Robert: Okay. We'd like to get started. I think we've got most of the people who have signed up into the online presentation so let me start off by saying that I would like to welcome everyone to our first presentation of our new lending seminar series. I'm Robert Farmer, from Gowling WLG, and I'm a partner in our Real Estate and Financial Services group. The Gowling WLG lending seminar series will provide a discussion of current topics of interest within the lending industry. Today's presentation will be in the form of a panel discussion. I'm very pleased to be joined on today's panel by Marlon Bray, Senior Director, Costs and Project Management, with Altus Group, and by Katriina Niitsoo, Vice President, Real Estate Markets, with Royal Bank of Canada. So welcome, Marlon. Welcome, Katriina. We will be discussing the impact of the recent increases in cost, challenges concerning the availability of goods and services and the impact of increases in interest rates with respect to the Canadian real estate development industry. To get things started I will ask Marlon to talk a bit about budgeting and scheduling in today's environment. Marlon?
Marlon: Perfect. Hello, everybody. So budgeting and scheduling as evidenced was has become a lot more difficult in the Canadian market over the last 7, 8 years, especially since 2017 when the whole market sort of flipped into that high rise across the country and went gangbusters, and the GTA is probably the extreme example, which is the slide that's up right now. It basically takes an excruciating amount of time for approvals, costs revenues side tend to be influx quite a lot, until recently revenues tended to keep pace with cost versus out pace it but both condo rentals starting to struggle a little bit and being sort of beat and scarred a little bit by cost interest rate changes. Obviously cap rates. Bill 23 is coming in, Ontario specifically, but it's not a complete fix by any means. So the first slide, it's a chart we made a long time ago in 2016, and we keep updating it as it seems to be popular or infamous, I'm never quite sure which direction we're heading in with it, and it basically shows how the sales price of a condo is. This one shows you an example in Toronto. Obviously if I put this up for Ottawa it would slightly differ as well and the reason we use the GTA is it's kind of the extreme example of what's been going on. The challenge is when you start to look at the government charges in particular, which is where a large part of the focus was, right now they stand at between 22 - 27%. So 25% of the sales price of a condo ends up going in government charges and fees. HST, DCs, and this is what's really made the returns very difficult and the rental would have slightly different distribution but a similar sort of problem caused by the government charges. If you start to look at it, this year alone DC increases, City of Toronto came back looking for 46% increase, that basically was sort of the final nail in the coffin on quite a number of rental projects and it's caused significant challenges on the condo side. Now obviously Bill 23 phases that in a little bit but if you start to look over the last 10, 12 years the fees the government charges is a continual issue that's been really undermined and making it very difficult to budget and the re-visited it in a cycle, which again has been extended, but DCs for example, over the last 10, 12 years on a 2-bedroom has gone from below $10,000.00 in Toronto to over $80,000.00. That's at the same time as the City of Toronto was sitting on its piggy bank of 2 billion dollars in uncommitted costs from development. So again, this all ends up in the end price. HST hits both condo and rental equally and while the rates are stable, the absolute values increase massively relative to revenue, because of the antiquated calculation. So again, this can get to $100,000.00 just on a condo, through in interest rate challenges that have been happening recently, redoing the cash flow, land costs have stayed high and then the soft costs, they're difficult because the approvals take so long. So when you're budgeting and scheduling you really are taking on a massive risk, whether that be a condo, even though you know the revenue before you go in to the ground, or rental where you're really committing a lot of capital before you get up and running, it makes it really challenging because the schedule can be somewhat unknown. It takes a ridiculous amount of time in Canada, which we'll show in a moment, those increases go into one place which is basically the home buyers. Next slide, please.
This was a very simple chart I put together for a slide deck. It was a request of one of the developers. What we did is we're looking at why revenue has to go up. So now only do we have to budget cost side and the schedule side, we also have to deal with the revenue and peg it. The challenge is the cost side keeps moving. This is an example of changes again. This is just Toronto specifically but proposed DC rates, basically add 18 to 26k a unit, then parkland dedication, not that got deferred but it'll probably come back again. Obviously the calculation is down Bill 23 for now. Toronto Green Standards version 4 basically added 5 to 12 thousand dollars a year. If we do include free zoning at 5% using a rental form, that basically adds 27 thousand to 35 thousand dollars onto every single condo purchaser. Tanking of the basement, 10 to 20 thousand dollars. Then we throw in escalation on that so basically the end price for condo has to shift up by 100, 120 thousand dollars a year to try and deal with the constant cost side and the constant DC fee side. If you look at them, they're somewhat equal in terms of their pressure and this has been continuous, and this is why the challenge on affordability is and why you haven't seen revenue come down yet on the new construction side, is basically it can't come down. Do you want to go to the next slide?
