Incenting Purpose Built Rental Housing – A Primer
Description: Incenting Purpose Built Rental Housing A Primer on the Economics of Development CMHC Housing Policy Division April 20th 2016 Steve Pomeroy Focus Consulting Inc. Carleton University Centre for Urban Research and Education (CURE), Ottawa
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slide1. Incenting Purpose Built Rental Housing – A Primer on the Economics of Development
CMHC Housing Policy Division
April 20th 2016 Steve Pomeroy
Focus Consulting Inc. &
Carleton University Centre for Urban Research and Education (CURE), Ottawa<br>
slide2. Outline Long term trend in rental supply
Why rental development not viable
Key terms used
Elements of a pro forma and illustrative examples
How different incentives might improve viability/affordability 2 Focus Consulting Inc. 2016<br>
slide3. 3 Rental Housing Production - Canada Focus Consulting Inc. 2016<br>
slide4. Rental Trends - Ontario 4 Rental on average 6% of all starts since 2000 Focus Consulting Inc. 2016<br>
slide5. Assessing the economics of rental development: Developing and using a pro forma analysis Focus Consulting Inc. 2015 5<br>
slide6. Rental Pro Forma – Key Terms LTV = Loan to Value Ratio
Cap rate = capitalization rate (to estimate lending value)
DCR = Debt Coverage Ratio
NOI = Net Operating Income
RoE = Return on Equity
CMHC MIF Premium = mortgage insurance Focus Consulting Inc. 2016 6<br>
slide7. Main elements of pro forma Operating Budget (revenue & expenses: establishes potential cash flow and NOI available to service debt
Capital Budget - establishes total capital requirements (covered by mortgage and equity/grant)
Underwriting terms – establishes maximum loan capacity (lender and CMHC as insurer) Focus Consulting Inc. 2016 7<br>
slide8. Operating Budget Focus Consulting Inc. 2016 8<br>
slide9. Capital Budget – Land and Hard Costs Focus Consulting Inc. 2016 9 * Current hard costs $/sq ft range
Basic wood-frame $100-$135 between
Medium quality concrete mid-highrise $170-$220<br>
slide10. Capital budget – Soft costs Focus Consulting Inc. 2016 10 * While a cost, these are amortized so not reflected in capital budget<br>
slide11. Lending and Underwriting Criteria Strongly influenced by CMHC insurance criteria
Sets method for establishing maximum loan (based on a max LTV or 85% and DCR of at least 1.2 if 10 yr term (1.3 if only 5 yr term)
DCR more important than LTV
Some reduction-flexibilities if target affordable rents
waive premium, lower DCR to 1.0, incr LTV to 95% Focus Consulting Inc. 2016 11<br>
slide12. Focus Consulting Inc. 2016 12 How elements come together Operating Budget (NOI) Capital Budget
(Total costs to be covered) Maximum Financing Capacity CMHC Underwriting
rules Minimum Equity/Grant Required Viable Not Viable<br>
slide13. Illustrative Pro forma (per unit) Typical new market (rents - $1600/mo) Focus Consulting Inc. 2016 13 Assumes mix 1 & 2 Bed; rents @ 150% of AMR (of $1,075/month);
Taxes at new multi-residential rate<br>
slide14. Illustrative Pro forma (per unit) Focus Consulting Inc. 2016 14 Determining potential to carry debt and thus required equity or grant – based on NOI<br>
slide15. Combining elements Focus Consulting Inc. 2016 15<br>
slide16. Eg 2: Rents at 100% AMR (use with rent supplements) Focus Consulting Inc. 2016 16<br>
slide17. Pro forma for affordable (80% AMR) Focus Consulting Inc. 2016 17<br>
slide18. Options to enhance affordability Reduce costs:
Waive Municipal fees and charges
CMHC premium waiver for affordable rents
Zero rate HST (not done in Fed Budget)
Contribute Public land (reduce or eliminate land cost)
More basic construction (wood, surface parking)
Increase Revenue
Mixed income with full market to cross subsidize affordable (vs. 100% affordable)
Utilize rent supp/allowances, and retain market rent Focus Consulting Inc. 2016 18<br>
slide19. Options to enhance affordability Focus Consulting Inc. 2016 19 LTV constrains max financing to $85,000 vs. DCR @1.1 (= $120,000)<br>
slide20. Focus Consulting Inc. 2015 20<br>
slide21. Exploring implications What is policy objective?
Stimulate supply (private market); or
Address affordable rental need Focus Consulting Inc. 2016 21<br>
slide22. Incenting market supply Options to improve net income
Reduce or eliminate property taxes
Energy efficiency(tenant vs. owner)
Optimize rent at max possible
Options to lower costs
Basic construction (WF vs. masonry)
Waive some public fees and charges
Exempt rental from HST
Land at below market cost Focus Consulting Inc. 2016 22<br>
slide23. Incenting market supply Options to provide low rate financing
No impact on cost
Increases leverage of a fixed NOI
Translates into larger loan (re DCR) and lower equity
Thus enhances RoE Focus Consulting Inc. 2016 23<br>
slide24. Addressing affordable rental need Can we build affordable housing?
