The borrower wanted the interest rate advantages associated with CMHC-insured financing. However, CMHC historically values assets lower than market value, which can result in an unfavourable loan amount for the borrower.
The First National Solution:
CMHC uses its own underwriting guidelines, which are not necessarily aligned with market factors. As a result, there is a disconnect between the amount CMHC typically approves and the amount that the market would pay. In Vancouver, this disconnect is often apparent in the valuation on a ‘per suite’ basis. For this borrower’s building, the unit mix included large three-bedroom suites. The valuation was higher than typical per suite values, and certainly higher than CMHC was prepared to accept. It was the First National team’s goal to justify a value to CMHC of more than $500,000 per rental apartment suite.
The First National Approach:
Housing affordability issues in Vancouver have many residents choosing to rent for longer periods of time. As a result, three-bedroom apartment units are growing in appeal. In fact, the City of Vancouver has been supporting and promoting this trend by encouraging developers to build larger rental units to accommodate the needs of families.
Anticipating this trend, the First National team presented a case to CMHC to increase its cap on loan amount per suite. By setting this new precedent, borrowers with larger three-bedroom units can achieve acceptable and strategic CMHC loan amounts.
The First National team encouraged CMHC to tour the asset to gain a better understanding of its appeal to families and more mature renters struggling with the affordability of Vancouver housing. The team then created a case study to support its proposed valuation, profiling other similar units as well as condos.