outline of a community housing development …...development program april 28, 2016 presentation of...
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1431 Fullum St., Suite 102, Montréal, Quebec H2K 0B5 [email protected] • www.rqoh.com • 514-846-0163
OutlineofaCommunityHousingDevelopmentProgram
April28,2016
PresentationoftheRéseauquébécoisdesOSBLd’habitation(RQOH)
Forthepast15years,theRQOHhasformedasolidaritynetworkwiththemissiontobringtogether,supportandrepresenttheQuebechousingNPO(H-NPO)community.
Byitsactions,itseekstofosterthedevelopmentandsustainabilityofhousingNPOs,therecognitionoftherighttohousing,andaccesstoqualitysocialhousing.
Quebec’s50,000NPOunitsaredividedamong1,200organizations.Theseareorganizedineightregionalfederations,allaffiliatedtotheRQOH.Morethan10,000peopleareactiveasvolunteers,onewayoranother,inthisnetwork,whichalsocountsontheparticipationofatleast6,500employees.
Varioussocioeconomic-healthindicatorsdefineourtenantsasgenerallythemostvulnerableindividualsinQuebecsociety.
Thevaluesofsocialjustice,democracy,solidarityandautonomyguidetheRQOH’sactions,directionsandpositions.Ourworkisgovernedbyamobilizingandparticipatoryapproachinvolvingallthecomponentsandbodiesofthemovement:NPOs,federations,boardofdirectors,workingcommittees,volunteers,employeesandtenants.
TheRQOHisanorganizationprimarilyfundedbyvariouscontributionsmadebyhousingNPOsandbenefitsassociatedwithitsofferofservicestotheregionalfederationsandthelocalH-NPOs.
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TableofContents
INTRODUCTION ...................................................................................................................................................... 5
THEACCÈSLOGISPROGRAM ................................................................................................................................. 6
ANINNOVATIVEPROPOSAL .................................................................................................................................. 8
GENERATIONSFUND,RÉGIEDESRENTESDUQUÉBECANDCANADAPENSIONPLANINVESTMENTBOARD .................................................................................................. 9
THEGENERATIONSFUND ................................................................................................................................ 9THERÉGIEDESRENTESDUQUÉBECANDTHECANADAPENSIONPLANINVESTMENTBOARD ....................................... 9
THEFINANCIALMECHANICSOFPERMALOGE .................................................................................................... 11
SYNTHESISOFTHEPERMALOGEPROGRAM ...................................................................................................... 16
MODELLINGONTHESCALEOFONEUNIT .......................................................................................................... 17
RISKFACTORSOFTHEPERMALOGEMODEL ...................................................................................................... 18RETURNONINVESTMENTOFTHECDPQANDTHECPPINVESTMENTBOARD ........................................................ 18NPOOPERATINGCOSTS .............................................................................................................................. 19VARIATIONOFTENANTINCOMES .................................................................................................................... 19
ACOMPARATIVEANALYSISOFTHECOSTSOFTHEACLANDPERMALOGEPROGRAMS ............................ 20FORTHEGOVERNMENT .............................................................................................................................. 20FORTHECOMMUNITYDEVELOPER ................................................................................................................ 21FORTHECOMMUNITYPARTNERS .................................................................................................................... 21FORTHETENANT ......................................................................................................................................... 22
TABLEOFTYPICALCOMPARATIVEDATAFORACLANDPERMALOGE .............................................................. 23
CONCLUSION ........................................................................................................................................................ 25
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Introduction
Quebec’scommunityhousingneedsareverysignificant.Regardlessoftheindicatorused(thenumberoftenanthouseholdsallocatingmorethan30%oftheirincometorentorthenumberofregistrationsonthesocialandcommunityhousingwaitinglists),allseriousanalystsofthehousingfieldarriveatthesamefinding:itisimperativetosupportanddevelopsocialhousing.
Thisimperativeisshared,inparticular,bymunicipalities(asevidencedbymanydemandsfromtheUnionofMunicipalitiesofQuebec,theFederationofMunicipalitiesofQuebecandtheFederationofCanadianMunicipalities)andbymanystakeholdersandanalystsinthefieldsofhealth,economics,socialwork,urbanplanning,etc.Butresearchers,socialmovementsandGovernmentalwaysrunintothesameobstacle:developingcommunityhousingisexpensive.
WhentheprovincialbudgetwastabledinMarch2015,MinisterLeitãoannounceda50%reductionoftheamountsallocatedtothedevelopmentofnewsocialhousing,loweringthegovernmentcontributionfrom$252millionto$126million.Inthisfield,asinothers,theGovernmentaffirmsthatitisnolongerabletoinvestasmuchasbeforetomeetsocialneeds.
ThesamebudgetannouncedtheintroductionoftheprivateRentSupplementProgram(RSP),intendedtooffsetthereductioninthenumberofnewsocialhousingunitsbyanassistanceprogramtohelp1,000tenantspaytheirrentontheprivatemarket.
Intheviewofthecommunityhousingmovement,thisapproachhasmanyfaults.Firstofall,socialhousingoffersmorethanaroof–itofferscommunitysupport.Hereisanexampletoillustratethisdifference:aseniorlivinginpovertyandsocialisolationseesherfinancialpositionimprovewiththeRSP,butthisdoesnotsolvehersocialisolationproblem,whereascommunityhousingdoes.Thesameargumentappliestopeoplewithothersocialvulnerabilities,suchasproblemsofmentalhealth,drugaddiction,discrimination,etc.1
Moreover,large-scaleexperimentswithRSP-typeprogramsintherestoftheworldhavegeneratedsomeperverseeffects,includingupwardpressureonrentsthroughoutthemarket(whereasconstructionofsocialhousinghastheoppositeeffect).
