Lenders are stepping up as developers to minimize financial losses
Canada’s distressed condo market is forcing lenders to take on an unexpected role – developers. Instead of cutting their losses, some lenders are stepping in to buy unfinished projects and see them through to completion, hoping to recover their investments.
This approach, called a credit bid, marks a shift in the real estate financing landscape as lenders find creative ways to navigate challenges posed by rising interest rates and declining home values.
The trend is most visible in Ontario, where projects like a partially completed condo development in Kitchener have been rescued by lenders. Gentai Capital and partners ELM Developments and Dorr Capital purchased the project out of receivership for $75 million last month.
Gentai converted its second mortgage into a majority equity stake, injected new capital, and secured fresh financing from KingSett Capital to allow senior lenders to walk away without losses.
While ELM Developments will manage construction, Gentai now finds itself owning the project, a big pivot for a firm that primarily provides loans.
“The preference would be just to get the cash back for the debt and be done with it,” CBRE Canada vice chairman Mike Czestochowski told BNN Bloomberg. “But this is the lender getting creative, and having their hand forced.”
This isn’t an isolated case. CBRE data showed that since interest rates began climbing in 2022, lenders have used similar credit bids to take over projects in Ontario, including a condo development in wine country, a suburban townhouse complex, and an apartment building near Toronto.
Betting on a rebound
The abrupt rise in interest rates has created tough conditions for developers. Many are struggling to make mortgage payments, and 2023 saw the highest number of receiverships in at least a decade. This year is on track to surpass that record.
For lenders, the alternative to stepping in often means selling projects at a loss.
“If you feel that there’s no profitable way to complete the project you certainly wouldn’t be putting more money into it,” Czestochowski said. “They have to be optimistic that our market is getting better and not worse.”
Some lenders believe a market rebound is on the horizon, making the gamble worthwhile.
“It will come back,” said Brian Dorr, head of commercial mortgage lender Dorr Capital, a partner on Gentai’s Kitchener credit bid. “If you can do this, I think it’s the best solution for keeping the lenders whole.”
While a temporary oversupply of condos has cooled markets like Toronto, industry experts warned of an impending housing shortage.
Shaun Hildebrand, president of consultancy Urbanation, said a slowdown in new condo starts will significantly impact the market in the coming years.
“It’s really going to be a big dramatic change in the market,” said Hildebrand. “You’re currently dealing with a glut in the market at the moment. But it’s a temporary phenomenon and it’s going to quickly turn into a situation of under supply.”
Condo projects can take years to complete, meaning today’s slowdown could result in fewer homes on the market later, potentially driving prices back up.
Read more: Investor retreat from condo market worsens Canada's homeownership crisis
While credit bidding is typically a last resort, more lenders are using this strategy not just to recover their funds but also to stabilize prices and ward off opportunistic lowball offers.
“It allows the parties to establish a floor and effectively deters bottom feeders,” said Mitch Vininsky, a managing partner with KSV Advisory who specializes in receiverships. “If a developer falters and bids are not forthcoming or below market, a lender has to be prepared to step in to protect its interests.”
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