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Rob Richards and Daniel Dubois, co-founders of Key Living.Key Living Corp.

When it comes to an individual or a family stepping into Canada’s housing market there are two traditional options: buy or rent.

Now, Toronto-based start-up company Key Living Corp. says it has been inspired by the spiraling housing affordability crisis in the country’s largest cities and has launched a new financial arrangement it calls a hybrid of that binary choice: a chance for a prospective home-buyer to “co-own” an existing property, that they also get to live in and earn equity on as they pay rent.

The company says its business differs from existing rent-to-own, time-share or other fractional-ownerships schemes in a number of key ways, but the promise – and the potential pitfalls – may be contained in those details.

“I was running a venture capital firm inside one Toronto’s larger condo development companies [Plaza Corp] and I observed how things shifted from us selling 95 per cent of our product to end-users, to now selling 95 per cent of our product to investors, and I thought there has to be a better way,” said Rob Richards, the co-founder and CEO of Key Living.

What’s clear is that, in markets like Toronto, condominium prices are well out of historical norms of affordability. According to condominium real estate analysts Urbanation Inc. the average price of a resale condominium reached $707,000 for the first time ever in the third quarter of 2021.The CMHC benchmark down payment of 20 per cent would be over $140,000, and finance experts say it would take the average home-buyer more than 20 years to save up that much money.

Earlier this month, Key Living began posting some of its “co-ownership” condo apartments on the Toronto Regional Real Estate Board’s multiple listing system, which then populates to such sites as Realtor.ca. The first thing a shopper would notice is the rock-bottom prices, like the $13,500 asking price for suite 203 in the Epic on Triangle (a Plaza Corp-constructed building) at 68 Abell St. near Queen West and Dufferin Street. The description spells out the caveat: “You Are Buying Just 2½ per cent Of This Condo Valued At $540,000.”

The one-bedroom-plus-den apartment in question is about 500 square feet, shaped into a long rectangle with a window wall and balcony at the end. Property records show it has only had one set of owners, ostensibly a pair of condominium investors who bought it from plans or an assignment, as Mr. Richards says so far Key Living has signed up a combination of condo-owning Real Estate Investment Trusts and a few individuals with large rental apartment portfolios. Most of the apartments that have appeared on Key Living are found inside Plaza-built buildings.

The listing and Key’s descriptions imply a buyer will own 2½ per cent of that condominium. But because that transaction is not going to be recorded on the title of the apartment, what they actually have is a contract that grants them the option to buy that condo in as few as three years, while in the mean-time paying a monthly rental fee to the owner. That fee includes a portion that goes to earning more equity in the apartment (on which Key earns a small fee each month). If the renter wants to sell their minority interest, they also gain a share of any accrued equity over the time of occupancy.

Mr. Richards touts the “co-ownership” status as the best of both worlds: the renter doesn’t assume the mortgage debt or need to provide a huge down payment, and the contracts have the same “security of occupancy” as a registered owner of the apartment.

Former Bank of Canada Governor Stephen Poloz is advising Key Living, and says he supports the idea because it could encourage some buyers to take on less debt to get into the ownership market. “I’ve always talked about what we’re missing is something in-between renting and owning,” he said. “I care about the risks people take moving into home ownership. In what we used to do, we worried a lot about monetary policy and financial security risk; a model like this causes people to take less risk.”

A Key Living Corp. unit in Toronto.Key Living Corp.

Mr. Poloz had an excellent view of the burgeoning affordability crisis from Ottawa in his former role, and says the low-interest rate environment he presided over between 2013 and 2020 was intended to support the economy broadly, but has also enabled levels of mortgage debt never seen in Canada before. “The unhappy part is a side effect; this growing stock of household debt that could make the household sector vulnerable … that’s the downside,” he said.

Another potential downside could be the legal uncertainty created by the contracts: the lack of title registry leaves the minority investor in a potentially precarious spot. What if the on-title owner wants to sell? What if the tenant stops paying? What if, when the tenant wants to buy the unit, the owner doesn’t want to sell anymore? What is the venue to adjudicate such disputes?

According to Caryma S’ad, a Toronto lawyer who specializes in landlord tenant issues, the novelty of these agreements leaves open real questions about what happens in the event of a dispute between the “co-owners.”

“You can’t be a tenant and a landlord simultaneously,” she said. “If you are on title, you fit under the criteria of owner or partial owner.”

Because Key Living tenants are not on title, Mr. Richards says their rental agreements include a pledge for parties to go to independent arbitration over disputes. But Supreme Court of Canada decisions in 2020 and 2021 severely weakened so-called “mandatory arbitration” clauses on access to justice grounds, which could throw any Key Living dispute into the lengthy and expensive civil courts process. That’s if the cases don’t end up before judicial bodies such as Ontario’s Landlord Tenant Board, where things tend to go poorly for tenants if an owner wants to use the property for some other use.

“I would also be concerned if this intermediary company [Key Living] vanishes or goes bankrupt, and there’s nothing to claim against,” Ms. S’ad said.

Still, the opportunity could be enticing: There are close to 80,000 condominium apartments being rented in Toronto, and for investor-owners the opportunity to cash out a chunk of cash and gain a tenant with a co-owner’s incentive to buy more equity over time could yield better return than the average market rent. So far, about 30 buyers have purchased a minority stake in just the first few months of operation.

In an era where the phrase “financialization of housing” has come to be curse flung at big capital looking to extract rents from housing needs, Mr. Richards said his financial innovation could ease the barriers to entry for some ownership hopefuls. “Up until now, investor capital keeps people locked off the property ladder … we’re aligning that interest and that capital such that it lifts our people up onto the property ladder,” he said.

In markets like Toronto, condominium prices are well out of historical norms of affordability.Key Living Corp.

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