1 2013,AECOM,ÉtudesurlesimpactssociauxdesactivitésdelaSociétéd’habitationduQuébec,Québec,SHQ,
online:http://www.habitation.gouv.qc.ca/en_vedette/en_vedette/article/etude_dimpacts_des_activites_de_la_shq.html.
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AnotherseriousproblemwithRSP-typeprogramsistheiradhocnature.Contrarytotheconstructionofabuildingdedicatedtosocialhousing,theRSPisatemporaryintervention,dependingonthegovernments’annualbudgetchoices.Thisisashort-termapproach,whilehousingisapermanentneed.Fromthecradletothegrave,everyoneneedsaroofovertheirheadeverydayoftheirlife.Itisthereforeappropriatetohavealong-termstructuringapproachtoaddressthisissue.TheRSPdoesnotmeetthiscriterion.
ItcanalsoberecognizedthattheRSPhasfeweffectsoneconomicdevelopment,doesnotmakeanycontributiontorevitalizationeffortsinurbancentres(orstabilizationofpopulationsinruralcommunities)anddoesnotactasamechanismlimitingrealestatespeculation.Constructionofsocialhousingmakesapositivecontributiontoallthesechallenges2.Notonlyissocialhousingalong-termresponsetohousingneeds,butitisalsoasoundeconomicinvestment.Itstimulateseconomicactivitythroughouttheterritory,favourslocalsmallbusinessand,oncetheoriginalinvestmentphaseiscompleted,guaranteesasupplyofsocialhousingunitslessexpensivethantheRSP3.
ThistextisthereforemeanttobeacontributiontothesearchforaproposalthatwouldmakeitpossibletofindfinancingmechanismsthatarelesscostlyfortheGovernment,whileallowingtheongoingdevelopmentofsocialandcommunityhousingtoprovideastructuringandsustainableresponsetohousingneedsforthemostsociallyandfinanciallyvulnerablepopulations.
2 2011,AECOM,Étuded’impactsdesactivitésdelaSociétéd’habitationduQuébec,Québec,SHQ,online:
http://www.habitation.gouv.qc.ca/la_shq/retombees.html.3 Forexample,itcanberecognizedthattheRentSupplementProgram(RSP)announcedbyMr.LeitãoinMarch
offersunitsatarent10%moreexpensivethanthemedianmarketprice,whilearecentRQOHstudyshowsthattheaveragerentofNPO-typeunitsis14%lowerthanthemedianmarketprice. 2015,AllanGaudreault,LescaractéristiqueséconomiquesetlaviabilitéfinancièreduparcdesOSBLd’habitationduQuébec,Montréal,RQOH,online:https://rqoh.com/viabilite-fianciere-osbl-2/.
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TheAccèsLogisProgram
Sincethelate1990s,themaincommunityhousingdevelopmentsupportprograminQuebechasbeenAccèsLogis(ACL).Dependingontheannualbudgetsofthevariousgovernments,thefundsallocatedtothisprogramhavemadeitpossibletobuild1,500to3,000unitsperyear.TheprogramisadministeredbytheSociétéd’habitationduQuébec(SHQ).Sinceitsinception,ACLhasallowedfortheconstructionofslightlyover25,000units,and6,000morearebeingdevelopedasthisdocumentiswritten.
Essentially,theACLprogramcanbesummarizedbyfourmaincharacteristics4.
• SHQfinancialassistancetothedeveloperfortheconstructionofthebuildings.Thisassistance,accordingtotheprogram,mustcover50%ofthedevelopmentcosts.Inpractice,theamountsdisbursedcorrespondtoapproximately40%ofthecosts,becausetheSHQcontributionislimitedbytheprogram’sscalesdefiningthemaximumpriceauthorizedforaunit(thisamountvariesaccordingtothetypeandsizeoftheunit).Thesescalesgenerallyaremoremodestthantheactualcostsclaimedbythecontractorsselectedbyapublictenderingprocess.
• Acontributionbytheorganizationgenerallyequivalentto40%ofthevalueof
theprojectandusuallyprovidedthrougha35-yearmortgage(fixedraterenewableevery5years)contractedwithafinancialinstitution.ThelenderisidentifiedbytheSHQduringatenderingprocessfortheprogramasawhole.ThemortgageisguaranteedbothbythepropertyandbytheSHQ.Inpractice,theprogram’sratesareslightlyhigherthantheratesavailableonthemarket.Thisissurprisinggiventhedoubleguarantee(thepropertyandtheSHQ),whichprotectsthelender,andtheprogram’sflawlessmortgagerepaymenthistorytodate.Thecurrentrateis2.6812%,eventhoughitiseasytofindratesof2.5%onthemarket5.Theotherproblemisthattherates,basedon5-yearcycles,inducerisksrelatedtopotentialratevariations.Thesevariationsmayhavemajorimpactsonthebudgetcapacityofthedevelopergroups.Sinceitisnotunusualtoseearateincreaseof2%,3%,4%oreven5%fora35-yearmortgage,thisriskisquitereal.