This is a study we did for build and this is just one chart out of it and our economics did it. This was part of the background to Bill 23, and it just looked at the study we did in 2020 and 2022, and if you look down the list of approvals basically everything's taking longer. So it's actually got worse. Now this is pretty much across a GTA thing where this is a GT average, not just Toronto, and Toronto got even worse because in Toronto we brought in inclusionary rezoning. That then in essence put about 8 years worth of applications into the system in one go and that then clogged up the entire system that pushed the delays even worse and every chart would show how the distribution is across the GTA. We're not all equal in terms of the approvals. Toronto's probably the worst place in North America. Calgary's pretty good for approvals. Montreal, Vancouver sit in the middle. So it's not a Canada wide issue, per se, it's not great in a lot of locations but Toronto's by far the worst. Next.
So this is escalation but this is a Stats Canada version rather than the Altus version. In essence there's two things to show from this chart. One, we've had an extreme level of increases from 2011 through to today. Now our distribution slightly different than this and our distribution spreads this out more. Stats Canada's catching up. The only reason I like this chart is if you look at the blue sections, that's the last two recessions, and if you look at the last two major recessions we had we never really had more than six quarters of a decrease in cost and they never hit the extremes of the upside. So even running into a recession we wouldn't expect a long-term correction in construction prices. In fact right now we've projected it's more likely it's going to be stabilization. It's usually short term when it comes back. If anything, right now we're probably going to stabilize at low levels of escalation in the next few years before we then ramp up into major increases in 2025, which I can talk about in a second. Next slide.
The only good sign is this is an example, again I'm using Ontario but if I looked at this for Vancouver, I looked at this for Montreal, it's a similar pattern in that before the pandemic we're running at say 2 billion in the GTA. We ramped up to about 3 billion last year in building permits pulled. Fast forward to 2022, beginning of the year we're running at 3 and a half, 4 billion, on the pace of last year's starts and last year's sales. As we move forward this has already started dropping. We're going to see this drop off significantly across the country. Building permits are slowing. We're going to see slowing starts as the sales velocity slows in a number of area. We're likely to see across Canada 10 to 15% less starts, next year and the year after. Luckily we don't have a housing crisis otherwise we'd be in real trouble because right now we're slowing down housing, municipalities making housing less affordable, Feds increase immigration, we don't have enough homes. So realistically it's tents or everyone moves to Alberta which has been a very good advert series they've been putting out recently. Although I think if we moved a million and a half people to Alberta it'd probably mess their system up. If we want to go to the last slide.
So this is the last slide. So right now we're going to run into 2023, 2024. It's going to be interesting in terms of the slow down in the starts. Costs are likely to stabilize so it's an opportunity. How long does that opportunity last? Maximum 2025 and then it all goes pear shaped again. Basically if you look at the math with how many new people are going to come into the country, which is fantastic, and then where are we going to locate people and how far we are behind in housing, the Province has to do something. So the Province is going to be focused on solving the housing crisis, be that in Ontario or in BC. You've already seen signs of that movement and then at some point someone has to build more. Housing Task Force is the best example in Canada because they set an actual number of 1.5 million homes over 10 years, basically doubling the volume of construction. CMHC did that national view and we had extreme shortages in a lot of the large centers. So basically it's going to go crazy again in 2025. Labour's going to be a challenge. Cost is going to go up. Housing is going to become less affordable in the near term but it's more of a long-term goal, which is housing affordability, and I know Katriina in a moment's going to take a quick talk about interest rates and stuff, but obviously something happening with interest rates would be rather helpful right now. Just to conclude that discussion on cost and budgeting, it's easy in a time of uncertainty to get too risk adverse and start putting in … … opportunity. Great news, your projects will always come under budget. Bad news, you'll have no projects. So development's all about taking sensible risk but no one ever made any money in real estate without taking some degree of risk. So it's that balance risk. That balance contingency. That balanced schedule and it's understanding where your risks come from and just dealing with them in a proactive manner. That's the end of my section of the slides. So, Robert, Katriina, don't know if you had anything else you'd like to add or comment.
