In 2018, Bank of Montreal backed investors who paid $173-million for a property at the corner of two busy Vancouver streets. Last July, the owners stopped making interest payments, and in January, BMO put the project into receivership.CHRIS WATTIE/Reuters
Bank of Montreal BMO-T is caught up in a messy battle over the future of a planned 55-storey condominium tower in downtown Vancouver.
At first glance, it’s a fight that feeds fears of a meltdown in all the big banks’ commercial real estate loan portfolios. BMO backed a flashy development that’s now worth far less than the $169-million of debt the project accumulated over the past five years.
Dig a little deeper into British Columbia court filings, and it becomes clear BMO is willing and able to do what it takes to ensure the bank gets repaid, in full, on a bad loan. That’s consistent with what analysts are now saying about all the banks: In all but the worst case scenarios, losses on real estate lending will be manageable, and far lower than what’s currently forecast.
BMO’s problem loan in Vancouver is a case study for what’s playing out on office, retail and residential projects across the country.
In 2018, with interest rates low and condo construction booming, BMO backed investors who paid $173-million for a property at the corner of two busy Vancouver streets: Haro and Thurlow. Their plans to build a 516-unit development got hung up at city council, in part over concerns the tower will block mountain views. Last July, the owners stopped making interest payments.
In January, BMO put the project into receivership. Court documents reveal the property’s seven creditors, including lenders based in China, are at odds over how to move forward. The city’s assessed value on the property is just $98-million.
Court filings show while some lenders may take a bath, BMO’s $82.2-million loan is likely to be paid in full. The bank’s claim ranks ahead of other creditors. It has the court’s blessing to start a sales process in late February and accept offers in April. Last year, a rival Vancouver real estate company, Chard Development Ltd., bid $93-million for the property, which the former owners turned down.
If the receiver – Deloitte – can sell the Vancouver property and BMO’s loan is repaid, the impact on the bank’s problem loan portfolio is significant. In the most recent quarter, BMO set aside a total of $446-million for credit losses.
If all the banks match BMO’s experience in downtown Vancouver, and come through this real estate cycle with relatively modest loan losses, it would come as a pleasant surprise to investors and regulators.
Last October, federal regulators at the Office of the Superintendent of Financial Institutions updated their risk outlook for the banks and flagged mounting problems in commercial real estate as a major concern. Those well-founded fears weighed heavy on the share prices of all Canada’s banks.
Since last fall, sentiment around loan losses has improved, and the banks’ stock prices have jumped. After a RBC Capital Markets investor conference in January that saw all the bank chief executives make presentations, analyst Darko Mihelic said in a report that “the banks expect provisions for credit losses (PCLs) to continue to normalize, but not revert to peak levels seen in previous recessionary environments.”
He added: “While commercial real estate losses and potential concerns about mortgage renewal shock still persist, investor concern regarding PCLs is not as high as is typical, likely reflecting a consensus call for a ‘soft landing.’”
Working out bad loans can mean a brawl between borrower and bank. It’s a contentious, time-consuming process. Expertise in restructuring loans – a skill set that was seldom required over the past decade, when rates were low – is now essential at every bank and corporate law firm. Lenders have to be willing to occasionally seize the keys of properties they never wanted to own.
There’s a wonderful chapter in Tom Wolfe’s novel, A Man In Full, detailing a hard-nosed banker’s boardroom showdown with a debt-heavy Atlanta developer. The session leaves the borrower soaked in sweat after making numerous concessions and giving up most of his fortune.
Similar scenes are now playing out in Vancouver boardrooms, and with developers across the country. And the banks are winning these battles.
Andrew Willis