What Causes Pre-Construction Condo Cancellations?

Development

9 minute read

March 1, 2023

Sometimes, a delay is just a delay.

And other times, a delay is just the first step along the road to a cancelation.

As you’ll see in today’s blog, many of the reasons for cancelations are often rooted in the same problems that caused delays, but some are extensions, and some are completely different reasons altogether.

These are in no particular order, other than what I think of when I really question why a condominium project might be canceled in Toronto….

1) Zoning and approval.

If you close your eyes and picture the northwest corner of Bloor and Dundas in Roncesvalles, what do you see?

I see a leopard.

No, wait, it’s something else.

It’s a giraffe.

I see this:

I honestly don’t know what the corner looks like right now, but that’s what I see in my mind.

I see the failed 2007 development called “Giraffe Condos.”

This project wasn’t economically viable because the city of Toronto wanted 10-storeys but the developer wanted 27-storeys.

Remember, developers can start pre-sales before they have a final design or approval, and of course, they can always change the design.

So why not start taking deposits on an empty site when you don’t even have an agreement with the city on what to build?  You can always cancel the project and send the deposits back.

There have been no shortage of attempts to build condominiums in this city, and many of those attempts fail at the very first step: getting permission.

It is the City of Toronto’s job to ensure that developers don’t simply build 275-storey condos into the stratosphere and as such, a city planner is assigned to every application and will provide a recommendation on what should be built on any given site.  Some planners are more lenient than others.  Some are anti-development and others are all for it.  On any given day, you never know who you’re going to get, and when you throw city councilors into the mix, with their varying ideologies and pandering to constituents, things rarely go the developers’ way.  At least, not the first go around.

It often takes many dances between the developer and the city in order to get them to kiss at the end of the song, so to speak.  Or not.

Developers will often make several revisions and resubmit applications over and over, and while sometimes they get what they want in the end, other times, they just get shot down.

The very first reason that some condominium projects are canceled: the developer and the city can’t make the project work.

2) Economic viability.

A developer won’t build a condo if the project will not result in a profit.

Hard stop.

As I mentioned on Monday, there are some out there that believe a developer should be forced to “follow through with their promise,” but that’s pie-in-the-sky thinking.

And for those who are new on TRB, please keep in mind: I’m not on the developer’s side here.  I’ve been writing anti-pre-construction rants for fifteen years, but I won’t succumb to the naivety that is currently plaguing many Torontonians when it comes to this subject matter.

Economic viability was one of our reasons listed in Monday’s blog for condo delays, but it’s also a reason for condo cancelations.

We talked a lot about sales on Monday as a reason for delays.  Of course, they could also be a reason for cancelations, which is to say that if you can’t sell out a pre-construction condo, you might cancel it.

But ironically, we see cancelations for projects that are actually selling well!  In fact, according to Urbanation data, “Museum FLTS” by Castlepoint Numa & Greybook Realty Partners started selling in June of 2016 and was 100% sold, with the 70% sales threshold being met in a mere one month’s time, and yet this project was canceled.

Why?

Economic viability.

The developer isn’t under any obligation to share the reasoning.  No books need be opened.  No math need be explained.

But that didn’t stop angry buyers from suggesting as much.

I remember getting calls from some journalists who were invested in the project and one said to me, “We just need to get to the bottom of this.  We need to know what happened.”

But that’s the thing: you don’t get to know what happened.  It doesn’t work like that.

I’m not saying it shouldn’t.  I’m saying it doesn’t.

The developer, and only the developer, can define “economic viability,” and even if it’s the developers’ internal bean-counters who are to blame for failing to forecast an increase in materials, labour, and interest rates, it still doesn’t matter.  The developer has the final say on what’s “economically viable.”

This is probably the number-one largest reason why projects are canceled, and of course, it leads to #5 on our list which you’ll read at the end…

3) Financing.

You could tie this into “economic viability,” except that there are cases where a project is economically viable, and where the developer doesn’t have financing, just as there are projects where the developer has financing but the project isn’t economically viable.

As we discussed on Monday, there are many sources of funding for condo developments.

Developers rarely finance their own projects.  After all, they’re developers, not equity groups or banks.

Even if a developer has “skin in the game” financially, there’s always a bigger player or at least a big player who can make or break the project financially, and every agreement is different.

Financing could fall through because sales aren’t high enough or are taking too long, or because interest rates have increased and gross sales remain the same, or how about because the developer doesn’t get the zoning or approval that they’re looking for, and while they want to go ahead with the project, the financier doesn’t?