4 AllthedetailsoftheAccèsLogisprogramarepresentedontheSHQwebsite:
http://www.habitation.gouv.qc.ca/programme/programme/acceslogis_quebec.html.5 Ratehub,online:http://www.ratehub.ca/meilleurs-taux-hypothecaires-quebec.
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• Afinancialcontributionfromthecommunity.Themunicipalauthoritiesandorganizedgroupsofcivilsociety(KiwanisClubs,religiouscommunities,privatefoundations,etc.)mustcontributetocoverthedifference,generally20%to30%ofthedevelopmentbudgetofACLprojects.
• SHQfinancialassistancetothetenants.Inprincipal,atthetimeoftheir
inauguration,theunitsdevelopedwiththeACLprogramareleasedatapriceequivalentto94.5%ofthemedianmarketpriceforsimilarunitsinthesameregion.However,sincetheprogramrequiresthat2/3oftheunitsbeleasedtopersonswithverymodestincomes,theSHQassiststhetenantswithfinancialsupportthatlimitstheircontributiontotherentto25%oftheirincome;thedifferenceispaiddirectlybytheSHQtothedeveloper.AstheACLprojectsevolve,thepriceoftherentsgraduallymovesawayfrommarketprices(whichrisemuchfasterthantherentsforcommunityhousing)andendupstabilizingaround70%to75%ofthemedianmarketprice.
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AnInnovativeProposal
SincetheACLprogramisconsideredtooexpensivebytheGovernmentandtheRSPformulainvolvesmanydeficiencies,thecommunityhousingmovementisconsideringaboldproposaltotheSHQtobreakthisimpasse:Permaloge.
Theaimofthisprogramistopermitthedevelopmentofthousandsofcommunityhousingunitseachyear,withoutcapitalinvestmentfromtheGovernment,throughsounduseofdifferentexistingfinancialproductsandmechanismswithwhichtheGovernmentandthemarketarefamiliar.ThefinancialsetupthatsustainsPermalogewouldmakeitpossibletosupportcommunityinitiativesforhousingconstruction(buildingsubsidies)andhelppeoplepaytheirrent(individualassistance).
Asitsnameimplies,Permalogeaimsatapermanentresponsetohousingneeds.ItisdistinguishedfromtheAccèsLogisprogrambythefactthat,attheendofa15-yearcycle,theGovernmentcouldrecover100%oftheamountsinvestedindevelopmentand,inexchangefor15yearsofGovernmentassistancetothetenants,thedevelopercouldthenfinance20moreyearsofrentsupplements,inadditiontoowningtheproperty.
ThisformulathereforeispotentiallymoreadvantageousthanthecurrentACLprogramand,aboveall,clearlymoreinterestingsociallyandfinanciallythantheoptionoftheRentSupplementProgramontheprivatemarket.
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GenerationsFund,RégiedesrentesduQuébecandCanadaPensionPlan
InvestmentBoard
TheQuebecgovernmentshouldbefamiliarwiththegenerallogicofPermaloge,becauseitisbasedonthesamemajorconceptsasthosethatledtothecreationoftheGenerationsFund6.Moreover,thebenchmarkreturnsusedherearethoseoftheRégiedesrentesduQuébecandtheCPPInvestmentBoard.
TheGenerationsFundTheQuebecgovernmenthaschosentopayoveronebilliondollarseachyearintotheGenerationsFund,whichhastheexclusivemissionofpayingdownthedebt7,insteadofrepayingthedebtdirectly.
TheGenerationsFundseekstotakeadvantageofthedifferentialbetweentheQuebecbondrateandtheappreciationofavastinvestmentportfolio.SincetheQuebecgovernment’screditratingisverygood(andtheSHQ’sisevenbetter),theinterestrateschargedbyinvestorsareverylow(1%forone-yearfixedratebonds). Ontheotherhand,thereturnonalarge,diversifiedandwell-capitalizedportfolioisaround7%8.TheexpertsattheConseildutrésorandtheMinistèredesFinancesconcludethatthistypeoffinancialsetupallowsthedebttoberepaidmoreeasilyandmorerapidly.
Permalogeusesexactlythesamelogic.
TheRégiedes rentesduQuébecandtheCanadaPensionPlanInvestmentBoardOneoftheprogram’sinnovativeaspectsisthemutualizationofthereturnandriskofthesocialhousinginvestmentportfolio.WiththeACLprogram,eachprojectisfacedwiththeobligationtoprotectitselfindividuallyagainstpotentialinterestratevariations.WiththePermalogeapproach,thisriskismutualizedamongtheprojectsandovertime.
6 AnActtoreducethedebtandestablishtheGenerationsFund,CQLRc.R-2.2.0.1,<http://canlii.ca/t/698hd>7 Ibid,section28 ProjectedreturnoftheGenerationsFundfor2015-2016,
http://www.budget.finances.gouv.qc.ca/fondsdesgenerations/
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Although each project’s individual obligation is limited to the contribution fixedwhen its agreement is signed, the project benefits from the return on the entireportfolioforthedurationofits35-yearagreement,andevenbeyond.
