MORTGAGE LOAN INSURANCE TO FACILITATE AFFORDABLE RENTAL PROPERTIES

Transcription

1 MORTGAGE LOAN INSURANCE TO FACILITATE AFFORDABLE RENTAL PROPERTIES CMHC S Approach to Mortgage Loan Insurance for Affordable Rental Projects Ministry of Municipal Affairs and Housing Updated February 2007

2 Outline: Mortgage Loan Insurance for Affordable Rental Projects Assessment of affordable rental projects Mortgage loan insurance flexibilities Minimum documentation to be provided to CMHC Case studies CANADA MORTGAGE AND HOUSING CORPORATION 2

3 What is Mortgage Loan Insurance? Insurance provided by CMHC to protect Approved Lenders against losses arising from mortgage loan defaults Benefits to Borrower: A larger loan amount at a lower interest rate Available for a variety of residential income-producing projects and purposes Renewal assurance CANADA MORTGAGE AND HOUSING CORPORATION 3

4 What qualifies as Affordable Rental Projects under CMHC s mortgage loan insurance program? New additions to affordable housing stock 5+ units Modest in size and design CANADA MORTGAGE AND HOUSING CORPORATION 4

5 Assessing Affordable Rental Projects Assessment of risk based on: Housing market - demonstrate appropriateness of rents Borrower - demonstrate competence and capacity Project - demonstrate a Net Operating Income (NOI) sufficient to service the debt Funding - assess adequacy of construction budget and funds to complete the project CANADA MORTGAGE AND HOUSING CORPORATION 5

6 Housing Market Factors Affecting Risk Local economic conditions Demographic market trends Market conditions Demand for subject project Sources of Information Housing market reports Feasibility study CANADA MORTGAGE AND HOUSING CORPORATION 6

7 Borrower Competence Property management experience at least 5 years of experience in operating housing projects of similar type and size Construction management ability successfully completed similar projects on time and within budget. Capacity Credit and repayment history break-even cash flow over the past 5 years with excellent credit and repayment history Financial statement review demonstrated viability CANADA MORTGAGE AND HOUSING CORPORATION 7

8 Acceptable Substitutes for the Borrower Criteria (on a case-by-case basis) Property management experience must enter into a contract with a company that has at least 5 years experience operating a housing project of similar type and size Construction experience Where a construction management approach is used, must enter into a formal contract with a parent/affiliated company that has similar experience. Otherwise, must enter into a fixed price contract with a general contractor with similar experience. Credit and repayment history - additional security/guarantee or a higher Debt Coverage Ratio (+0.10) based on actual rents CANADA MORTGAGE AND HOUSING CORPORATION 8

9 Project Physical Location Environmental site assessment (ESA) Building type/unit mix/age/condition Tenure Financial analysis Pro-forma operating statement to demonstrate Net Operating Income (NOI) sufficient to service debt Benchmarks may be useful for carrying out the expense analysis segment CANADA MORTGAGE AND HOUSING CORPORATION 9

10 Benchmarks: Realty taxes Varies compare with properties in neighbourhood Insurance $100 - $150 per unit/year Heating $600 - $850 Hydro $600 - $750 Water & sewer $200 - $400 Maintenance & repair $500 - $800 Management fees 4-6% of Effective Gross Income (EGI) Replacement Reserve 4% of EGI * Effective gross income includes Affordability Payment CANADA MORTGAGE AND HOUSING CORPORATION 10

11 Funding Availability of Funds Sources and Uses of Funds chart to demonstrate adequacy of funding to complete construction Construction Cashflow Projection to ensure sufficient funds are available during the construction period to cover the incurred costs CANADA MORTGAGE AND HOUSING CORPORATION 11

12 Funding cont d Sources and Uses of Funds Sources: Federal funding-ahp $980,000 Uses (Project cost): Land $471,897 Provincial funding- AHP $1,470,000 Hard costs including contingency $4,129,053 Other GST rebate, gifts and Municipal waiver $566,468 Soft costs $427,660 Borrower s equity $460,545 Cost of Financing $45,000 Insured mortgage excluding provincial portion $1,870,000 GST $273,403 Total $5,347,013 Total $5,347,013 CANADA MORTGAGE AND HOUSING CORPORATION 12

