Missing Middle Condos pt. 4.2 - Deposits

Welcome back to Part 4 of our Missing Middle Condominium Series, everything to do with Condominium Purchase Agreements. In Part 4.1, we talked about the mandatory inclusions from Tarion and HCRA. Today, we're covering everyone's favourite topic - money. More particularly, deposits.

In Part 1, we referenced using purchasers' deposits as part of your capital stack as being a big benefit of developing your Missing Middle Project as a condominium. This is only really relevant if you're selling pre-construction, so keep in mind that if you are selling as-built product, it will probably make the most sense to follow a regular resale deposit schedule.

Deposit Schedule

Unlike a resale residential purchase which usually has only one deposit before closing, a pre-sale condo usually has a schedule of regular or semi-regular deposits. This allows purchasers to commit to buying without having all the cash available up front. Determining this deposit schedule is not a simple task, as you want something standard, but that meets a lot of the needs of a lot of different parties.

• Your lender: First and foremost is your lender. If you're using deposits as part of your capital stack, your lender is going to demand a certain level of committed sales before advancing any money under your construction mortgage. A committed sale isn't just a signed piece of paper; it's an agreement with enough of a deposit behind it that the lender is reasonably comfortable that it's a real deal and will likely close. Before you commit to a deposit schedule, if you don't already have a construction lender lined up, you'll want to canvass a few lenders to find out what their minimum threshold will be. You should also be conservative in your scheduling; if your last set of deposits is scheduled to come in the same day as your construction loan is being advanced, you're probably in trouble. Deposits bounce all the time; sometimes for as simple a reason as the purchaser forgot to move money between accounts that day. Make sure there's at least a few weeks gap to account for any issues.
• Your purchasers: If your lenders want to see money in the bank as soon as possible, your purchasers may be the exact opposite - they want to put their money at risk as late in the game as can be. This is understandable. Building an attractive deposit schedule means being attentive to market conditions, and adapting - sometimes, to get to the same amount, smaller, more regular deposits are considered more attractive (but keep in mind, every deposit will have an administrative cost, so balance out against that). You may have to negotiate out of your standard terms to land a deal, but always keep in mind the lender's threshold when you're doing that - you may be able to afford to make concessions for a couple of deals, but with a Missing Middle building, you likely don't have a lot of wiggle room.
• You: Your interests are a bit of a mixed bag here. On the one hand, having more money earlier on in the process sounds great. It gives you more confidence to go ahead and build. On the other, as soon as a deposit is in, statutory interest (per s. 82(1) of the Condominium Act and O.Reg 48/01 s. 19(3)) starts accruing at 2% below the bank rate for the relevant period. This wasn't a factor when interest rates were effectively nil, but it seems like they're back to stay, so taking deposits to early can cost you. You'll want to schedule deposits, with some room for error, around when you'll actually use them.

Using your Deposits

Unlike a freehold project (at least, for now) deposits on a condo project, regardless of the size, don't get paid directly to the builder. Under s. 81(1) of the Condominium Act, they must be paid to your lawyer or a prescribed trustee (but realistically, your lawyer) to be held in trust pending the posting of prescribed security.

Tarion can and does cover up to $20,000.00 of deposits, but (1) your deposits are likely going to exceed that amount & (2) if you're new to development, Tarion will likely make you obtain a bond for that amount from a deposit insurer. So if you plan on using your deposits, you're going to be in the market for excess condominium deposit insurance ("ECDI").

ECDI is available from a number of sureties - Aviva, Westmount and Trisura are a couple of well known providers, and there are more out there. A good insurance broker who specializes in new construction will help you source the best insurer for your project.

Generally, you can expect to spend close to 1% of deposits on your ECDI, but be aware - there are some non-scaling setup costs (ECDI is usually protected by a charge against your property and other security for the surety) that will be amortized out on a large deal, but could turn around and bite you, so be sure to get quotes from your lawyer and broker on what the set up costs will be, in addition to the surety's rate.

Back to your Construction Mortgage

There are two more points to keep in mind about using deposits, and they connect back to your construction mortgage.

1. Your surety will establish a ratio of contributions (X:Y), where the construction lender has to advance X in construction funds at the same time as they release Y in deposits. As the construction lender will be monitoring construction and advancing based on completion level, this de facto allows the surety to piggy-back on the construction lender's due diligence. This ratio may be up for negotiation, so it may be worth asking if it can be increased before signing off on your commitment.
2. Both the construction lender and surety will be taking security against your project's property. Because the surety has a statutory obligation to secure deposits, they'll need to enter into an agreement with the construction lender protecting first claim on the deposits. When you're negotiating your construction mortgage, make sure there's a provision in there that requires the lender to do this (and, ideally, agree to use the surety's form, because stubborn parties can run up thousands in legal expenses negotiating these forms, and as the developer, you may be stuck paying both sides' legal bills.

Dual Representation

Through the process, there's an important point to note - your deposit insurer is almost certainly going to hire the same law firm as you. This is a cost-saving measure, but it comes with a serious implication - there's no confidentiality anymore. If your lawyer learns you're diverting deposit funds from the project, they'll have a positive obligation to the surety to disclose that information. The key here is to not use the deposit money for any purpose other than the construction of the project. It's there to build the purchaser's home, not buy a Maserati (or pay down debt on other projects).

And now for something different

I've been picking topics and subtopics for the last six weeks, but now faithful reader, I have to ask you for your help. Would you be so kind as to help me choose what to cover next? I'm deciding between the HST Rebate and Adjustments. Comment or DM to let me know which comes next.