Inthisrespect,Permalogecanbecomparedtoadefinedbenefitpensionplan,suchastheonemanagedbytheRégiedesrentesduQuébec(RRQ)ortheCanadaPensionPlan.Thebenefitspaidtoaretireeofsuchaplanarenotdirectlyrelatedtothereturnofthepensionfundatthetimehemadehiscontributionstothefund.Therefore,thecontributionlevelrequiredfromthedevelopers(andeventuallyfromtheSHQand/orCMHC) wouldbefixedbyactuarialstudiesintendedtoestablishtheadequatecontributionleveltoguaranteetheappreciationofthePermalogeportfoliosothatitcanmeettheprogram’sobligations.
Forcomparativepurposes,Quebecerswhoappliedforapensionduringthe2008financialcrisis(income-25%)didnotdirectlyexperiencetheeffectsofthesuddenreductionofRRQcapitalization.Inthesameway,retireeswhoappliedforapensionin2013(income+13.1%)didnotseetheirpensionincreased,eventhoughthiswasagoodyear.
Communityhousingcannotbefinancedonanannualadhocbasis.Sincehousingisapermanentissue,itisimportant(forcitizens,theauthoritiesanddevelopers)tobeabletomanagethisconcernwithtoolsthatintegrateandtakeadvantageofthisfact.ThisiswhatPermalogeallows.
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TheFinancialMechanicsofPermaloge
ThemaincharacteristicsofthePermalogeprogramareasfollows:
• Bondfinancing.Byusingbondfinancinginsteadofmortgagefinancing(asisthecasewithACL),Permalogesucceedsinreducingthecostoffinancingnecessarytodevelopcommunityhousingprojects.Aboveall,Permalogeguaranteesbudgetstabilityfortheentirerepaymentperiod.Currently,ÉpargnePlacementsQuébecissuesbondsatratesrangingfrom1.1%(forabondrepayableafteroneyear)to3%(fora15-yearbond9).TheCanadianone-yearbondrateis0.7%10.
ThepossibilityofusingafixedrateforthedurationofaprojectisamajorqualitativeimprovementcomparedtotheACLprogram.
• Leverage.Byproceedingwithabondissuehigherthannecessaryforconstructionofthebuilding,andbyinvestingthedifferenceinadiversifiedportfolio,theprobablereturnofthisportfolioshouldbesignificantlyhigherthanthecostoffinancinggeneratedbythebond.Forexample,CaissededépôtetplacementduQuébec(CDPQ)hashadahistoricalreturnof8.6%sinceitsfounding;thereturnforthepastfiveyearsis10.46%andthereturnforthepast10years(includingtheABCPcatastropheof2008)is7.22%11.TheCPPInvestmentBoardhashadanannualizedreturnof8%forthepast10years.Thehypothesischoseninwritingthisproposalis7%.
• Acommunitycontributionof15%ofaproject’sdevelopmentcost.AlthoughtheACLprogramprovidesfora15%contribution,inpracticecommunitiesmustmakeahighercontribution.However,thisrepresentsanobstacletothedevelopmentofprojects,especiallyinruralandsemiruralcommunities.Itthereforeseemsappropriatetoreducetherequirementsimposedinthisregard.
• Adevelopmentbudgetadjustedtotheactualcostofconstruction.ThestandardsoftheACLprogramhavebecomeunrealistic.Currently,themaximumsauthorizedbytheprogramarethoseestablishedin2009.Inpractice,thedevelopersandthecommunitymustmakeupthedifference.Theworkingassumptionsubmittedhereis$190,000foratypicalone-bedroomunit,whichcorrespondsmorecloselytotheactualconstructioncostofatypicalunitofthis
9 ÉpargneplacementQuébec,online:
http://www.epq.gouv.qc.ca/F/Info/taux_en_vigueur/produit_complet.aspx#terme.10 CanadaSavingsBonds,online:http://www.oec.gc.ca11 CaissededépôtetplacementduQuébec,online:http://cdpq.com/fr/resultats/donnees-historiques.
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size.
• AGovernmentcontributiontoassisttenantsinpayingtheirrent.Tenantsofsocialhousingprojectshaveverymodestincomes.ArecentinternalRQOHstudyshowedthat80%oftenanthouseholdsofhousingNPOshaveanincomebelow$20,000peryear.TheGovernment’scontribution,inourhypothesis,seekstolimitthetenants’contributionto25%oftheirincome.TheACLprogramalsooffersthesametypeofassistance.However,theorganizationoftheassistanceisfacilitatedanditscostisreducedconsiderablywiththePermalogeprogram(withoutprovokingarentincreaseforthetenant).
• Afinancialcontributionfromthedevelopergroupadjustedtoitsbudget
capacity.ThelogicintroducedbyPermalogeseekstoseparatetwoconceptscurrentlyconfusedbytheACLprogram.Ontheonehand,thereisthenotionofthegroup’scontributiontotheproject.Ontheotherhand,thereisthenotionofmortgagerepayment.Itisimportanttoobtainasignificantcontributionfromthedevelopergroup(evidenceofthecommunity’scommitmentandtheproject’slong-termviability).Itisunnecessaryforthiscontributiontobedefinedbythemortgagemarket’sinterestrates.Othervariablesandothersourcesoffinancingcancontributetorepaytheinvestment.
