Buying a pre-construction condominium in Ontario slightly differs from purchasing a resale unit. A few more steps are involved, including two different stages called the Interim Occupancy and Final Closing, and a related occupancy fee.

In Ontario, an occupancy fee is a common practice. It’s a fee charged to buyers of pre-construction homes until the final closing of the property. This monthly occupancy fees are also known as “phantom rent”, which makes it sound scary and off-putting. But should the homebuyers be fearful of the occupancy fees? Let’s analyze the facts together.

What are occupancy fees?

Occupancy fees are monthly payments made to the developer during the interim occupancy period, which typically starts when the building is declared “fit for occupancy” by the municipality. These fees cover the interest on the outstanding balance of the purchase price, as well as other costs associated with the development.

It is important to remember that whenever you purchase a new home, there is a period of time between when you take occupancy of your residence and when you take ownership of your newly built home. This is known as the ‘occupancy period’ or ‘interim occupancy’. Be that a new condo, a townhome, or a house, the same principle applies. New condos are particularly affected by this issue, so we will focus on condos and condo townhomes in this article.

You can’t own something that doesn’t exist, and in real estate in Ontario, a property does not exist until it is entered into the Land Registry system (until it is ‘registered’). This process takes some time in a new condo building or townhome development because there are often dozens or even hundreds of “units” to register at the same time.

Once your unit is ready and set for living, you take possession of it, but not ownership. You must pay the developer for the right to live in the home. The amount of the occupancy fees is roughly equivalent to the interest on the amount outstanding on the purchase price. 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.

The occupancy period ends when the building is registered, your mortgage kicks in, and you get the deed to your property.

That said, the occupancy fees are not something that a developer can simply “make up” and charge you what they want. When you pay occupancy fees, you are not “throwing your money away” or paying rent for nothing. You are paying for the exclusive right to use and occupy the property.

It is normal and there is no way around it, however there are effective strategies to minimize the costs.

How are occupancy fees calculated?

Occupancy fees are typically calculated as a percentage of the outstanding balance of the purchase price, minus any deposits, maintenance fees, and estimated applicable residential property taxes (Toronto property tax rate would be slightly different from that of Markham, or Richmond Hill, for example).

There is a simple formula that is the same for every condo or condo townhome in Ontario.

When you own a condo or a condo townhome, you pay 4 things every month:

condo fees (except for Freehold townhomes which are typically more expensive than condo townhomes, but you won’t have to pay monthly condo fees),
property taxes,
mortgage payment which consists of 2 parts: principle and interest.

When you are in the occupancy period of your new home, it’s the exact same except you just don’t pay the principal portion of your mortgage each month.

So your monthly occupancy fee payment is typically around 20-30% less than what your monthly expenses will be when final transfer takes place and your mortgage kicks in.

Occupancy fees can have a significant impact on your finances, especially if you’re not prepared for the added expense. It’s essential to factor these fees into your budget and consider the overall cost of ownership when making a purchase decision.

What are some tips for managing occupancy fees?

Make sure to understand the occupancy fee structure and terms before signing a purchase agreement.
Consider purchasing a unit on a higher floor, or a townhome to be completed last in a row, which may have a shorter occupancy period. Keep in mind, that with the townhome developments where the property itself is freehold but there is a condo corporation for the common elements and respective condo fee, the process is very similar to that of the condos, you get occupancy first, then once the exterior construction is completed as well, the final closing takes place where the title is transferred and condo corporation is registered.

While it is not possible to predict the length of occupancy period with absolute accuracy, it normally ranges between 6 to 18 months, so the higher up you are in the building or the closer your townhome is to end of the development, the shorter the occupancy period will be. Of course, to find these details about the development, you need to work with a knowledgeable real estate professional. So, as an example, if you buy a unit on the ground floor, you can expect a long occupancy period. If you buy the penthouse, you will likely have a very short occupancy period.

Plan your finances accordingly to accommodate the added expense of occupancy fees.
Research the developer’s reputation and reviews to ensure you’re working with a reputable builder.

