Refinancing for future success
The federal government has committed $150 million over four years (2016-2020) towards loan pre-payment flexibility for certain housing programs. Through this investment, Section 26/27 non-profit housing providers can apply to pay out the remainder of long-term, non-renewable mortgages held by the Canada Mortgage and Housing Corporation (CMHC) without penalty.
Section 26/27 programs are federal non-profit housing programs that were developed under the National Housing Act. These programs received capital contributions, and were given 50 year, fixed mortgages with CMHC at an interest rate of 8%. For the duration of their mortgage, these programs have federal operating agreements that mandate the provision of affordable rents. They do not receive operating subsidies from the federal government, however some have entered into Service Level Agreements with their Service Managers through which they receive funding to provide rent-geared-to-income (RGI) subsidies to their tenants.
The current loan prepayment program allows selected Section 26/27 providers to refinance their mortgages through the private market at interest rates that are far lower than their CMHC fixed rate. The intent is that this will allow providers to lower their expenses, keep rents affordable, be in a stronger financial position, and transition to self-sustainable operating models.
Housing providers can apply to prepay their mortgage on the basis of three criteria:
- Completing repairs to promote housing sustainability
- Creating new affordable housing units
- Maintaining/increasing the level of RGI units
They must provide an application along with support documents which could include a Building Condition Assessment, a Business Plan for the development of new units, or a Financial Plan to demonstrate the support of RGI units. Housing providers must also include a confirmation letter from their new lender, and have approval from their Service Manager.
The next deadline to submit an application is currently February 1, 2018. However, if the 2017 budget is not fully spent, a second call for applications will be announced later this year.
ONPHA Member Experience: St. Paul’s L’Amoreaux Centre
Toronto’s St. Paul’s L’Amoreaux Centre is a non-profit organization offering numerous programs for seniors including care management, assisted living, adult day programs, recreation and fitness classes, and many more. They also own and operate a rental housing building with 297 units, the majority of which receive RGI subsidies through an agreement with the City of Toronto. In 2016, the St. Paul’s L’Amoreaux Centre was successful in their application to prepay the remainder of their CMHC held mortgage, and their Director of Finance, Suba Satgunaraj, shared some insights on the process with ONPHA.
With approximately 14 years left in their CMHC mortgage, the St. Paul’s L’Amoreaux Centre determined that the opportunity to refinance at a lower interest rate would allow the organization to maintain RGI units, and give them improved cash flow to undertake other projects.
Their Board of Directors was very supportive of the initiative, and their Service Manager approved the refinancing on the condition that the new mortgage was not insured by CMHC. Their Service Manager also committed to extending their RGI subsidy for 10 additional years. Ultimately, the St. Paul’s L’Amoreaux Centre refinanced their mortgage for slightly more than it had initially been to put them in a financial position to undertake needed capital upgrades.
We asked Suba to identify any surprises they encountered along the way, and if there was any advice they would give to potential applicants. Here are a few things she identified:
- Paul’s L’Amoreaux already had a Building Condition Assessment in hand which allowed them to move quickly when this opportunity was identified
- Organizations should negotiate with more than one financial institution, and it is best to work with major banks that you already have established business relationships with
- Organizations should carefully review all existing debt obligations they hold and how these might be impacted when refinancing the mortgage, and communicate with those lenders
- Housing providers should be very open with potential lenders about their programs, the CMHC payout process, any other long-term liabilities they have, and their expectations for refinancing
- There will always be delays, but housing providers should be upfront about what they, as non-profits, can handle (e.g. the maximum budget for legal fees, other penalties in consolidation of long term debt)
- To avoid confusion, it would be best to have the refinancing process managed by one person in the organization if they have the authority to do so
Prior to submitting their application, St. Paul’s L’Amoreaux Centre received confirmation from their Service Manager that paying out their mortgage would not preclude them from funding opportunities such as the Social Housing Improvement Program (SHIP). This may not be the case for all programs or service areas so it is important that those considering applying to prepay their mortgage speak to their Service Manager about this aspect.
If you are a Section 26/27 provider that has prepaid your CMHC mortgage, we would love to hear about your experience. Please get in touch with us at firstname.lastname@example.org or 1-800-297-6660.
If you are considering applying to prepay your mortgage, please do not hesitate to contact ONPHA’s Member Support department if you have questions or need support. We can be reached at email@example.com or 1-800-297-6660, ext. 115