Currently, several real estate developers in the Lower Mainland are facing financial trouble. Many are being forced to sell their projects before defaulting, while others who cannot find buyers are being pushed into receivership or foreclosure. Let’s examine one such project and see what insights we can gain.
The Shawn Oaks Townhouse Complex
Shawn Oaks Townhouse Complex is located on Oak Street, near the former Oakridge Transit Centre. Landmark Premiere Properties acquired the site in phases between 2016 and 2021. The developer proposed a project consisting of a 31-storey strata tower, a 33-storey strata tower, and a six-storey social housing building, totaling over 600 residential units, along with a one-storey childcare facility with 37 spaces. However, this proposal has not yet been approved, and no rezoning application has been submitted.
Currently, the property has two mortgages, and the lenders are demanding repayment. The first mortgage, issued by Trez Capital, stands at approximately $73,479,000, accruing interest at $29,204 per day. The second mortgage, provided by the Peterson Group, amounts to $28,439,000, with daily interest costs of $16,916. Landmark has stated that in December 2019, the property was appraised at $100,831,806 and that this financial difficulty is isolated to Shawn Oaks, without affecting its other projects.
Receivership and Reverse Vesting Order
Trez Capital petitioned the court for a receivership, which the Peterson Group supported. This decision allows for the use of a reverse vesting order (RVO), a legal mechanism for selling distressed real estate. Instead of selling the assets directly, which would trigger a substantial property transfer tax, all liabilities are transferred to a new shell entity, leaving only the real estate in the original corporation. The shares of the original corporation are then sold, effectively bypassing the transfer tax.
Key Takeaways
Real Estate Investing is Risky
Real estate investment can seem easy when markets are rising, but downturns reveal who has planned ahead. Even experienced developers can fail when financial conditions change.
Second Mortgages Carry High Risk
Lending in second position is inherently risky, particularly if there isn’t sufficient equity cushion. In a default situation, costs can quickly accumulate. Since the first mortgage lender gets paid first, second-position lenders risk losing money if they are not careful. In this case, the total outstanding debt between both mortgages is about $101,965,000. Additionally, legal fees and sales commissions could easily add another $1.25 million or more. With a daily interest cost of $46,210, by the time the sale is finalized, the second lender might not recover the full amount they are owed.
Incorporation Can Protect Assets
Landmark has stated that its other projects remain unaffected by this insolvency. This is because incorporating a business helps contain liabilities within the corporation. The Shawn Oaks Townhouse Complex is held within one corporation. No matter how much debt is owed, creditors cannot pursue the owner’s other assets.
Use a holding company to avoid paying the property transfer tax
Holding real estate within a holding company, allows you to sell the property without paying the property transfer tax. This is because you are selling the shares of the holding company and not the property inside. There is no transfer of title.
This is why Trez Capital requested a reverse vesting order to facilitate the sale of the townhouse complex. The RVO allows the shares to be sold. For a $100,000,000 complex, we are talking about 3M in property transfer tax!
That’s all for now—hope you found this analysis insightful!
