CITY OF VANCOUVER

POLICY REPORT
Housing

 

Date:

February 16, 2005

 

Author:

Cameron Gray

 

Phone No.:

7207

 

RTS No.:

4872

 

CC File No.:

4664

 

Meeting Date:

March 1, 2005

TO:

Vancouver City Council

FROM:

Director of the Housing Centre, in consultation with the Directors of Real Estate, Finance and Legal Services

SUBJECT:

Extensions for Non-Market Housing Leases

RECOMMENDATION

GENERAL MANAGER'S COMMENTS

The General Manager of Community Services RECOMMENDS approval of the foregoing.

COUNCIL POLICY

Council’s priorities for social housing are to "maintain and expand housing opportunities with priority being given to families with children, SRO residents, and the mentally ill, physically disabled, and others at risk of homelessness."

The City leases sites for non-market housing for 40 or 60 year terms and considers a prepaid rent of 50% of freehold value to be the market value of a 40 year lease and 75% of freehold value to be the market value of a 60 year lease.

PURPOSE

This report seeks Council approval to add twenty years to the leases for non-market housing sites with 40 or 41 year terms subject to payment of additional lease rent at year 45 of the extended term.

BACKGROUND

The City’s policies for leasing sites for non-market housing have evolved since 1972 when the City first began leasing instead of selling sites to non-market housing sponsors. For the south shore of False Creek and Champlain Heights, which the City developed from 1974 to 1986, the original policy was that a 60 year lease warranted a discount of a third off freehold value. This policy had to be varied in the early 1980s when land prices soared while non-market housing budgets were static with the result that the City was forced to discount some non-market housing sites by more than 50%.

When, in the mid-80s, the City began buying scattered sites for the development of non-market housing, land prices had dropped and the full cost of the land could be recovered from the budgets set by the Federal social housing programs then in place. The City adopted the policy that a 60 year lease should pay the full purchase price as prepaid rent and that a 40 year lease warranted a 25% discount from freehold value.

From 1980 to 1988 37 non-market projects were developed on land leased from the City for either 40 or 41 year terms and with the lease rent prepaid for the full term. Eighteen of these leases include a right to renew the lease for a further 20 years at the expiration of the initial term, with additional lease rent to be paid at that time.

In 1986, the Province took over administration of the new Federal/Provincial social housing program, and in 1987 retained a consultant to assess the value of 40 year and 60 year leases. The consultant concluded that a 60 year lease should be valued at 75% of freehold value and a 40 year lease at 50%. The City did not completely accept the consultant’s analysis or conclusions but did adopt a lease policy consistent with them.

In the late 1990s, the problems of envelope failure (‘leaky buildings’) emerged. The problem affected both market and non-market housing, and since then CMHC and BC Housing have been working with the non-profit rental and co-operative housing sectors on finding and implementing solutions.

On June 24, 2003, Council approved amendments to the lease for Jubilee House, a non-profit rental project in Downtown South, to extend the lease by 20 years, with additional lease payment due on the 45th anniversary of the extended lease. Jubilee House had a 41 year lease and an extension was required to provide a sufficient term to pay off the additional financing that CMHC was providing to cover the cost of repairing the building.

DISCUSSION

CMHC has been working with the Co-operative Housing Federation of BC (CHFBC) on a solution for the envelope failure experienced by many of the non-profit housing co-operatives built in the 1980s. There are 104 (1,147 units) non-profit housing co-operatives (most of them serving families) in the City and a quarter are experiencing envelope failure. The negotiations between CMHC and CHFBC have been protracted as the cost of the repairs can be high, averaging $50,500/unit ($2,900,000/co-op), and the impact on affordability can be severe as 40-60% of the members of non-profit housing co-operatives cannot afford market rents and receive subsidies.

In 2004, CMHC and CHFBC, in partnership with the Province’s Home Owner Protection Office, agreed on a remediation program for envelope failure that involves low-interest financing from the Province and from CMHC and that will preserve the capacity of non-profit housing co-operatives to provide subsidies to low and modest income households.

Most of the financing that CMHC and the Province is to provide will be paid back after the current 35-year mortgages are paid off to ensure that the co-operatives’ viability is not jeopardized in the short term. As the 40 and 41 year leases do not provide a long enough term for the financing to be repaid, CMHC and CHFBC have asked that the City allow the leases terms to be extended now. A 60 year term will allow the debt to be repaid with a cushion to allow the co-operative the ability to finance standard repairs e.g. replacing the roof. CMHC and CHFBC advise that the co-operatives will be able to pay for the extensions but not until the current mortgages are paid off, and therefore are seeking the same arrangement that the City approved for Jubilee House:

a 20 year extension with additional lease rent to be due on the 45th anniversary of the extended lease with the additional annual rent to equal the land value of the property times the City’s cost of borrowing at the time prorated for the fact that the lease rent would cover 20 years but be paid for over the 15 years remaining in the lease. The additional rent payment could be either prepaid in full or paid annually.

Annual payments are the most likely option, and, using today’s numbers, the cost of paying the additional land rent would be in the range of $300 to $350/month/unit.

There are four co-operatives that are seeking extensions to their lease now:

Co-operative

Address

Current Lease Expiry

Maple Creek

2053 West 8th Ave

2026

Paloma

1580-1638 East 3rd Ave

2024

Rising Star

1556 East 6th Ave

2026

Vera

531-597 S.W. Marine Drive

2025

These co-operatives have all reached agreement with CMHC on the terms and conditions for the envelope repairs and are ready to proceed with the repairs. They have specifically asked for the lease extensions as CMHC will not advance the funds for the repairs until the lease extensions are approved.

It is reasonable to extend the lease term at the time the co-ops are renovated, as long as the City is financially kept whole. The repairs required for envelope failure are extensive and in almost cases the life of the buildings will be extended well beyond the 20 years left in the current lease term.

There are likely other non-profit housing co-operatives with 40 or 41 year leases who will seek lease extensions once they reach agreement with CMHC. In addition, there will likely be non-profit rental housing projects that will want lease extensions for the same reason. Consequently, it is recommended that Council authorize the Director of Legal Services to extend any lease of a non-market housing project with a 40 or 41 year term by 20 years on condition that additional lease rent be paid on the 45th anniversary of the extended lease with the additional rent to equal twenty times the market value of the land component of the property times the City’s cost of borrowing. The additional rent payment could be either prepaid in full or paid annually.

FINANCIAL IMPLICATIONS

The non-market housing on land leased from the City is held in the Property Endowment Fund. At the end of the lease terms the sites are expected to generate a reasonable rate of return to the PEF. The proposed extensions will allow CMHC to provide additional financing to cover repair costs while ensuring that the PEF is appropriately compensated.

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