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The new CMHC Rental Construction Financing Initiative:

How good is it? In Budget 2016, the federal government allocated $2.5 billion over four years for a program of direct loans to for-profit rental developers, social housing providers and municipalities. Details were announced on April 20, 2017. CMHC and the government have gotten several things right in the program. However, there are significant impediments to taking up the loans, and some key unknowns. In principle, the program is open to all communities across Canada, but CMHC will likely select projects in communities where rents are relatively high and vacancies are low, or where the rental supply has fallen behind population growth. CMHC has been receiving applications since April 20, and has already received a large number of applications compared to the number they can fund with the $625 million available in 2017. They are still accepting applications to choose the ones that will “have the greatest impact for Canadians.� At $25 million per project, CMHC can accept 25 projects. As well, applications can be made in 2018 for 2018 funding, and so on for the next three years after 2017. Projects that are not accepted can be re-submitted in a subsequent year, as long as construction has not begun.

Program advantages The Rental Construction Financing Initiative will provide direct loans for the construction of rental housing mostly for the middle class. There are some affordability requirements, but they are relatively modest and developers can apply them to 20 to 35 per cent of the suites, leaving the rest at full market rents. The total intended rent for the building needs to be set at least 10 per cent below the potential revenue for the building (i.e., what could be obtained if all the units were rented at the market rent for similar new rental units in

the community). The key program advantage is that the benchmark rent is the market rent for newly constructed units with similar amenities to those of the project. That rent can be far above the average rent for existing units with the same bedroom count As a second test regarding affordability, a developer needs to keep at least 20 per cent of the units at rents below what the median household in their community can pay (spending 30 per cent of their pre-tax income). Table 1 shows some examples of that requirement, and related rent levels.

Table 1: Affordability levels (monthly rent) City

Minimum requirement (100%)

<70% (3 points)

Average existing 2-bedroom apartment (for comparison)

$2,149 $1,957 $2,190 $2,047 $1,998

$1,504 $1,370 $1,533 $1,433 $1,399

$1,063 $1,327 $1,037 $1,068 $1,450

Halifax Toronto Hamilton Winnipeg Vancouver

Notes: 1. The rents in columns 2 and 3 are based on 2015 median household incomes, according to Statistics Canada. The thresholds will increase over the life of the program. 2. The units that meet the chosen affordability standard cannot consist only of small units, but it is not clear what mix of unit sizes will satisfy the requirements or gain the project an extra priority. 3. Only 20 to 35 per cent of the total units will be subject to these requirements.

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4. See the discussion of the Social Outcome Scoring Grid below for the reason why projects will likely need to provide the units at 70 or 80 per cent of the minimum affordability requirement. (Ninety per cent gains one point, 80 per cent gains two points and 70 per cent gains three points.)

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The program provides for loan advances starting from an early stage of construction, and so it can largely or entirely replace construction financing. That is a huge benefit given the cost of construction financing. For projects with sufficient priority, the loan can be for 100 per cent of the construction cost, another substantial advantage. The interest rate is to be about 50 basis points above the interest rate paid on 10-year Government of Canada bonds at the date of the first advance. If interest rates rise, that will lock in a good interest rate for the entire term of the loan, which is to be 10 years from the date of the first advance.

program, and the cut-off may be 20 or 21 points in some areas. This may be difficult for a for-profit developer to achieve. For energy consumption, a for-profit developer is likely to be able to achieve savings of 25 per cent over the building code, thus gaining two points. (Fifty per cent would get three points and a net-zero building would get five points.) Enhanced accessibility should get a developer four points. Access to transit should get two points in a city with good transit.

While interest payments begin immediately, principal payments begin after one year of stable operating income. The amortization period can be up to 50 years. At the term of the loan, CMHC mortgage insurance will be provided at no cost to the borrower. All of those features are very positive. However, some problems exist.

Collaboration may get a developer one point easily (for a partnership, even if it is between a developer and a rental owner/manager). Up to four more points are available for a donation of land or for other government support or concessions on property taxes or development charges. (Social housing providers may well rack up all five points in that area.)

Program problems To apply, developers need to have a shovel-ready project, on which construction has not yet begun, and does not begin until underwriting is complete. Processing delay may lose construction time, which is no small thing with Canada’s constrained construction season.

Counting those areas, many developers can readily achieve nine points out of 16. To reach 18 points, a developer will need all nine points that are given for enhanced affordability. To do that, the proposal needs to guarantee affordability at the 70 per cent level for 21 years, for the basic 20 per cent of units plus at least 11 more units.

While relatively modest requirements have been set for basic eligibility, the program is already heavily over-subscribed. As a result, only projects that exceed the basic requirements by a considerable margin are likely to be selected for funding. The basic requirements are the affordability standards described above, AND • a minimum 15 per cent less energy use and greenhouse gas emissions than the 2015 National Energy Code for Buildings or the 2015 National Building Code, and • at least 10 per cent of the units must meet or exceed accessibility standards for the municipality, province or territory, or if no local standards exist, the 2015 National Building Code. In addition, access to the project and all common areas must be barrier-free. However, given the volume of applications, our current information is that to actually receive funding, a developer is likely to need to propose a project in an area that needs new supply, which reaches higher standards than the minimums for program eligibility. The Social Outcome Scoring Grid CMHC has created a Social Outcome Scoring Grid to determine the loan prioritization, and whether the financing will be available for 90, 95 or 100 per cent of cost. One hundred per cent financing requires a score of 19 points or more. Out of a possible total of 25 points, a score of at least 15 to 19 is likely to be needed to receive financing under the

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Social housing providers would likely meet those affordability standards, and also gain points for having other government supports and donating land. However, they may not have many shovel-ready projects. Key unknowns As of the date of publication, the key unknowns are: • The exact interest rate (or interest rate savings) • The speed of processing and underwriting • What geographic areas will qualify in practice • What point count will be needed in different areas (or overall) Conclusion CFAA is in favour of incentives for new rental construction in areas where new rental construction is needed, such as Toronto, the Greater Golden Horseshoe and Greater Vancouver. However, as Table 1 shows, the current affordability test works in the wrong direction for Toronto and Vancouver. CFAA will monitor the program results, and provide input to CMHC and the government on what is needed to make the program more successful. CFAA invites you to provide input at — John Dickie, CFAA President

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