by Holden Rhodes and Becky Griffiths
Why are so many apartment owners interested in converting their apartment buildings to condominiums with no intent in selling units or even operating as a condominium corporation? The answer is simple. Although there are some risks and barriers, conversions often achieve real property tax savings, competitiveness and flexibility in refinancing of the existing development along with many other benefits.
Converting to condominium is one way to address the existing inequity between the assessment of condominium (single family residential (“SFR”) assessment rate classification) and new rental apartment units and existing apartment buildings (multi-family residential (“MFR”) assessment rate classification).
Depending on the jurisdiction, apartment owners could achieve up to a 40% property tax reduction following conversion. The reason for the reduction is that upon the change in legal title, condominiums are assessed as SFR units rather than being taxed at the MFR classification which is typically a higher classification. In Windsor, for instance, the multi-family rate is 2.74 times higher than the single family rate.
It is important to note however that the benefit derived from this reclassification is to some extent reduced by the increased value by which the Municipal Property Assessment Corporation attaches to units which are condominium titled. Further, the benefits do not immediately follow conversion as the benefit must first be passed on to the existing tenant for as long as he/she occupies the unit. On the positive side for landlords, however, vacancy and tenant turnover is reduced. When turnover does occur, the property tax reduction is then passed directly to the building owner thereby making the landlord more competitive with other owners who do have condominium titled properties.
Another benefit to conversion is the value that is added. Reduced realty taxes result in increased net operating income and which in turn provides an increase in market value for condominium titled properties. Converting to condominium further increases borrowing strength and may result in better interest rates.
The benefits of condominium conversion, however, are not available to everyone. As established in the Planning Act, municipalities are able to discourage the conversion process through the contents of their Official Plans. This was confirmed by the case of Goldlist Properties Inc. v. Toronto (City) where the Ontario Court of Appeal concluded that the City of Toronto could enact provisions restricting conversions of property from rental to condominium.
Common policies within the Official Plans of many municipalities in Ontario include restrictions on conversion unless the vacancy rate for rental accommodation exceeds a specified limit and unless the average market rents for units proposed are above the average market rents for the unit type in that particular geographical location.
The process of converting to condominium can be a lengthy one. Applications are submitted to the local planning department which are circulated to various agencies for comment. A staff report is then prepared by City administration either recommending denial or approval. The report will also set out various draft conditions that must be satisfied before final approval is granted. If the approval authority for the municipality is not planning staff but rather City council, the process is delayed in that the planning report is usually presented at a public planning and development committee meeting where the public has the opportunity to address the committee. Once the committee reviews the report, the committee will then make recommendations for consideration by City council.
In deciding whether to convert to condominium, attention should also be made to the cost of making such an application. In addition to legal fees, consideration should be made to the application fee in the appropriate jurisdiction. Further, draft plans of condominium are required to accompany an application for conversion which therefore results in surveying costs. The applicant will also have architectural or engineering costs in that “as built plans” must be prepared if they do not exist and the declaration to be registered on title must contain a certificate that all buildings on the property have been constructed in accordance with the regulations made under the Condominium Act, 1998.
The cost of satisfying the draft conditions can also be significant depending on the conditions imposed. Some municipalities require that an inspection of the property be carried out by a person qualified under the Professional Engineers Act or the Architects Act or otherwise qualified and report to the approval authority on all matters which may be of concern to the approval authority. The municipality will then provide a list of the deficiencies that must be rectified before final approval, which results in further engineering and construction costs for the applicant. This can be seen however as a positive in that these physical improvements likely have the effect of further increasing the property value and ensuring the ongoing safety and integrity of the building.
Despite the costs and hurdles to conversion, many apartment owners feel that the positives outweigh the negatives. Upon conversion, owners are left with a reduction in realty taxes, added value, increased borrowing strength, greater business flexibility and competitiveness. Not bad for a change in legal title.