13 In summary, the Maximum Loan is established through the following process: Lending Value market value project cost Loan-to-Value Ratio (LTV) Loan/lending value Debt Coverage Ratio (DCR) Net operating income/principal & interest Maximum Loan LTV DCR CANADA MORTGAGE AND HOUSING CORPORATION 13

14 Mortgage Loan Insurance Flexibilities CMHC introduced a series of enhancements to the usual loan insurance criteria to facilitate the creation of affordable rental housing units. These enhancements are known as mortgage loan insurance flexibilities. CANADA MORTGAGE AND HOUSING CORPORATION 14

15 These flexibilities include: Reduced equity requirements Reduced income required to cover debt payments Relaxation of rent-up requirements Extended amortization period Reduced/waived mortgage loan insurance premiums CANADA MORTGAGE AND HOUSING CORPORATION 15

16 AFFORDABILITY CRITERIA The project s level of affordability will determine the degree of mortgage loan insurance flexibility available. Three levels of affordability criteria derived from distribution of rents in the market on a rent percentile* basis. Level I - Level 2 - Level 3 - The majority of rents in the project are < 80 th rent percentile The majority of rents in the project are < 65 th rent percentile Federal-Provincial Affordable Housing Program (AHP) projects * For example, if the 80 th rent percentile rent is $700, then 80 % of all surveyed units would have rents that fall below $700. CANADA MORTGAGE AND HOUSING CORPORATION 16

17 AFFORDABILITY CRITERIA Rent Percentile (Affordability Criteria 2007) Toronto CMA Level 1 80th Level 2 65th Level 3 Bachelor 1 - Bedroom $850 $990 $781 $915 Project rents meet Federal- Provincial 2 Bedroom 3 Bedroom+ $1,175 $1,350 $1,065 $1,249 Affordable Housing Program requirements CANADA MORTGAGE AND HOUSING CORPORATION 17

18 MORTGAGE LOAN INSURANCE FLEXIBILITIES Level 3 Category Flexibilities Maximum loan Debt coverage ratio Lesser of 95% of project cost or the amount generated using applicable debt coverage ratio, but not to exceed project cost less grants less equity, where applicable Debt coverage ratio requirements based on actual rents, inclusive of CMHC fees, premiums and reserves: 1.10 (term <10 years) 1.00 (term 10 years) CANADA MORTGAGE AND HOUSING CORPORATION 18

19 MORTGAGE LOAN INSURANCE FLEXIBILITIES Level 3 Category Flexibilities cont d Rent-up requirement Extended amortization period Mortgage loan insurance premiums Equity & Grant Injection Rental achievement holdback completely waived prior to rent-up without premium surcharge Full waiver of the surcharge to extend amortization period up to 40 years for the insured loan excluding the affordability payment portion Complete waiver of premiums - refer to table below Grant flow flexibility: Once AHP funding is unconditionally committed to the project, the Lenders may commence insured loan advances. All other equity from the sponsor continues to be required prior to any advancing. MMAH s equity requirement for AHP projects applies herein. CANADA MORTGAGE AND HOUSING CORPORATION 19

20 MORTGAGE LOAN INSURANCE FLEXIBILITIES AFFORDABLE PREMIUM Mortgage Loan Insurance Premiums Loan-to-Value Ratio ( LTV) Base Premium (Standard Rental) Level 1 and 2 Affordable Rental (Base Premium after reduction) Level 3 Affordable Rental 65% 1.75% 1.20% 0.0% 70% 2.00% 1.40% 0.0% 75% 2.25% 1.50% 0.0% 80% 3.50% 2.40% 0.0% 85% 4.50% 3.10% 0.0% 90%* n.a. 3.40% 0.0% 95%* n.a. 3.80% 0.0% CMHC application fees apply under all levels of affordability * Offered on a temporary basis until end of 2009 CANADA MORTGAGE AND HOUSING CORPORATION 20

21 MORTGAGE LOAN INSURANCE FLEXIBILITIES EXAMPLE : LEVEL 3 PROJECT Determining Maximum Loan: 1. Potential Maximum Loan (95% of cost): $5,082,500 (Project cost: $5,350,000) 2. Potential Maximum Loan based on debt coverage ratio of 1.0 and net operating income of $275,000: $3,363,600 (Assume blended amortization period of 27 years 7% interest rate and 10 year term) 3. Potential Maximum Loan based on project cost less grants $3,340,000 less equity, where applicable (Grant=$1,475,000, Equity =$535,000) 4. Maximum loan amount - Lesser of (1) or (2) or (3): $3,340,000 (3) CANADA MORTGAGE AND HOUSING CORPORATION 21

22 MIXED-USE PROJECTS Underwriting considerations for projects with a mix use of affordable, market and/or non-residential components Mixed-use with Level 3 units Level 3 units Level 1or 2 units, market, non-residential Maximum loan Mortgage loan insurance premiums 95% of cost (assuming required debt coverage ratio met) Level 3 requirements 0% - Premiums waived for Level 3 only Respective loan-to-value ratio, debt coverage ratio and equity requirements Respective premium requirements CANADA MORTGAGE AND HOUSING CORPORATION 22

23 MIXED-USE PROJECTS Underwriting considerations for projects with a mix use of affordable, market and/or non-residential components cont d Mixed-use with Non-Level 3 units Level 1or 2 units (majority) Market units Maximum loan (assuming required debt coverage ratio and equity are met) Mortgage loan insurance premiums 95% of lending value *Loan-to-value ratio for Level 1 or % *premiums for Level 1or 2 *Non-residential component will follow its respective guidelines CANADA MORTGAGE AND HOUSING CORPORATION 23

24 VIABILITY ASSESSMENT TOOL CANADA MORTGAGE AND HOUSING CORPORATION 24

25 Minimum documentation to be provided to CMHC: Request - Certificate of Insurance' ( CMHC 60335). Description of the property including construction type, number and type of units, condition, income/expense analysis on Lender s form or CMHC Current credit reports for the Borrower and Guarantors. Signed and up-to-date personal net worth statements for all individual Borrower/Guarantors, including details for any real property held: address, description, income and expenses, mortgage balance, mortgage payment and value. Includes validation for substantive asset-values. Financial Statements for the most recent 5 years for Corporate Borrowers/Guarantors. For Corporate Borrowers indicate the type of structure (i.e. sole proprietorship, limited company, partnership, etc.), the ownership of the entity (including percentage ownership), key individuals, their responsibilities and reporting relationships. Application fee. Borrower s project revenue and expense projections for one year. CANADA MORTGAGE AND HOUSING CORPORATION 25

26 Minimum documentation to be provided to CMHC cont d: Copy of construction budget. A schedule of the construction cashflow projection. Sources and Use of Funds schedule demonstrating that anticipated costs are equal to the identified sources of funding (equity, funding, loan amount). Copies of all third party contribution agreements or letters of intent from appropriate parties. Copies of all rent supplement agreements or letters of intent from appropriate parties. Copies of operating subsidy agreements or letters of intent from appropriate parties. Suite layouts and details/specifications regarding finishes and amenities. If leasehold tenure, a copy of ground lease, supported by the Solicitor s opinion, regarding compliance to CMHC policy. CANADA MORTGAGE AND HOUSING CORPORATION 26

27 Minimum documentation to be provided to CMHC-cont d: A summary of the borrower s past management experience and the résumé of the manager if different from the Borrower. Confirmation that Borrowers /Guarantors mortgage debt repayment is current. For properties with commercial/retail space, the total square footage of the building and the total square footage allocated to commercial/retail space and the analysis of income/expenses and value of the nonresidential space. CANADA MORTGAGE AND HOUSING CORPORATION 27

28 The following documents are usually required later in the process prior to funding, but may be useful for CMHC earlier in the process, if available: Letter from the lender confirming that the Phase 1 Environment Site Assessment for the subject property conforms with CMHC policy relating to environmental risks. Copies of all signed contracts, if available. Confirmation of zoning. Documentation in support of construction budget: Quantity Surveyor s report. CANADA MORTGAGE AND HOUSING CORPORATION 28

29 CONTACTS Contact Caroline Ling Phone number: CMHC general web-site address: CMHC Mortgage Loan Insurance For Multi-Unit Properties: cmhc.ca/en/hoficlincl/moloin/moloinle/mumoloin/upload/multi -Unit-Reference-Guide-Dec-2006.pdf Toll free phone on Affordable Mortgage Loan Insurance guidelines: Multi-Go CANADA MORTGAGE AND HOUSING CORPORATION 29

30 THANK YOU CANADA MORTGAGE AND HOUSING CORPORATION 30