B.C. agency to foreclose on rentals in Merritt over construction loan

B.C. agency to foreclose on rentals in Merritt over construction loan

Developer of Olympic Villas asked B.C. Supreme Court judge to start trial proceedings given difficulty repaying a loan

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B.C. Housing has started foreclosure proceedings against a rental apartment building in Merritt after the developer failed to repay a low-interest 2019 construction loan on time.

But the developer said B.C. Housing hiked the interest rate two years ago to 7.2 per cent from 1.5 per cent, adding $2 million to the total owing and making it impossible for the company to pay. The outstanding loan is now worth $18 million and counting.

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The companies said cost overruns of 20 per cent and a two-year delay in construction in downtown Merritt, which added $4 million to costs, were caused by factors out of their control, including a work stoppage and supply chain problems caused by the COVID pandemic, the flood that hit the city in November 2021, and rising interest costs that drove up construction costs.

The developer, B.C.’s housing critic and the housing minister all say the financial difficulties with the project show the lack of oversight and other shortcomings of now-discontinued loan for building affordable rentals under a government program called Housing Hub. It was set up years ago to fund private enterprises to build affordable housing.

The Merritt project faced controversy in the legislature in 2021 when it was learned the developer had dropped plans to include 19 below-market units and was planning to charge rents above the province’s cap of $1,650 a month for a three-bedroom unit. The project faced further scrutiny last year when it was reported it had placed ads on Airbnb and Expedia to rent out some units as short-term rentals.

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The B.C. Supreme Court has allowed B.C. Housing to issue a document that is the first step in foreclosure against developer Olympic Villas and its construction company, TBS Procurement Interface, both owned by Irfan and Zhara Sonawala.

The petition’s reasons for judgment said the courts included a clause in the order giving the developer six months to pay to avoid foreclosure on the four-storey 75-unit building.

But the developer said it can’t do that while costs rise. Associate Judge John Bilawich said in his judgment interest was adding $3,558.60 a day to the amount owed.

The developer wants B.C. Housing to drop higher interest rate to 1.5 per cent, which it had agreed to in 2019. B.C. Housing raised the rate in 2022 after the developer asked for a third extension for repayment, explaining that it signed a new mortgage agreeing to the higher interest rate under duress because B.C. Housing was threatening to foreclose.

The Sonawalas asked the court to send the case for trial so it could argue the interest rate was unconscionable.

But Bilawich ruled there were no issues deserving a trial — and the developer had agreed to the rate instead of finding another lender. He said the original interest rate was “exceptionally low” and the modified rate was at RBC prime rate.

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HousingHub, a division of B.C. Housing, was established by the NDP government in 2018 and provides low-interest loans to developers to build housing for middle-income families with a household income of less than $99,000 per year. The loans are repaid once construction is complete.

The province, which had earmarked $2 billion in 2022 for Housing Hub, said it has switched to a different program, B.C. Builds.

“It’s a reminder, I think, of why we’ve launched B.C. Builds,” Housing Minister Ravi Kahlon said. “I think people understand that taking public lands and giving them to private interests … with no checks and balances is not what people want to see.”

He said B.C. Builds will maintain affordable housing construction and management in the “public’s hands and have non-for-profits operating” them.

“As for this specific development … anyone that steps forward on a housing project has requirements, things that they must do and in this case, those things were not taken care of.”

Kahlon also said those living in the building won’t be affected by legal proceedings.

The Olympic Villas was originally budgeted at just under $20 million and the companies received a $16.5 million loan and contributed the remaining $3 million. But final construction ended up at $23.6 million after delays.

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It’s currently valued by B.C. Assessment at $15 million.

The Sonawalas weren’t earning enough to pay their monthly payments. In April 2023, Irfan Sonawala sent an email saying they had rented out only 26 units with revenue of $42,790 and “the total rent is way lesser than the $90,000 you have been charging us per month. It does not include my operating cost. I cannot afford to pay any higher interest. … Please make sure that no further interest is added.”

Zhara Sonawala said they couldn’t meet their expenses without raising the rental rents and said they felt “royally, royally screwed” by B.C. Housing when it hiked the interest rate then right after filed the petition for foreclosure.

“They (B.C. Housing) are trying to make themselves look good by offering money to say they’re helping to fund affordable housing but they’re not doing anything to help (renters) because our costs have to be passed on to them,” she said.

B.C. United housing critic Peter Milobar said the foreclosure is another example of how affordable housing has been mismanaged by the government.

“It doesn’t seem like the province had proper oversight or followup” on loan recipients, he said. “Now taxpayers are footing the bill for the cost of expensive lawsuits against those speculators,” he said.

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