Toronto private investment firm High Art Capital launched its GTA Rental and Affordable Housing Initiative — a fund expected to be capitalized with a minimum of $1.3 billion to acquire blocks of new, unsold condominiums across the Greater Toronto Area (GTA) for conversion into long-term rental housing — in April.

Last month High Art announced that it had completed a large-scale block acquisition of condo units and partnered with SEIU Healthcare, the union representing 75,000 frontline healthcare workers across Ontario, to give 650 eligible members access to below-market rental housing.

High Art has secured a commitment from Building Ontario Fund (BOF) of up to $300 million in mezzanine debt financing and a nominal equity investment.

“They have to factor in the 30 per cent requirement by BOF to have affordable housing, and those units are tagged for life with the 30 per cent,” Toronto real estate lawyer and Robins Appleby partner Leor Margulies explained to RENX.

“It's not five years or 10 years, and BOF gets its money back," he said. "It's in there for a return. This isn't a government grant.”

Jesta and others share High Art Capital’s strategy 

While Toronto's condo market posted its first sales gain in three years in the last quarter, a lot of that was attributed to investment groups buying units in bulk. The standing developer-held inventory also hit a record 5,001 units, up 68 per cent year-over-year.

Though High Art seems to be the largest bulk condo purchaser in the GTA, other investors are also in on the action.

“There are others that are sniffing around and looking at it, but it has to make sense,” said Margulies. “And you have to be able to set up a structure that manages these units because it's not like you're managing a building.”

Montreal-headquartered Jesta Group announced the acquisition of a bulk condo portfolio in a recently completed building near Toronto Metropolitan University valued at $30 million in May as it launched a $500-million acquisition program targeting more than 1,000 condo units over 12 months.

Montreal's Quinze Cent condo at 1500 Rene-Levesque Blvd. W., developed by Brivia Group and Tianqing Investment Group, saw 94 of its units acquired by a holding company owned by the chief executive officer and chief financial officer of Jesta Group for a discounted price of nearly $34 million this summer.

Similarly, Montreal real estate investment firm Ipso Facto acquired 165 units of the 1 Square Phillips condo in its hometown for a discounted price of about $65 million last month. The sale was part of a restructuring process under which the Brivia Group-developed building was placed in the hands of insolvency trustee firm Raymond Chabot.

Goals behind these investments

“They’re looking at buying properties both for income in the short term and appreciation in the long term, and they're looking at the oversupply of units and the excess inventory that builders are stuck with that are either unsold because they held back units or because they've been terminated and are defaulted units,” Margulies said regarding the strategy used by bulk condo unit buyers.

Margulies estimates that these bulk buyers, sometimes referred to as vulture funds, are getting discounts of at least 30 per cent on their purchases from developers. 

“They're taking a loss but they're liquidating it, and they're getting something now,” said Margulies of developers.

Margulies noted that bulk condo buyers in Ontario that are looking to rent units until selling them in five years or so, when they hope the market will have recovered, will be selling units that will no longer be covered by the Tarion-backed Ontario New Home Warranties Plan Act — which has a value that has to be weighed.

Margulies expects Tarion, a not-for-profit consumer protection organization established by the Ontario government to administer the province’s new home warranty program, and condo deposit insurers to take a financial hit due to projects that fail to close.

Options for condo buildings with stalled sales

Developers of condo buildings that are in the home stretch of being completed, but are facing financial difficulties and high numbers of unsold units, may have to evaluate whether or not to complete them when some of their unit purchasers may not be able to close on their deals. 

Other options are to: terminate purchase agreements, return deposits and convert to purpose-built rental; sell to an investor that would complete the building as a purpose-built rental; or complete the building and do a forward sale to an investor that would operate it as a purpose-built rental.

“Does the building always work?” asked Margulies. “No, it doesn't, and the numbers may not work because of your land costs, your construction costs and the rents that you're getting. The ROI doesn't make sense.”

Well-capitalized land owners that can afford carrying costs may choose to sit on it and not do anything until the market recovers sufficiently to launch a new condo project.

Some developers are looking at creating their own rental pools in their condo buildings or are getting inventory loans to do that so they don’t have to sell units at a discount, according to Margulies.