“Financing” is a nice catch-all to say that the developer isn’t always the one who pulls chute on these projects.  Many times, these projects are effectively canceled by somebody else…

4) Bankruptcy.

I’m not one to dance on graves, but when the news broke about Cresford Developments’ major financial issues, and it turned scandalous, before it turned into a bankruptcy, I couldn’t help but feel vindicated.

Back in 2014, a colleague and I had sixteen listings in Cresford’s MYC project on Merton Street for a short while, and I say “a short while” because it turned nasty very quickly.

I had never worked with a developer before, and while this was resale and not pre-construction, we never saw eye-to-eye.

We disagreed on absolutely everything.

A classic example: we believed in staging and they didn’t.  When we finally convinced them to stage, they rebuffed our stager and insisted on bringing in their own; a person who eventually gave up halfway, left furniture scattered in a handful of units and even in the common areas, and it made our job twice as tough in the end.

After a month of carrying units unsold, with few showings and zero interest, they decided to raise their prices.

We were never a good fit.

And after selling three of the units, we opted not to continue the working relationship, but not without vitriol and animous being thrown at us every step of the way as we exited the door.

Years later, I saw the stories about Cresford and the names therein.  Some of the people with whom I had the most unprofessional dealings in my whole career were named in articles about the company’s demise, and I, for one, was not surprised.

It’s possible that the ultimate end of Cresford Developments had nothing to do with the people, the attitudes, and the business philosophies, and only had to do with their cash crunch.  But I don’t know.  I don’t think anybody truly does, and I’ll say this about the way they conducted themselves: it sure didn’t help.

The same can be said for Urbancorp, whom I wrote about on my blog countless times from 2008 through 2016, and after Urbancorp when bankrupt, I posted this:

July 29, 2016, “For Sale: Everything Urbancorp!”

This detailed the firesale of Urbancorp’s assets after their bankruptcy.

Five of Urbancorp’s sites were listed for sale for $1 with bids to be submitted by the end of that summer.

For those who are newer to real estate as a hobby, here’s a timeline of 2015-2016 events that led to Urbancorp’s bankruptcy:

January 27, 2015 – Urbancorp Cancels “King’s Club” Condo Project

June 3, 2015 – Urbancorp Refuses To Give Back Deposits On Val Homes Project

March 31, 2016 – Urbancorp Complaints To TARION Result In A “Warning”

April 4, 2016 – Urbancorp’s Bonds Plunge In Value On The Tel Aviv Stock Exchange

April 17, 2016 – TARION Threatens To Revoke Urbancorp’s Registration

April 22nd, 2016 – Urbancorp Files For Bankruptcy

May 3, 2016 – The CEO of Urbancorp Files For Bankruptcy.

This culminated with the firesale of Urbancorp’s existing real estate, although I’m sure this “firesale” made the principals whole, and then some.

When it comes to Cresford Developments, their downfall happened far quicker and there was way less build-up.

In fact, it wasn’t until a lawsuit broke, with a former employee suing the company, that the financial problems were exposed.

From there, it unraveled quickly!

February 21, 2020: Former Cresford Developments President Alleges “Cash Crisis” At Condo Firm

April 1, 2020: Three Toronto High-Rise Condo Projects Started By Cresford Developments In Receivership

April 6, 2020: Cresford Receivership Crushing For Condo Buyers

June 12 2020: Court Approves Concord Pacific’s Purchase Of Clover Condos At Yonge & Wellesley Streets

The latter article deals with the heartbreak of pre-construction condo buyers who purchased units in Cresford’s projects only to see Cresford go bankrupt and cancel the projects.

But remember what happened after that?

Oh, wow, it got interesting…

August 28, 2020: Clover Condo Buyers Want To Limit Project Owner’s Profit

Oh, that’ll be the day.

That’s the day the world stops turning and we go from socialism into something completely state-controlled, but I digress.

Urbancorp and Cresford are the two most high-profile condominium developer bankruptcies that I can think of, but feel free to share if you know of others.

Both had questionable reputations; Urbancorp far more than Cresford, but both ultimately had financial problems that led to their bankruptcies.

I honestly don’t believe that poor business practices, shoddy workmanship, or downright screwing over buyers for decades on end would lead, on their own, to bankruptcy.  Pre-construction buyers have demonstrated, time and time again, that they will always go back to the well, they will always line up to buy magic beans, and that a bad reputation isn’t going to get in the way of their get-rich-quick scheme.

