A nearly complete mixed-use residential rental and retail project has gone into receivership in London, Ont., as its lender alleges construction delays blew an initial construction budget of $18 million and that dozens of entrepreneurs are claiming millions for unpaid work.
London’s Applewood Marketplace Inc. is perhaps just one of many developments facing financial troubles due to grinding delays and rising costs affecting the construction industry. Data from real estate research and data firm Altus Group shows that around 60% of residential and commercial projects are facing delays of around a third of their original schedule.
Court filings from construction lender MarshallZehr Group Inc. allege Applewood owes it more than $58 million, with interest on all that debt exceeding $36,000 a day. The contractors also filed liens for $8 million in unpaid work.
There are two directors appointed for Applewood Marketplace, located on former farmland on the northern outskirts of London: Mike Clawson and Perry Sempecos. Until recently, Mr Clawson was primarily known as a London-based bespoke home builder, and Mr Sempecos is part of a family business in property and commercial development.
The court documents contain unproven allegations that have not been tested in court. Mr Sempecos declined to comment and Mr Clawson, whose colleagues said he was on a month-long holiday in Europe from mid-July, could not be reached.
In 2019, Mr Clawson bought a plot of land from Peter Sergautis, a local landowner who had been planning a larger development with the same Applewood brand since the early 1980s and began parcelling out and selling parts of the properties. Mr. Sergautis has no ongoing financial relationship with Mr. Clawson or his partners, and said he hopes the parties will reach an agreement to complete which will allow the construction of the first part of his dream development.
In 2020, Mr. Clawson and Mr. Sempecos took out loans from MarshallZehr to finance the construction of the first phase of the project: a five-story building with 107 rental apartments and retail space on the ground floor.
Even though Phase 1 faced delays from key contractors, Applewood began preparing work on the land reserved for a larger second phase on the site, which was to contain more than 460 apartments. An affidavit from MarshallZehr COO Cecil Hayes suggests the troubled project began to crumble on April 4, 2022, when the company stopped paying interest on its loans. In May, the first of 46 liens for unpaid work by contractors began to appear on title deeds.
By June, all work on the site had ceased and on June 3, 2022, MarshallZehr sent a Letter of Demand and Notice of Intent to Enforce Security (NITES) to Applewood. After that, the debtors allegedly attempted to sell the project to a third party and shared a purchase and sale agreement with MarshallZehr that has since expired. In an affidavit, Mr. Hayes writes, “I believe it is unlikely that the transaction as currently structured will close,” while acknowledging that the assessment of the potential sale rests with the receiver.
On August 3, a receiver from Ernst & Young Inc. was appointed to oversee a resolution of the company’s insolvency. What happens next will be some sort of arrangement that will either see MarshallZehr convert its debt into equity in the project, or some sort of sale arrangement that will repay the loans.
“It would be inappropriate for MarshallZehr to provide additional comment regarding this receivership,” said MarshallZehr CEO Peter Berczi.
In construction, time is money and delays can eventually deplete a company’s cash reserves.
“Interest is just the tip of the iceberg – it’s much bigger than that,” said David Schoonjans, senior director of Altus Group which focuses on cost and project management.
“There are overhead costs associated with the project: crane rental, management, subcontractors. Take a 30-story skyscraper in the Greater Toronto Area; you can easily spend half a million or $800,000 every month you’re behind. That’s a lot of money very quickly. And there are 50 companies on this project, so when you delay, you open yourself up to a huge box of litigation issues.
Mr Schoonjans said a challenge in defining delays and their potential costs is that there may be instances where an expected timeline has never been realistic, meaning costs have been underestimated. from the start. What may be happening now is that the tide is receding and beaching the builders who were already swimming too close to the rocks.
“When the markets go up and everyone sees what looks like huge profits…all they’ve ever seen is people making money from real estate and for many years, many sloppy mistakes were covered by the rise in revenue,” said Schoonjans.
While demand for housing is stronger than it has ever been, construction costs have risen even faster than incomes. “We’re at this impasse where costs have to come down or revenues have to go up…or the projects aren’t going to get built.
While the financial challenges of delays impact key players in a development, the bad news also impacts contractors whose companies are also pressured by the same labor and supply issues. supply.
Steve Creces of CD Drywall & Acoustics in London has filed a $170,000 lien after drywall and soundproofing work he carried out in the retail space of the Applewood building was halted.
“It is substantial. We are not a big contractor. We make about $5-6 million in revenue per year. It’s a big success,” he said.
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