Evan Pawliuk: With CMHC’s equity takeout
requirements, this has made rental housing providers plan their capital expenditures around their financing events, such as a maturity of an existing loan. In the past, rental housing providers may have gone ahead and spent on their capital expenditures out of cash on hand or through cash flow from the properties and then repatriated the funds through a CMHC loan. That is no longer possible. We have been engaging with our clients to discuss their plans for their portfolios to ensure the proper planning is put in place. There are other solutions available to groups to allow for the capital expenditures to go ahead without delays, but planning with your lender is very important.
RHB: In your experience, how do rental housing providers tend to finance different types of CAPEX projects? Paula Gasparro: Most rental housing providers have strategies as to which CAPEX projects they work on in a calendar year. Generally, these are funded via equity or accumulating reserves from NOI.
Evan Pawliuk: Depending on the size of the
rental housing provider, some would do this through financing or cash on hand that has been earned off the cash flow from their portfolio. One area that CMHC’s equity takeout rules provide some flexibility is that the financing from one building can be spent across the rental housing provider’s portfolio versus toward the building that was financed.
RHB: How do you evaluate different types of CAPEX projects with respect to approving financing? What criteria do you use for different financing situations? Paula Gasparro: Any capital improvement to a multi-family building that involves spending dollars to complete is considered CAPEX. At CMLS Capital, we require the borrower to provide us with invoices for work completed and it would be helpful to have before and after photos.
Evan Pawliuk: The criteria for an allowable
capital expenditure is quite simple. If the capital expenditure is related toward an improvement that is not recurring on an annual basis, then we would accept that as an allowable capital expenditure.
RHB: Where do you expect interest rates to go in the short term?
22 | Nov/Dec 2021
Paula Gasparro: We have been very fortunate
over the past few years to be in this very low interest rate environment. All good things usually come to an end. I see the Bank of Canada raising rates slowly starting in Q2 2022.
Evan Pawliuk: Unfortunately, this is a question no one really knows the answer to. In the recent past, there has been a lot of volatility within the bond market because of the uncertainty of the path of recovery of the economy going forward, and questions around the nature of the inflation that is being experienced currently. I am an advocate of mitigating any risk within business where possible. Real estate is a cash flow business, and one of the biggest pieces of determining what your cash flow will be is understanding what your principal and interest costs are going to be. To help our clients remove this risk, we created an Early Rate Lock program to allow for rental housing providers to lock in their interest rate up to six months in advance of the funding date. We have seen a lot of take up in this product lately, given the rise in rates being experienced.
RHB: How are rental housing providers taking advantage of today’s low borrowing rates when financing their CAPEX projects? Paula Gasparro: We are seeing borrower
select longer terms when financing their projects, ten-plus year terms when available. There has been a lot of refinancing. There have also been acquisitions and construction of new multi-family properties.
Evan Pawliuk: There are a couple of ways to
take advantage of the current rate environment if you do not have an upcoming mortgage maturity, or a property that is free of any debt. You could look to refinance one of your properties with a maturity date in the near future, or through a CMHC second mortgage. With the upcoming maturity option, I would recommend looking at the cost of borrowing by incorporating any prepayment costs to determine what the additional funds being borrowed will cost for that term, and compare toward what you could invest those funds into. With a CMHC second mortgage, there is a similar cost of borrowing as a CMHC first mortgage.
RHB: Thank you for your participation.