Robert: Just before we move over to Katriina and take a look at some of these elements from a lender perspective, just a couple of quick points on yours. On your first slide you had mentioned about we saw the increase in the government costs. The costs, the municipal costs, etcetera, of development. How much it's increased over the last few years. Then you've got this initiative here that with your current slide up talking about increasing the number of homes. Is there going to be a bit of a clawback on some of those costs from government to sort of make it a little bit more affordable? And then also on the approval process, how are they going to be able to achieve this increase in residential construction given those two elements that you initially noted?
Marlon: Well I think the approval process in the residential, they've got a trial program they're looking at right now and they're looking at digitizing entire approval process, and there's a company coming that does this very successfully in Europe, and they've got a trial approach right now that should significantly speed it up. Obviously Bill 23 helps to a degree in that now municipalities are going to have to come up with a plan for specific target and population growth in specific areas and how many homes to build. On the government fee side, I think you've probably seen the reaction to Bill 23 was very negative from the municipalities. Most of them came out and did what they do best which is ask for money from the Province and the Feds. But realistically, if we double the value of construction even if development charges are phased in, in essence they're going to have a significant increase in revenue, not a drop in revenue. We've also noted the GTA in general sounds something like 5 billion dollars worth of unspent DCs and parkland contributions, so to say that that has to go up or short money, I think is misleading and I think the challenge you've got is we have a tax system that right now taxes new home construction and, in general, commercial real estate unfairly compared to other sources of taxable income and that's often been the issue. I mean, realistically, if you're buying a condo or your building to purpose for rent, you're the easy person to hit with high taxes, high fees, because you don't vote.
Robert: Okay. Well, I know we could talk on and on about that subject, but I want to turn things over to Katriina, and ask Katriina to give some insights from the lender perspective.
Katriina: Thank you, Robert. It's a pleasure to be here and as Robert and Marlon know, my voice is not completely back after a bout with the flu so hopefully it sticks around for the next 45 minutes or so. Firstly, interest rates. I think one of the most common questions probably any banker would get is, where do we see rates going? Bankers are not all economists but we do work closely with, especially at RBC, with the great economics team, RBC Economics, that provides us with really excellent information. So as we all know, higher interest rates continue to filter through to household borrowing costs and inflation has been cutting into purchasing power. More recently we're seeing slowing growth prospects and early signs of easing inflation. So we do think, from RBC Economics' point of view, that the Bank of Canada could be close to end of its current rate hiking cycle. So RBC is predicting a 25 basis point hike in December and then flattening out at 4% over the course of next year. The other four banks, as you see on the slide here, the other four of the Big Five are predicting a 50 basis point increase in December and BMOs going even further, predicting a further 25 basis point hike early next year. But there is consensus among the Big Five that the overnight rate will level off next year and will actually start reducing near the end of 2023 or early 2024. Next slide, please.
On the back of this aggressive Bank of Canada rate hiking cycle, bond yields in Canada have increased significantly over the course of 2022, which have driven higher fixed borrowing costs. But rates have retraced from their peak and starting from Q4 2022 the market has baked in reduced yield bonds over the course of next year. But as we have all kind of witnessed over recent months, the rising costs of borrowing has had a very major effect on affordability, on purchaser's ability to qualify for mortgages based on higher test rates and on purchaser confidence overall. So what we've been seeing in the market is almost like a complete lack of activity. We're in very much a standstill period at the moment. Next slide, please.
So where do we think that the sales activity is going to go? So almost all sales launches, both high rise and low rise, were initially intended for the latter half of this year have now been pushed to 2023. Earliest spring, some moving further on into the year. There really hasn't been much on the market to move in the first place, in the new build market, and with everything that's been happening with the inflation and rate increases, the demand has not been eliminated. It's still there. It's still on the sidelines, growing, not going anywhere. As I mentioned, kind of influencing where we think sales will be going next year as well, we do expect the interest rate increases to ease off and to level off next year. One prediction is that after a couple of no hike Bank of Canada meetings, that that might be enough confidence back in the market to see the purchaser's coming back, especially for the spring sales launch period. Just going back to demand again, we have huge population immigration growth targets in Canada. Four to five hundred thousand over the next few years. I think our target is actually closer to the five hundred thousand mark going forward. In 2022 a loan we issued, 750,000 international student permits, and these permits are a pathway to permanent residency and eventual citizenship as well, and the people will always need a place to live. So as we're inviting these people into the country, and investment into the country, there will continue to be that drive forward demand for housing. Marlon touched on this. We have an obviously massive undersupply of housing. Hopefully Bill 23 will have some real tangible effects on our supply crisis. It is a crisis. So we'll see how that plays out going forward. Also we're Canadians, and we're kind of humble and we don't toot our own horns very much, but Toronto is a world class city and it's a great place to be. People want to come and invest, and live and visit so we can't discount that either. The fundamentals and the prospects for strong sales activity going forward are quite strong. Next slide, please. Oh, animation.
