Condos vs. Co-Ownership [media clip]

A new twist on home buying

As rental rates rise some landlords are selling off apartments one by one, but watch out for that tax bill

From Friday’s Globe and Mail

Imagine owning a home in Forest Hill for a mere $121,000.

Okay, it’s only a 400-square-foot bachelor apartment. But it’s solidly built, well-maintained and quiet. And the location is unbeatable — a dead-end street lined with Sixties-vintage low-rise apartment buildings and single-family homes off Spadina Road, in a hidden enclave of boutiques and cafés known as Forest Hill Village.

For less than $300,000 you can have a two-bedroom apartment with more than 900 square feet in the same 45-year-old building at 60 Montclair Ave., a short walk from the Bathurst West subway station and St. Clair Avenue. To buy something that size in a new condo building in the area would cost more than twice that much, and you’d have to wait for it to be completed.

There must be catch, you say. Well, yes and no.

The building at 60 Montclair is part of a new wave of “co-ownership” ventures in which rental apartments are sold off one by one as they become vacant, resulting in a mix of owners and tenants within the same building.

“The buildings are a little bit older, but they’re in some of the best locations in the city,” says Hanya Kizemchuk, the owner of 60 Montclair, which has been in her family for 40 years.

Buildings like hers were built solid and soundproof, she explains.

“There’s 12-inch concrete between units rather than the new standard of eight inches. … The walls are plaster on mesh, not drywall.”

Ms. Kizemchuk has already sold six units in her 48-unit building, all of them to outsiders who bought them as pied-à-terres after tenants had moved out.

Units have been offered to tenants first, she says, and they cannot be evicted for the purposes of selling units, but none have taken up the offer so far.

The last time Toronto experienced the co-ownership trend, in the 1980s, the provincial government became alarmed about the loss of rental housing and curbed the practice by passing the Rental Housing Protection Act. The explosion of new condominium development that followed prevented the trend resurfacing when Mike Harris’s government repealed the act in 1997.

But now that condo prices are going through the roof and landlords are facing the rent-depressing effects of a 4-per-cent vacancy rate, co-ownership is back.

For buyers, it offers an opportunity to buy a no-frills living space that they can upgrade as much as they want and rent out if they choose.

For landlords, it’s a way to make additional money on their properties in a flat rental market at a time when the city is not approving total condo conversions.

And for tenants, it means a chance to buy their apartment if they have the money. If not, they face the prospect of living down the hall from people who own their units and get to vote on the building’s board of directors, while tenants have to speak through their landlord.

The tenants at 60 Montclair weren’t thrilled by the co-ownership move, but have accepted it, Ms. Kizemchuk says. “I’ve known some of them for 10 years. Once I comforted them and said nobody can throw you out, you’re protected under the Tenant Protection Act, they felt better about it.”

However, the city of Toronto has concerns.

“The real problem for us is it doesn’t require any planning act approval to go from the rental form to something quite different,” says Patrick Lee, manager for community policy at the city. “Going condo needs formal approval, and all is above-board and out in public. But with co-ownership, it’s just a matter of going into the [Ontario Municipal Affairs and Housing] ministry office and registering a business, and you go into a different type of tenure.”

Martin Rumack, a Toronto lawyer with a long involvement in co-ownerships who teaches a course on the topic for agents of the Toronto Real Estate Board, explains the differences between condo ownership, co-operative ownership and co-ownership like this: With condos, you purchase a unit in a building and gain a percentage interest in the common areas. You receive a deed to the unit you have purchased.

With co-ops, you purchase shares of a private corporation that owns and manages the building. You also receive a leasehold occupancy interest in a specific unit and the exclusive right to use it. You do not receive a deed; you receive shares in the corporation.

In a co-ownership setup, you purchase an undivided percentage of the building that is registered on title (your name is on the legal ownership document), along with the exclusive right to occupy a specific unit — subject to the Tenant Protection Act (you cannot kick out sitting tenants). You receive a deed setting out the percentage interest you have acquired.

“Co-ownership is a hybrid between co-op and condo,” Mr. Rumack says.

With condos and co-ownerships (but not co-ops), you can mortgage your interest in the property without getting consent from the property’s board of directors. However, only a few finance companies will provide mortgages for co-ownership units. The big banks steer clear of them, but trust companies and credit unions will provide mortgages, though usually at a rate a couple of points higher than the banks’ mortgage rates.

A unit owner needs approval from a building’s board of directors to resell his unit, but Mr. Rumack says this is generally a “rubber-stamp” process.

Since the 1980s, the number of co-ownership buildings in Toronto had remained steady at about 30 until two years ago. Now there are four or five new ones that Mr. Rumack is aware of, including 60 Montclair and another seven-storey building one block north of it in Forest Hill Village.

“It’s not a stampede, not a gold rush,” Mr. Rumack says. “There’s a bit of startup.”

Mr. Lee, the manager for Toronto’s community policy, says the city is concerned that landlords may see co-ownership as the first step in getting full condo approval. “People go from rental to co-ownership, then they cry the blues about there being no financing available, or needing to settle estate matters. ‘Please let us go to condo,’ ” he says. “They think they can exert more pressure on us.”

He wants landlords to know that that is not going to be the case. In fact, the city plans to approach the province to tighten up the process and make sure buyers understand that co-ownership is not a step toward condo status, Mr. Lee says.

Ms. Kizemchuk says she knows she couldn’t get approval to convert her whole building into condos, but wants to provide ownership as an alternative and to share the investment potential of units in the building.

Before she launched the venture, she undertook a $400,000 upgrade of the building’s envelope and mechanical systems to ensure that buyers would not face surprise charges later for building maintenance.

While she had intended to do a basic renovation on all the for-sale units, changing the kitchen counters and bathroom fixtures but keeping the parquet floors and the basic room configurations, she found that some buyers were content to buy them as is and bring in their own renovators.

“My objective is to clean the places up,” she says. “If you want to blow your brains out making it high-end, you can do that.”

She says she doesn’t have the money to put in granite or marble, and in any case that’s a matter of taste and it would be wasteful to change things only to have the buyer rip them apart again.

“We’re all in this to make a buck, and I’m happy to pass on the opportunity to add value,” she says. She acknowledges the co-ownership trend will lead to “some flip buildings” — where a lot of investors buy just to resell and never move in — but she adds, “Mine won’t be one of them.”

One factor that may deter investors from co-ownerships is high unit taxes and maintenance fees. At 60 Montclair, unit owners will have to pay combined tax and maintenance fees of $5.02 a square foot — close to $700 a month for a two-bedroom. About 40 per cent of that is property tax.

The city taxes rental buildings at a rate 3.69 times higher than condos, partly on the rationale that these are investor-held buildings. Mr. Lee says the gap will be narrowed over the next 15 years to 2½ times higher, but that the city continues to view the co-ownership buildings as rental for tax purposes, and he wonders “if, indeed, people know what they’re getting into.”

Posted January 11th, 2007

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