Refinance, Retrofit, Redevelop or Run! Planning your Society’s future 1
Background • Since the early 1980’s through to the 2000’s both levels of government have been encouraging and offering various programs to Non-Profit housing societies to finance and operate affordable rental housing. • The federal government through Canada Mortgage and Housing Corporation, CMHC, and the provincial government through BC Housing have been the agencies responsible for the delivery of programs and the administration of the numerous operating agreements with the sponsoring societies. • The Operating Agreements govern how societies operate and manage their projects. The terms, conditions and responsibilities vary greatly depending on the specific program under which a project was funded. Generally the funding was based on a 35 year term for mortgage amortization and funding of rental subsidies. • As these agreements expire the societies become solely responsible for the projects’ ongoing financing and operations. In BC this affects almost 30,000 rental units the last of which will expire by 2033. 2
Workshop Team Facilitator: • Fiona Burke, Board member, Red Door Presenters: • Susan Snell, Executive Director, Red Door • Denis Loeppky, Development Consultant The Red Door Housing Society is currently working on the redevelopment of 2 projects. Many of the examples to be shared in this workshop are taken from these projects. 3
Workshop Objectives • The objective of this workshop is to consider options for your Society to consider relating to the future operations and management of your projects. • We intend to run through this presentation relatively quickly in order to have time for questions and answers as well as focus on the issues you as society leaders want to address. • We hope that at the conclusion of this workshop and the overall conference you will take away some ideas and be able to build some enthusiasm within your organization for addressing the challenges ahead. 4
Refinance, Retrofit, Redevelop or Run This presentation will provide examples and explain some evaluation tools that can be used to determine the best approach to consider for the future. • Refinance: What will the financial situation be when the mortgage matures and the subsidies cease. Will your revenues be sufficient without subsidies and will you cash reserves be sufficient to undertake any outstanding maintenance need or upgrades. • Retrofit: Has your project deteriorated due to deferred maintenance or just hasn’t aged well. Would extensive retrofitting fix the problems and if so, would it be financially prudent to refinance in order to fund the work. • Redevelop: If your project is no longer viable and it is not feasible to retrofit should it be replaced? If so, with what? Would a new build be financially possible? Would the new project be affordable? What happens to the residents during the demolition and construction. • Run: Should we, or can we, simply hand the project over to another willing society or give it back to the government. 5
The First Step • The first step any Society Board member and/or administrator needs to take is to “decide to begin”. • A feasibility study begins with gathering the information already on hand. • Your most recent financial statements, together with your operating, mortgage and land agreements are a good place to start. • If you have multiple projects collect the agreements for each as they may vary considerable depending on the program variation under which they were funded. • While a formal building assessment of your buildings will need to be done, in the early stages you probably have a good idea of what is needed as either maintenance or upgrades. • In order to move forward it is also important to understand what options are available and what has worked for other societies facing the same issues. 6
Self-Assessing your situation The key to developing a realistic action plan for the future is to undertake a thorough assessment of your current circumstances. • Is your Society currently financially viable? • Is your project operating as originally intended and is it still meeting the needs of your community and residents? • Will the project/s be viable when the mortgage matures and the subsidies cease? • What is the physical condition of your building/s or are they in need of minor improvements or major upgrading? • If the project/s need to be replaced how can you undertake new development and still keep rents affordable without subsidies? • What is possible under our existing operating, mortgage and land agreements? • Where do we start? 7
Start by considering the options • Refinance • Retrofit • Redevelop Or • Run 8
Refinance • Will your project be financially viable when the mortgage matures and the subsidies end? The following is an example from Red Door Housing Society’s Mi Casa project using their operating budget from the 2012 financial statements: Annual Revenue 288,363. Annual Expenses 273,784. Surplus: $14,579. Less rent subsidies - 26,449. Less mortgage P&I -102,922. Net Revenue 261,914. Net Expenses 170,862. Surplus: $91,052. • Based on the above upon full repayment of the mortgage and subsidy withdrawal the project would have an increased annual operating surplus of $91,052. • The expiry of the Operating Agreement and termination of the rent subsidies, will allow eligible residents to directly access rental assistance under the RAP or SAFER programs. The society could increase the rents to the RAP or SAFER maximums as the residents can receive subsidies directly. Again using this example by increasing tenant rents to RAP maximums the net annual rental revenue would increase from $223,975. to $304,444. a further increase of the annual surplus of $80,469. 9
Refinance • As the previous slide illustrates projects that are in relatively good condition can be maintained with proper maintenance and regular upgrades funded from the society’s annual operating surpluses. Surpluses can also be set aside to grow a capital replacement reserve for future renovation or redevelopment needs. • Where the building is structurally sound but due to age or deferred maintenance a number of issues and or upgrades are needed, societies may seek short term financing in order to bring the building into good condition. Depending on the value of this work societies may obtain the short term financing from their traditional banking facility. • Major work relating to; structure, envelope and or health and safety would fall into our next category, Retrofit. • The Mi Casa example will carry through into the redevelop option. 10
Retrofit • We define retrofit as extensive work including; structural, envelope, mechanical and electrical to bring a project to current standards and extend the projects useful life by decades. • A critical component in the decision to undertake the extensive work is a thorough building assessment by competent professions. • The work will likely require a design team including architect, engineers and other technical consultants. The builder selected, either by invitation call for proposals or by public tender must be bondable and have extensive experience in major multi-family renovations. • This work usually requires secondary or refinancing in order to obtain the capital required to fund the work and usually requires that all, or portions of the project, be vacated to accommodate the construction. 11
Retrofit • We have supplied copies of an InfoLink article entitled “Saving Affordable Housing – A Case Study” from the Fall 2013 edition that details how the North Peace Seniors Housing Society did refinance their project privately through a pension fund and did undertake major renovations and improvements to all their facilities. • Their refinancing and restructuring included; pre-paying their CMHC mortgage, cancelling their operating agreements, purchasing back their leased land, obtaining a new private mortgage to both retire the CMHC mortgage and fund the major retrofit. This did involve increasing rents to SAFER maximums and assisting residents to access the benefits to replace the previous PRAP subsidies. • Since its refinancing and restructuring in 2004 the Society has undertaken the needed project improvements, established capital replacement reserves and acquired additional projects and property to increase the supply of affordable housing and support services to seniors in the Fort St. John area. 12
Redevelop • As a project reaches the end of it’s useful life Societies must consider replacing it. Societies faced with this option need to consider all the challenges and options available. • Redevelopment or replacement of an existing housing complex is challenging as there are no government facilitated programs similar to those under which projects were originally built. Societies are required to leave their comfort zone as building operators and managers and begin to take a lead role as a housing provider. • This can be a difficult decision for both Boards and Staff to make however, non-profit societies must accept that their role is changing and the need for affordable rental housing continues and is not being address by either level of senior governments or the private sector. 13
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