the company’s debt to allow it to continue operating. However, in some cases, a receivership may occur within the context of a CCAA proceeding.

Billard gave the example of one case in which the CCAA process allowed a developer to maintain and reprice the purchase contracts for units, only for other financial issues to emerge.

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“One development that we looked at pretty closely had condos selling for $550 a square foot,” he said. “The company did a CCAA process that was confirmed in late 2022 and increased the price to $950 a square foot.” Billard said that of the 260 units, only 40 of the ones that were sold opted to stay in and purchase their unit at the new price. “The rest of the unit holders said, ‘We just can’t afford it,’” he said.

As a result, they had to refund depositors at a 12 per cent premium, which increased financial strain on the developer. Currently, construction on the building, which was nearing completion, has been halted due to a lack of funds.

Condo and office towers fill the downtown skyline in Vancouver, B.C., In January, the Bank of Montreal and other creditors successfully obtained a court-appointed receiver for a 55-storey condominium tower in the city.
Condo and office towers fill the downtown skyline in Vancouver, B.C., In January, the Bank of Montreal and other creditors successfully obtained a court-appointed receiver for a 55-storey condominium tower in the city. Photo by Darryl Dyck /The Canadian Press

A number of other projects across the country have been forced directly into receivership in recent months.

In January, the Bank of Montreal and other creditors successfully obtained a court-appointed receiver for a 55-storey condominium tower in downtown Vancouver. BMO says it is owed more than $82 million.

In November, a number of Vandyk Properties developments, encompassing 1,700 units across Toronto, were placed into receivership due to debts surpassing $200 million.

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A month earlier, a four-tower development called Elevate Condominiums in Kitchener, Ont., was also placed into receivership with $64 million owed. According to the lender’s counsel slip, one tower was already 80 per cent complete.

Last summer, a seniors home in St. Albert, Alta., went into receivership with construction incomplete. By July, Careadon Corp., the owner, owed $82 million to creditors. Out of 164 planned suites, only 54 were ready for occupancy, and just eight were leased. Careadon Corp. has owned the site since 2015 and had aimed to finish by 2018.

And last May, The Tesoro Collection in Vaughan, Ont., was one of several Stateview Homes projects to enter into receivership due to nearly $350 million in mortgage debt. The project was later sold with approval of the court.

Whether developers who find themselves in a difficult financial predicament should be given some kind of a break is a matter of debate.

“I do believe there are some good developers where things just get away from them and it’s certainly no fault of theirs or sometimes it’s just it’s really bad timing,” Bray said, arguing in favour of some leniency.

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Bray blames the current spike in receiverships on the federal government and the Bank of Canada, which initially reassured the public that interest rates would remain stable during the pandemic, only for rates to change unexpectedly a year or two later.

“No one could predict that interest rates were going to increase by this much before they did,” he said.

But Francesco Margani, founder and principal broker of Franc & Co, which specializes in debt financing, argued against any special treatment.

“I think there should be no real grace period because this is just economics 101 — you borrow money, you have to repay the money and if you can’t pay, you better find a way to either sell it or bring in somebody who can help you pay it — you take a lesser piece of the deal,” Margani said, emphasizing that the primary goal is to complete the project and deliver homes, even if it means the developer must accept a reduced profit by seeking financial assistance.

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Instead of bailing out developers, more capital should be made available for development projects through refinancing, allowing new investors to enter. He suggests that if individuals or entities are willing to invest their capital with a reasonable expectation of return, it could benefit both parties involved — those lending the money and the developers. This approach could help save development projects and allow them to continue moving forward.

“Because at the end of the day, we really do need housing and project cancellations are not helping the situation,” he said.

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