Here’s a breakdown of how occupancy fees affect the overall cost of ownership:

Increased Monthly Expenses: Occupancy fees are typically paid monthly, which can add to your overall monthly expenses, including mortgage payments, property taxes, and maintenance fees.
Higher Upfront Costs: Occupancy fees can be a significant upfront cost, especially if you’re purchasing a new condo. This can impact your cash flow and affect your ability to afford other expenses.
Longer Payback Period: Occupancy fees can extend the payback period of your mortgage, as you’ll need to pay interest on the outstanding balance of the purchase price during the interim occupancy period.
Higher Total Cost of Ownership: Occupancy fees can increase the total cost of ownership, as you’ll need to pay interest on the outstanding balance of the purchase price, as well as other costs associated with the development.

As mentioned earlier, the occupancy fee is calculated based on the outstanding balance of the purchase price, minus any deposits, maintenance fees, and estimated property taxes. Other factors that can affect occupancy fees include:

Developer’s Costs: The developer’s costs, such as construction costs, marketing expenses, and administrative fees, can impact the occupancy fee.
Interest Rates: The interest rate on the outstanding balance of the purchase price can affect the occupancy fee.
Interim Occupancy Period: The length of the interim occupancy period can also impact the occupancy fee, as you’ll need to pay interest on the outstanding balance for a longer period.

One way to minimize the impact of occupancy fees on your overall cost of ownership is to work with a reputable real estate professional and/or lawyer and discuss your purchase in detail to understand the Occupancy Fee Structure during the 10 day cooling period. Go over the occupancy fee structure and terms before signing a purchase agreement, and plan your finances accordingly to accommodate the added expense of occupancy fees.

It is possible to negotiate the occupancy fee with the developer, through your real estate broker. Here are some tips to help you negotiate the occupancy fee:

Research the market value of similar units in the same building or complex to determine a fair occupancy fee.
Consider the developer’s costs and expenses, such as construction delays, labor costs, and interest on outstanding loans. There is often a relationship between the length of the occupancy period and the experience level of the developer. The more experienced the developer, the more efficient the building process and the developer’s operations, the shorter the occupancy period. Experienced developers who are familiar with process and who have diligent lawyers working behind the scenes for them know how to build and how to register a building as quickly as possible.
Keep looking at alternative development projects and be prepared to walk away if negotiation is rejected
Look for concessions: instead of negotiating the occupancy fee, focus on extracting “off-deed” concessions, such as a lower deposit amount or a “drop dead” date for closing.

Most importantly, do your due diligence in reviewing the purchase contract with a real estate broker and a lawyer, making sure the financing is in place for the deposits as well as the mortgage and get comfortable before moving forward and finalizing the purchase.

Remember that it is in the developer’s best interest to register the building as quickly as possible and to have the occupancy period as short as possible. This is because they foot the interest (on land acquisition and construction, front ending infrastructure, property tax, other deposits, insurance, operations and maintenance) before closing and they don’t get their money from the banks until the building is registered and all the unit owners have their mortgages commence. The registration can't occur until majority of units are occupied. Therefore, they are motivated to close/register as soon as they can.

Contrary to popular belief, developers are not allowed to make money on occupancy fees (interest, maintenance fees, etc.) during the interim occupancy period. Vendors/Developers are strictly prohibited by the Condominium Act, 1998, section 80(4), from profiting off of these fees. They solely cover the carrying cost of the development during Interim Occupancy. Even if the Vendor’s construction mortgage interest rate is 15%, they can only charge the BOC 1-year conventional mortgage rate.

So… can the buyers mitigate these costs? Well, one way to spare yourself from paying occupancy fees is to rent out your new condo or townhome.

Renting out your new condo or townhome

The first step when renting out your condo or townhome during occupancy is to find out if you are even allowed to. That’s right, you might actually not be allowed to rent out your unit. This may prove to be especially frustrating if you are an investor and purchased your unit to be rent out.

When you are in the occupancy period, you don’t technically own the property yet, so the developer has the right to dictate the terms of the occupancy period and your rights as the buyer of the unit.

Once final closing has taken place, you own the unit, and you can do whatever you want with it.