• Allowingthecommunitydevelopertoachievefinancialviabilityassoonas
possible.Reducingthetermoftherepaymentperiodallowsthedevelopertoreducethecostofitsrentsmorequickly,reducethescopeofitsfinancialreserves(becauseithasrealestateassets)andchannelthemtobuildingmaintenance.Currently,theACLprogrampreventsthedeveloperfromusingitsrealestateassetsbeforethe36thyearoftheproject.Thissituationgeneratesseveralharmfuleffects.Firstofall,itforcesthedevelopertoallocatealargepartofitsresourcestoanunproductiveexpenditure:interestpayments.Thenitcompelsthedevelopertoconstitutereservestoabsorbaneventual“mortgagerateshock”whenitsmortgageisrenewedeveryfiveyears.Thisismoneythedevelopercannotinvestinbuildingmaintenanceandcommunitysupporttotenants.Moreover,duringthe35yearsinwhichafirstmortgage(guaranteedbytheSHQ)burdenstheproperty,itisimpossibletousetheequityinthepropertytofinanceotherdevelopmentprojects.Thisconstraintconsiderablylimitsthepossibilityof“off-program”developmentandforcesthecommunitymovementtorelyalmostexclusivelyontheGovernmentasafundingsource.Bypreventingthecommunitymovementfrominvestinginthedevelopmentofsocialhousing,theGovernmentdeprivesitselfofakeyfinancialpartnertorespondtosocialhousingneeds.
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• Thedeveloper’slong-termcommitmenttosupplyaunitatanaffordablepriceforaverylow-incomehousehold,onceitsrepaymentobligationiscomplete.Inthemodelimaginedhere,thedeveloper,effectivefromthe15thyearoftheproject,isabletoofferunitsataverylowcost,basedonexploitationcost(taxes,insurances,maintenanceandmanagement),freeoffinancingexpense.
• Aselfsustainsystemtohelptenantspaytheirrentfromthe16thyearonward.
Duringthefirst15years,theprogramcapitalisesenoughresourcessothatfromthe16thyearitisabletosupportthetenantssotheycanpaytheirrent.Thisisdonewithoutanyadditionalcontributionfromthestate.
TheprogramisarticulatedbylinkingthelowbondfinancingcostsavailabletotheGovernmenttothereturnobtainedbyaverywell-capitalizeddiversifiedportfolio.Thebasicassumptionappliedistoentrusttheamountsinquestiontoaninstitution,suchasCaissededépôtetplacementduQuébecortheCPPInvestmentBoard,sothatitmanagesthismoneyasitdoeswiththeotheramountsentrustedtoitbytheCPP,theRRQ,theCSST,theGenerationsFund,etc.Thisminimizesthemanagementcostwhilebenefitingfromtheexpertiseofthesepublicinstitutions.
Thefollowingfigureisanillustrationofthesuggestedmechanism,reducedtothescaleofonehousingunitwithadevelopmentcostof$190,000.Hereisabriefdescriptionofthefigure.
Originofthefunds
• Twosourcesoffinancingareusedforthedownpayment.
o AGovernmentbond $285,000o Acommunitycontribution $28,500o Total $313,500
Investmentmadewiththefunds• A$190,000trancheisgiventothedevelopertobuildtheunit.• A$123,500trancheisturnedovertoCDPQortheCPPIBtoinvest.
TheGovernmentmakesanannualrentalassistancecontribution forthefirst15years
• Sincetheaveragetenanthasanincomeof$12,000peryear,andtherentnecessarytocovertheprojectcostsis$11,000,thetenantcannotassumethisexpensewithoutassistance.Forthetenant’scontributiontocorrespondto25%ofhisincome,thatis,$3,000,thetenantmustreceive$8,000ingovernmentassistanceperyearsothathecanpayhisrent,or$666permonth.
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Financingexpenses• Theinvestmentportfoliomustpaythebondholderanannualreturnof3%
peryear,or$8,550peryear.
Incomegeneratedbyinvestmentsduringthefirst15yearsoftheproject
• Theportfolioobtainsa7%return,lowerthanthehistoricalreturnofCDPQortheCPPIB,onthe$123,500entrustedtoit,namely$8,645peryear.
• Thedeveloperpaystheportfolio$7,000peryeartocontributetorepaymentofthebond.
• Thisamountisaddedtotheinitialamountof$123,500investedatthebeginningoftheprocess,therebyincreasingthegainsgeneratedbytheportfolio’sinvestments.
Theresultsofoneyearofoperationoftheproject(duringthefirst15years)
• Portfolioreturnon$123,500 $8,645• Developer’scontribution $7,000• Paymentofinteresttothebondholder -$8,550• Year-endincome $7,095
Availableassetsattheendofthe15thyear
• Originalcapitaloftheportfolio• Theannualincomefromoperationspaidtotheportfolio
eachyearduringthefirst15
$123,500
yearsoftheproject,thatis,acompounded returnofanannualinvestmentof $7,095at7%x15years $178,290
• FinancialassetofthePermalogeportfolioafter15years $301,790• Realestateasset($190,000x2%compoundedannually) $255,714• Totalfinancialandrealestateassets $557,504
Repaymentofthebondinthe15thyear
• Valueofthebond -$285,000• Financialasset $301,790• Total $16,790
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Sincethebondisrepaidinthe15thyear,thedeveloperreceivesareleaseandnolongerhastopaytheGovernment.Whatisimportantisnotthatthedeveloperhasrepaidtheamountremittedtoitatthebeginningoftheproject,butratherthatthebondholderisrepaid.ThemodelallowsthedevelopertobethefullownerofthepropertyattheendofYear15andreleasestheGovernmentfromtheobligationtoguaranteetheproperty’sfinancing.
