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An examination of alternate financing for co-operative housing Pomeroy, Steve 1984

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AN EXAMINATION OF ALTERNATE FINANCING FOR CO-OPERATIVE HOUSING by STEPHEN PAUL POMEROY B.A., The U n i v e r s i t y of B r i t i s h Columbia, 1980 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in THE FACULTY OF GRADUATE STUDIES School of Community and Regional P l a n n i n g We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA September 1984 © Stephen Paul Pomeroy, 1984 In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. I t i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Department O f Commnni f y a n d R p g i n n a l P l a n n i n g The University of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 D a t e O c t o b e r 1 1 , 1 984 DE-6 (3/81) ABSTRACT The past decade has seen the emergence of an i n c r e a s i n g housing problem c h a r a c t e r i z e d by c o n s t r a i n t s on a c c e s s i b i l i t y to homeownership and a r e n t a l s e c t o r f r u s t r a t e d by p r o h i b i t i v e l y high development c o s t s . In ad d r e s s i n g t h i s problem t h i s t h e s i s proposes that c o - o p e r a t i v e tenure be pursued as an a f f o r d a b l e a l t e r n a t i v e to the t r a d i t i o n a l forms of ownership or r e n t a l tenure. The h i s t o r i c a l s t r u g g l e f o r l e g i t i m a t i o n of c o - o p e r a t i v e tenure in government housing p o l i c y has more r e c e n t l y r e s u r f a c e d with the F e d e r a l Government t h r e a t e n i n g to c u r t a i l funding to the Co-operative Housing Program. T h i s t h e s i s contends that the f u t u r e of the c o - o p e r a t i v e housing movement i n Canada l i e s i n the e x t r i c a t i o n of the movement from i t s c u r r e n t dependence of s u b s t a n t i a l government s u b s i d i e s . I t i s proposed that t h i s o b j e c t i v e be pursued through i n n o v a t i v e f i n a n c i n g methods. Data from a r e c e n t l y developed c o - o p e r a t i v e p r o j e c t have been u t i l i z e d i n base case s i m u l a t i o n s with v a r i o u s f i n a n c i n g techniques. Both P r i c e L e v e l Adjusted Mortgages and bond f i n a n c i n g were found to be e f f e c t i v e i n overcoming the p r o h i b i t i v e l y high housing charges n e c e s s i t a t e d f o r a m u l t i - f a m i l y c o - o p e r a t i v e housing development to be economically v i a b l e without government a s s i s t a n c e through d i r e c t grants or loans, or i n d i r e c t tax b e n e f i t s . The nature of these two f i n a n c i n g techniques would however s t i l l r e q u i r e government support i n the form of loan guarantees, bond i s s u e , and l e g i s l a t i v e amendments. Th i s t h e s i s concludes with the p r o p o s i t i o n that through the adoption of i n n o v a t i v e f i n a n c i n g the c o - o p e r a t i v e s e c t o r c o u l d move toward a p o s i t i o n of grea t e r independence. C o n c u r r e n t l y , government c o u l d u t i l i z e indexed mortgage f i n a n c i n g to i n c r e a s e c o s t e f f e c t i v e n e s s and t a r g e t t i n g of e x i s t i n g s o c i a l housing programs. Leaf 4 missing i n numbering V TABLE OF CONTENTS Page LIST OF TABLES . . i x LIST OF FIGURES x ACKNOWLEDGEMENTS x i Chapter 1 . INTRODUCTION 1 Problem Statement and O b j e c t i v e s 1 Co-ops and S o c i a l Housing P o l i c y 2 Co-ops as an Independent T h i r d Sector .... 