How are lenders managing the current and future market conditions? So this is a really tough question to answer and the reason for that is because it really depends on your lender. In the current environment there are lenders that have decided to take a step back and kind of quite down their lending activity in more of a wait and see approach moving through next year. Certain other lenders have decided to reserve capital for a small group of select clients. Some have decided to change their structuring and pricing, perhaps, to mitigate for increased risk. I work at RBC so I can only speak from the RBC perspective, but we're very proud at RBC that we haven't made any changes, where we're staying very close to the ground. We're out there every day talking to our clients and our partners and understanding what's happening in the market. But we're there and we're consistent for highly valued relationships. So we'll continue to support our clients through this challenging time as well. Next slide, please.
So just a quick overview of what an RBC client looks like so that there's context in the rest of what I'm saying here. So we are not transactional lenders. We are very much relationship lenders and have many decades long relationships with our clients. We typically deal with tier one and top tier two developers/builders based out of the GTA. Reputation and experience of our developer/builder client is extremely important. We do consider ourselves a values based organization so there needs to be strong alignment there which includes transparent and honest communication, both ways. We've seen, Marlon I'm sure has seen, no more than now has it been apparent that the long, strong, long lasting relationships with subtrades is extremely important and has really kind of allowed certain developers to weather the storm much better than others. Of course, we look for recourse and liquidity as always, and just provided a quick overview of some of the lending that we do at the bottom there. Anywhere from land acquisition through to development construction, operating facilities, inventory loans, term lending, commercial mortgages. So if we could just move over to the next slide, that'd be great.
I get questions every day regarding our deal structuring, and given current market conditions, will RBC be changing any of our structuring requirements? So the short answer to that is, no, but I will expand. Bank guidelines are designed to protect a bank through various market conditions and across various markets. So really they are not changed very often. I'll say at RBC we do pride ourselves in our very creative deal structuring and flexibility. We really like to work around, like treat every deal uniquely, and look at it with a fresh lens. So pre-sales. The comment we get a lot from are developers is absorption rates have slowed in the current environment. It's taking a longer time to reach pre-sales conditions, and many developers also prefer to holdback a large portion of their units, to act as a buffer against construction costs that were affixed earlier on in the project. With the expectation being that the sales price will continue to appreciate through the course of the project. So we'll often get the question, will you lower you pre-sales requirement prior to funding? At RBC we work with an 80% loan coverage that equates to 70 - 75% sales, essentially. It depends on the project. But so, no, we will not change our guidelines but we will make exceptions to guidelines in the right circumstance. So that right circumstance would be the right experienced client, great location, good sales activity. So maybe we'd go below 80% loan coverage on the outset but we would look for the client to step in with, say additional equity, or perhaps additional recourse at the outset that we could trade off as those sales continue to come in. Equity - I actually don't get this question that much because I think most people in the industry know that there isn't a lot of flexibility on the equity side. Pretty much all the large banks for 15% on high rise and 10% on low rise. That has not changed and I'd say that's a pretty sticky requirement, and especially for a large syndicated project where you need a structure that would be palatable to other large banks, with some exceptions, but generally we like to stick to those equity requirements.
