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Sep 30, 2014

Rental Incentives for Newly-built Condominiums

By: Tara Welat

Developers are offering more and varied incentives to attract purchasers to newly marketed condominiums as well as those projects that are close to completion.

Although rent-to-own units are not yet widespread, those developers who offer this program provide a prospective purchaser the opportunity to rent brand new condominium units with the option to purchase down the road. Rent-to-own agreements typically combine an occupancy agreement for a specified time period with a purchase agreement for a set purchase price. Monthly payments are required of prospective purchasers and a portion of each payment is applied to the purchase price as a “deposit” and the remaining portion is a non-refundable “occupancy fee”. At the end of the occupancy period, the purchaser typically must come up with the balance of the purchase price. The obvious advantage is that while typical purchase agreements for new condominium units require deposits of at least 20%-25% of the purchase price, the rent-to-own option allows a prospective purchaser the opportunity to purchase a unit by payment of 5% of the purchase price.

The biggest disadvantage to the developer is the loss of the HST New Housing Rebate to any subsequent eligible purchaser of the residential unit in circumstances where the option to purchase is not exercised by the prospective purchaser.

Another incentive increasingly employed by developers is rental programs providing consents to purchasers to lease their units upon the occupancy date and prior to the final closing date. Standard developer purchase agreements prohibit the assignment and/or leasing of the unit prior to the final closing date except with the prior written consent of the developer. Providing the consent to lease prior to the occupancy date provides some measure of comfort to those purchasers who are purchasing the unit as an investment and require the rental income to carry the unit until the final closing date.

As with rent-to-own programs, there are definite risks to the developer if the purchaser unexpectedly cannot close the deal or breaches a financial covenant under the purchase agreement. Not only can the tenant in occupation of the unit pose a potential problem to the developer, but in the event the deal is terminated and the developer must re-market the unit, it will fail to qualify as a newly built residential condominium unit for the purposes of the HST New Housing Rebate to any subsequent purchaser. Despite this risk, the significant deposits purchasers are required to pay leading up to and on occupancy of the unit means that developers will continue to face a low level of defaults under purchase agreements reducing their exposure to the potential loss of the HST rebate.

Related Practice Areas

Commercial Real Estate Law

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