I remember getting calls in the early-2010’s from buyers of Urbancorp projects who read what I wrote on TRB, all of them asking, “Should I go ahead with my purchase?”  I always told them unequivocally, “No,” and asked them to follow up with me in a week, or allow me to follow up with them.  I never spoke to a single person who took my advice.  While I didn’t talk to them all, those who I did speak to all went ahead with their purchases, and several were in the ill-fated Val Townhome project.

No, it’s only bankruptcy that kills a developer in the end, or financial peril from which they can’t recover.

Many condominium projects have been canceled because of bankruptcies, although it’s probably not the number-one cause.

5) The ability to cancel and re-sell without reprisal.

Do you like the movie Fight Club?

It’s one of my all-time favourites, and not because every young man between the ages of 16 and 35 was in love with the movie, the concept, and Brad Pitts’s abdominals when the film came out in 1999, but rather because I absolutely love satire.

Take away the anarchy, the fighting, and the darkness, and you’ve got a satire on society!

I also read the book.  I’ve always wanted to say that about something

There’s a scene when Edward Norton’s character (no spoiler here…) is on an airplane and he’s explaining to a passenger sitting next to him how his company decides whether or not to issue a recall of a defective car in the event the company discovers a major fault:

“I was a recall coordinate.  My job was to apply the formula.  A new car built by my company leaves somewhere traveling at 60 mph.  The rear differential locks up.  The car crashes and burns with everyone trapped inside.  Now, should we initiate a recall?  Take the number of vehicles in the field, A, multiply it by the probable rate of failure, B, then multiply the result by the average out-of-court settlement.  A, times B, times C, equals X.  If “X” is less than the cost of the recall, we don’t do one.”

Sometimes, that’s just how business goes.

By the same token, you have to figure that many condominium developers have applied the same logic.

If a developer could cancel a project and then re-launch and re-sell it, what would the decision-making process look like?

How much flak will they take for the cancellation?  How much damage to their reputation?  How many of the original buyers will walk away versus those who will re-purchase?  How much money must be spent on marketing, staffing, and logistics to re-sell the other units?  Lastly, how much more money will they re-sell for and is that amount more than the cost of the cancelation and re-sale?

I’m sure we don’t want to think that there are board rooms in condominium developers’ offices where these conversations are taking place, but cancelations don’t lead to re-launches by accident.

Let’s give developers the benefit of the doubt here, for a moment.

If a project is launched in 2011 and the target start date for construction is 2012 with a target completion date of 2014, consider that if sales are slow, or zoning/approval takes too much time, or events lead to construction starting in 2016 instead of 2012, then you have four years’ worth of increased costs on materials, labour, and operations, yet the revenue generated from the 2011 sales remain the same.

In that case, sure, a developer would look at a cancelation so they can re-launch and re-sell the project, but it doesn’t mean they would all do it.

As I said in the economic viability section, developers aren’t going to build if they forecast a loss.

Now, consider a situation where the developer does start construction but cancels the project.

Huh?

Wait, what?

Yes, this actually happened!

Urbancorp canceled a King West project when it was halfway through construction so they could sell the project to a REIT.

It was almost amusing if you can find the humour in it.  They effectively “borrowed” money from those buyers, via their deposits, and the sales allowed Urbancorp to obtain financing to start the project.  Then when the project was approaching completion, they “canceled” it, returned those deposits, and sold the building as a whole.

I honestly can’t see that ever happening again, but I can’t think of a better way to end this point!

So there you have it, folks.

The top five reasons for condo cancelations as I see them, and I can’t really think of a sixth reason without basically repeating one of the five points above.

Notice how they all tie into one-another?

It’s often two reasons why condos are cancelled, that is to say, one leads to or from another.

Well, I for one ended up a little blue after reading and writing about cancelations and delays, so perhaps a fun topic is in store for Friday?

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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10 Comments

  1. TLM

    at 10:37 am

    I’m genuinely surprised at this post. David, didn’t you read the Monday comments? It’s been illegal to cancel a project for economic viability issues since 2012 – Tarion specifically prohibits it. Publishing this kind of misinformation twice in a row is just irresponsible.

      1. TLM

        at 10:30 am

        If you know it’s illegal for a developer to cancel based on economic viability, I think it’s irresponsible and misleading to publish that as the #2 reason projects are cancelled, especially without mentioning that it’s actually illegal. Any random person reading the post would assume that this type of cancellation is permitted.