On the deposit side we've had a lot of discussions over the last couple of years with our clients regarding extended deposit structures. So deposits stretched out over a long collection timeline or perhaps a large portion of deposits due on occupancy. We really prefer that our clients steer clear of any kind of structure like this. It's additional risk on closing for both our developer and for the lender as well. We have seen traditional deposit structures while absorbed for launches that have been in the market. I would say this ask tends to come from the sales and marketing departments within different companies. So if someone's faced with this situation I'd say talk to your lender well ahead of launch because extended deposit structure could have a very serious impact on ability to qualify pre-sales and to syndicate out to the rest of the market. On fixed price contracts, and Marlon touched on this a little bit, but we have seen some easing of costs for recent contracts that have gone out for tender, for some of the projects that we're involved in. I'd say not industry wide but certain developers that have very deep sub-trade relationships, and strong project pipelines, are seeing the benefit of some of that easing costing at the moment. So we have been getting questions about fixed price contracts; would we be wiling to reduce the amount of fixed price contracts we require initially prior to funding and then as a certain step up on reaching a certain milestone, and yes. The answer's yes. We would definitely look at that, we want to do what makes the most sense for the project. If we are seeing the benefit of some, although as Marlon said, it's temporary. It's not going to be forever that we're seeing kind of this easing in costs but while there's the opportunity to benefit from the cost environment, we'll definitely work with our clients to structure around that. Lastly, we get a lot of questions around land acquisition and pre-development financing, especially in the current market where's there a lot of apprehension. So I'd say, us at RBC, we do like land and pre-development financing. It has to be, obviously, for the right client. We typically don't want to go to far past 3 years out in development and 50 - 60% leverage. Preference obviously for zoned land but if there's a strong indication that zoning will go smoothly we'll take a look at that as well. So there are still lenders lending against land in current environment. RBC is one of them. So that's it for me. I'll pass it maybe back to Robert for now.
Robert: Good and we want to leave a little bit of time for Q&A at the end but I also wanted to discuss a concept, force majeure, that has been more pertinent over the last few years as a result of COVID and strikes and other developments within the market. I think it's beneficial for people to understand what force majeure is so I'll go through this quickly so we have a little bit of time on Q&A. So force majeure is a contractual provision. It's created and agreed upon by the parties themselves. That's different than contract frustration which is an equitable remedy that the court decides to exercise. What we're talking about when we speak of force majeure is an agreement between the parties to a contract to bring in this provision, this concept into their agreement, and I'll discuss quickly in the context of a development loan agreement. It's very important to determine the magnitude and scope of force majeure. So the parties need to decide what constitutes a force majeure event. What are the notice requirements associated with it? What are the required mitigation efforts associated with it? Important, which specific contractual obligations are impacted by the occurrence and continuation of a force majeure event? We'll see, in just a few minutes I'll just talk about, it doesn't get you out of all your obligations. In fact, it's going to be very specific on what obligations are going to be impacted by a force majeure event.
So just before I go into looking at typical force majeure provisions, I want to mention two important aspects of force majeure. The first is that force majeure, it should be an event that makes it impossible for a party to satisfy it's obligations under the loan agreement. I stress impossible, not just significantly more expensive but more difficult. That's not a force majeure event. That was made quite clear by the Supreme Court of Canada in Atlantic Paper Stock, the St. Anne-Nackawic Pulp and Paper Company. In the interest of time I won't go through too much detail but the court made it very clear, the Supreme Court of Canada, made it very clear that it has to be a force majeure event, to claim such it has to render impossible for the party to satisfy its obligations. The second point I want to note that's also very well established is that the parties themselves cannot create the event. It has to be an event which is unanticipated by the parties and beyond the control of the parties. Now if you don't mind bringing up the slide.
Here is typical force majeure provisions that I would use in a development loan agreement if I was representing the bank. So again it's important to define what a force majeure event is. I highlight in red some of the important wording here. Again, it prevents and renders impossible to carry out the obligation. It's not caused by the obligors and I note, for example we just went through COVID, so that's a great example of a force majeure event. At the end, for greater certainty, I stress that a lack of funds, increased costs, the state of the market, or any vocal or negligent act or omission on the part of the obligors does not constitute a force majeure. Next we want to take a look at which specific provisions of the agreement. So once you've defined what a force majeure is, you say well how does it impact your obligations under the agreement? Really there's a couple of covenants that would be most likely to be impacted. So if we could bring up that slide.
The first covenant is the obligation to diligently and continuously proceed with the project. When you are introducing a force majeure provision you have a carve out, to the wording there in red, except during a force majeure and only to the resulting extent that the borrower is unable to proceed in accordance with the project budget and construction schedule during the force majeure. The second provision is quite similar to the first. So again it's a carve out of the obligations that are only going to be relevant during a force majeure event, and only to the extent that the force majeure event makes you unable to carry out your obligations. Two additional important covenants that you would typically add to your development loan agreement are the obligation for the borrower, in this case, to give notice to the lender of the occurrence of a force majeure event and then also notice to the lender of when the force majeure event ceases to be applicable. The second additional covenant that you would typically seek is a requirement on the part of the borrower of the party who is claiming relief from an obligation to take actions, which are reasonably in their control, and that they're capable of taking to remedy the impact of the force majeure. You can't just simply say, I'm impacted by a force majeure and then just sit on your hands. You have to take reasonable steps to mitigate the extent and the impact of force majeure.
