High Art Capital recently announced the launch of a new fund called the Greater Toronto Area (GTA) Rental and Affordable Housing Initiative. It has been anchored by a $300 million mezzanine debt commitment (and a "nominal equity investment") from the Building Ontario Fund (BOF) and is expected to be capitalized in total with a minimum of $1.3 billion.

The objective is to acquire approximately 2,200 rental homes in blocks within newly completed, unsold condominiums across the GTA and convert them into long-term rental housing. Included within this will be approximately 550 affordable rental homes that are expected to be title-protected at rents set at the lower of 25% below local market rent or 30% of median gross household income.

This is interesting, but it's certainly not the first example of investors buying, or wanting to buy, excess condominium inventory. However, it may become the largest in Toronto and, as far as I know, it's the only one to partner with the public sector (BOF is a provincial Crown agency).

The way it is intended to work is as follows:

Condominium developers are sitting on unsold inventory and maybe on inventory they took back after purchasers defaulted (and which may be subject to legal action). What High Art will do is say to developers, "Hey, if you give me a really awesome deal, I'll take 50 of those condominium units off your hands." And if the developer is desperate enough, they will say, "Sure, that sounds good. Let's do a deal and then go for a nice closing dinner."

But at what price?

As we've talked about many times before on the blog, developer pricing is typically based on a cost-plus model. We take our costs, add a margin, and there's the final sticker price. The reason prices haven't fallen as much as one might expect on unsold units is because they're hitting the "cost floor"; developers don't want to lose money, unless they are given no other option.

But for this rental fund model to work at reasonable costs of debt, I suspect that, in many/most cases, deals will need to be struck below a developer's cost basis. So, it'll be very interesting to watch how this fund deploys capital and who the winners and losers are in this market.

Regardless, I think it is good that we are seeing this sort of activity. The faster we deal with the pain, the faster we'll get to the other side.

Cover photo by Patrick Boucher on Unsplash

High Art Capital recently announced the launch of a new fund called the Greater Toronto Area (GTA) Rental and Affordable Housing Initiative. It has been anchored by a $300 million mezzanine debt commitment (and a "nominal equity investment") from the Building Ontario Fund (BOF) and is expected to be capitalized in total with a minimum of $1.3 billion.

The objective is to acquire approximately 2,200 rental homes in blocks within newly completed, unsold condominiums across the GTA and convert them into long-term rental housing. Included within this will be approximately 550 affordable rental homes that are expected to be title-protected at rents set at the lower of 25% below local market rent or 30% of median gross household income.

This is interesting, but it's certainly not the first example of investors buying, or wanting to buy, excess condominium inventory. However, it may become the largest in Toronto and, as far as I know, it's the only one to partner with the public sector (BOF is a provincial Crown agency).

The way it is intended to work is as follows:

Condominium developers are sitting on unsold inventory and maybe on inventory they took back after purchasers defaulted (and which may be subject to legal action). What High Art will do is say to developers, "Hey, if you give me a really awesome deal, I'll take 50 of those condominium units off your hands." And if the developer is desperate enough, they will say, "Sure, that sounds good. Let's do a deal and then go for a nice closing dinner."

But at what price?

As we've talked about many times before on the blog, developer pricing is typically based on a cost-plus model. We take our costs, add a margin, and there's the final sticker price. The reason prices haven't fallen as much as one might expect on unsold units is because they're hitting the "cost floor"; developers don't want to lose money, unless they are given no other option.

But for this rental fund model to work at reasonable costs of debt, I suspect that, in many/most cases, deals will need to be struck below a developer's cost basis. So, it'll be very interesting to watch how this fund deploys capital and who the winners and losers are in this market.

Regardless, I think it is good that we are seeing this sort of activity. The faster we deal with the pain, the faster we'll get to the other side.

Cover photo by Patrick Boucher on Unsplash