        Now you’re saying okay, sure it’s illegal, but developers are just improperly using another condition as cover to cancel for economic viability reasons. Not only is this not as easy as you’re suggesting (Tarion actually looks pretty carefully at cancellations, and developers have to prove they’re cancelling for the stated reason and made bona fide efforts to satisfy the relevant condition), but it assumes developers are acting improperly, when in reality they might have the right to cancel a project for a separate permitted reason like financing, which is driven by similar factors.

        The fact that some other news outlet is similarly publishing something misleading isn’t a reason for you to do it, and I’m sorry but I think your post is more misleading than the CTV article because you separately list economic viability and financing as if they each stand on their own.

        1. David Fleming

          at 2:22 pm

          @ TLM

          I’m sorry, I don’t know if we’re discussing the same point or different ones. I think you’re focused on the definition of “economic viability” where as I’m simply talking about profitability.

          Are you saying that if a developer realizes that a project isn’t economically viable, profitable, successful, solvent, et al, then they will still proceed with the project?

          That’s all my point is referring to.

          The phrase “economic viability” has a different meaning, pre-2012, as it was used in developers’ standard contracts.

          Had I titled this point “Inability to profit,” would have you an issue with it? What I’m asking is: do you believe that developers who pre-sell condo projects, only to find out they’re not profitable, go ahead and build them? Because if your answer is “yes,” then we have a serious difference of opinions.

          The article link I posted referred to “rising labour costs” as a reason for cancellations as well as “supply chain issues.” These are factors that drive costs for developers, make projects less profitable, and result in cancellations.

          Keep in mind, I’m also not talking about today. I’m looking in the rear view mirror and talking about Giraffe, Cosmos, Kings Club, et al. Many of these projects were canceled before the provincial government stepped in last fall.

          Don’t forget, we’ve seen the difference between “satisfactory financing” and “unfettered discretion” argued in court.

          https://www.thestar.com/business/real_estate/2019/04/23/cancelled-cosmos-condo-buyers-lawyer-argues-purchase-contracts-were-unlawful.html

          “Sole, absolute, and unfettered discretion to cancel,” is what is written, or was written, in many standard contracts.

          Projects not being profitable can lead to a developer canceling a project at their “sole, absolute, and unfettered discretion.”

          DIAM Developments canceled a Danforth project “due to unforessen circumstances” that resulted from “construction cost increases, delays, and the lender calling in a construction loan.”

          https://www.thestar.com/news/gta/2019/03/19/danforth-condo-cancelled-by-developer.html

          Are we on the same page? Let me know. I value your input here.

        2. Derek

          at 4:33 pm

          tomayto tomahto

    1. JL

      at 12:04 pm

      That’s the very issue here. Since the “valid” reasons for cancelling like “financing” are so broad, loosely defined, and not subject to proof or review, they can easily become a catch-all for “we just don’t want to proceed on our original terms”.

      It would be interesting how things would play out if there were serious penalties for cancellation (payable to the pre-con buyers), but I suppose developers would just build the added risk into their prices (but maybe also take fewer risks with attempts at more marginal projects?). Still, I wonder if on balance the benefits of a more predictable and stable pre-con industry (with less speculative developments) would outweigh that risk cost premium.

      1. Izzy Bedibida

        at 1:50 pm

        Great one…especially when developers cancel a project and quickly relaunch it under a new name with much higher pricing.

  2. Sirgruper

    at 2:16 pm

    David

    Enjoyed your blog as always. I actually knew the Giraffe developer and they had other sites at the time that all went ahead but the councillor was dead set against that one. Some councillors are anti development and you can see certain parts of the City have not developed notwithstanding proximity and transit due to these long term councillors. Selling early before planning is completed, firstly, speeds up the development process but secondarily, also helps to put pressure on the councillor as the councillor saying no to some sad paces on the front page of the Star is sometimes a deterrent.

    My experience is that the top developers almost never cancel. They know their product, numbers, what they are likely to build and their reputation is worth more to them than a few million dollars either way.

    Quick PS. Cresford was definitely special and you broke the first two rules of Fight Club.

  3. Zeus

    at 11:28 am

    I like what I read!

  4. RPH

    at 2:35 pm

    What are your thoughts on a developer that tells you that he will tear up your condo preconstruction sales contract if you don’t agree to a price increase? And the project has not been cancelled.

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