Donald-St. Mary project in doubt as developer enters creditor protection By: Martin Cash Posted: 7:00 PM CDT Wednesday, Apr. 26, 2023

Hey there, time traveller!
This article was published 26/04/2023 (897 days ago), so information in it may no longer be current.

High interest rates, cost overruns and construction delays have forced a halt to work on the 120-unit, 14-storey residential project at Donald Street and St. Mary Avenue.

Donmar Properties Ltd. (a company controlled by Gordon Howard, owner of three Keg Steakhouse and Bar restaurants in Winnipeg) owes $25.5 million to secured lenders and has been granted creditor protection by the courts.

Ernst & Young Canada has been appointed monitor and Colliers International has been given exclusive listing to find someone to take over the project or to find investors to get it back up and running.

The future of the project — which is estimated to be 36 per cent complete — is in doubt, but court documents show a potential buyer has entered discussions.

Three real estate professionals, who spoke on condition their names would not be used, said a scenario where a project has advanced this far and then run out of money and is unable to proceed is a rare occurrence in Winnipeg.

However, each of them also said the current high interest rate environment, coupled with continually rising construction costs, could render many multi-family developments now under construction uneconomical.

The court documents show when the project was first contemplated in the fall of 2019, early estimates pegged its cost at $40 million. After revisions from Akman Construction Ltd. (general contractor on the project), its total budget is up to $63.8 million, with $23 million in costs already incurred.

The increasing estimated costs to complete the project were likely not all about interest rates, but it caused a substantial amount of the increase.

In Ernst & Young’s first monitor’s report, it noted “the increased annualized financing burden associated with current interest rates totals more than $2.443 million ($4.654 million over tenure of the project).”

For instance, Access Credit Union — which promised to provide construction mortgage financing of $42 million — first quoted a 4.6 per cent interest rate, but by March 30, 2023, rates were up to 7.70 per cent.

The developer did not draw down any funds from the Access mortgage, but does owe Steinbach Credit Union $12.8 million, documents show.

In April 2019, Akman commissioned an architectural design for the project at a $40-million budget. The rough estimate on the designs came back at $53 million. That delayed the project for more than a year.

In the monitor’s report, it said: “If not for this delay, the project may have been started and possibly completed much sooner, during a time when interest rates were lower.”

As well, the delay meant the project has not yet been able to secure tax increment financing from the City of Winnipeg, because its rules changed during that time, according to Ernst & Young.

Howard and officials from Colliers and Akman were not available to comment on the issue Wednesday.

One real estate professional suggested a potential scenario could be for a new investor to step in and only build the parkade and first-floor commercial space — not the residential tower.

The original concept included space for a 10,000-square-foot restaurant.

Howard owns three Keg locations in the city (Garry Street, McGillivray Boulevard and Portage Avenue). Although not on any of the public documents, industry sources said the expectation was for a new Keg restaurant to be built in the Donald Street and St. Mary Avenue development.

One real estate professional said the fact construction on the project has been halted was “troubling.”

“It is big project,” he said. “It is not good for the city.”

“It is big project… It is not good for the city.”–Real estate professional

Notwithstanding the developer’s insolvency, the monitor’s report indicated even if it were completed as planned, it would take some time before the project became profitable.

“In consideration of the current rental rates for apartments and commercial space in the city, and the estimated total costs of the project, it is more likely than not that the capitalized value of the project (fair market value), based on estimated future net operating income and increased interest rates (thereby higher capitalization rates), would not yield a positive return to the sole shareholder upon completion.”

One real estate professional said many projects being built now, with a schedule to be completed in this interest rate environment, “are going to be stuck with negative cash flows or long pay-down period. You have to make sure debt and cash flow are married.”

martin.cash@freepress.mb.ca