Just before we get into the Q&A, I know I went very quickly on this because I did want to leave time for questions, I just want to highlight two more points. The borrowers have to appreciate that the occurrence and the continuation of a force majeure event has no effect on their other obligations under the loan agreement. You still have to pay interest. You still have to pay repay the principal. You still have to provide the reports. The only thing that you have relief over is what is specifically agreed upon by the parties. Also very important, any guarantors have to appreciate, its very important that they appreciate, that the occurrence and continuation of a force majeure event has no impact whatsoever on their obligations under the guarantee, or if they provided an undertaking to fund cost overruns and interest payment deficiencies, the force majeure event would have no impact on their financial obligations under the undertaking as well. I know that was quite quickly going through this. Sorry but I know we're up a little bit against the clock so I do want to go and turn it over to the Q&A side.
A question came in, is it common or acceptable to provide for offsetting of increases and decreases in different line items, as long as the overall budget amount does not change within a development budget? I'll turn that over to Marlon, I guess, first and get your feedback, Marlon on that question. So can we do offsets on increases in some line items, offset by a decrease in another line item?
Marlon: Yeah, it's fairly common. A budget's a living, breathing thing. It's got to last sometimes 5, 6 years so it's very common that stuff moves around and then we just tend to track it. So the original budget is always tracked. Where the budget went is always tracked and then you just track the movement within an overall budget. So if one line tenders under the other tender is over the money will move around. If there's money left after tendering that goes into contingency and the object hopefully to balance the bottom project. Interest reserves, an other classic, one often been used to cover off project overruns, in terms of schedule overruns, being able to pull money out of interest reserve. Obviously It's a little tricky now as interest is actually going up but in the past they used to have interest reserve and what not. So it's very common that the thing is a living, breathing, document.
Robert: I agree completely with that and most of the time I'm representing the lenders but I do have some developer clients. A pretty large project that we were developing. It was a couple hundred million on the first phase and we had negotiated, initially in our loan agreement with respect to in particular the interest reserve, that we thought it was a little bit high and we thought interest rates were going to go down so we had negotiated with the lender, with concurrence of our cost consultant and their monitor, that as the interest reserve was deemed to be excessive that we could use those to off-set costs in other line items and they had agreed to do that. But we negotiated that at the outset. Katriina, any comments on that?
Katriina: Yeah. I would say from a lender's perspective we're understanding, like as Marlon said that, it's a budget, it's a living, breathing budget and it's subject to change. But we do typically within our credit agreements stipulate a threshold by which the X number of dollars, no changes over X number of dollars without advising the lender, and that's just for us to continue to have that detailed level of insight into the moving pieces of the project.
Robert: Okay. We have another good question here. It's a challenging one but I won't shy away from it. The question is, for how long was the pandemic considered a force majeure event? Very tough question. Great question. So what's interesting is, if you remember back on my definition, it was that it has to render it impossible for a party and that the party has to be prevented from satisfying their obligations. So I would say that a pandemic itself is not automatically a force majeure event It's a force majeure event if, as a result of the pandemic, you are unable, you are prevented and it's impossible for you to satisfy your obligations. A good example would have been during the pandemic, it wasn't the pandemic per se, but when the Ontario Provincial Government put a temporary cease order in effect with respect to construction sites, that's a very good example of what would be a force majeure event because it was illegal to continue the project. So your obligation to continue the project certainly would have a strong argument that that's force majeure. Then later on when the government announced that if you didn't have your super structure permits, for example on large projects, if you didn't have it by a certain date then you could not apply for and receive one for a certain period of time. Therefore you would be prevented from continuing on with your project. I was representing a developer on a large project that we ran into that. We did manage to get our permit in time but if you were unable to get your permit, and it was due to sort of those circumstances, you would have an argument that that's force majeure. However, again, that's what lawyers do. There is case law that an Alberta Court of Appeal said, if it was foreseeable that you should have taken the steps to obtain it, for example you should have applied for your permit earlier, now that would be a question of judicial notice on a determination as to whether a party should have been able to see it once the pandemic sort of started and we were seeing what was happening in the industry. But that would be my response on that in that the pandemic is considered a force majeure. How long? Well it depends on the extent to which it rendered your obligation, rendered it impossible and prevented you from carrying out your obligation.