4 THEORETICAL SIGNIFICANCE AND PRACTICAL IMPORTANCE OF RESEARCH 6 "The Housing Squeeze" 6 Recent Changes i n the Nature of Mortgage Finance 7 The I n s e c u r i t y of Ren t a l Tenure 9 The Co-operative A l t e r n a t i v e 10 Forms of Housing Co-operatives 11 Economic and S o c i a l B e n e f i t s of Housing Co-ops 13 C o n f l i c t i n g Obectives of the Sec. 56.1 Co-op Program 15 RELATIONSHIP TO EXISTING RESEARCH AND LITERATURE 17 v i A l t e r n a t e Mortgage Instruments: The T i l t Problem 17 A l t e r n a t i v e F i n a n c i n g f o r Co-operative Housing 18 Methodology 20 CHAPTER ORGANIZATION 21 2. HISTORY OF CO-OPERATIVE HOUSING IN CANADA 23 C r e d i t Unions: The C u t t i n g Edge 25 The E a r l y Housing C o - o p e r a t i v e s 27 Co-operative Housing: A S o l u t i o n to Emerging Urban Problems? 29 Co-ops: A Tenure f o r the Poor? 33 Willow Park and Other "Experimental Co-ops" 35 The Quebec Experience Provides I n s p i r a t i o n 37 "The Innovative Housing Fund" 38 1969: The T u r n i n g - p o i n t i n F e d e r a l Housing P o l i c y ! 39 The 1973 Amendments to the N a t i o n a l Housing Act 40 Co-ops No Longer a "Grass Root' Movement . 42 The 1978 N a t i o n a l Housing Act Amendments . 44 The S e c t i o n 56.1 Program 45 O p p o s i t i o n to the Co-op and Non P r o f i t Program 47 1983 Program E v a l u a t i o n 49 Lessons From H i s t o r y 52 3. REDISTRIBUTING CO-OP AFFORDABILITY THROUGH ALTERNATE MORTGAGE INSTRUMENTS 54 v i i R e l a t i v e Long Term A f f o r d a b i l i t y of Co-operative Housing 54 The Need f o r A l t e r n a t i v e Mortgage Instruments: The T i l t Problem 57 I n t r o d u c t i o n of New Mortgage Instruments . 61 Underw r i t i n g C r i t e r i a 62 D e f a u l t Risk 64 D e f a u l t Risk and A l t e r n a t e Mortgage Instruments 65 Under w r i t i n g Co-operative Housing 67 4. A REVIEW OF FINANCING ALTERNATES FOR CO-OPERATIVE HOUSING 71 PART ONE: ALTERNATIVE MORTGAGE INSTRUMENTS . 71 The Graduated PMT Mortgage (GPM) 71 GPM F i n a n c i n g of Co-op Housing 75 The P r i c e L e v e l Adjusted Mortgage (PLAM) . 77 Ob s t a c l e s to Adoption of PLAMS 79 Recent Support f o r PLAMS 80 F i n a n c i n g Co-ops with PLAMS 82 V a r i a b l e Rate Mortgage (VRM) 85 U t i l i t y of VRM's i n Co-op Housing 86 PART TWO: OTHER FINANCING ALTERNATIVES 87 Member E q u i t y 89 Member RHOSP's as a Source of Member Eq u i t y 90 P r e r e q u i s i t e s to Co-op Equity Through RHOSP's 91 P o t e n t i a l f o r Generation of E q u i t y Funds . 93 The Case f o r Member Eq u i t y 94 v i i i O b s t a c l e s to Member E q u i t y : The Condominium A l t e r n a t i v e 95 Bond F i n a n c i n g 97 Mechanics of Bond F i n a n c i n g 100 Types of Bond 101 I n s t i t u t i o n a l P r e r e q u i s i t e s to Adoption of Bond F i n a n c i n g 103 Tax Exempt Co-op Bonds 104 SUMMARY 105 5. DISCUSSION AND CONCLUSIONS OF RESEARCH 109 P r e f e r r e d A l t e r n a t i v e s 109 P o t e n t i a l f o r Bond F i n a n c i n g 110 Advantages of L i n k i n g Co-operative Tenure and Indexed F i n a n c i n g 111 The Long Term, Real Cost of Housing 111 Income Risk 113 C o n s i d e r a t i o n s A r i s i n g from Research 116 Co n c l u s i o n s : I m p l i c a t i o n s f o r Both Government and the Co-operative Housing Sector 118 REFERENCES 122 APPENDICES A. Base Case Data 128 B. Graduated Payment Mortgages 130 C. P r i c e L e v e l Adjusted Mortgage 138 D. Ex Poste S i m u l a t i o n : A m o r t i z a t i o n Tables f o r Standard and Indexed Mortgages 142 E. Examination of S e c t i o n 56.1 (NHA) Co-operative Program 144 ix LIST OF TABLES Table Page 2.1: CO-OP HOUSING IN CANADA BY PROVINCE (1983) .. 