PURPOSE BUILT RENTAL PROPERTY TAX STATUS IN FLUX
CANADIAN PROPERTY MANAGEMENT
The arrival of new purpose-built rental housing onto Toronto’s market has pumped up the City’s tax assessment base by an average of $1.12 billion in each of the past five years, translating into an average annual influx of $6.28 million in additional property tax revenue. A new report to City Council’s executive committee projects that discounts flowing from a recently authorized optional tax subclass for new multi-residential developments could have a fairly modest impact on revenue growth with relatively negligible initial tax shifts between property classes.
“The arrival of new purpose-built rental housing onto Toronto’s market has pumped up the City’s tax assessment base by an average of $1.12 billion in each of the past five years, translating into an average annual influx of $6.28 million in additional property tax revenue."
Earlier this year, the Ontario government filed a regulation giving municipal governments the flexibility to convey discounts of as much as 35 per cent below the residential tax rate for up to 35 years to encourage construction of new rental housing buildings with at least seven units. Under those rules, municipalities will first have to pass a bylaw to establish the subclass and properties will qualify only if a building permit is issued after the bylaw is in place.
Purpose-built rental projects now under construction, or in the development pipeline with a building permit already secured, will continue to fall into the existing new multi-residential tax class, which is taxed equivalently to the residential tax rate for a 35-year period from first occupancy. After that time, all properties revert to the multi-residential tax class, which is taxed at a higher rate than residential properties in most Ontario municipalities.
Based on the recent five-year average of about 24 new rental multi-residential properties per year, Toronto financial staff estimate that each new year of entrants into the optional subclass would garner a collective annual tax reduction of $940,000 to $2.2 million, depending on the discount rate Council might choose. Initially, it’s calculated that a 35 per cent discount would shift roughly $2 of extra taxes onto a home with a current value assessment of $694,000 (the average CVA for Toronto residential properties).
However — particularly given that the subclass is upheld as an incentive for new construction — it’s assumed that other property classes will be subsidizing a growing number of new multi-residential ratepayers into the future. That would include the two other multi-residential tax classes.
“Over time, the financial impact from the rate reduction is expected to gradually increase, as new buildings are developed and added to the assessment roll,” the finance department report states. “Introducing a new multi-residential (municipal reduction) subclass would result in three distinct multi-residential classifications, each assigned its own specific tax rate primarily based on timing of the development. These varying classifications may result in different tax rates for similar properties, potentially creating financial inequity for multi-residential property owners.”
Meanwhile, Toronto staff’s consultation with the Building Industry and Land Development Association (BILD) of the Greater Toronto Area indicates that the potential property tax discount is viewed as a weak incentive. Developers and property managers generally maintained that even the maximum 35 per cent discount would not alter debt service ratios significantly enough to have an impact on financing.
“BILD Toronto has advised that they would need a full tax exemption for 20 years and a waiver of all development charges to make the projects viable for the required investment yields,” the report states.
For now, considerations related to enacting the new subclass are scheduled to occur later this year when the 2025 budget process begins, and the finance department report is simply for the executive committee’s information. Still, the report recommends that Council cap any contemplated tax discount at 15 per cent, which would be on par with rate for the City’s small business property tax subclass. “In considering a new subclass for new multi-residential properties, it is important to consider a fair and consistent approach,” it states.
The Ontario government offers matching discounts on the provincial education levy portion of property tax bills for municipalities that have adopted the optional small business subclass, but has not yet made that promise for the new multi-residential class. To date, few Ontario municipalities have moved on the option, which was introduced after most of them had set their 2024 budgets.
GTA APARTMENT MARKET 1ST HALF OF 2024 "WHERE ARE THE DEALS"
THE APARTMENT GROUP
We are not into the first half of 2024 and now have had the chance to gather data over the pat 18 months and more importantly since the period where interest rates have shot up. Well on a micro or quarterly level, the market is definitely in a state pause. In Q1 2024 there were 11 sales and in Q2 12 deals. This is flat but much lower than almost any quarter in the pat 10 years. There were some deals which occurred in Q2 2024 which took advantage of the new Capital Gains which came into effect at the end of June 2024. We conclude if this was not the case that Q2 sales would have been much less.
Cap Rates have held steady at around 3.8%. However, the price per suite did decline from $383,000 to $280,000. We It is tough to draw inference on price per suite on a quarterly basis at the best of times and even harder with so few deals. One large high end or low end deal could skew the numbers.
Comparing the first half of the year with others brings forth the true state of the GTA market. In the first half of 2024 there were 23 sales with is down from 31 in 2023 and 45 in 2022. On the value of deals, 2024 saw around $485MM in sales down from $800MM in 2023 and $1.03BB in 2022. This is a substantial decline. As well, the total number of suite sold in 2024 was 1,525 down from 3,500 in 2022.
Prices are now being impacted due to the higher interest rates and the overall economic conditions which exists in the GTA and around the world. Price per suite averaged around $370,000 in 2022 and this now had dropped to $315,000 in 2024. The same can be said regarding cap rates which grew from 2.8% in 2022 to 3.8% in 2024.
The lack of sales is a direct result of the fact that the apartment market is strong and there is lack of motivation to sell nor is there any panic to sell even if owners are refinancing their assets in today's market. For the most part the fundamentals in the apartment market are strong and unless an owner has made a miss step, fire sales will be few and far between. That said deals DO occur and people will need to sell for a variety of reasons: death, divorce, partnership issues, accumulated debt in other areas etc. We suspect this is the reason for the lower of prices as buyer demand today is muted and they will purchase on "their price and terms".