I want to make sure we get to a few questions so I'll turn this one over to Katriina and Marlon, this next question. Are you seeing less opportunities for fixed contracts with low rise and single family built?
Marlon: If you want me to take a question, I mean low rise is always interesting contracts, to say the least, and they vary quite considerably. A lot of them tend to be piecemeal but most low rise contracts only last a year anyway so realistically they fixed and obviously low rise has had some unique challenges around lumber prices. More recently we started to see the challenges on the concrete supply side. I don't know if it's good news on the contract side is with low rise expected to considerably slow in the next years. I suspect there's going to be a stabilization in price in low rise much quicker than more recently.
Robert: Okay. I'll just go to the next question here so we can sort of maximize the number of questions. Did you see more condo projects being canceled for cost hikes versus the sale price when the sale price was set up?
Marlon: I mean this year there's barely been any condo cancellations in the GTA. All is massively behind where we were last year. That's not to say more condo cancellations aren't coming, especially as you move down the food chain, the secondary lenders or below and there are projects that people are aware that are in some degree of trouble. But again they're deal with differently even if they go into receivership. They're not necessarily cancelled anyway, so to speak, so usually going back looking for increased revenues as different exit strategies now than necessarily just canceled. Most projects get canceled because of time and basically what happens is it takes so long to get into the ground, get through the approvals that the cost side overtakes the revenue side. So I wouldn't necessarily say it's sold too low or it's a cost hike. It's usually that time and that approvals that comes back and bites and, again, more often tends to be certain developers just get in trouble with certain projects.
Robert: How does that affect, Katriina, how did that affect your monitoring of your obligation? If you've got a loan agreement that you've issued and you run into an issue where it's been delayed for approvals or whatever. The fundamental, the sort of the numbers on the project start to change, and of course the developer's coming back to you with updates to the budget. How important a factor is that in your decisions?
Katriina: I'd say it would be very important, obviously, if there's a material change in the overall economics of the project. We've been kind of lucky with RBC in, I don't know if I should use lucky but strategic, with RBC in that we deal with primarily with tier one lenders that have the financial wherewithal to step in and inject additional equity when needed or additional liquidity. So it's not a scenario that we've been really faced with in any kind of serious way, luckily. But whenever we have these material budget increases that affects the overall economics we will group together with our Marlon Bray, our cost consultant, our client and we'll put our heads together to figure out the best way to navigate through it. There might be an opportunity to use additional deposits and reduce overall bank debt. There might be a combination of equity and other items but it's really kind of a case by case business but we're lucky. Yes, we're lucky we haven't had to deal with any very dire circumstances.
Robert: Okay and I guess we have time to work in maybe one final question here, a real quick one for Marlon. What's the current split between labour and materials in construction costs? I guess I'll put a context to it. Let's talk high rise condo.
Marlon: That's the question is how long is a piece of string because it changes from trade to trade to trade and it can be as low as 20%, as high as 60%, and it all depends on the actual project specific to yourself. It's very hard to do just a basic rule of thumb on average because ever project does different dependent on the material that you've chosen. So that's unfortunately a non-answer because it's sort of impossible to answer.
Robert: Good. Well I know that part of our process here, with setting up this lending seminar series, is we wanted to make sure that we had 45 minutes to do the presentation and answer some questions and really try to sort of have a nice balance between the time commitment from people attending and listening to this to the value of the information that's presented during it. We hope that this has been very enjoyable to everyone. I'd like to thank you for all attending. We had over 500 people attending which is wonderful. We actually had planned about 300 so thank you so much for taking time. This is the first presentation from Gowling WLG's new lending seminar series, and we will be getting notice on our next presentation and we look forward to continuing this going forward, and thank everyone again for your feedback. If you could scan the QR code that would be greatly appreciated and we look forward to continuing this relationship. I'd like to thank Marlon and Katriina, of course, for participating in this first panel and providing such wonderful insights.
Marlon: Thank you.
Katriina: Thank you. It's been a pleasure.