Alowrentfor20additionalyearsFurthertoitssocialmissionandinrecognitionoftheassistanceprovidedbytheGovernment,thedeveloperundertakestoofferalow-rentunitfor20yearsafterrepaymentofthebond.Concretely,itreducestherentbyanamountequivalenttothecontributionitremittedtoCDPQ.Theassistancenecessarytoguaranteethetenantalowrentisreducedconsiderably.
• 25%oftheincomeofatenantearning$12,000peryear $3,000• Costofmanagementandmaintenanceofaunit $4,000• Annualassistancenecessaryforthetenant $1,000
Toofferthisassistance,theSHQusestheassetsstillavailableinthePermalogeportfolio,$16,790.Thisamountgeneratesareturnof$1,175peryear,whichismorethantheamountrequiredforrentalassistance.
• Annualreturnat7%of$16,790 $1,175• Onetenant’sannualneedforfinancialassistance $1,000• Annualsurplus $175
ApositivefinalnetincomefortheportfolioAttheendofthe35thyear,theprojectallowstheportfoliotogenerateanetincomeof$23,965.
• Assetsinthe16thyear $16,790• Appreciationcompoundedat7%ofa$175annualsurplus $7,175• Finalsurplus $23,965
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SynthesisofthePermalogeProgram
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ModellingontheScaleofOneUnit
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RiskFactorsofthePermalogemodel
AlthoughsomeofthevariablesusedtomodelthePermalogeprogramarereliable,therearestillsomeunknowns.Thenextsectioncoverswhathavebeenidentifiedasthemodel’smainriskfactorsandsuggestsmethodsthatcouldbeconsideredtomitigatethem.
ReturnoninvestmentofCDPQandtheCPPInvestmentBoardAlthoughthefiguresusedherearebasedonthehistoricalreturnsofCDPQ(8.6%)andtheCPPIB(8%),thereisnoguaranteethatthePermalogeportfoliowillsucceedingeneratingareturnof7%foreach15-yearcycle.
However,theriskisattenuatedconsiderablybytwofactors.Althoughthemodelillustratedisreducedtothescaleofonehousingunit,itmustnotbeforgottenthattheprogramwouldconcernatleast3,000unitsperyearforseveralyears.Thus,theamountsentrustedtoCDPQwouldbearound$370,500,000peryear($123,500perunitfor3,000unitsperyear).Ifitisconsideredthattherepaymentofthebondisnecessaryonlyattheendofthe15thyearandthattheprogramlastsatleast15years,theamountsaccumulatedinthisfundwouldrepresentamassofaround$12billionbythebeginningofthe16thyear.Theobligationtopay$855,000,000($285,000x3,000units)toproceedwithonefullyearofbondpaymentswillnotthenbeaproblemwhentheprogramreachesthatpoint.ThisisallthemoretruegiventhatthehousingNPOshaveadefaultrateapproaching0%forhonouringtheirmortgagerepaymentobligations.Therepaymentsharecomingfromthedevelopers($105,000)isthereforevirtuallyguaranteed.
Moreover,forreasonsofsimplicityandclarity,thebondfinancingusedinthemodelisbasedon15-yearbondsat3%.However,theportfoliomanagerscoulddecidetouseotherformsofbondstoimprovetheprogram’sreturn.Forexample,one-yearfixed-ratebondsarecurrentlyat1.1%forQuebecand0.7%forCanada.Theuseofdiscountbondscouldalsobeconsidered,whichwouldallowanincreaseinthepotentialreturnontheinvestmentsentrustedtotheportfolio,becausethistypeofinvestmentdoesnotrequireanannualinterestpayment.Thesedifferenthypothesesmakeitpossible,inparticular:
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• toincreasethecapitalizationlevelofthefundsentrustedtotheportfolio;• toincreasetheprobabilitiesofareturnclosetoCDPQandCPPIBhistorical
returns;• topostponethefirstbondrepaymentcyclebeyondthe15thyearofthe
program.Inaddition,Permalogeopensupimmensepossibilitiesforadditionalfinancing,becauseitauthorizesthedevelopertousetheequityofitspropertyeffectivefromthe16thyearinsteadofhavingtowait35years,asimposedbytheACLprogram.
NPOoperatingcostsThemodelsetoutherepresentsveryrealistic(andevenslightlyhigh)operatingcostsfortheprojecttowork.Beyondthemortgage,thedeveloperofanACLprojectmustalsoassumeregularoperatingcosts,suchastaxes,insurance,maintenance,etc.Asinthecaseofallthecomponentsofthisproject,additionalstudiesarerelevanttoestablishthepreciseamountsnecessarytoguaranteetheprojects’viability.Oncethisworkisaccomplished,itwillbepossibletoadjustthemodel.
Onemainavenueforadjustmentisavailabletotheprogram.Itispossibletochangetheamountofthebondissuedinitially.Byincreasingthisamount,theshareofthefinancingbasedonthereturnofthePermalogeportfoliocanbeincreased.
VariationoftenantincomesThemodelstudiedheretakesitforgrantedthatthetenantincomelevelwillbestablefor35years.Thisstatementcouldprovetobefalse.
Forexample,theconditionsgoverningthedifferentformsofassistancepaidtovulnerablepopulationshaveevolvedconsiderablyoverthepast35years(manyreformsofsocialassistance,employmentinsurance,oldagesecurity,veterans’benefits,familyallowances,etc.).