Today is more important than ever to use the services of a professional seasoned realtor with experience in the apartment market and in slow or muted markets like we have now. Apartments is all we do and have been doing it for 30+ years. If you are thinking of Selling your asset, contact us for candid and professional advice.
NEW APARTMENT GUIDELINE INCREASE ONTARIO
REMI
The Ontario government will hold the allowable rate for residential rent increases at 2.5 per cent for a third consecutive year in 2025. The newly announced rent guideline, which goes into effect January 1, will apply to sitting tenants in units that came onto the market prior to November 15, 2018, provided no above-guideline increases have been approved by the provincial Landlord and Tenant Board.
In setting the annual rent increase guideline, the Ontario government looks to the Statistics Canada’s consumer price index as an indicator of general cost trends. The 2.5 per cent threshold for 2025 falls short of the current 3.1 per cent average inflation rate, but the two rates have moved closer than when the 2024 guideline was established 12 months ago. At that time, the average inflation rate was 5.9 per cent.
Landlords will need to give sitting tenants written notification 90 days in advance of planned rent increases, while rents can be reset to what the market will bear when units turn over. In announcing what is slated to be lowest allowable rent increase rate in Canada, the Ontario government also points to a pick-up in construction of new purpose-built rental housing over the past three years, which has resulted in the highest number of housing unit starts in more than 30 years.
134 CARLTON STREET - TORONTO - $7,480,000 / $213,715 PER SUITE / 3.58% CAP RATE
This is the sale of a wood frame walk up rental apartment building downtown Toronto. The building has been updated over the years including suites and dates from the 1920's. The asset includes 35 suites with mostly small bachelor suites. The building has a brick exterior, double windows and flat roof. There is no site parking and the rents were around 80% below market. This deal closed June 21, 204 with a substantial First Mortgage VTB for one month. This asset was in the same ownership for years and this sale closed taking advantage of the lower capital gains tax. This property was fully marketed and the buyer was a private investor.
810 ROYAL YORK ROAD - ETOBICOKE - $15,000,000 / $250,000 PER SUITE / 3.95% CAP RATE
This reflects the sale a 60 suite rental concrete apartment building on a 1.5 acres site. This is a prime high demand rental location and the building had a brick exterior, double windows and flat roof, elevators, surface and underground parking. The asset had gas fired hot water radiant heating and over 10 suites have recently renovated and the parking lot was redone in 2020. This building too was under the same ownership for decades and closed taking advantage of the lower capital gains. The property was well maintained with mostly one and two bedroom suites with over 45% rental upside. It was fully marketed and sold to a private investor.
80 SOUTH FORSTER PARK DRIVE - OAKVILLE - $10,200,000 / $330,000 PER SUITE / 4.80% CAP RATE
This is a asset comprise a low rise rental apartment building with 31 suites on a 1.2 acre site. The improvements are circa the mid 1960's and the Seller renovated and upgraded many suites and common areas including the exterior of the asset in the last 5 years. The building is considered to be in above average condition for its age with surface parking. This is a walk concrete building with on site laundry and larger suites with 2 and 3 bedrooms. There was over 30% rental upside and almost $500,000 was recently spent improving the asset. Many of the suites have turned. Tenants pay their own hydro. This property was fully marketed and was purchased by a private investor again under the capital gain wire.
11-25 SHERWOOD AVENUE - TORONTO - $30,710,000 / $301,000 PER SUITE / 4.00% CAP RATE
This is a well property in midtown Toronto near Yonge and Eglinton. The 1.3 acres site comprises 4 identical wood frame walk up rental apartment buildings dating from the 1930's. The exterior is tudor in style with brick and masonry with a mansard roof and double windows. These are low maintenance buildings with no elevator, balconies and underground parking. The buildings were considered to be in good condition at the time of sale. There was strong rental upside being only steps to Yonge Street. This building was purchased by the Seller 2020 for $34MM. The property was fully marketed and sold to Gowan Property Management which is a long time private apartment owner.
THE APARTMENT GROUP
Together the team has completed over 1,500 transactions and has sold over $7.0 billion in apartments and development land. Put us to work for you and see the results. NO ONE has sold more buildings than our group. Experience, knowledge and professionalism will insure you get the right deal or the highest price if you are selling.
The Apartment Group is a dedicated team of professionals specializing in the sale of multi-residential investment properties. With over 40 years of combined experience, the team brings together their strengths including strong negotiation and sales skills along with highly technical market analysis and appraisal methods.
We are a boutique Brokerage but have the capabilities of the larger houses without the overhead. We have: an internal database of over 10,500 active apartment and land Buyers; a list of all apartment building owners in the Greater Toronto Area; our web site gets over 50,000 hits a month; we highlight properties for sale through our newsletter which reaches 10,000 investors monthly.
MITCHELL CHANG
President & Owner,
Salesperson
Direct: 416-219-0436
mchang@cfrealty.ca
LORENZO DIGIANFELICE, AACI
Broker of Record, Owner
Direct 416-417-9098
ldigianfelice@cfrealty.ca
JAKE RINGWALD
Salesperson
Direct 416-996-7713
jringwald@cfrealty.ca