Real estate developer Westbank faces onslaught of litigation for Canadian, U.S. projects due to unpaid bills

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Westbank Corp., a prominent Canadian developer known for its ambitious architecture, is facing problems at several projects in Toronto and Seattle with contractors claiming millions of dollars in unpaid bills.

The number of lawsuits and liens has been piling up over the past year – a particularly difficult period for the industry as borrowing costs and construction expenses soar. More than two dozen construction and trade businesses have been fighting with Westbank over unpaid bills. The allegations have not been proven in court.

The Vancouver-based developer, which incorporates dramatic art at sites such as the Shangri-La hotels in that city and Toronto, said it is not commenting on the details of individual disputes that are subject to continuing negotiation or litigation, other than to say it expects to reach a resolution.

It added that delays caused by constructing through a global pandemic are far from unique to its projects. “Despite the challenging circumstances across the industry, our relationships are strong and construction on our projects is progressing,” Westbank spokesperson Ariele Peterson said.

Like other developers, Westbank has had to contend with the significant spike in costs for materials and labour along with soaring borrowing costs. Residential construction expenses are up 58 per cent over three years. And the cost of borrowing for builders is at its highest level since the turn of the century, with the prime interest rate charged by banks at 7.2 per cent.

The sharp escalations have contributed to financial problems at several other Canadian developers this year.

Sam Mizrahi’s Toronto luxury condo project The One was put into receivership in October by its lenders after it defaulted on $1.6-billion in debt payments. Lenders have put several Vandyk Properties developments into receivership after the Toronto-area residential builder defaulted on more than $183-million in loan payments. StateView, a residential builder based north of Toronto, was placed into receivership after defaulting on $349-million in debt payments.

In Vancouver, residential developer Coromandel Properties filed for creditor protection after its lenders demanded that it repay more than $200-million in loans. And Onni Group, a developer with properties in several North American cities, has been sued by numerous contractors in British Columbia for unpaid bills.

But Westbank, founded in 1992 by current chief executive officer Ian Gillespie, who has made “fight for beauty” a tagline at his company, is one of the largest and most well-known Canadian developers to see such an onslaught of litigation. Although the amounts of some liens are not large, the volume of claims and the litigation is notable, painting a portrait of a developer that is in conflict with its trades on many fronts.

A review by The Globe and Mail of legal action facing 10 other prominent Canadian real estate developers in Ontario shows no similar flurry of claims from unpaid creditors.

Westbank has pushed out completion dates at skyscraper projects in Seattle, Toronto and Vancouver after expanding over the past decade.

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In Seattle, more than two dozen construction companies have accused Westbank and its former general contractor, Graham Construction and Management Inc., of not paying them for work at residential complexes called Museum House and WB1200.

The problems started surfacing in 2022 when Westbank removed Graham as its contractor at Museum House, sometimes referred to as Terry because of its location on Terry Avenue. Terry will eventually hold two 33-storey towers with 486 apartment units.

As the general contractor, Calgary-headquartered Graham was in charge of hiring specialists for work such as welding and installing windows. When Graham was removed in March, 2022, its subcontractors turned to Westbank for payment.

The bills started racking up. Twenty-two subcontractors have placed liens, or legal claims, on the Terry project, and/or Graham, Westbank and Westbank’s development company, Icon West.

“Graham and Terry failed and refused to pay,” High Rise Glazing Specialist LLC, said in a lawsuit filed December, 2022, in Washington State’s superior court.

The glazing company is still owed US$1.45-million for work done from June, 2020, through June, 2022, according to court documents. High Rise Glazing and its lawyer did not respond to a request for comment. Graham did not respond to repeated requests for comment. A trial is tentatively scheduled for next year.

Meanwhile, subcontractors continue to place liens against Terry, the most recent one filed Nov. 8 by Zuhause Design LLC for US$231,781.

Under Washington State law, a lien is no longer enforceable after eight months unless the complainant follows up with a lawsuit. However, contractors often do not take that step because the costs of suing can run into tens of thousands of dollars. Although some liens on the Terry project have, in effect, expired, that does not mean the developer has settled the contractors’ unpaid bills.

An active lien typically devalues the property and prevents the developer from refinancing the site, unless the developer satisfies the lien by paying the unpaid bill or arranges to release the lien by purchasing a bond to replace it.

Even though Westbank has released some liens by posting bonds, that does not mean the subcontractors have gotten paid.

That was the situation for Iris Window Coverings NW Inc., which has an outstanding bill of US$123,178 after providing automated draperies for the Terry project. Westbank posted an US$184,000 bond to release the lien. But none of that money has flowed to Iris Window, which is now struggling financially.

“It’s a huge issue. We’re a small company,” said Iris Window president Scott Davidson. “This is a contributing factor to some of our financial challenges.”

A similar story has occurred at WB1200, a pair of 47-storey skyscrapers with about 1,000 apartments also called Stewart, after the street name. Westbank plans to suspend a Boeing 747 fuselage between the towers as a tribute to the aircraft maker’s history in Seattle.

About a dozen subcontractors placed liens against the project and Graham over the past two years, with the latest one filed in December. Zuhause’s Nov. 8 lien is for US$13.5-million. The company started work at Stewart in June, 2021, according to the lien document. Zuhause did not respond to a request for comment.

Westbank was also embroiled in litigation with Graham over a US$50.1-million lien the general contractor filed against the WB1200 project accusing Westbank of not paying for work conducted from April, 2018, through November, 2022.

Westbank took Graham to court to reduce the amount of the lien, and Graham countersued Westbank, which kept the lien active. Graham eventually reduced the lien to US$42.5-million and then released it. But the lawsuit has not been closed, according to court filings.

Experts say a large number of liens filed against a developer is seen as a red flag of problems.

“Typically it means there are serious issues with funding,” said Seth Millstein, a lawyer with Pillar Law PLLC, who has practised construction law for nearly two decades in Washington State.

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Westbank has traditionally served as its own general contractor, co-ordinating construction of its projects and hiring the subcontractors. But it broke the pattern in Seattle and Toronto, where it is building offices, condos and rental apartment buildings.

Westbank selected construction company EllisDon Corp. as contractor for two of its Toronto sites: A 57-storey commercial office and residential tower at 19 Duncan St. near the financial district, and an apartment complex of five buildings with 890 rental units at Mirvish Village, the former site of the Honest Ed’s thrift store, a Toronto landmark at Bathurst and Bloor streets.

However, similar to Seattle, the relationship with its general contractor began to fray in 2022, and Westbank took over as its own contractor from EllisDon on both projects.

EllisDon, which along with Graham is one of the country’s top construction management companies, launched a legal action in June against Westbank for missed payments at Mirvish Village. In the same month, EllisDon filed and then dropped a separate claim for $4.4-million it said was owed on Duncan.

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Three other construction companies followed suit and sued Westbank in September and October for unpaid bills over the Mirvish site.

“Transitions of this kind are invariably complex and require time to resolve,” Westbank executive Ian Duke, who leads the acquisitions and development teams, said in an interview in November. He also said the decision to remove EllisDon “is a more disruptive move than we normally want to do,” but he added that discussions and disagreements with trades is a normal part of the business.

“What you end up with in situations like this is a difference of opinion between us and them as to the cost of delays in the project, who should bear the delays and who caused the delays,” he said. ”These are conversations that as a matter of course we have on every project … and obviously we’re having them a little more now because with the pandemic and delays that’s caused.”

But other industry executives warn it can be costly in reputation, time and money to let contractor relationships degrade to that stage.

“That’s a big problem, you don’t mess around with not paying your key trades,” said Bryan Levy, CEO of Toronto-based DBS Developments. “We’d take that very seriously.”

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Westbank began in the 1990s, building a couple of shopping malls in the Vancouver suburb of Richmond, and two high-end condo buildings on Georgia Street, as the city started to see an influx of condo-building.

The developer gained more prominence in Vancouver as it took on increasingly high-profile and unique projects: the Shangri-La tower, completed in 2008; the complicated redevelopment of the Woodward’s department store site that combined market housing, social housing, retail and university space, completed in 2009; and the Fairmont Pacific Rim hotel, embellished with poetry on the exterior, and now one of the city’s most expensive hotels.

In 2011, Westbank opened an office in Shanghai, with Mr. Gillespie telling The Globe that the public debate raging in B.C. about whether speculation from foreign buyers was making Vancouver and its suburbs unaffordable was racist and inflammatory.

