1. 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 Steve Pomeroy Focus Consulting Inc

2. 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 Steve Pomeroy Focus Consulting Inc

3. Future is Now Steve Pomeroy Focus Consulting Inc Public Housing 1964+ 50 yrs; Non Profit 1978 +35 yrs Nationally federal funding declines by $650 Mill in next decade In Manitoba it falls by by $28 Mill

4. 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 Steve Pomeroy Focus Consulting Inc

5. Project Financial Viability Operating 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 Steve Pomeroy Focus Consulting Inc Quick 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.

6. Project Potential Outcomes (at Expiry ) Steve Pomeroy Focus Consulting Inc * NOI = Net Operating Income Projects will fall into one of four categories, Multi project Providers may have a mix of outcomes across their portfolio

7. 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 Steve Pomeroy Focus Consulting Inc

8. 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 Steve Pomeroy Focus Consulting Inc

9. Research Findings National Sample – confirmed expected at risk Steve Pomeroy Focus Consulting Inc

10. Next to end most likely viable Steve Pomeroy Focus Consulting Inc

11. 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 Steve Pomeroy Focus Consulting Inc

12. 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 Steve Pomeroy Focus Consulting Inc Search CHRA/MNPHA website for the tool and ref guide

13. Example – Input data Input Variables Required: EG #2 : (Lower RR balance) VariableInput hereComments & suggestions Project identifier (name/ref #)EG #2 Just a ref # for your use if you are assessing more than 1 project Last fiscal year end (data year only) 2011 The 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 rates Expected 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% Steve Pomeroy Focus Consulting Inc

14. Example Output (results) Steve Pomeroy Focus Consulting Inc

15. Example 2: Summary Steve Pomeroy Focus Consulting Inc

16. 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 Steve Pomeroy Focus Consulting Inc

17. 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 units e) Abandon RGI rents in favour of low break-even rents f) Review mix of working poor vs. social assistance RGI households g) 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 Steve Pomeroy Focus Consulting Inc

18. Some Potential Remedies Addressing Insufficient Capital Reserves: h) Borrow against surplus i) Add a capital improvement levy to rents j) Seek P/T approval to increase pre-expiry contributions k) Seek P/T approval to re-amortize and borrow before expiry for replacement l) Seek renewal of funding support (P/T or SM) These are discussed in user guide – Addressing the Expiring Subsidy Challenge: Options and Remedies Steve Pomeroy Focus Consulting Inc

19. 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 Steve Pomeroy Focus Consulting Inc

20. Thank you Steve Pomeroy Focus Consulting Inc Additional background reports available at www.focus-consult.com