In the long term, if the market actually moves into a recession, he sees five major impacts:

• There will be greater scrutiny on projects, budgets, and repayment sources. This will include more scrutiny of agreements of purchase and sale, as well as future homeowners’ or condo unit holders’ mortgage approvals. “They may also want more down payments in order to minimize the likelihood of purchasers backing out of the deal.”

• Lenders will want developers to sell more units in advance before they are prepared to finance construction, particularly in high density developments. They will also be concerned about the enforceability of the agreements of purchase and sale, so it will be important to ensure that the developer has not made a material change in the project that would give purchasers a right to get out of the deal. This could include opinion letters from counsel stating that the agreements are fully enforceable and unconditional.

• Lenders will probably require more equity infusion from the developer and possibly more security from guarantors with a more solid asset base than the developer. They may also want restrictions on the developers or their guarantors moving assets without the lenders approval.

• There may be requirements for tighter restrictions on subordinate financing or other outstanding loans that might have an impact on the developer’s cash flow. “They’re going to restrict you from doing anything vis-à -vis the project or incurring debts unrelated to the project, if you’re the borrower or the guarantor of that borrower. They want you exclusively. They don’t want any other impact on your source of funds.”

• If the recession deepens, there may be restrictions on the size and complexity of projects. This is because the risk of having to take over a project before it is finished is “a lender’s worst nightmare” and the more complex the project is the more difficult it is to finish and the more expensive it is to bring in new people.

“I see some of those signs already today and I think they’ll just be more pronounced if we get into a really recessionary real estate market,” says Herskowitz.

If the property market begins to spiral downwards, there is the risk that potential homebuyers will stay out of the market because they hope or fear that prices will keep going down. This, in turn, will make it harder for developers to pre-sell their units and meet the thresholds that lenders will require before they advance construction funds. “This tightening market has a whole bunch of tentacles,” says Herskowitz, noting that various trades, subcontractors, and ancillary businesses will also suffer — “and lawyers act for all of those trades as well.”

“Then the focus on real estate becomes — instead of borrowing — how do I issue power of sale,” he says, noting lots of lawyers are taking refresher courses “in case the worst happens.”

“You will also see more liens registered. Project payments get slower so liens go on faster. They get more nervous. So, instead of waiting the full 45 days to file a lien, maybe they only wait 30 days,” says Herskowitz