50 2.2: RENTAL DWELLING STARTS, SECTION 56.1 AND TOTAL CANADA, 197.9-81 51 2.3: DWELLING STARTS, INTENDED FOR THE RENTAL MARKET BY CMA 1980 AND 1981 51 3.1: EX-POST PROJECT SIMULATION: COMPARISON OF (3Br u n i t ) CO-OP OCCUPANCY CHARGES WITH TYPICAL MARKET RENTS FOR A CO-OPERATIVE DEVELOPED IN 1972 56 3.2: COMPARISON OF MORTGAGE PAYMENTS AND PAYMENT TO INCOME RATIOS UNDER ZERO AND 10% INFLATION UNDER LEVEL PAYMENT MORTGAGES 59 4.1: IMPACT OF VARIOUS INTEREST AND EQUITY LEVELS 89 4.2: CONTRIBUTIONS TO REGISTERED HOME OWNERSHIP SAVINGS PLANS BY INCOME LEVEL OF CONTRIBUTOR, 1980 92 4.3A: BOND YIELDS AND MORTGAGE INTEREST RATES, 1961-1981 98 4.3B: COMPARISON OF 5-YEAR CONVENTIONAL MORTGAGE RATES WITH SELECTED CANADIAN RATES 99 4.4: SUMMARY OF ALTERNATE FINANCING OPTIONS 106 4.5: SUMMARY OF ALTERNATE FINANCING OPTIONS (MORTGAGE PAYMENTS) 107 5.1: EX-POSTE PROJECT SIMULATION: COMPARISON OF OCCUPANCY CHARGES UNDER SLPM VERSUS PLAM FOR A CO-OPERATIVE DEVELOPED IN 1972 114 5.2: SUMMARY OF RELATIVE INDICES AND INCOME QUINTILES 1971-83 115 X LIST OF FIGURES Fi g u r e Page 3.1A: IMPACT OF INFLATION ON PAYMENTS 60 3.IB: IMPACT OF INFLATION ON PAYMENTS TO INCOME RATIO 60 4.1A: PAYMENT PROFILES: SLPM VERSUS GPM 72 4.1B: PRINCIPAL AMORTIZATION: SLPM VERSUS PURE GPM 72 x i ACKNOWLEDGEMENTS In undertaking t h i s r e s e a r c h , I wish to acknowledge the c o n s t r u c t i v e comments and encouragement of both my a d v i s o r s , Dr. David Hulchanski and Dr. Stan Hamilton. Invaluable a d v i c e was a l s o r e c e i v e d from many of my f e l l o w students, e s p e c i a l l y Derek Murphy; E l a i n D u v a l l and Columbia Housing; Bob N i c k l i n and Gary Hiscox of CMHC and Rob Dowler. I am indebted to CHF f o r p r o v i d i n g the working papers of i t s res e a r c h and a l s o to the Un i t e d Church of Canada f o r the Housing Bursary which s u s t a i n e d myself and my f a m i l y through my f i n a l year of s c h o o l . To my wife J i l l and daughter J e s s i e , thank you f o r j u s t being there when I needed e i t h e r encouragement or d i s t r a c t i o n , and f o r p e r s e v e r i n g through numerous r e p e t i t i o n s of 'I'm n e a r l y f i n i s h e d . ' — now I am! 1 CHAPTER 1 INTRODUCTION Problem Statement and O b j e c t i v e s The o b j e c t i v e of t h i s t h e s i s i s to demonstrate the p o t e n t i a l f o r c o - o p e r a t i v e housing as a v i a b l e a l t e r n a t e housing tenure to the t r a d i t i o n a l and predominant forms of r e n t a l and ownership. T h i s t h e s i s examines means of e s t a b l i s h i n g co-ops as a r e l a t i v e l y a f f o r d a b l e tenure while minimizing dependence upon f e d e r a l s u b s i d i e s . Through the l a s t decade a housing a f f o r d a b i l i t y problem has developed due to a widening gap between the economic c o s t of p r o c u r i n g r e n t a l housing and the r e t u r n to the i n v e s t o r (determined by market rent l e v e l s ) . D e c l i n i n g vacancy r a t e s and "unhealthy" housing markets have emerged. In a d d i t i o n to f r u s t r a t i n g the r e n t a l market, high c o s t s compounded by high f i n a n c i n g c o s t s c r e a t e an o b s t a c l e to ownership a c c e s s i b i l i t y . A n o n - p r o f i t c o - o p e r a t i v e i n which a p p r e c i a t i o n i n property value i s never c a p i t a l i z e d through r e s a l e can r e s u l t i n r e l a t i v e l y reasonable housing c o s t s over the long term. I d e a l l y , i f these long run b e n e f i t s c o u l d be brought forward, or a l t e r n a t i v e l y , i f c o s t s c o u l d be d e f e r r e d , c o - o p e r a t i v e tenure c o u l d p r o v i d e an a f f o r d a b l e housing a l t e r n a t i v e to ownership or r e n t a l tenure. I t i s i n t h i s context that a l t e r n a t i v e f i n a n c i n g instruments are 2 examined - as a means of r e d i s t r