The purchase price of your condo unit says $300,000. The final total is closer to $330,000… or more. Hello, development charges.
Closing fees like development charges need to be factored into your investment calculations in order to make solid purchasing decisions. So how can you plan for hefty development charges, and how can you save on them?
If you’re looking to avoid a nasty closing cost bill, there are two things you have to do: First, strategically plan your purchase to take development charges and other closing costs into account. Second, negotiate for capped fees before you sign a purchase of sale agreement. This can save you tens of thousands of dollars, but many buyers don’t even think to ask.
But wait… development charges?
Back up a sec. What are development charges, and why do I have to pay them?
Development charges are issued to a builder from their city when the developer receives their building permit. These charges are paid by the developer to fund infrastructure: roads, libraries, parks, education, the Spadina subway extension… and more. Each city’s specific charges are different, because they pay for municipal construction and development.
The main development charges are general levies, Education levies, Section 37 levies, and Green Standard levies.
They can cost a lot of money, but they’re also necessary. If builders are constructing a residential unit, the city needs money to support that new incoming population with schools, hospitals, and transit. And they mandate greener new construction that will ultimately lower the city’s carbon footprint. The city then spreads this cost out by square footage of the proposed building; that is to say, the developer pays by the unit.
This makes it nice and simple to pass these charges onto the unit buyer. Depending on the size of unit your purchase and where you choose, you’ll get a nice development charge bill when you close your condo unit.
A quick note: development charges go up yearly (give or take). Your purchase agreement will stipulate that you are responsible for any changes to closing costs over the course of construction. This scared a whole whack of people when Toronto proposed doubling development charges in 2013.
Estimating your development charges
Toronto (and other municipalities) have handy charts available online for developers to use to estimate their development costs.
Toronto Education levy
Section 37 levies
Section 37 levies are negotiated per-building between the developer and the city - and your building won’t always have them. Individual neighbourhoods have specific bylaws that limit building height or density. And your developer might want to bypass these. So they offer the city a “community space”, like a large green space, park, or even public art gallery. Then the developer passes the cost of this onto the unit buyer.
This doesn’t help you, the buyer, estimate your closing costs. You actually can’t accurately estimate what your development charges will be three to four years from now. That’s a death sentence for an investment: if you can’t accurately account for the cost of investment, how do you know whether it’s a good one or not?
How to make a deal breaker into a deal maker
Cap your development charges. Before you sign your purchase agreement, you or your real estate sales rep should negotiate for “incentives” that include limiting how much you pay on closing. That’s the only way to sleep soundly at night (at least, for me!)
Sometimes, you can get some charges capped at zero dollars. Whitehaus Condos, currently in construction at Yonge and Eglinton, did just this when I worked on the project in 2015. Capped development charges gave my clients more purchasing leverage, and essentially decreased the cost of their investment.
These caps are presented as “incentives”. They’re there to sweeten the pot for unit buyers. Negotiating for low or zero-dollar caps requires you to approach the developer about buying a condo unit early. As in, VIP sale, pre-sale, and first block sales.
This is when developers are at their most desperate. They’ve paid a ton of fees to get their building approval, but they can’t get a bank to give them money until they’ve sold a significant portion of the proposed building. So the earlier you buy, the more leverage you have in negotiating a good incentive package.
So the best way to negotiate the lowest development charges? Buy early.
Development charges are more important than you may think
One final note: your development charges don’t cost exactly what they cost.
Here’s the rationale: development charges, and other closing fees, are out-of-pocket expenses that you pay before you get occupancy. If you’re buying the property to rent out, that means development charges are part of your initial purchase cost. They’re not a rolling cost that ends up being covered by rental income (rental income covers your month-to-month expenses, like mortgage, maintenance fees, hydro, etc).
Your initial purchase costs, as opposed to your rolling monthly costs, is the ultimate of your investment: how much do you have saved, and what can you get for those savings?
When buying a condo as an investment, you put in approximately $60,000 to buy a unit worth 5 times that amount. The bank mortgages the other 80% of your investment. Then a tenant pays for that 80% over time.
Development charges eat into that $60,000, giving you significantly less purchasing power. If there are $10,000 in development costs, and you only have $60,000 for a deposit, then you really only have $50,000 for a deposit. And so you can only buy a unit worth $250,000, instead of $300,000.
So your out-of-pocket expenses have a huge impact on your ability to invest. When you get these fees capped, you have more purchasing power, and more money to invest in the unit.
There’s a lot more to development charges then meets the eye - especially when it comes to investment. If you’d like to know more, I’m happy to talk about it. Send me a message and we can go for a no-sales-I-promise coffee chat.