construction site in canada

Guide 101: Occupancy Fees

You might be reading a lot about occupancy fees lately. Also known as “phantom rent,” these are payments made by buyers of pre-construction condos before they take official ownership of their units. 

Once you start paying these fees, you enter the “interim period” and can move into your unit even though you haven’t received final approval and registration from the municipality. These fees aren’t counted towards your deposit or purchase price and are used by the builder to complete the remaining units or amenities. 

fees written on blocks

How are Occupancy Fees Calculated? 

Occupancy fees are used to pay three expenses. Expect to spend $2,500 to $6,000 monthly until the project closes. Let’s categorize them for easy understanding: 

  1. Interest on the Unpaid Balance: If you’ve paid 20% as deposit, you’ll be charged interest on the remaining 80%. This amount is mentioned in the purchase agreement. Once the 10-day cooling period is over, you can’t cancel the agreement, and have no choice but pay the occupancy fees. 
  2. Estimated Municipal Taxes: Any annual property tax that the builder paid in advance for the year you move in is added to the fees.  
  3. Common Expenses: These are projected monthly maintenance fees that cover the cost of building amenities and services​. 

Why Are Occupancy Fees Necessary?

Yes, occupancy fees are necessary. The developer uses these funds to manage ongoing expenses and continue selling any unsold units​. 

Builders don’t begin work on a pre-construction project until 60% of units are sold. That’s because most commercial lenders won’t qualify them until they are convinced that it is a good project. On top of that, most projects are delayed because of labor shortage and material shortage. Costs rise and they fall short on funds needed. 

How Long Do You Pay Occupancy Fees?

Sadly, there’s no guarantee of how long you will have to pay occupancy fees. Typically, it lasts from a few months to over a year. A lot of factors play a role including stage of construction at the time of occupancy, how quick the remaining units and common areas are finished, and approval by municipality. 

Differences Between Lower and Higher Floors

Units on lower floors usually become ready for occupancy earlier than those on higher floors. As a result, buyers of lower-floor units often have a longer occupancy period compared to those purchasing higher-floor units. This information isn’t readily available and the builder’s office won’t ever tell you this, but you should take this into consideration while choosing your condo unit. 

And Remember… 

Occupancy fees do not contribute towards building equity in your condo. Unlike mortgage payments, these fees are purely to cover the developer’s costs and do not reduce your principal balance. Once the building is registered and the title is transferred, these fees cease, and you start making mortgage payments if you financed the purchase​. 

The word COST written on a silhouette of a construction site

4 Tips for Managing Occupancy Fees

  1. Review Your Purchase Agreement: You get 10 days to back off from a pre-construction purchase agreement after signing it. Use this time to read it through with your lawyer and see if the builder’s terms and conditions are reasonable. Your lawyer will also explain concepts that are new to you. If the terms and conditions aren’t described, reach out to the builder within those 10 days and they’ll cancel the agreement. You’ll have your deposit back in another 10 days. 
  2. Budget Accordingly: Occupancy fees are higher than average rent or mortgage payment, so you must set a budget aside for that. Considering some occupancy periods last for 6-12 months, set aside around $20,000 to $35,000. 
  3. Monitor Construction Progress: Stay in touch with your developer to get updates on the construction timeline. You can also stop by the construction every few weeks to check progress. 
  4. Pay in Full: Simplest but slightly unrealistic way to save on occupancy fees is paying 100% of the condo cost before moving in. Then, the builder will only charge you for common expenses and property taxes. Inform the builder during the 10-day cooling off period, so they can amend their occupancy clause. 

What if I can’t afford occupancy fees? 

That’s a sad situation to be in as you might have to sell for a loss, depending on whether the area has appreciated or not. In this case, you can assign the condo to someone else after taking the builder’s permission. You might make a few thousand dollars in profit but if it is towards the end of the project timeline, you might have to accept a small loss. Most projects will charge up to $10,000 to assign, which covers penalty and processing fees. Reach out to a real estate agent for more details on this process. 

Always read your purchase agreement carefully to know exactly what you’re committing to. Be cautious of builders with a history of project delays because the longer the period, the more dollars you’re wasting towards nothing.

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