The Pros, Cons and Steps to Converting a Rental Building to Condos
The conversion of a rental building to a condominium is a project that involves changing the legal structure of an existing development. It enables an owner to share in the ownership and operation of a residential or commercial complex, while having negotiable title to an individual unit. The legislation that governs a condominium is called the Condominium Act, SO 1998, C-19.
Advantages to converting
There are pros and cons for building owners and potential condo buyers to converting a rental building to a condominium. These include:
- With the increasing cost of buying property, it is difficult for first-time home buyers to break the rental cycle. With condominiums, there is a more affordable means of ownership for a first-time home buyer.
- It provides for flexibility. Each condominium unit is its own parcel and as such it can be mortgaged, financed and/or sold individually.
- It provides for potential tax savings. While this is not a certainty, the Municipal Property Assessment Corporation (MPAC) treats a rental building and a condominium differently. For a rental building, MPAC uses a gross income multiplier to determine the value used for taxes. For condominiums, MPAC uses the sum of the total of the market values for all the individual units. This tends to provide higher assessments for rental buildings.
- By dividing up the property into smaller pieces, the building owner may be able to achieve a higher total selling price.
Disadvantage of converting
With every advantage, there are also disadvantages that building owners must understand and prepare for before starting a conversion project. These considerations include:
- The Residential Tenancies Act, SO 2006, C-17 provides for tenants’ security of tenure if conversion occurs. The tenants cannot be forced to move out and the owner or purchaser must follow rules and regulations to obtain vacant possession of the unit.
- The conversion process can take from anywhere from nine months to 2 years to be fully completed.
- Many experts are required such as a lawyer, a surveyor, a realtor, an engineer, a tax consultant and an accountant. The fees for the associated experts must form part of the cost / benefit analysis.
- There is no Tarion warranty coverage for existing buildings that are converted to a condominium.
- Municipalities are able to discourage the conversion process through the contents of their Official Plans. Common policies 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.
Steps to converting
Prior to commencing the process of conversion, if the property is owned by a corporation or several corporations, a special resolution allowing the conversion is required. The actual process of conversion involves 2 major steps.
The first step is the actual division of the property into smaller parcels. This requires the approval of the municipality. For the City of Ottawa, there is an application form called the “Plan of Condominium”. This form is used whether one is building a new condominium or whether an existing building is being converted. The fees associated with the application vary depending on the number of units, value of infrastructure or requirement of public consultation.
Once an application has been submitted, the Planner will circulate it to City Departments, the Ward Councillor and required public bodies for their comments. The planner will then prepare a Delegated Authority Report recommending draft plan approval with conditions. For existing buildings, a certificate that all buildings on the property have been constructed in accordance with the regulations made under the Condominium Act is a very important condition. Another condition may be an inspection of the property with a report being sent to the municipality and then a list of deficiencies being given to the owner that must be rectified.
After all the conditions of draft plan approval have been met and where appropriate documented letters of clearance have been received, final approval can be given. The Plan of Condominium can then be registered in the land titles/registry system.
The second step is the registration of the condominium corporation with the land registry office. This requires a declaration. A declaration includes the condominium constitution and the description, which includes diagrammatic representations including surveys of the land and improvements. The land registry office will then give the corporation a name and a sequential number.
It is important to note that the process can be quite lengthy and expensive. There is no way to determine whether the application will or will not be approved prior to submission. Prior to starting any of the process, it is important to conduct a cost benefit analysis, to do the proper research and to contact the appropriate professionals.
If you have any questions about converting a rental building to a condominium, please do not hesitate to contact either: