The Challenge Ahead: What Will Happen When Social Housing

Operating Agreements Expire?

MNPHA Conference Nov 22, 2013

Steve Pomeroy, Focus Consulting Inc. and Research Associate, Carleton

University Centre for Urban Research and Education

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Context: End of Operating Agreements

• Social Housing Funded with long term operating subsidies, matching mortgage amortization period (50 yrs./35yrs)

• Mixed funding: • Federal/Prov/Terr cost shared; • Federal unilateral• Provincial unilateral

• Subsidies usually terminate in tandem with maturing mortgage

• Under F/P/T agreements Federal subsidy obligation terminates - P/T’s then have to decide how to manage

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Future is Now

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Public Housing 1964+ 50 yrs; Non Profit 1978 +35 yrsNationally federal funding declines by $650 Mill in next decade In Manitoba it falls by by $28 Mill

Two types of concern

1. Without mortgage, does project collect sufficient rent to be viable (cover operating costs)?

2. Does project have sufficient capital reserves or capacity to refinance to maintain building in sound condition?

• Implications for both funders (Manitoba Housing) and for Providers

• Separate concern and advocacy over federal withdrawal

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Project Financial ViabilityOperating Viability

• With no mortgage payment and reduced or no subsidy, will rents cover operating costs?

Capital Adequacy• What capital renewal is required and are current reserves or

ongoing surpluses (if any) sufficient to support capital renewal

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cQuick viability test: As a basic rule of thumb, if the current annual subsidy is greater than the total annual mortgage (P&I), the project is very likely to experience post-expiry difficulty. With no corrective actions, a project in this situation today will have negative Net Operating Income (NOI) at expiry.

Project Potential Outcomes (at Expiry)

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* NOI = Net Operating Income

Projects will fall into one of four categories, Multi project Providers may have a mix of outcomes across their portfolio

Implications for Providers

• If viable – opportunities to reinvest surplus or refinance for capital renewal

• If not viable (Negative NOI) – Provider needs to plan to improve cash flow/reduce deficit to be self sustaining• Implications re RGI levels (e.g. Urban Native) • Are some units at risk• Is there risk precious rgi units will be lost?

• Potential for Province to extend subsidy• But don’t assume/depend on this

• First need to assess situation for each project: • Use Simplified Assessment Tool

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Anticipated Projects “at Risk”• “Public Housing” (owned and managed by Province and

Municipalities) • Family vs. seniors buildings

• Urban Native (high % RGI and deep subsidy)• Some independent Non-Profit

• Depends on degree of targeting and past management practice)• Generally properties that are deeply targeted with large

proportion of RGI units

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Research Findings National Sample – confirmed expected at risk

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Next to end most likely viable

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How will your project fare?• A Simplified Assessment Tool has been developed for

CHRA/MNPHA to help all providers self assess the likely outcome.

• This uses a few key elements, all of which are readily available to you

• It uses a proxy measure to assess capital adequacy • Note caveats on capital adequacy test: recommend Building

Condition Assessment (BCA) and Capital Investment Plan • Tim will discuss capital assessment and planning in more detail

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Simplified Assessment Tool• Excel spreadsheet tool to help providers determine:

• Net income = operating financial viability• Adequacy of Reserves (BCA?)

• Discussion guide: Addressing the Expiring Subsidy Challenge: Options and Remedies

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Search CHRA/MNPHA website for the tool and ref guide

Example – Input dataInput Variables Required: EG #2 : (Lower RR balance)Variable Input here Comments & suggestions

Project identifier (name/ref #) EG #2Just a ref # for your use if you are assessing more than 1 project

Last fiscal year end (data year only) 2011The reporting year from your data source. Enter year only, without day month (i.e. "2012")

Year Operating Agreement terminates (year only) 2016

See your operating agreement. Enter year only, without day month (i.e. "2012")

Total units 70 Total rental units in project

Total revenues 390,000 Include: RGI and market rents, any parking, laundry or other but exclude any subsidy revenue received

Total operating expenses 415,000 Include: Taxes, insurance, admin, maintenance, etc. Exclude: mortgage interest and principle

Balance in Capital replacement reserve (end last fiscal yr.) 120,000

Balance in Capital Replacement Reserve at end of last fiscal year

Annual allocation to Capital Replace Reserve 27,000 Use current/planned annual contribution amount

Sec 95 Surplus subsidy Fund (SSF) -

Balance in surplus subsidy fund (applies only to pre 1986 sec 95 projects). Assume this can be reallocated to capital reserve

Expected (assumed) inflation and mortgage ratesExpected rate of inflation in operating expenses 2% Note: use these defaults, unless you have strong evidence

for different rate. With RGI rents revenue is likely to grow more slowly than operating costs

Expected growth rate of rent revenue 1% Annual interest rate for refinancing 5%

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Example Output (results)

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Example 2: Summary

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Completed assessment - results

• Use tool to determine situation for each project• Then determine overall impact and phasing:

• Do early projects have positive NOI & later ones negative? Potential to cross subsidize?

• Are Capital reserves sufficient? Do you have room to refinance?

• Explore ways to remedy any negative results• (other than just rely on Province to extend subsidy

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Some Potential Remedies

• Addressing unviable or weak viability:a) Adjust market rents (if well below market)b) Adjust RGI mix (e.g. shallow/deep; number RGI)c) Explore ways to improve RGI tenant income (skills etc.)d) Shift some RGI units to market unitse) Abandon RGI rents in favour of low break-even rentsf) Review mix of working poor vs. social assistance RGI householdsg) Seek supplementary assistance from funder.Sell some properties to generate capital for renewal and reduce subsidy shortfall

These are all discussed in user guide – Addressing the Expiring Subsidy Challenge: Options and Remedies

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Some Potential Remedies• Addressing Insufficient Capital Reserves:

h) Borrow against surplusi) Add a capital improvement levy to rentsj) Seek P/T approval to increase pre-expiry contributionsk) Seek P/T approval to re-amortize and borrow before expiry for replacementl) Seek renewal of funding support (P/T or SM)

These are discussed in user guide – Addressing the Expiring Subsidy Challenge: Options and Remedies

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Advocacy Activities

• FCM/CHRA etc. highlighting the EOA issue at Federal level• Ongoing advocacy to retain Federal “savings” in housing• Specific targeted ask re a capital renewal program (like in CEAP

stimulus) • P/T Ministers also actively advocating on these issues• MNPHA advocating with Manitoba Housing

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Thank you

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Additional background reports available at www.focus-consult.com