Sincetheincomesofcommunityhousingtenantsarelargelydependentonthesesocialtransfers,thecommitmenttoofferunitsataccessiblepricesforthesepopulationsfor35yearsisconditionalonthemaintenanceofatenantincomelevelthroughouttheprogram.Ifthebenefitspaidtothevulnerablepopulationsweretodecrease,thedeveloperscouldnotbeboundbytheirobligationtoprovideunitsataffordablepricesforthepoorestmembersofsocietywithoutbeingabletocountongreaterGovernmentassistance.
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AComparativeAnalysisoftheCostoftheACLandPermalogePrograms
Permaloge’sfinancialadvantagesovertheACLarenotableforallthepartiescontributingdirectlytocommunityhousing.
FortheGovernmentCurrently,theACLprogramrequiresthreetypesoffinancialcommitmentsfromtheGovernment,namelyacontributiontodevelopmentoftensofthousandsofdollarsperunit,amortgageguaranteefortheentirevalueoftheprojectfor35yearsforthelender(NationalBankorDesjardins),anddirectassistancetotenants,guaranteeingrentsequivalentto25%oftheirincomes.
• Areductionofthenetdebt
Thedirectcontributiontodevelopmentrepresentsanetexpenditureof$252millionperyearfortheGovernment($126millionin2015-2016).Thisexpenditureisaccountedforasnetdebt,becausetheGovernmentdoesnotacquireanytangibleassetsinreturnforthiscontribution. Thus,thedevelopmentofcommunityhousingisperceivedbytheConseildutrésorandthefinancialanalystsasanexpenditurethathasnofinancialcounterpart.
ThescenarioproposedbyPermalogetotallychangesthispartofthedeal.Eachdollarmobilized(bybonds)isbackedbyassets.Infact,theassetsinquestionareboundtogrow,whiletheliabilitiesremainstable.Thecommunityhousingfinancingoperationisthereforeeliminatedfromthenetdebt.
• Anincreasedlevelofsustainability
ThemortgageguaranteeoftheACLprogramrepresentsamaterialriskfortheQuebecgovernment,becausethe5-yearfinancingmaturitiesinduceavariabilitythatcouldprovedramaticiftheratesincreasedsignificantly.Insuchacontingency,itisforeseeablethatseveralACLandAffordableHousingQuébecprojectswouldfindthemselvesindifficultyandwouldhavetorelyonSHQassistancetodealwiththesituation.Byusingfixed-rate15-yearfinancing,asPermalogeprovides,thisriskiseliminated.
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• AconsiderablylowercostperunitTheamountdisbursedfordirectassistancetotenantslivingincommunityhousingdoesnotdiminishovertimeundertheACLprogram.However,Permalogeallowsaconsiderablereductionofassistancetotenantsforthelast20yearsofthe35-yearcycle.
Inall,byaddingtheSHQ’sparticipationindevelopmentandthedirectassistancetothetenant,itcanbeestimated,overa35-yearperiod,thattheSHQmakesacontributionamountingto$145,695perunit.Permalogewouldallowreductionofthiscontributionto$95,420,adifferenceof$50,275perunitinfavourofPermaloge.
ForthecommunitydeveloperPermalogealsorepresentsanimprovementforthecommunitydevelopercomparedtotheACLprogram.Byreducingprojectfinancingto15years,thedevelopergainsinseveralrespects.Firstofall,itbenefitsfromratestability,sothatitavoidshavingtoconstitutereservesforaneventualmortgagerateshock.Byconcentratingtherepaymentperiod,itreducestheshareofitscontributionintendedtofinancetheoption(itpaystheprincipalinsteadofpayinginterest).Finally,theshorttermallowsittoreducethereplacementreserves.Theydonotneedtobeashighbecauseitwillnothavetousethembeforepayingthemortgage.Ineithercase,thisallowsittoallocateitsresourcestoimprovingtheservicesofferedtothetenantsinsteadoffinancingitsdebt.
Byhavingequityinitspropertyafteronly15years,itcaneventuallyuseittofavouranewdevelopmentphase,togoontoimproveitspropertyortoinvesttheseassetsusefullytoserveitssocialmission.
ForthecommunitypartnersInpractice,thecostsauthorizedbytheACLprogramrequirecommunities(withthemunicipalitiesplayingtheleadingrole)tomakeaninvestmentmuchgreaterthanthe15%providedbytheACLprogram.Thefinancialstructuremakesitpossibletoreducetheinvestmentsrequiredbymunicipalitiesandtheotherpartnerstomoreacceptablethresholds.InfactthecommunitycontributionhasbecomesohighwithACLthatthemobilizationofcommunityresourcesforaprojecthasbecomeoneofthemainfactorsslowingdownprojectdevelopment.ItisnotunusualwithACLforthecommunitytorequireyearsofworkandrepresentationstoconstitutethefundsnecessarytosubmitaviableACLproject.
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Thishasthreemajornegativeimpacts.Firstofall,theamountrequireddiscouragessomestakeholders.Then,thedelaysbetweenthepromisesofthecommunitypartnersandthedevelopmentoftheprojectmeansthatcommunityresourcesareimmobilizedforyears,attheexpenseofothercommunityprojects(municipalities,socialgroupsandreligiouscommunitiesaresolicitedforallkindsofprojects).Inthiscontext,otherprojectsthatcanbeaccomplishedmorequicklydemandthatthebudgetsbeallocatedtotheminsteadofleavingthemoney“dormant.”