i b u t i n g c o s t s with the a b i l i t y to pay. The d e s i r e to develop an a l t e r n a t i v e to the co n v e n t i o n a l forms of tenure r e s u l t s from what may be termed the "housing squeeze": The i n c r e a s i n g i n a c c e s s i b i l i t y of homeownership and the i n s e c u r i t y of r e n t a l tenure. A number of means are a v a i l a b l e to a s s i s t i n a d d r e s s i n g t h i s i s s u e , i n c l u d i n g mortgage r a t e insurance, home-ownership a s s i s t a n c e programs, mortgage i n t e r e s t d e d u c t a b i l i t y , rent supplements and s h e l t e r allowances to name but a few; t h i s t h e s i s w i l l , however, focus only on c o - o p e r a t i v e tenure as one p o s s i b l e s o l u t i o n . Co-ops and S o c i a l Housing P o l i c y Co-op housing i n Canada has evolved s u b s t a n t i a l l y w i t h i n the context of F e d e r a l s o c i a l housing programs. There i s , however, no reason to c o n s i d e r co-ops only w i t h i n t h i s c o ntext. In general terms c o - o p e r a t i o n means "working together toward the same g o a l " (Oxford E n g l i s h D i c t i o n a r y ) Hence any group of households choosing to pool t h e i r c o l l e c t i v e resources to secure housing c o u l d be c o n s i d e r e d a c o - o p e r a t i v e . The furidemental q u e s t i o n i s 'of course, are co-ops c u r r e n t l y a t t r a c t i v e as a r e s u l t of some inherent a t t r i b u t e of t h i s form of tenure or simply as a r e s u l t of government s u b s i d i e s ? . 3 Recent surveys (Woods Gordon, 1980; CMHC, 1983) i n d i c a t e t hat co-op membership ( i n the c u r r e n t NHA sec. 56.1 Co-op Program) tends toward younger p r o f e s s i o n a l s who tend to be upwardly mobile, together with a number of low income f a m i l i e s on l i m i t e d income. Many of these upwardly mobile households got i n t o co-ops when they had lower incomes and were l e g i t i m a t e b e n e f i c i a r i e s of s o c i a l housing programs but now skew the income p r o f i l e of co-ops. The m o b i l i t y r a t e of co-op members i s low ( l e s s than 1.5% - Poulton, 1983). The important q u e s t i o n i s whether t h i s low m o b i l i t y r a t e i s merely economically motivated - t h a t i t s a good d e a l - or i s there a phi 1 i s o p h i c a l b a s i s f o r t h e i r p a r t i c i p a t i o n . In the l a r g e r m e t r o p o l i t a n c e n t e r s , where housing c o s t s i n the inner c i t y tend to be high, the a t t r a c t i o n of c e n t r a l l y l o c a t e d co-ops i s enhanced. Given a choice between homeownership in the o u t l y i n g suburbs,households may be w i l l i n g to accept a more modest, but new and c o n v e n i e n t l y l o c a t e d co-op a l t e r n a t i v e . Moreover, the p o t e n t i a l r e l a t i v e a f f o r d a b i l i t y of co-ops p l a c e s t h i s tenure i n a s i m i l a r p o s i t i o n to that of r e n t a l housing p r i o r to the removal of rent c o n t r o l s : minimizing housing expenditures i n c r e a s e s the amount of d i s p o s a b l e income f o r other purchases, an a t t r i b u t e which w i l l undoubtably make co-ops a t t r a c t i v e . C l e a r l y i t i s d i f f i c u l t to d i s c e r n the m o t i v a t i o n s of c u r r e n t co-op members? there i s no doubt that a l l of these reasons come i n t o p l a y . The i s s u e to be addressed i s how to 4 r e t a i n co-ops as an a f f o r d a b l e a l t e r n a t i v e without r e l i a n c e upon the s u b s t a n t i a l government s u b s i d i e s which c u r r e n t l y make t h i s tenure f e a s i b l e . Co-ops as an Independent T h i r d Sector The scope of t h i s t h