A Practical Guide to Financing Affordable Housing

  • First National Financial LP

Affordable housing providers across the country will soon see the expiration of National Housing Act Section 95 agreements that, for decades, have provided reliable mortgage financing. As a result, for many, it's now time to plot mortgage (re)financing strategies for a post Section 95 world.

In this article, we provide a guide to alternative financing options, and examine eligibility requirements along with associated features, benefits and costs. In preparing it, we sought assistance from Daniel Bragagnolo, Director, Commercial Mortgages at First National Financial, Canada's foremost affordable housing mortgage lender with over $100 billion under administration.

According to Daniel, there are many financing options available in the market today and each may form part of a viable strategy, depending on the individual circumstances of the borrower and the property in question.

"Before comparison shopping for a mortgage, I always advise affordable housing providers to think carefully about their long-range vision and objectives, their immediate and long-term needs for capital and the value of optimizing their current assets to improve their viability, because contemplating these variables will lead to appropriate decision-making on the type or types of loans that should be pursued," said Daniel.

Common (re)financing options are shown below.

 Loan Type  Features/Benefits Eligibility
CMHC Flex Financing Incentivizes affordable housing construction by providing loan amounts of up to 95% of the cost of construction – compared to 75-80% for conventional construction loans – lower interest rates, significantly discounted premiums, up to 40-year amortization and the ability to seamlessly roll the financing into term loans during the lease-up period               

At the time of first occupancy, the owner must take a reduction of 10% of potential rental income measured using an appraisal report and during the term affordability period (generally defined as the 10-year term after an occupancy permit is issued), a minimum of 20% of the project’s total units must have rental rates at or below 30% of the median household income in the local neighbourhood or have a separate affordable housing agreement with another level of government

CMHC Take-Out Financing               Provides up to 85% loan to value over terms of up to 10 years (and sometimes longer) with competitive interest rates even after insurance premium costs 80% of the units must be below the 30th percentile of rents in the subject market, or rents in the subject market, or the criteria may be met if the project has another agreement with a separate level of government to provide affordable housing, or have less than 5 years remaining in a current operating agreement
Conventional Take-Out Financing   Offers shorter processing times for funds and no mortgage insurance premiums, but at somewhat higher costs and with shorter terms than CMHC programs and lower LTVs (typically no more than 75%)  

Set by individual lenders

Conventional Bridge Financing       Facilitates the renovation/repositioning of an affordable housing project until normalized operations are reached, but at higher carrying costs and lower LTVs (typically 75%)          

Set by individual lenders

Interest only payments may be available to help with interrupted cash flow


As noted, each option has its own qualification criteria. In the case of conventional lenders, many financial institutions do not participate in financing affordable housing projects because they have difficulty gaining comfort with cash flow sources. Daniel's firm, First National, has studied the sector thoroughly, and due to its willingness to participate, has become the leading lender of choice for affordable housing developments.

For providers, understanding eligibility is a critical consideration before any loan application is made, as is understanding the hurdles involved in exiting Section 95 loan agreements early.

To see how different financing alternatives and approaches can work to address the needs of affordable housing providers, we asked Daniel to provide a case study. He obliged with two.

How CMHC Programs Worked Best For A Toronto Not-for-Profit

The first example involved an affordable housing provider whose Section 95 agreement had expired, but because of past financing limitations, was left short of the $18 million of funds needed to upgrade a 319-unit property. The solution Daniel recommended was to refinance the property with a non-recourse, CMHC-insured mortgage.  While it sounded straightforward, there were complexities.

"The most notable issue was that under Section 95, the provider previously received a government subsidy while also providing an internal subsidy to cover the difference between rent geared to income that they received on their units and market rents," said Daniel. "That government subsidy ended with the expiration of Section 95 and as a result, we knew going in that CMHC would base its valuation on the actual rent received from the tenants, minus the subsidy, meaning that CMHC's offer of new financing would likely fall about $1 million short of required funds."

Prior to submitting the application to CMHC, Daniel proposed using the CMHC Energy Efficiency Program to make up the funding shortfall. Leveraging this program first, First National was able to get CMHC to fund the entire loan amount of $18 million in two advances. The first advance was termed out to 10 years at an interest rate of 2.79% and helped the borrower achieve a premium rebate of $48,000 by demonstrating that the energy retrofits they were planning to complete would lower the overall energy consumption of the building by 10-15%.

How Conventional Financing Served The Immediate Needs Of A Halton Not-for-Profit

Daniel's second use case featured a provider that wanted to build 100 new affordable housing units but had three years left on its existing Section 95 loan. In this case, Daniel recommended starting with a conventional bridge loan of $3.5 million that covered both the costs of repaying CMHC for the early Section 95 exit and investing in early development costs for the new units. This option worked best for the borrower because it had the funds required to move forward with its plan and  payments on the loan were lowered to interest only.  Most of all, because the loan was open for prepayment, the strategy resulted in flexibility on timing, meaning that if the group was ready to build earlier than planned, it would not incur large penalties to break the mortgage.  Since development planning is unpredictable and can range anywhere from 6 to 12 to 60 months, this level of flexibility was essential.

The project is now ready to break ground and the provider's application is in for approval for a CMHC term loan and a CMHC affordable Flex loan to cover all of the costs of the new project.

The Bottom Line

Having participated in numerous affordable housing mortgage financing transactions, Daniel advises borrowers to seek advise early, and certainly well before their Section 95 Agreements are set to expire.

"Not-for-profit boards have a duty to secure the best possible financing arrangements," says Daniel. "Performing this duty takes time and requires deep thinking and preparation, well before competitive financing options are considered."

As an authority on the subject, Daniel is often asked by not-for-profit organizations to help with this assessment process. He does so free of charge and obligation. Moreover, he also helps borrowers to understand how loan submissions will be evaluated by lenders, including CMHC-approved lenders like First National, craft those submissions and advocate for the borrower.

"We are major supporters of affordable housing across Canada," says Daniel. "It's why we invested in mastering the nuances of housing regulation and researching the funding programs that exist to help."

For additional information, you can reach Daniel at 416.597.5460 or by email at daniel.bragagnolo@firstnational.ca.