Developers in Vancouver are facing a confluence of economic and regulatory factors that are financially stressing projects and making insolvencies more common.
Even if developments don’t fail, they may require a restructuring to make financial sense in a new environment characterized by a significant escalation in costs and other barriers.
Various factors are creating a challenging climate for builders. They include inflation, the steep jump in the key interest rate from 0.25 per cent in March 2022 to five per cent in June 2023, redistributive taxes and policies, rising construction costs, permitting delays and changing building codes.
They also include limits on foreign investment, weak pre-sale demand, rent controls, higher infrastructure levies, supply chain issues, a tough financing climate, construction liens, work stoppages and property tax arrears.
Sometimes, insolvency leads to receivership. This is when a creditor goes to court and obtains an order that a neutral third party or “receiver” be appointed to put together an assessment of the business and a plan going forward.
“We’ve never seen this many receiverships in one cycle, and I think there are still a few more to come,” said Tony Quattrin, vice-chair with CBRE Limited, which does some work for receivers selling distressed properties.
“Circumstances sort of contrived to create this unique environment and why we are seeing these receiverships. You almost couldn’t have predicted how many things had to conspire at the same time to bring this event about,” he said.
Real estate insolvencies on rise in Canada
Insolvencies in Canada are 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 Q2 2024, compared to 198 in Q2 2023—an increase of 43 per cent.
Meanwhile, there were three CCAA proceedings in the real estate, rental, leasing and construction sectors in Q2 2024, unchanged from Q2 2023. (CCAA proceedings are rare for real estate developments, and are mainly intended for complex situations involving going concerns.)
A company is insolvent when it is no longer able to meet its debts as they come due, or it can be insolvent on a balance-sheet basis. A developer may be unable to pay trades or suppliers, or may have a maturing loan that cannot be repaid or refinanced.
In real estate, the most common type of insolvency proceeding is a receivership, where a creditor files against the developer. A creditor will go to a judge, who will hear dissenting views and can override the interests of the parties.
Often there will be a sale or the project will get built out. There are time-limited stays of proceedings, so no party can enforce its debts without court approval. Creditors hope to eventually get paid out as best as possible depending on their rank.
The main difference between BIA and CCAA proceedings is the involvement of the debtor and whether the debtor controls the process or not. The CCAA process is debtor-driven and receiverships are creditor-driven. The total amount of debt, and the parties’ strategic goals, will determine the path forward.
“It’s a bunch of things, like a perfect storm, a confluence of factors, that are coming together to make it very difficult for a real estate project to be successful in this environment,” said Dina Kovacevic, editor of Insolvency Insider, which has observed a rise in real estate receiverships in Vancouver since 2021.
Recent insolvencies in Vancouver are cause for concern
Experts say multi-family residential projects are virtually always the subject of real estate receiverships, rather than other sub-sectors like office and retail.
On January 11, 2024, after the B.C. Supreme Court was petitioned by the Bank of Montreal, Deloitte Restructuring Inc. was appointed as the 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 industry website Storeys, this was a project at 1045 Haro St. and 830-846 Thurlow St. in Vancouver where developers were planning 55- and 15-storey towers with 516 units, retail space, a child-care facility and a public plaza.
After being unable to commence for over five years, a proposed sale fell through and the owners defaulted on their interest payment in July 2023, leading to the receivership.
In August 2024, Storeys 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 entered receivership in May 2024 when construction was nearly halfway complete. The project by Centred Developments, legally owned by Grandlake Investments Corp., was meant to be 17 townhouses at the intersection of Park Drive and Granville Street. The proceedings were initiated in mid-February by First Commercial Bank, which was owed more than $10 million according to Storeys.
A third example is Coromandel Properties, which had $700 million in debt across 16 projects and sought creditor protection under the CCAA in February 2023. According to Storeys, after exiting creditor protection the following month, various creditors initiated individual foreclosure proceedings, and some of the company’s properties were sold off in receivership to recoup amounts owed to lenders.
“There’s very much a feeling in the industry that we haven’t seen the end of this and we are not close to stabilizing quite yet,” said Insolvency Insider’s Kovacevic. “It’s going to take some time and it’s going to be gradual.”
Proactive measures can be taken to stave off receivership
When a builder becomes insolvent, it’s common for creditors to take a loss and not be made whole.
Pre-sale purchase agreements can be terminated and the property re-marketed. Sometimes, deposits are returned months later with interest, and sometimes they are not returned at all.
To avoid such losses, lenders and borrowers often reach consensual arrangements, such as one or more forbearance agreements.
“There’s probably a lot of that going on, and it’s either you make a deal or you go into receivership,” CBRE’s Quattrin said.
Kovacevic agreed. “It depends on the situation, it depends on the relationship typically between the lender and the borrower, how transparent the borrower is being, and how much the lender is willing to work with them,” she said.
Derek Lai, partner and senior vice-president with Crowe MacKay LLP, is a licensed insolvency trustee whose book of business includes foreclosures and strata wind-ups. He said that sometimes, trustees like him are engaged by secured lenders to perform so-called “look-see” monitoring pursuant to security agreements.
In these informal appointments, Lai can perform a neutral and professional assessment of the viability of a restructuring, and can 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 running into issues and getting pressured by creditors. Prior to receivership, a borrower can take steps to protect itself and regularize its affairs.
“Post-COVID, we’ve seen an uptick in more debtor-driven processes,” he said, such as restructurings or filings of “Division I proposals” under the BIA. These proposals, meant for less complicated situations, can help avoid receivership or bankruptcy.
“We’re seeing a lot more of these types of restructurings as opposed to just straight-up 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 get a charge that potentially ranks ahead of other charges, which would allow the project to be finished and sold and other debts repaid.
There are also ways to restructure by selling assets, known as “liquidating proposals,” which can potentially allow a project to live on under new corporate entities.
Current wave of insolvencies worse than 2007-08: expert
CBRE’s Quattrin noted that his team has worked on about 11 real estate receiverships already this year, compared to just three or four in the aftermath of the 2007-08 global financial crisis.
During the Great Recession, “we saw these coming, banks were going to go under, the world was falling apart,” he said.
“We saw a couple receiverships come up, people walking away from their properties. We formed a receivership team, we got really focused on what the receivers needed … we became a service for that business. If you blinked, it was over. We did three [receiverships] and everything was back on track.”
“This [cycle] is much more severe, much more,” Quattrin said.
“Many more events conspired to make this one more devastating, and I think there’s more to come.”
