The Occupancy Period (aka Phantom Rent)
When you’re looking to purchase a pre-construction condo one of the biggest questions is “when will it be completed?”.
And the date that the builder or their sales rep will tell you is what’s called the “occupancy date”. Most people assume this is the day that they will get their condo. And they’re right…there’s just one issue. You don’t actually own your condo when you first receive your keys.
In pre-construction condos there are two types of closing: 1) Interim Occupancy; and 2) Final Closing.
Let’s say that you bought on the 5th floor of a 30-storey condo. Typically, when a building is approximately 60% sold, construction begins. After awhile (let’s say two years) the building is almost entirely complete including your unit.
The builder, not wanting to let the units sit empty until the entire building is completed, will call you up and tell you that your unit is ready and you can schedule a time to sign some paperwork and get your keys.
This is where the buyer really needs to pay attention (specifically before they sign the agreement of purchase). You will receive your keys from the builder and in exchange you will give them post-dated cheques to cover your “occupancy fee”.
Ok, so what’s an occupancy fee?
An occupancy fee (sometimes referred to as phantom rent) is a fee that a buyer will pay until final closing. I’m sure you have a couple of questions. First, how much is the occupancy fee and when is final closing?
The occupancy fee structure is determined by the builder and will be in your purchase of agreement when you first sign your deal. It can include any of the following but cannot be greater than them:
- interest calculated on a monthly basis on the unpaid balance of the purchase price at a prescribed rate;
- an amount reasonably estimated on a monthly basis for municipal taxes attributable to the unit; and
- the projected monthly common expense contribution for the unit.
Ok, so in plain english that means that the occupancy fee will be made up of the interest portion on the balance of your purchase price, the estimated monthly taxes, and the estimated monthly maintenance fees.
A couple of things to mention:
- The amount of the occupancy fee is about what you’d expect to pay once you receive your mortgage because the first few years of a mortgage payment mostly consist of paying off the interest, and;
- The occupancy period normally last anywhere from 3-6 months.
On that last point, it’s impossible to tell how long the occupancy period will last. It will depend on the reputation of the builder, but most importantly it will depend on how many floors there are in the condo and what floor you purchased your unit.
So, in our example you would have bought on the 5th floor of a 30-floor condo which means that your occupancy period would last longer than someone who bought on the 28th floor. And, of course, if you bought on the 28th floor you would have a much shorter occupancy period than someone who bought on the 5th floor.
I can imagine you’re not too thrilled right now. So, you’re telling me that I’ve put down 20%, waited 3 years for my condo and when I’ve finally gotten my keys the unit still isn’t mine but I have to pay what basically amounts to a mortgage payment for anywhere from 3-6 months???
You will not receive title to your condo until the building passes site and city approval. This process can take a few months.
So, what happens to the occupancy fee? Does it go towards my mortgage?
Unfortunately it does not. The money goes directly to the builder. They essentially use this money to recover the costs of trying to continue to sell unsold units and get the building running.
One thing to keep in mind is that the builder doesn’t get any of your downpayment until the building closes, so they have the incentive to have as quick of an occupancy period as possible. They want their units sold and they want their money so they can move onto future projects.
So, to reiterate, you will be paying a monthly fee to the builder that is pretty close to what you can expect to pay for your mortgage.
Once you do get that communication from the builder that the building is registered, you will then have to arrange your mortgage for closing. Once that is completed, title is officially transferred to you and then you will begin your monthly mortgage payments.
What are the takeaways from this blogpost?
First, it’s super important to have your purchase of sale agreement reviewed by a lawyer that specializes in pre-construction condos.
They will be able to lay out the details of the occupancy fee structure and tell you what the builder has included as part of the fee.
Second, that fee will typically include the interest on the unpaid balance of your purchase price, monthly property tax and monthly maintenance fees. This will be approximately what you can expect to pay for a mortgage once you have title. If you pay too much during occupancy, the builder will credit you on closing. If you pay too little, it’s up to the builder to determine if you have to make that adjustment on closing.
Finally, it’s important to keep this process in mind when choosing which floor to purchase on. The lower the floor that you purchase on the longer your occupancy period will last.
However, that doesn’t mean that you should just purchase on the highest floor because builders will include a per floor premium on top of the listed purchase price. There can easily be a $30,000 difference between the same unit on the 5th floor and 20th floor (at a $2000/floor premium).
The most important thing is to understand that this process exists and realistically there is no way out of it. You just have to do your research and hope that the occupancy period is short!
If you have any questions about the occupancy period that I didn’t go over please leave a comment below or contact me directly!