So how do you know if you have permission to rent it out? You can check your contract for the “Right to Lease during Occupancy” clause or consult your lawyer/real estate broker, but the best thing to do is simply ask the developer.

Find out what their policy on rentals during occupancy is and if there are any stipulations or fees.

Occasionally some developers say you can rent it out but only if you use their on-site designated rental agent to lease it.

Are there any other factors to consider?

Developers are putting more restrictions, rules and fees on investors who wish to do so, mostly due to insurance concerns. Consult your lawyer for advice, but in general, you can be charged fees for renting out your condo during occupancy – even if you have permission in your contract. 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.

The most common fees these days are two-fold: one fee for the simple “right to lease” the unit, and another fee to list your unit on the MLS system. Fees vary, but fees may vary from $1500-$4000, or higher.

Certainly, try to get it explicitly written in your contract that there will be a $0 fee for renting during occupancy, but there’s very little chance of any developer agreeing to that clause.

Sometimes, developer may ask you to sign a waiver of your right to Delayed Occupancy Claim in order to rent your unit out. So, should you waive your rights?

Delayed occupancy claims are a billion-dollar expense for developers in Ontario. Delayed occupancy is a program under Tarion that basically says that if your condo or freehold home occupancy is delayed past a certain point, or if you are not notified in the exact proper way of occupancy delays, that you are entitled to compensation for the delays. Most property investors still don’t know this program even exists in Ontario. This Tarion program is especially pertinent to new condo owners, since building a new condominium can take more time than constructing a freehold home, which means the potential for construction delays can be greater.

The maximum compensation under this program is $7500.

Some developers have had to pay millions of dollars in delayed occupancy claims to purchasers, and this comes straight out of their profits. Recently developers have realized that they can get out of paying them and potentially save themselves millions of dollars by simply forcing property investors to waive their rights to them in exchange for renting during occupancy.

So the question of if you should agree to waive your rights to a claim or not – you just need to do some simple math and figure out if it’s worth the potential rental income (and hassle) of renting out your unit.

For example, if you bought a studio on the penthouse floor of a condo, and you are owed $7500 in delayed occupancy fees by the developer, it’s not worth waiving your rights.

Your occupancy period since you are high up is going to be very short, and your rental income on a studio is going to be relatively low. In this case, you’re better to leave it empty until final closing and take the $7500 delayed occupancy claim instead.

However, if you are a 2 bedroom unit on the 2nd floor of a 50 storey tower, and you are owed $2000 in delayed occupancy fees, you’re better to waive your right to delayed occupancy. In this case, you’re looking at probably 9 months of occupancy fees to pay, and your potential rental income each month is a lot, so you suck it up, waive the rights to delayed occupancy claim and get it rented.

Can you avoid occupancy altogether?

Renting your new home during occupancy is a bit of a hassle, but nothing that cannot be overcome by an experienced investor. It can be a great cost mitigation strategy.

With condos, buy all your pre-construction condos on the highest floors in the building to shorten the occupancy period or eliminate it altogether. Buildings occupy from the ground up, so if you are on the lowest floors, you will have the longest occupancy period, and conversely, the highest floors will be the shortest. In some cases, if you purchased units in the top-5% of the tower, you can have zero occupancy period. The building can register and go to final closing before all units in the building are even ready to occupy. In this case, you just go straight to final closing, your mortgage kicks in on day 1. Some condo builders do not have any occupancy period, they take everyone straight to final closing on the same day. This is great for eliminating occupancy, but it results in a very high number of rental listings all dropping at once which does tend to drive rental prices down at first.

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

As per Globe and Mail, “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 caveat 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. One of the proposed solutions 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.

Back in January 2024, BILD, the builder and land developer lobby group in Ontario, wrote a letter to federal Finance Minister Freeland pushing for the changes to PRMHIA.

If the changes take place, real estate finance companies would need to offer occupancy period mortgages. This presents a significant business opportunity and has the potential to alleviate the issues with the homeownership costs.

Understanding and planning for occupancy fees is crucial when buying a pre-construction home in Ontario. By researching, negotiating, and budgeting effectively, buyers can manage these costs and make informed decisions about their investments.

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