Finally,andmostdramatically,thedelayshaveonemainconsequence:peoplewhoneedqualityhousingatareasonablepriceareobligedtocontinuelivinginbadconditionsforalongertime.
ForthetenantPermalogeshouldallowthedevelopmentofbetter-qualityprojects(becausethedevelopmentbudgetswouldbebigger),morerapidly(becausemobilizationofcommunityresourceswillbeeasier)andhaveorganizationsthatareinabetterfinancialposition(becausetheywillhavecontrolofalltheequityeffectivefromthe16thyear,withoutbeingthreatenedbyinterestratevariations),andcapableofofferingbetterhousingconditions(becauselessmoneywillbeinvestedinfinancingpropertiesandmoreinmaintenanceandmanagement).
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TableofTypicalComparativeDataforACLandPermaloge
Targetbudget ActualMAC ActualMAC ActualMAC
Permaloge(realisticbudget
allowingsustainable
development+universal
accessibility)
ACL-SHQ
ACLdeveloper
Programsandactual
additionalcontributions
(PRQ,innovation,
etc.)Developer’scontributionforconstruction3½
190,000
51,650
Communitycontribution 28,500 16,000 35,000
Quebecbonds 285,000
OriginalinvestmentinCDPQ 123,5
00
Developer’scontribution(mortgage)
40,000
Developer’smortgagerate 0.024 Annualmortgagerepayment 1,687 AnnualrateofreturnonPermalogeportfolio
0.07
ValueofannualreturnonPermalogeportfolio
8,645
Annualinterestrateonthebond 0.03
Annualinterestpaidonthebond 8,550 CDPQannualreturnminusannualbondinterest
95
Developer’sannualcontribution 7,000
Annualconsultedincome 7,095 Compoundedappreciationofannualinvestment
178,290
15-yearappreciation+originalCDPQdeposit
301,790
Surplusafterrepaymentofthebond 16,790
Annualappreciationofthesurplusforyears16to35
1,175
AnnualcontributiontotheRSPforyears16to35
1,000
Netannualsurplusinthe16thyear 175 Annualsurplusappreciatedfor20yearsat7%
7,790
Surplusinyear16+compoundednetannualsurplusforyears17to35
24,580
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Targetbudget ActualMAC ActualMAC ActualMAC
Tenant’sannualincome 12,000 12,000
25%ofthetenant’sincome 3,000 3,000 Costofmanagement,maintenance,insurance,etc.
4,000 4,000
Managementcost+Developercontributionyears1to15 (orACLmortgagerepayment35years)
11,000
5,687.00
AnnualRSPnecessary(25%income–costandcontribution)years1to15
8,000
2,687
2,687
RSPnecessarymonthlyyears1to15 667
224
224
TotalRSPcostforfirst15years 120,000 40,305 TotalRSPcostyears16to35 20,000 53,740 Totalcostofdirectassistancetotenant 140,000 94,045 PortfoliocontributiontotheRSPyears16to35
20,000
Directassistancetotenant35years+Assistancetodevelopment-Surplusafterbondrepayment- Appreciationofthesurplus
95,420
145,695
SHQnetmonthlyRSPcostyears1to15 667 511 SHQnetmonthlyRSPcostyears16to35
83
224
AveragenetmonthlyRSPcost35years 227 347 DifferenceforSHQ,Permalogevs.ACL
-50,275
Differenceincommunitycontribution 12,500
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Conclusion
Leavingvulnerableandfragilepopulationstotheirowndevices,withoutsufficientsocialprotection,notonlybringsdifficultiesfortheindividualsinquestionbutalsohasmajornegativesocialandfinancialconsequencesforthecommunityasawhole.
Avoidingasingledayofhospitalizationbyprovidingadequatehousingcanfundoneyearincommunityhousing.ImprisonmentofapersonforoneyearcoststheGovernmentasmuchasthecontributionnecessarytohousethispersondecentlyincommunityhousingforalifetime.
Thus,anadequateresponsetothesocialneedsforhousinghaspositivebudgetaryandsocialimpacts,bothindividuallyandcollectively.
Itisobviousthatafewpagesarenotenoughtodefineadetailedanddefinitiveprogramofthescopementionedhere.
Atthisstageofthediscussion,thisisnotonlyimpossiblebutuseless.
TheRQOH’sintentionatthistimeissimplytoprovideasufficientlyconvincingdemonstrationtoitspartnersandtheauthoritiessothatcrediblesolutionscanbeenvisionedthatrespondbothtotheGovernment’sbudgetrequirementsandthesocialconcernsofcommunityhousingstakeholders.
Bytakingadvantageofthecollectivedevelopmenttoolsoursocietyhasinstitutedoverthepast40years,webelieveitispossibletocombinethefinancialexperienceofinstitutionsliketheSociétéd’habitationduQuébec,CanadaMortgageandHousingCorporation,theCaissededépôtetdeplacementduQuébecandtheCanadaPensionPlanInvestmentBoardwiththatofthecommunityhousingmovement.Together,itispossibletomeetthesocialneedsforhousingthattheprivatemarketisunabletosatisfysuitably.
50,000 housing units
1, 200 organizations
8 regional federations
1 solidarity network
1431FullumSt.,Suite102,Montréal,Quebec H2K0B5
514-846-0163•[email protected] •www.rqoh.com