Avoiding Interim Occupancy Fee "Phantom Rent" for a condo

[smyth]

I have a question regarding the interim occupancy fee, mainly the interest calculated on the unpaid balance of the purchase price. Do condo builders allow lumpsum deposits to be made prior to initial occupancy to reduce these costs? Does it have to be the full amount, or can it be half, or even a quarter?

If this is possible, when should it be done and should it be done directly with the builder or through the builders lawyers?

Thank you

 

[carturo15]

This is possible and it must be done directly with the builder prior to occupancy so they can calculate your occupancy fees. They have to make an amendment to the agreement of purchase and sale and you can pay whatever amount you want, a little bit less than full amount, half, quarter, etc. Interest rates nowdays are ver low, builders are currently using like 3.5% to calculate the interest on the unpaid amount and even if the rates go up between your occupancy and final closing, the rate won't change. So you need to evaluate if it is worth to pay full balance or half to the builder when you don't know how long is going to be the period between occupancy and final closing, sometimes it can be a year. or maybe you can do something better with your money during that period of time.

 

[BobBob]

Another, maybe most important thing to keep in mind is risk. Your down payment is held in escrow by lawyers and is relatively safe. The developer doesn't get it until closing, at which point you can also pay a lump sum to the financial institution which gives you a mortgage. If you pay a lump sum to the developer at occupancy (avoiding "phantom rent"), you are taking on the risk of something happening to the developer before closing, and potentially losing that lump sum.

 

[AHK]

We spoke with both the developer's representatives, and with our lawyer regarding a lump sum payment. From what we learned, a purchaser has the unilateral right to pay the balance owing on occupancy, and avoid the 'Phantom Rent', if that election is made during recision period associated with the original purchase. Subsequent to that time, any request for a lump sum payment on occupancy, above what was in the original (or subsequently amended) purchase agreement, is at the grace of the developer, and from what I understand, not often granted. In our case, the developer would not agree to accept any lump sum above the 15% payment on occupancy which was already established in the purchase agreement payment schedule.

Regarding the 'Phantom Rent' - the purchase agreement stipulates that it is calculated on the balance remaining at time of occupancy (in our case 70%) times a prescribed rate. It turns out the prescribed rate is the rate that is posted for either a one year or a two year (I forget which) closed mortgage by the Bank of Canada, with the prescribed rate for February being 3.25%. The rate is updated on a monthly basis. In our case, and I would presume applicable elsewhere, the developer wants a series of post-dated cheques for the Phantom Rent, maintenance and taxes at the time of the initial occupancy. How then to handle changes which take place in the prescribed rate in the months between initial occupancy and final close? It turns out that any changes in the rate become month to month variances, which are itemized and settled as part of the adjustment schedule for the final close.

That is the limit of my understanding - based on several telephone calls with both our lawyer, and representatives from the developer. I hope it helps.

AHK

 

[AHK]

Another, maybe most important thing to keep in mind is risk. Your down payment is held in escrow by lawyers and is relatively safe. The developer doesn't get it until closing, at which point you can also pay a lump sum to the financial institution which gives you a mortgage. If you pay a lump sum to the developer at occupancy (avoiding "phantom rent"), you are taking on the risk of something happening to the developer before closing, and potentially losing that lump sum.

A further comment on the risk factor - again, based on what I was told, in order obtain the funds, the developer has to obtain a letter of credit from their bank, which would be used in case of default, prior to the funds being released (this may only apply when electing to pay the entire balance owing - I am not sure). Two concerns were identified to us, first the developer may well ask for the purchaser to cover the cost of the developer's letter of credit, and secondly, if the developer were to default, it may be a time consuming and possibly convoluted process to secure the title.

AHK

 

[shelfun]

We bought a condo last year and will close in 2 months time. What we did was to alter the last instalment of the downpayment to a higher amount to reduce the "interim occupancy fee". I don't see why & how the developer will deny it. I've also heard of buyers who managed to raise more money just before the closing & so they had their lawyers do the necessary alteration (with a fee) and it's done.

Can the developer legally deny you of paying say 70% up front instead of 20%? That would mean I HAVE to take 80% loan to buy a unit, doesn't sound right.

 

[AHK]

We bought a condo last year and will close in 2 months time. What we did was to alter the last instalment of the downpayment to a higher amount to reduce the "interim occupancy fee". I don't see why & how the developer will deny it. I've also heard of buyers who managed to raise more money just before the closing & so they had their lawyers do the necessary alteration (with a fee) and it's done.

Can the developer legally deny you of paying say 70% up front instead of 20%? That would mean I HAVE to take 80% loan to buy a unit, doesn't sound right.

If at the time the offer to purchase is negotiated that you will have the cash on hand at occupancy, and the larger payment is included in the schedule to which the developer had agreed, no problem. Also, within the recision period, a purchaser has the right to elect to pay the balance on occupancy. After that, any change in the payment schedule is by request, and up to the good graces of the developer to accept it, but they are under no legal obligation to do so. As the saying goes - a contract is a contract. Please bear in mind - I am not a lawyer, and there may be specific scenarios to which these general principles, based on our own experience, might apply. If you are indeed in the fortunate position to put kown a much larger payment on occupancy than originally anticipated when the unit was purchased, speak with the developers sales representative and / or your lawyer to see what may be done.

AHK

 

[shelfun]

So far I haven't heard from anyone that has problem with changing the "last downpayment" at closing. The lawyers are always willing to do it with a fee. Neither have I heard of any developer denying the change. Having said that, I'm assuming it's not a very common "situation". I know of 2 buyers in 500 Sherbourne who had asked for the change & are both granted. I was even advised to look into my last downpayment again before my PDI in late April.

 

[Dan_550]

So far I haven't heard from anyone that has problem with changing the "last downpayment" at closing. The lawyers are always willing to do it with a fee. Neither have I heard of any developer denying the change. Having said that, I'm assuming it's not a very common "situation". I know of 2 buyers in 500 Sherbourne who had asked for the change & are both granted. I was even advised to look into my last downpayment again before my PDI in late April.

I recently moved into 55 Stewart (Thompson Hotel) and was denied in my request by Freed Developments to pay the balance owing on my unit. I purchased in 2006 and by no means at that time did I think I would be in a position to pay down the balance owing. Had I known at the time I would have written it into the purchase agreement. I've chalked it up to a costly learning experience on my first foray into property ownership.

 

[shelfun]

I'm sorry to hear that Dan_550. I guess some developers are not as flexible; it sucks.

 

[simuls]

I recently moved into 55 Stewart (Thompson Hotel) and was denied in my request by Freed Developments to pay the balance owing on my unit. I purchased in 2006 and by no means at that time did I think I would be in a position to pay down the balance owing. Had I known at the time I would have written it into the purchase agreement. I've chalked it up to a costly learning experience on my first foray into property ownership.

Clearly they are making a profit on the IOF. Honestly, the more I hear about Freed, the less I like.

 

[Dan_550]

I think he's just over-extended himself in terms of the number of active projects and the timelines he's projecting to the public. I'm happy with my unit and with the building (or will be once its complete), however there's a serious lack of communciation with occupant's and a general feeling of being 'in the dark'. I hope for his sake the occupancy of future projects (75 Portland/650 King etc) go much more smoothly than 55 Stewart. They could have at least extended an increase in the final down payment by 20 or so percent and I'd by mediocrely happy....