Great points Mark, but the fact of the matter is that people are going to be living in a suite that they do not yet own, and as such should pay for that privilege.
The Ontario's Condominium Act clearly defines the interim occupancy, and says that a developer/builder can pass on the costs to the buyers that they bear between the time a buyer moves in and when the project is registered and handed over to the newly organized condominium corporation.
The issue, as you are aware is that purchase deals cannot officially close until a project is registered, but you take interim occupancy earlier than that. Until the units close, ownership lies with the developer.
During this time the developer/builder still makes payments on the loan that financed construction, pays municipal property taxes, and covers the upkeep costs for common areas such as the pool and landscaped grounds.
It consists of:
- Estimated property taxes
- Share of common elements
- interest on the unpaid balance of the purchase price.
So... That is why you have to pay the interim occupancy, or the "Phantom Rent".
For people who claim they did not know about the "interim occupancy", then they should have a word with their lawyer who reviewed all of their condo documents and should have informed them of it.
The main time that I feel this gets a bit weird is when you are paying the interim occupancy, but the common areas are yet to be completed.

Woops... I got caught up in the answer above, and forget to mention some points of interest to your original question of "WHY" there is the interim occupancy...
Bureaucracy!
Once the building is completed, there are a lot of government approvals that must be met in order to officially close on the building.... this takes a lot of time, and with such a huge number of new condos in the major metro-areas, it takes a lot of time to get all of the approvals...
Think of the following few things:
1. file a declaration with the municipality and the provincial land registry office;
2. described and recorded each unit at the land registry; and,
3..... etc...etc...etc...

In Vancouver, there are no occupancy periods (from what I understand). Occupancy and registration (title transfer) is on the same day. I don't know how they get around the prolonged occupancy period, but if they can do it, why can't we Toronto?

hmmm interesting response Matthew...so it seems like the only reason why Ontario developers do implement the interim period is because they can!
Wouldn't freehold subdivisions go through a similar process of getting approvals registering the new streets, address etc etc? The ONLY expense that is justified for people to pay before final closing is maintenance. In most cases the purchaser is already paying to discharge the developers mortgage, installation of meters and a slew of other BS charges, i don't see the justification of paying the significantly larger ones such as property tax, especially if the amount paid isn't applied as an adjustment at time of closing!
Then there's the "interest on the unpaid balance of the purchase price"... That's straight cash they're collecting! It's not going toward anything but the developers own mortgage. If it must be collected then it should be applied to the purchase price.
They've clearly set out budgets to carry the costs of the development during the 4 years it takes to build, I don't see why they couldn't budget another 6 months...
Totally agree with Andrew on this one...if anyone from Vancouver can share a little insight on this matter it would be greatly appreciated!

....well... with what Andrew said, now we must look to the Vancouver system! I am on it!
BTW: I do not think that you can compare subdivisions to condos with regards to this. They are completely different beasts.

Andrew is right. I sell new developments in both BC and AB and have never heard of this at all. Possession is usually the day following closing fees and title transfer.
Adjustments are done at the same time and buyers aren't responsible for any taxes, condo fees or any costs whatsoever until possession.
The only costs before closing are deposits.

Amar said:
Andrew is right. I sell new developments in both BC and AB and have never heard of this at all. Possession is usually the day following closing fees and title transfer.
Adjustments are done at the same time and buyers aren't responsible for any taxes, condo fees or any costs whatsoever until possession.
The only costs before closing are deposits.

Awesome! Thanks Amar.
So, does the building sit vacant and completed while ALL the final approvals are put into place?

Matthew said:

Amar said:
Andrew is right. I sell new developments in both BC and AB and have never heard of this at all. Possession is usually the day following closing fees and title transfer.
Adjustments are done at the same time and buyers aren't responsible for any taxes, condo fees or any costs whatsoever until possession.
The only costs before closing are deposits.

Awesome! Thanks Amar.
So, does the building sit vacant and completed while ALL the final approvals are put into place?

Yup, it's vacant until the possession day. And possession isn't given until after closing which is after all occupancy permits etc.

Amar said:
Yup, it's vacant until the possession day. And possession isn't given until after closing which is after all occupancy permits etc.

Yowzers! I think I like the Ontario system better! It gets you into your new home earlier, rather than just having it sit vacant collecting dust!
I wonder if it also makes for more expensive units, as in builders have to sell for more as the heaviest interest days on construction-financing is at the end. As such, they are not able to off-set any of their heavy interest bearing days with interim fees.

So in Ontario, you get into the home before construction is completed and the city has given occupancy permits?
Is that even safe?

