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Condominiums under construction on Broadway Ave. in north Toronto, on Oct 5, 2023.Fred Lum/The Globe and Mail

Buying pre-construction condominiums can be an expensive and drawn-out process, but one part of the exercise is causing more stress than ever before.

The so-called “occupancy period” – the length of time between when the buyer of a new condo is given the keys and when the buyer takes actual ownership of the unit – is growing longer and more expensive. This gap leaves the new owners in possession of the unit and liable for costs, but with no legal status as owners. The problem is particularly acute for investor buyers looking to rent out the units, since developers often won’t allow rentals during the interim occupancy period.

“It’s killing some of my clients,” said lawyer David Feld. “They can’t handle the big cheques that are $5,000 a month.” Mr. Feld’s company, Feld Kalia Professional Corp., works with condo buyers and the condo assignment market. “It starts draining their savings. It makes it harder for them to close and complete the transaction.”

The occupancy problem is going to affect a growing number of new condo buyers. Industry analysts at Urbanation Inc. said there are 26,934 condos in the Greater Toronto Area that are expected to reach completion in 2024. Most of those units will have some period of occupancy before the buyers can take final possession.

As the situation stands now, there is no set length of time between when a buyer’s apartment or townhome has been completed and considered habitable and when the rest of a building is registered with the municipality, giving the developer a single land title that it can then subdivide among the individual new owners.

According to Urbanation Inc., the average occupancy period for condos in the GTA has been relatively stable in recent years at around six months, but there are many examples where interim occupancy can last as much as a year or more.

Some of the buyers most affected are those who bought lower-floor units in a super-tall tower of 40 storeys or more: Most towers complete from the bottom up, and the period of time between occupancy on the lowest levels to the top floor’s completing can be 12 to 18 months.

Mr. Feld said it wrong to assume the interim occupancy fees – which are a mix of property taxes owed by the builder and interest payments on the buyer’s unpaid balance for the condo – go toward the buyer’s bottom line. Instead, he said, a buyer is contractually obligated to pay occupancy fees to the developer but those fees are not subtracted from closing price they will eventually pay to become the owner of the condo.

For example, a $1-million condo might require a 20 per cent deposit, or $200,000. The buyer then has to pay interest to the developer on the $800,000 still owing during the occupancy period. Those rates are typically pegged to prime bank rates, which have been at or above 8 per cent in the last year. Thus, the buyer is paying $5,400 a month; if occupancy takes a year the total reaches $64,000. But they still have to pay the original $800,000 closing price at the end, meaning the occupancy period has raised the total cost of buying the condo by 6.4 per cent.

As bad as this situation is for individual buyers, some in the industry worry the interim period is locking up capital that’s badly needed to keep the economy moving.

“There are 358 active projects in the province. In the next 24 months, there will be somewhere in the vicinity of 60,000 units that will be occupying. That’s more than $60-billion in capital trapped in interim occupancy period,” said Kevin Murphy, an entrepreneur and former finance executive with Royal Bank of Canada who founded a company called OneClose with the goal of providing mortgages to bridge the occupancy gap.

The sticking point is that, under Canadian law, to insure a mortgage it must be registered against a property title. In the interim occupancy period the pre-construction buyer has no title, just a contract that says title will be registered at a later date. Mr. Murphy’s solution includes title insurance and deposit protection insurance to cover the full cost of the unit for both buyer and developer. But in order to insure this kind of no-title mortgage the federal Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA) needs to change.

According to Mr. Murphy, allowing a mortgage during the occupancy period would both serve builders, who get the full payout before transferring title, and the buyer because now the interest they pay is on their own mortgage and goes toward paying off the unit right away.

In January, Dave Wilkes, president and CEO of BILD, the builder and land developer lobby group in Ontario, wrote a letter to federal Finance Minister Chrystia Freeland and Housing Minister Sean Fraser pushing for the changes to PRMHIA that Mr. Murphy and other finance companies would need to offer occupancy period mortgages.

“By doing so, and at no cost to taxpayers, the Government of Canada can unlock additional capital for builders, facilitating the creation of more housing supply,” wrote Mr. Wilkes. “This change not only benefits new homebuyers by reducing the financial strain during the interim occupancy period but also supports broader housing market stability and growth.”

At the moment, many developers won’t allow buyers to rent out their units during interim occupancy to help cover the costs of the fees, in large part because developers worry that if the buyer doesn’t close they will be stuck with a tenant when they have to take back the unit.

A developer cancelling a pre-construction sale because of a financial default from the buyer during the occupancy period was once rare. But not so rare any more, according to Mr. Feld.

“More and more deals are not closing,” he said. Even flexibility on allowing renters, or changing payment terms aren’t always enough to save a transaction. I am seeing some leniency, and still, it’s not closing the deal. Things are down to the wire … people are just trying to get the deals done.”

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