Reduce size/quality
Limits to options on cost side
Provide rent subsidy/housing allowances
Avoids distorting viability of development
Build at real cost, optimize financing/grant mix
Specifically target low incomes
Avoid project based oversight, admin cost Focus Consulting Inc. 2016 24<br>
slide25. Questions and Discussion Focus Consulting Inc. 2016 25<br>
slide26. Thank you! 26 Additional background reports available at www.focus-consult.com<br>
CMHC Housing Policy Division
April 20th 2016 Steve Pomeroy
Focus Consulting Inc. &
Carleton University Centre for Urban Research and Education (CURE), Ottawa<br>
slide2. Outline Long term trend in rental supply
Why rental development not viable
Key terms used
Elements of a pro forma and illustrative examples
How different incentives might improve viability/affordability 2 Focus Consulting Inc. 2016<br>
slide3. 3 Rental Housing Production - Canada Focus Consulting Inc. 2016<br>
slide4. Rental Trends - Ontario 4 Rental on average 6% of all starts since 2000 Focus Consulting Inc. 2016<br>
slide5. Assessing the economics of rental development: Developing and using a pro forma analysis Focus Consulting Inc. 2015 5<br>
slide6. Rental Pro Forma – Key Terms LTV = Loan to Value Ratio
Cap rate = capitalization rate (to estimate lending value)
DCR = Debt Coverage Ratio
NOI = Net Operating Income
RoE = Return on Equity
CMHC MIF Premium = mortgage insurance Focus Consulting Inc. 2016 6<br>
slide7. Main elements of pro forma Operating Budget (revenue & expenses: establishes potential cash flow and NOI available to service debt
Capital Budget - establishes total capital requirements (covered by mortgage and equity/grant)
Underwriting terms – establishes maximum loan capacity (lender and CMHC as insurer) Focus Consulting Inc. 2016 7<br>
slide8. Operating Budget Focus Consulting Inc. 2016 8<br>
slide9. Capital Budget – Land and Hard Costs Focus Consulting Inc. 2016 9 * Current hard costs $/sq ft range
Basic wood-frame $100-$135 between
Medium quality concrete mid-highrise $170-$220<br>
slide10. Capital budget – Soft costs Focus Consulting Inc. 2016 10 * While a cost, these are amortized so not reflected in capital budget<br>
slide11. Lending and Underwriting Criteria Strongly influenced by CMHC insurance criteria
Sets method for establishing maximum loan (based on a max LTV or 85% and DCR of at least 1.2 if 10 yr term (1.3 if only 5 yr term)
DCR more important than LTV
Some reduction-flexibilities if target affordable rents
waive premium, lower DCR to 1.0, incr LTV to 95% Focus Consulting Inc. 2016 11<br>
slide12. Focus Consulting Inc. 2016 12 How elements come together Operating Budget (NOI) Capital Budget
(Total costs to be covered) Maximum Financing Capacity CMHC Underwriting
rules Minimum Equity/Grant Required Viable Not Viable<br>
slide13. Illustrative Pro forma (per unit) Typical new market (rents - $1600/mo) Focus Consulting Inc. 2016 13 Assumes mix 1 & 2 Bed; rents @ 150% of AMR (of $1,075/month);
Taxes at new multi-residential rate<br>
slide14. Illustrative Pro forma (per unit) Focus Consulting Inc. 2016 14 Determining potential to carry debt and thus required equity or grant – based on NOI<br>
slide15. Combining elements Focus Consulting Inc. 2016 15<br>
slide16. Eg 2: Rents at 100% AMR (use with rent supplements) Focus Consulting Inc. 2016 16<br>
slide17. Pro forma for affordable (80% AMR) Focus Consulting Inc. 2016 17<br>
slide18. Options to enhance affordability Reduce costs:
Waive Municipal fees and charges
CMHC premium waiver for affordable rents
Zero rate HST (not done in Fed Budget)
Contribute Public land (reduce or eliminate land cost)
More basic construction (wood, surface parking)
Increase Revenue
Mixed income with full market to cross subsidize affordable (vs. 100% affordable)
Utilize rent supp/allowances, and retain market rent Focus Consulting Inc. 2016 18<br>
slide19. Options to enhance affordability Focus Consulting Inc. 2016 19 LTV constrains max financing to $85,000 vs. DCR @1.1 (= $120,000)<br>
slide20. Focus Consulting Inc. 2015 20<br>
slide21. Exploring implications What is policy objective?
Stimulate supply (private market); or
Address affordable rental need Focus Consulting Inc. 2016 21<br>
slide22. Incenting market supply Options to improve net income
Reduce or eliminate property taxes
Energy efficiency(tenant vs. owner)
Optimize rent at max possible
Options to lower costs
Basic construction (WF vs. masonry)
Waive some public fees and charges
Exempt rental from HST
Land at below market cost Focus Consulting Inc. 2016 22<br>
slide23. Incenting market supply Options to provide low rate financing
No impact on cost
Increases leverage of a fixed NOI
Translates into larger loan (re DCR) and lower equity
Thus enhances RoE Focus Consulting Inc. 2016 23<br>
slide24. Addressing affordable rental need Can we build affordable housing?
Reduce size/quality
Limits to options on cost side
Provide rent subsidy/housing allowances
Avoids distorting viability of development
Build at real cost, optimize financing/grant mix
Specifically target low incomes
Avoid project based oversight, admin cost Focus Consulting Inc. 2016 24<br>
slide25. Questions and Discussion Focus Consulting Inc. 2016 25<br>
slide26. Thank you! 26 Additional background reports available at www.focus-consult.com<br>