Returning residents, young urban professionals, and REITs have created a seemingly insatiable demand for housing options across Jamaica. There has been a steady and gradual growth in areas like Kingston and other metropolitan areas in Jamaica namely, Portmore, Montego Bay, Spanish Town, and even Drax Hall / Priory in St. Ann. Currently, about 56.65 percent of Jamaica’s population lives in urban areas. The completion of highways to Mandeville and St. Thomas means that these areas are ripe for continued development as well.
This fiercely competitive climate for real estate has meant that more and more purchasers are buying units before construction is complete – and sometimes even before ground has been broken on a project. But entering into an agreement for sale for a pre-construction property comes with special considerations: construction delays, cost overruns, escalation clauses, etc., and buyers typically have little to no leverage to negotiate terms with developers.
Why consider Pre-Construction Strata properties
Sometimes, it’s the availability; other times, it’s the lower price. In most cases, the choicest units will sell off quickly, so the earliest purchasers will have their pick of the units. It is also usually significantly cheaper to purchase pre-construction units. This is because developers offer discounts to meet sales quotas set by their lenders/investors, which may require a percentage of units to be sold before issuing a construction loan. Some buyers are motivated to act swiftly to secure the “first mover’s advantage”.
The reality of the situation
Many purchasers of pre-construction properties feel pressure to sign an (AFS) agreement for sale quickly, to lock in their choice of unit. But there are some special considerations for pre-construction properties that purchasers should take into account before inking a deal, including:
Delays. Construction inevitably takes longer than anticipated – and even reputable, experienced developers contend with materials shortages and logistical issues that can push projects over deadline. Delays can impact a purchaser in at least three ways: 1. If you are planning to live in the unit you are purchasing, do not make concrete plans to move until you have keys in hand – or, at a minimum, until the Certificate of Practical Completion has been received (indicating that a unit is nearly complete). 2. If you are getting a mortgage, you and your attorney need to keep track of the date on which the Letter of Undertaking expires, so that you can seek an extension if necessary. 3. Significant construction delays can result in increases in the cost of building materials and labor, triggering the escalation clause in your AFS, and meaning that the cost of your unit could increase 3-5% or more, depending on your specific circumstances. You will need to be able to find this cash in order to close.
Escalation. Almost all pre-construction / construction agreements for sale include an escalation clause, which allows the developer to adjust the purchase price upwards at completion to account for inflation, increased costs in materials or labor, etc. Sometimes the escalation clause can include a provision that requires a purchaser to match a later, higher bid received by the developer for the unit. As noted above, you will want to be sure you have enough cash on hand to cover any escalation costs.
Parking. This is a consideration common to ALL strata properties that are often overlooked by purchasers: how many parking spaces is your unit entitled to? Are they deeded (they belong to you) or assigned (they are marked for your use, but form part of the common property of the strata)? If a 2-3 bedroom unit has only one assigned parking space, it means there will be fierce competition for visitor’s spots and residents may park outside of marked spaces.
Utilities. Another consideration common to ALL strata properties: does the development have water storage and a backup generator, or do you need to install your own? If you are responsible for installing your own backup systems, make sure you account for the cost of doing so in your budget, as water and power outages are common across Jamaica, and rapid rate of development in certain areas of Kingston in particular has outpaced the ability of the utility companies to provide reliable service. Similarly, if you are purchasing in a high-rise (3 stories) does the development have provisions for a water pump to carry water to the higher floors? NWC is only obligated to supply enough pressure to reach the second floor – which may leave some residents high and dry.
Approvals and Permissions. Has the developer gotten planning permission, and are they building in compliance with that permission? If not, they could be subject to lawsuits or stop work orders imposed by local planning authorities that could delay construction indefinitely.
In addition, pre-construction purchasers should also take into consideration all of the regular issues that can arise in stratas: what do the by-laws say? Are pets allowed? Are short-term rentals (e.g, AirBNB) allowed? What is the recourse against owners who fall into arrears with their monthly maintenance fees? Are there any breaches of restrictive covenants that need to be addressed? Have you taken into account the various additional costs and fees that it will be necessary to pay in order to close?
If you are flexible with timing, and budget for contingencies, pre-construction purchases can be attractive investments. But purchasers should do their due diligence and be prepared for the special contingencies involved. Seek the advice of experienced legal counsel, who will take the time to go through the AFS with you, and explain the various provisions, so that you don’t get caught flat-footed.
-Nathanael Amore and Sarah Hsia
Disclaimer: The views expressed in this article are those of Rockstone Legal and do not constitute legal advice.