1. 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
Focus Consulting inc. CURE (C) 2015

2. 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
Focus Consulting Inc. 2016

3. Rental Housing Production - Canada
Focus Consulting Inc. 2016

4. Rental Trends - Ontario
Rental on average 6% of all starts since 2000
Focus Consulting Inc. 2016
Focus Consulting inc. CURE (C) 2015

5. Assessing the economics of rental development: Developing and using a pro forma analysis
Focus Consulting Inc. 2015

6. 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

7. 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

8. Operating Budget Expenses Monthly rent Rental revenue
Sundry Revenue (laundry, parking)
subtotal revenue
Less 3% vacancy
(a) Gross Revenues
Maint and Operations (incl management)
Utilities
Property Taxes
(b) Total Operating
(a)-(b) = Net Operating Income
Focus Consulting Inc. 2016

9. Capital Budget – Land and Hard Costs
Construction Budget*
Renovation Conversion hard costs
Stoves and Refrigerators
Laundry Equipment
Furnishings and equipment
Other
Surface parking
Landscaping
Equipment (apt elevator)
Land Acquisition
Land purchase
Engineering servicing costs
Legal fees
Title Transfer Fees
Soil geotech
Parkland Levy
Pre const interest carrying costs
* Current hard costs $/sq ft range
Basic wood-frame $100-$135 between
Medium quality concrete mid-highrise $170-$220
Focus Consulting Inc. 2016

10. Capital budget – Soft costs
Taxes during construction
Insurance during Construction
Utilities during const.
Interest During Construction
Legal Fees (excl land)
Architect/Engineering Consultants
Development Consulting
Additional Public Fees and Charges
Site Plan Application
Building Permit
Municipal Dev'l charges
Mortgage application fees (excl MIF premium)
PST/GST (HST)
CMHC Insurance Premiums*
* While a cost, these are amortized so not reflected in capital budget
Focus Consulting Inc. 2016

11. 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

12. How elements come together
Capital Budget
(Total costs to be covered)
Operating Budget (NOI)
Minimum Equity/Grant Required
CMHC Underwriting
rules
Maximum Financing Capacity
Viable
Not Viable
Focus Consulting Inc. 2016

13. Illustrative Pro forma (per unit) Typical new market (rents - $1600/mo)
Operating Budget
Revenues
Rental Income
19,350
Gross after 3% vacancy
18,770
Operating Costs
Maintenance and Operations
5,000
Property Taxes
1,000
Total Operating Costs
6,000
Net Operating Income
12,770
Capital Budget
Land
28,000
Construction costs
160,000
Soft costs
32,000
Subtotal
220,000
HST (Net at 5.2%)
11,440
Total Costs
231,440
(excludes CMHC premium)
Assumes mix 1 & 2 Bed; 150% of AMR (of $1,075/month);
Taxes at new multi-residential rate
Focus Consulting Inc. 2016

14. Illustrative Pro forma (per unit)
Determining potential to carry debt and thus required equity or grant – based on NOI
Total Cost
231,440
NOI
12,770
Lending 6.5% Cap rate
196,724
Maximum Financing Based on lowest of:
a) 85% of Lending Value
166,986
b) 85% of Cost
c) Achieving Minimum 1.2 DCR (3.5% mort)
177,613
Max financing (mortgage loan)
Required Equity/Grant *
64,454
* Amount of required equity impacts RoE
Focus Consulting Inc. 2016

15. Combining elements
Focus Consulting Inc. 2016

16. Eg 2: Rents at 100% AMR (use with rent supplements)
Exhibit 2 Rent at 100% AMR ($ per unit)
Development Costs
Land
28,000
Ave rent/month
$1,075
Construction
160,000
Soft costs
32,000
Total Cost
220,000
HST
11,440
Project Costs
231,440
Financing
Equity
146,270
<--
Less leverage = more equity/grant 
Mortgage Financing
85,170
Less leverage = smaller loan
CMHC Insurance Premium
3,833
(added and amortized)
Total Mortgage
89,003
Revenues, Costs and Cash Flow
(Rents and operating inflated at 2%)
Year 1
Year 5
Year 10
Revenues
12,513
13,963
15,417
Maintenance & Operations
5,000
5,412
5,975
Property Taxes
1,000
1,082
1,195
Total Operating Costs
6,000
6,495
7,171
NOI
6,513
7,469
8,246
Mortgage Payments
5,332
Cash Flow
1,181
2,136
2,914
Cash-on-Cash Return
0.8%
1.5%
2.0%
Unattractive rate of return on equity 
Focus Consulting Inc. 2016

17. Pro forma for affordable (80% AMR)
Exhibit 3 Affordable Rent 80% AMR ($ per unit)
Development Costs
Ave rent/month =
834
Land
28,000
Construction
160,000
Soft costs
32,000
Total Cost
220,000
HST
11,440
Project Costs
231,440
Financing
Equity
178,996
<-- Large grant/equity required
Mortgage Financing
52,444
<-- Significant reduced loan capacity
CMHC Insurance Premium
No CMHC premium, higher LTV 95%
Total Mortgage
Revenues, Costs and Cash Flow
Year 1
Year 5
Year 10
Revenues
10,010
11,171
12,333
Maintenance & Operations
5,000
5,412
5,975
Property Taxes
1,000
1,082
1,195
Total Operating Costs
6,000
6,495
7,171
NOI
4,010
4,676
5,163
Mortgage Payments
3,142
Cash Flow
868
1,534
2,021
Cash-on-Cash Return
0.5%
0.9%
1.1%
Focus Consulting Inc. 2016

18. 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

19. Options to enhance affordability
LTV constrains max financing to $85,000 vs. (= $120,000)
Focus Consulting Inc. 2016

20. Focus Consulting Inc. 2015

21. Exploring implications
What is policy objective?
Stimulate supply (private market); or
Address affordable rental need
Focus Consulting Inc. 2016

22. 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

23. 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

24. 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

25. Questions and Discussion
Focus Consulting Inc. 2016

26. Thank you!
Additional background reports available at