July 18, 2017

What Are Pre-Construction Condo Development Charges?

Unwary buyers who’ve signed up for a pre-construction condo over the last few years could find themselves faced with an unexpected extra bill when it eventually comes time to move in.

While most buyers of Toronto condos know they need to budget for closing costs – legal fees, land transfer tax, pre-paid property taxes, etc. – many fail to account for municipal development levies which, although initially charged to the real estate developer, actually end up coming out of the buyer’s pocket.

This can change price comparisons considerably, warns realtor Jamie Harnish. While listed price points make pre-construction a viable option in areas where resale condo prices are through the roof, many inexperienced buyers underestimate these development costs when shopping around.

“Pre-construction can be cheaper, at least that initial price tag – although not as much anymore – but certainly the advertised prices are less than what resale prices are going to be,” he explains. “I think that once people get further into a pre-construction deal they’re realizing that the numbers are starting to add up and … it’s not as straightforward as buying a place for $299,000.”

Costs Vary Widely from Project to Project

Development levies are collected by the municipality to pay for various services, including sidewalks, parks, sewers, and subway extensions – as well as improvements to nearby police, fire, and health services. While the amounts can vary sharply from project to project, the charges (here, for instance, are the most recent development rates for the city of Toronto) represent a substantial closing cost that can easily boost pre-construction condo buyers’ outlay by as much as $10,000, depending on a condo’s size and location.

When you purchase into a pre-construction project, whether a Toronto, Vancouver, or Hamilton condo, your contract will advise you that you can expect to owe a certain amount in levies at closing. The trouble is, these charges are payable at the time the building permit is issued, not when the condo project is launched or in pre-sale. And a lot could change before the project actually gets built, driving up costs in the interim.

Last year, a group of Scarborough condo buyers were left scrambling to come up with thousands of dollars in unexpected closing costs that they maintained were not made clear when they agreed to purchase their units. While the idea of additional fees was in the sales contract, many buyers are shocked at how these costs escalated. Ultimately though, rather than risk losing their deposits and being forced to move out of the units, most swallowed the unexpected bill.

Negotiate a Cap to Prevent Nasty Surprises

Frequently, buyers of pre-construction condos don’t bring in a lawyer until much later in the process – and that can be a costly mistake, suggests Toronto real estate lawyer Jeffrey Cowan. When clients brings him a contract for review, Cowan always advises them to go back to the builder during the 10-day cooling off period to get these development charges ‘capped’.

This way, if the city decides to double the development charges between the time they buy their unit and the time the project closes, they’ll be protected. Regardless of the actual amount paid by the developer, they’ll only be responsible for the maximum level agreed upon, he explains. It also forces clients to factor in these additional costs and fine tune their budget in advance of receiving the final statement of adjustments from the builder.

Development Costs Continue to Rise

Development charges are a huge source of revenue for municipalities and there’s no sign of them letting up anytime soon. In fact, many local municipalities are continuing to raise the prices of such charges. But you don’t want that to be your problem. Like most things in real estate, everything is negotiable. If a developer isn’t on board with capping these levies to a reasonable level, it may be time to look elsewhere.

With this in mind, prospective condo buyers should check the overall track record of the developer, particularly when it comes to their record for finishing projects on schedule and on budget. Tarion Warranty Corporation maintains a searchable database of developers, with detailed data about builders’ past projects.