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For many buyers scoping out pre-construction condos, monthly maintenance fees are often a top concern. “How much are condo fees?” and “Will they increase?” are usually the first set of questions brought up to Realtors after discussions around location and asking prices have been put to rest.
However, while condo fees are important, development charges represent another key closing cost in the new condo market, that if left ignored, can cause major headaches and add up to $1000’s more than expected.
Before delving deep into the subject, below we’ve highlighted two key takeaways about development charges that buyers need to account for:
- A capped clause: In your sale’s agreement with a real estate developer, it’s critical that you include a clause (in writing) that stipulates development charges will be capped. By including a capped clause, the amount you owe in development charges cannot be increased beyond a specific threshold, which helps protect you from skyrocketing fees while allowing you to more clearly budget all your closing costs in advance
- Pre-construction vs. re-sale: Development charges are only involved in pre-construction condo purchases, so those looking at resale properties on MLS don’t need budget for this added expense
Remember, while a pre-construction condo is a proven method to build equity, it’s critical buyers do all their research to ensure unexpected closing costs don’t bite into what could otherwise be a profitable venture.
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Overview: Development charges
The introduction of a brand-new condominium will inevitably have impacts on a neighbourhood’s social and urban fabric. After all, along with the fact a new tower is standing on a once empty lot, physically taking up real estate in a neighbourhood, a new condo will also result in a significant jump in the number of residents.
That means more people and more pressure on public transit, local roads, sewer systems, nearby schools and other amenities.
In order to accommodate for this change and ensure a neighbourhood is able to keep pace with the uptick in new residents, local municipalities impose an assortment of fees to fund certain infrastructure projects.
Revenue from these fees (cumulatively referred to as development charges or levies) are never pocketed by the condo builder but instead, are funneled to local municipalities to spur the creation and improvement of:
- Police and emergency services
- and more
Development fees – as a closing cost
The cost of development charges are carried over to consumers, so pre-construction buyers do foot a part of the bill owed to municipalities. These charges are not a recurring expense but a single fee paid at the time of closing.
Development charges are largely calculated based on the square footage of your future unit. So the bigger the unit, the larger dollar amount you’ll pay in development charges. The fee does vary from one condo project to the next however and there’s no fixed formula to calculate them. The City of Toronto does provides a quick overview of Development Charges here.
Arguably the most important fact that pre-construction buyers must know is that development charges must be capped.
As highlighted at the top of this article:
- In your sale’s agreement with a real estate developer, it’s critical that you include a clause (in writing) that stipulates development charges will be capped. By including a capped clause, the amount you owe in development charges cannot be increased beyond a specific threshold, which helps protect you from skyrocketing fees while allowing you to more clearly budget all your closing costs in advance
While you may be presented with a dollar amount in development fees at the initial time of purchase, this is only an estimate and actual fees can skyrocket between the time you sign a deal and final closing. Hence, the need to cap development charges.
The cost of development charges is set by the municipality and is not dictated by a developer.
The cooling off period is a mechanism that grants pre-construction condo buyers the right to cancel a sale for any reason, including to avoid unfavourable terms. Even after you’ve formally signed an agreement to purchase with a condo builder.
If a capped levies clause was not included in your sales contract, it may be recommended (after you’ve consulted with your lawyer first) that you take advantage of the cooling off period and rescind the sale.
The cooling off period for condos in Ontario is only granted to buyers for 10 days. Therefore, time is of the essence and pre-construction buyers should make it a top priority to have their real estate lawyer review all their paperwork.