Condo Development Charges – The Whopper of Them All – Zoocasa Guest Post

By Sheila O’Hearn, Zoocasa

 

Despite TREB’s May 2017 report of slightly dipping purchase prices and more supply for both Toronto condo and Mississauga condo buyers, the question of investing in a pre-construction unit never fails to escape scrutiny. Occupancy fees and closing fees drive up that initial asking price by double-digit figures; and as if that weren’t enough, unwary buyers will never think to ask about one other critical fee – the one-time development charge, due upon closing. In fact, that development charge can add up to a particularly unpleasant surprise.

The bad news first:

Besides occupancy fees, you’ll need to be prepared for a substantial outlay of closing costs, plus hefty development charges that include general levies, education levies, Section 37 levies, and Green Standard levies.

Each city issues development charges to a builder when the developer receives their building permit. The developer pays these charges which fund infrastructure, such as roads, libraries, schools, hospitals, parks, transportation amenities, and more. Each city’s charges are unique, because they pay for a city’s own relevant municipal construction and development projects.

The Catch:

Who doesn’t love all the newly built amenities in the location of your soon-to-be-built condo? As if they were free! The catch is that developers will put these infrastructure charges onto the condo buyer. Depending on the size and location of the unit your purchase, expect a substantial development charge bill when you close your condo deal.

These charges can cost a lot of money on pre-construction units, but the costs are also necessary. If builders are constructing a residential unit, the city requires money to support the incoming population with infrastructure, which might include schools, hospitals and transit. The city then spreads this cost out by the proposed condo’s square footage, which means the developer pays by the unit. The developer, in turn, charges you.

So, take caution to factor in charges you will end up incurring into your investment calculations to make an informed purchasing decision.

The Catch-22:

The trouble is this: it’s difficult to predict what the development charges will cost, and looking on the city’s website to get the most current figures won’t help a whole lot. The problem with development charges is that they are invoiced by the city upon closing, and if you’re in a situation where you’ve signed your contract on a pre-construction condo that won’t be built for two, three or four years down the road, who can say what those development charges will be?

Now for the good news:

Besides planning your purchase to take development charges and other closing costs into account, there is one prime and money-saving strategy open to you: Negotiate for capped fees before you sign a purchase of sale agreement. This action can save you tens of thousands of dollars.

Here’s why:

When you cap your development charges, this means the developer cannot exceed that capped amount to you. One source warns that if you don’t have a cap, and the city (such as Toronto illustrated in 2013) decides to double or triple the development charges between the time you buy your unit and the time you close, you could be responsible for any possible amount. It could be in the tens of thousands of dollars for this one closing cost alone.

If the developer from whom you are buying does not agree to a cap on your development charges, don’t buy! Repeat: Do not buy!

Development charges are rising every year in pre-construction condos and they provide a generous source of revenue for municipalities. Cities across the GTA are constantly pushing the limits on developers and raising these charges. The bottom line: Always have your development charges capped for each condo property you buy. The standard cap in most agreements ranges from $7000 to $10,000. Always consult with your realtor and your lawyer to determine your ideal capped fee.

Seek incentives:

Before you sign your purchase agreement, you or your real estate agent should negotiate for “incentives” that include limiting how much you pay on closing.

Sometimes, you can get charges capped at zero dollars, which are presented as incentives. Capping development charges gives prospective buyers more purchasing power, and effectively decreases the cost of the investment. Negotiating for low or zero-dollar caps requires you to approach the developer about buying a condo unit early, such as VIP sale, presale, and first block sales.

Another source reveals that the early stage is when developers are most willing to negotiate. They’ve paid exorbitant fees for building approval, but they can’t get a bank to give them money until they’ve sold a significant portion of the proposed building. The earlier you buy, therefore, the more clout you have in negotiating a good incentive package, and buying early is the best way to negotiate the lowest development charges possible.

Zoocasa is a real estate brokerage based in Toronto.

Sheila O’Hearn is a freelance and creative writer, and has worn many hats throughout her career, from general staff reporter to magazine editor. She has a keen interest in business entrepreneurship and currently writes for several outlets. Visit her at LinkedIn for more info.