^^You move in before the entire building is complete and final sign offs given... but, you can not move in until occupancy permits are granted. Other than all the fun safety stuff, you also need a working toilet and running water (if I remember correctly).
But, if you are on a lower floor (depending on how they are building), you might move in before the upper units are fully completed and before common amenities are completed.

Matthew said:

Amar said:
Yup, it's vacant until the possession day. And possession isn't given until after closing which is after all occupancy permits etc.

Yowzers! I think I like the Ontario system better! It gets you into your new home earlier, rather than just having it sit vacant collecting dust!
I wonder if it also makes for more expensive units, as in builders have to sell for more as the heaviest interest days on construction-financing is at the end. As such, they are not able to off-set any of their heavy interest bearing days with interim fees.

Yes you are in your home earlier...but you're paying uneccesary "rent". Let's use a conservative number like $1500 a month, and say on average the occupancy period lasts 6 months. That's $9000 or 3% of equity on a $300,000 purchase. I would need to see a heck of alotta dust accumulate for me to think this system is better.

Mark said:
Yes you are in your home earlier...but you're paying uneccesary "rent". Let's use a conservative number like $1500 a month, and say on average the occupancy period lasts 6 months. That's $9000 or 3% of equity on a $300,000 purchase. I would need to see a heck of alotta dust accumulate for me to think this system is better.

We may need to hear from a builder on this.
From my point above, I would imagine that in your case above, the total purchase price would have been increased by $9000 to accommodate for the fact that the building is sitting empty and they are paying their construction financing interest.
The money has to come from somewhere!

Hi everyone, Matthew, you - or one of your colleagues - requested MOSAIC weigh in on this via Twitter so I asked around the company and found out the following information on escrow closings and 'phantom rent'. I hope this helps!

The comments that Matthew made in his first reply to Mark are the most appropriate in explanation.
When we close in Escrow the purchaser pays to the developer his “down payment” and whatever interest would have been paid to the lender for the amount of the new mortgage to be registered is then paid instead to the developer. This amount is what you are describing as “phantom rent”.

But let's back up a bit and explain escrow a little more thoroughly...

If the new strata titles have not been issued/registered by the Land Registry then transfer of title cannot occur. This requires surveys of the building and approvals from the city. To allow the purchaser to move into their new home as planned, closing in Escrow is provided to accommodate the purchaser.

The developer is paying mortgage costs on that unit, and he is giving up possession of that unit when closing in Escrow occurs. When the developer gives up possession it should be expected that the home will be paid for. It is not to the developers benefit to close in Escrow as this results in a delay of full payment for the home. When closing in Escrow, the equity that a purchaser is providing (down payment) is then paid to the developer but the remainder that would be paid by the mortgage cannot be paid because title cannot be transferred and therefore the lender will not advance the mortgage proceeds. In place of this, the purchaser pays the interest he would be paying to the lender (the exact same terms are used for the escrow agreement as are in the purchasers mortgage terms) to the developer.

The commenter Mark is correct in stating that these moneys paid to the developer are not going to pay down his mortgage as would be the case if the mortgage were registered on his new property. However, if the completion dates had to be extended in order to wait for the strata titles to be registered then they would have to adjust their plans and continue to pay for whatever rent or mortgage they have currently. Most people see the adjustment of the completion date as more of an inconvenience and therefore wish to close in Escrow. There are some additional legal costs involved with closing in Escrow which are born by the purchaser.

We have had several cases where the purchasers lawyer has advised against the purchasers proceeding in Escrow. Some feel that often the explanation these lawyers provide is not very good (just some people's opinion).

I hope this helps clarify a bit. Please let us know if you have any additional questions on this and we will do our best to answer.

WOW! Definitly one of the best descriptions i've ever heard regarding the interim occupancy period...BUT my question was more along the lines of "Why even have and interim period". Why not skip it all together and deliver the product after all of the paper work has been filed with the City? (ie, just have one final closing instead of two)

Mark said:
WOW! Definitly one of the best descriptions i've ever heard regarding the interim occupancy period...BUT my question was more along the lines of "Why even have and interim period". Why not skip it all together and deliver the product after all of the paper work has been filed with the City? (ie, just have one final closing instead of two)

Hi Mark. I would have to agree with Matthew. The end of the building cycle is the most expensive for the builder due to interest on their construction loan. If there was no interim occupancy, then the units would have to sell for more money to cover these costs.
Interim occupancy gets you in the door earlier and is cost neutral over the cycle of the building.

So, does the "phantom mortgage" amount to around the same as you would pay to your lender, and you never pay both at the same time? The main difference being that with the latter you are gaining equity and paying down your mortgage?

Nope.
The total of the phantom rent is closer to what you will pay in your mortgage + property tax + condo fees. But, yes, the difference is that you are not building equity in your home at this time.