Vancouver developers face a confluence of economic and regulatory factors that are putting financial pressure on projects and making insolvencies more common.

Even if the developments do not fail, they may require restructuring to make financial sense in a new environment characterized by significantly rising costs and other obstacles.

Various factors create a difficult climate for manufacturers. These include inflation, the sharp rise in the key interest rate from 0.25 percent in March 2022 to 5 percent in June 2023, taxes and redistributive policies, rising construction costs , authorization deadlines and modification of building codes.

They also include limits on foreign investment, weak pre-sale demand, rent controls, higher infrastructure taxes, supply chain issues, difficult financing climate, construction liens, shutdowns work and property tax arrears.

Sometimes insolvency leads to receivership. This is when a creditor goes to court and obtains an order requiring that a neutral third party or “receiver” be appointed to establish a valuation of the business and a plan for the future.

“We’ve never seen this many receiverships in a single cycle, and I think there are a few more to come,” said Tony Quattrin, vice chairman of CBRE Limited, which works for receivers selling distressed properties.

“The circumstances have sort of been contrived to create this unique environment and the reason we’re seeing these receiverships. You almost couldn’t have predicted how many things had to conspire at the same time to cause this event,” he said.

Real estate insolvencies on the rise in Canada

In Canada, insolvency is governed by the Bankruptcy and Insolvency Act (BIA) or the Companies Creditors Arrangement Act (CCAA).

According to the Federal Office of the Superintendent of Bankruptcy, there were 283 bankruptcies and proposals in the real estate, rental, leasing and construction sectors under the BIA in the second quarter of 2024, compared to 198 in the second quarter of 2024. second quarter of 2023, an increase of 43 percent.

Furthermore, three LACC proceedings took place in the real estate, rental, leasing and construction sectors in the second quarter of 2024, an unchanged figure compared to the second quarter of 2023. (The LACC proceedings are rare for real estate developments and are mainly intended for complex situations involving business continuity.)

A company is insolvent when it is no longer able to meet its debts as they fall due, or when it may be insolvent based on its balance sheet. A developer may be unable to pay merchants or suppliers, or may have a loan coming due that cannot be repaid or refinanced.

In the real estate sector, the most common type of insolvency proceeding is receivership, in which a creditor files a claim against the developer. A creditor will go to a judge, who will hear dissenting opinions and can override the interests of the parties.

Often there will be a sale or the project will be built. There are time-limited stays of proceedings, so no party can enforce their debts without court approval. Creditors hope to ultimately be reimbursed at best according to their rank.

The main difference between BIA and CCAA procedures is the participation of the debtor and whether or not the debtor controls the process. The CCAA process is debtor-driven and receiverships are creditor-driven. The total amount of debt and the strategic objectives of the parties will determine the path forward.

“It’s a bunch of things, like a perfect storm, a confluence of factors, that come together to make it very difficult for a real estate project to succeed in this environment,” said Dina Kovacevic, editor-in-chief of Insolvency Insiderwhich has observed an increase in property foreclosures in Vancouver since 2021.

Recent insolvencies in Vancouver are concerning

Experts say multifamily residential projects are virtually always subject to property escrow, rather than other subsectors like office and retail.

On January 11, 2024, following an application to the Supreme Court of British Columbia by the Bank of Montreal, Deloitte Restructuring Inc. was appointed receiver and manager, without security, of certain lands and assets of Harlow Holdings Ltd., Haro-Thurlow Street Project. Limited Partnership, Haro and Thurlow GP Ltd.

According to the industry website Floorsthis was a project located at 1045 Haro St. and 830-846 Thurlow St. in Vancouver, where developers planned 55- and 15-story towers with 516 units, retail space, a daycare center and a public square.

After being unable to get off the ground for more than five years, a proposed sale fell through and the owners were unable to pay their interest in July 2023, leading to receivership.

In August 2024, Floors reported that the Supreme Court approved the sale of the property to Chard Development.

Another high-profile insolvency in Vancouver was the Modus project, which went into receivership in May 2024 when construction was almost half-finished. The project by Centered Developments, legally owned by Grandlake Investments Corp., was to include 17 townhouses at the intersection of Park Drive and Granville Street. The procedure was initiated in mid-February by First Commercial Bank, which was owed more than $10 million according to Floors.

A third example is Coromandel Properties, which had $700 million in debt spread across 16 projects and filed for CCAA creditor protection in February 2023. According to Floorsafter leaving creditor protection the following month, various creditors initiated individual foreclosure proceedings and some of the company’s properties were sold into escrow to recoup monies owed to lenders.

“There is a great feeling in the industry that we have not yet seen the end of this situation and that we are not yet close to stabilization,” said Insolvency InsiderIt’s Kovacevic. “It’s going to take time and it’s going to be gradual.”

Proactive Steps Can Be Taken to Avoid Receivership

When a builder becomes insolvent, it is common for creditors to suffer a loss and not be repaid.

Pre-sale purchase contracts may be terminated and the property resold on the market. Sometimes deposits are returned months later with interest, and sometimes they are not returned at all.

To avoid such losses, lenders and borrowers often enter into consensual agreements, such as one or more forbearance agreements.

“There’s probably a lot going on on this, and you either make a deal or you go into receivership,” said CBRE’s Quattrin.

Kovacevic agreed. “It depends on the situation, the relationship generally between the lender and the borrower, how transparent the borrower is and how willing the lender is to work with them,” she said.

Derek Lai, Partner and Senior Vice President at Crowe MacKay LLP, is a Licensed Insolvency Trustee whose portfolio of practice includes condominium foreclosures and liquidations. He said that sometimes administrators like him are hired by secured lenders to carry out so-called “watchdog” monitoring in accordance with security agreements.

During these informal meetings, Lai can make a neutral and professional assessment of the viability of a restructuring and make non-binding recommendations to the borrower, who will generally comply to avoid losing the lender’s support.

Sometimes he also works for debtors or builders who are experiencing problems and are under pressure from creditors. Before going into receivership, a borrower can take steps to protect themselves and regularize their affairs.

“After the COVID-19 crisis, we saw an increase in more debtor-focused processes,” he said, such as restructurings or filing “Section I proposals” under the LFI. These proposals, intended for less complicated situations, can help avoid receivership or bankruptcy.

“We’re seeing a lot more restructurings of this type than just receiverships,” Lai said.

If a project is still viable or near completion, “debtor-in-possession financing” can allow a builder to borrow additional funds and obtain fees potentially higher than other fees, which would allow the project to be completed and sold and other costs. debts repaid.

There are also ways of restructuring by selling assets, called “liquidation proposals,” which can potentially allow a project to continue under new companies.

Current wave of insolvencies worse than 2007-08, expert says

CBRE’s Quattrin noted that his team has already worked on 11 real estate receiverships this year, compared to just three or four in the aftermath of the 2007-08 global financial crisis.

During the Great Recession, “we saw them coming, the banks were going to fail, the world was falling apart,” he said.

“We’ve seen some receiverships, people leaving their properties. We formed a receivership team, we really focused on what the receivers needed… we became a service to that company. If you blinked, it was over. We did three (receiverships) and everything was back to normal.

“This (cycle) is much more serious, much more,” Quattrin said.

“Many other events have contributed to making this one even more devastating, and I think there are more to come.”

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@JamiMakan