Financing Affordable Apartments

  • First National Financial LP

In Toronto and Vancouver’s fall municipal elections, housing affordability was centre stage in debates, social media and campaign promises.

In Toronto, the two leading candidates suggested adopting development targets of 40,000 to 100,000 affordable units over a 10-year period. In Vancouver the discussion revolved around expedited timelines, flexible zoning, "gentle density" (a strategy that provides housing for intergenerational living, new families, and aging-in-place), tax measures, secondary suites, co-op housing and building on city-owned land.

Clearly there is a will for more affordable housing units but amidst all of these competing solutions, what’s the way to make it happen?

The CMHC Flex finance program is one clear answer. The CMHC Flex program is a construction and term financing package aimed squarely at the affordable apartment sector and it is creating new units right now. Introduced in May of 2017, market uptake for the program has been brisk.

First National currently has a large amount of affordable apartment construction in our pipeline, with much of it clustered in the markets that need it the most.

Qualifying Options

There are two ways to qualify for the Flex program, and I’ll start with the first. Year-one rents must be kept at 10% below new build market rates, as established by an appraisal. Rents can rise within guideline increases only for a 10-year period, after which they can reset to market rates on tenant turnover. The other restriction is that 20% of the units need to be at rent levels below 30% of the local median household income. This can impact some markets more than others, so referencing StatsCan for your relevant data is an important step.

The second way to qualify is by having an affordability agreement for your development in place with your local municipality. In most cases, this agreement will qualify you for the Flex program, subject only to the conditions present in your agreement.

So what's the payoff? What do you get for committing to diminished rents, other than the satisfaction of contributing to a more affordable city? In exchange for these concessions, an approved CMHC lender can now offer you a superior construction and term finance package that features leverage up to 95% Loan-To-Construction. Before you get overly excited, this is a theoretical maximum and underwriting constraints do reduce that number. Still, the end result is typically a considerably higher LTV than that of a conventional mortgage. 

Moreover, this program provides construction interest rates that are only slightly above the prime rate and for the term portion, the loan is non-recourse.   

Additionally, Debt-Service-Coverage-Requirements (DSCR) are also reduced. CMHC will allow a 1.10 DSCR, which is to facilitate higher loan amounts in a building that will have reduced income. 

Of course, insurance premiums are paid on all apartment loans secured through CMHC. These premiums can be sizeable, although the interest-rate savings make them profitable for borrowers. The relative size of the insurance premium increases as the loan-to-cost ratio gets higher. With the Flex program, the insurance premium is typically going to be half of what you would pay in a market-rent program.

Another advantage? You can set the interest rate on the term portion of your loan once you receive your certificate of occupancy, as opposed to waiting for lease up. Depending on the size of your project and local absorption rates, this can be a difference of months or even years. Builders are usually concerned with interest rates rising while they are trying to finish their projects. It’s one of the risks over which they have little control so the ability to set the rate early is a welcome relief.

Will the CMHC Flex Program single-handedly solve the affordability issues in cities across Canada? No, but it’s one powerful component of a multi-faceted approach to a complex problem.

Is it right for your project? Potentially, and it’s an option you do not want to ignore. It’s worth noting that it works better in some municipalities than others, so speak with a CMHC-approved lender that understands the program and has used it to help builders build.