The following year, Westbank had branched out to Toronto and built that city’s Shangri-La hotel, with a dragon-shaped sculpture in front.

By then, the developer was on a roll, expanding further into Vancouver and Toronto, and eventually into Seattle and San Jose, Calif. It also expanded to Asia, with projects in Tokyo and offices in Taipei, Shanghai and Hong Kong.

Like many other developers, Westbank launched new projects when interest rates were exceptionally low. Between 2010 and 2018, Canada’s prime rate was at or below 3 per cent. Prime never moved higher than 4 per cent until last year. Today, however, it is 7.2 per cent after a series of central bank rate increases.

This is important because construction loans typically have a variable interest rate that is about two percentage points higher than a lender’s prime lending rate.

Some of Westbank’s projects were originally scheduled to be completed in 2021 – before the Bank of Canada and other central banks started raising rates.

In Seattle, WB1200 and Museum House were originally scheduled to be completed by 2021, but Westbank’s website now says WB1200 will be completed in 2024, and Terry will be completed this year. It is unclear whether either will actually be finished by then.

In Vancouver, a 57-storey luxury condo tower downtown known as The Butterfly was supposed to be completed in 2023. But real estate observers estimate it is a year away still, and records show there are no completed sales of the condo units yet.

To look at how Westbank has been hit by the rise in interest rates, The Globe examined its construction loans based on land registry filings. In March, 2018, Westbank took out a $312.7-million loan from HSBC Canada for its Alberni condo project in Vancouver. The loan has an interest rate of prime plus one percentage point, according to public documents. In 2018, the prime lending rate was 3.45 per cent, which meant the interest rate on the loan was 4.45 per cent. Today, the interest rate on that loan would be 8.2 per cent. There is no sign that the loan has been discharged, according to property records from mid-November.

Westbank also took out an $85-million loan from Royal Bank of Canada this past May for a rental project in Vancouver’s West End that has an interest rate of the bank’s prime rate plus five percentage points – now a 12.2 per cent rate – according to mortgage documents registered to the property.

Westbank said construction loans are used to finance the majority of development costs in most real estate projects. “Although they may appear large in a vacuum, they represent a fraction of total project value. We do not disclose the specifics of project financing, budgets or costs, or matters related to our partnerships,” Ms. Peterson said.

Allied REIT, one of Westbank’s major partners in Toronto, is working with Westbank on Duncan and a project called King Toronto, a collection of condo units west of the financial core. Allied has provided loans to Westbank for the two Toronto projects and for two in Vancouver.

“We have complete confidence in Westbank as our joint venture partner,” Allied executive chair Michael Emory said. “Westbank has and will continue to meet all obligations to Allied, just as Allied has and will continue meet all obligations to Westbank.

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Craig Macklin, president of Lumbermens Credit Group Ltd., which provides credit risk intelligence for the construction industry, said that while he can’t speak directly to Westbank’s financial position, late payments are becoming increasingly common in the development industry.

“In this environment, the length of time it takes for someone to pay a vendor is being drawn out,” he said. “It’s the cascading effect of less credit and more expensive credit. Most people aren’t going to jump to pay in 30 days any more. The more important you are, they might pay toward something like 45 days.”

Mr. Macklin worries that these delays are putting increasing financial pressure on small suppliers, which have trouble surviving extended cash crises. Westbank’s King Toronto condominium project, for one, has been delayed again because its window-wall contractor, Integro Building Systems Inc., was declared bankrupt on Aug. 31.

His point is simple: When sub-trades can’t pay their own bills, they can’t help finish delayed building projects.

That is the case for Iris Window, the Seattle drapery supplier that is waiting to get paid by Westbank.

Iris Window has struggled to make money on jobs that were contracted at a fixed price that was quickly overtaken by rising inflation and labour costs. “A lot of suppliers wouldn’t hold their prices. In some cases, we had success in passing it along, other times not,” Mr. Davidson, the president, said.

He said Westbank recently contacted him to see if bids he placed years ago for its other delayed project were still good. “We weren’t in a place where we were interested,” said Mr. Davidson. “If our financial situation were different, we might be willing to stick our neck out.”

 

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