e s i s , t h e r e f o r e , i s s u b s t a n t i a l l y o u t s i d e the context of a s o c i a l housing program. The focus i s on combining the long run b e n e f i t s a t t r i b u t a b l e to n o n - p r o f i t (or l i m i t e d e q u i t y ) c o - o p e r a t i v e e n t e r p r i s e with v a r i o u s f i n a n c i n g techniques. In order to determine the degree to which c o - o p e r a t i v e tenure can be v i a b l e i n the absence of d i r e c t government subsidy. While ostensivel-y t h i s t h e s i s examines the p o t e n t i a l of c o - o p e r a t i v e tenure, i t n e v e r t h e l e s s remains to d i s t i n q u i s h between independant co-ops i n the sense that they are procured o u t s i d e the context of a s o c i a l housing program; and u n s u b s i d i z e d co-ops i n the sense that the l a t t e r r e c e i v e no government subsidy whatsoever. As C u l l i n g w o r t h has r e c e n t l y noted, the i n s t i t u t i o n a l framework w i t h i n which housing i s provided i n Canada ". . . i s c h a r a c t e r i z e d by an emphasis on s e l e c t i v e i n t e r v e n t i o n i n the mortgage market and s t i m u l a t i o n of demand f o r p r i v a t e housing" ( C u l l i n g w o r t h , 1981, p, 4). I n s o f a r as homeowners (of a l l incomes) have c o n s i s t e n t l y been e l i g i b l e to r e c e i v e v a r i o u s d i r e c t (e.g., CHOSP $3,000 f i r s t home purchase grant) and i n d i r e c t s u b s i d i e s (e.g., RHOSP's and exemption 5 from c a p i t a l g a i n s ) , i t i s both e q u i t a b l e and p o l i t i c a l l y tenable to provide some s i m i l a r l e v e l of a s s i s t a n c e to co-op tenure. In short, an independent c o - o p e r a t i v e s e c t o r should be e l i g i b l e f o r a s s i s t a n c e e q u i t a b l e with that extended to the market s e c t o r . Even i f the co-op s e c t o r can a t t a i n independant v i a b i l i t y i t i s l i k e l y that some form of sponsorship w i l l be r e q u i r e d ; at the very l e a s t l e n d e r s are u n l i k e l y to- extend c r e d i t without NHA insurance. S i m i l a r l y , bond f i n a n c i n g would depend on government backing. Moreover, though the scope of t h i s a n a l y s i s l i e s s u b s t a n t i a l l y o u t s i d e the context of s o c i a l housing programs, t h i s does not preclude the i n t e g r a t i o n of a s o c i a l housing component w i t h i n these "independant c o - o p e r a t i v e s " . Despite t h e i r u n s u b s i d i z e d nature these co-ops w i l l n e v e r t h e l e s s s u b s c r i b e to the Rochdale P r i n c i p l e s of Co-operation and adopt broad s o c i a l o b j e c t i v e s . To t h i s end they would be w e l l s u i t e d to housing a p r o p o r t i o n of low income households a s s i s t e d through a rent supplement program. I n t u i t i v e l y , i t would be l e s s expensive f o r government to apply rent supplements in a n o n - p r o f i t u n i v e r s e than in the p r i v a t e r e n t a l market where the p o t e n t i a l e x i s t s f o r l a n d l o r d s to cream o f f p a r t of t h i s income t r a n s f e r (Hulchanski, 1984). Government support, f i n a n c i a l or otherwise, would be more r e a d i l y forthcoming when an i n t e g r a t e d co-op/rent 6 supplement model i s i n v o l v e d . T h e r e f o r e , the scope of t h i s t h e s i s i n c l u d e s the task of demonstrating how c o - o p e r a t i v e housing and a l t e r n a t i v e f i n a n c i n g can perpetuate s o c i a l mix, with higher income households s u b s t a n t i a l l y "paying t h e i r own way". THEORETICAL SIGNIFICANCE AND PRACTICAL IMPORTANCE OF RESEARCH "The Housing Squeeze" The d e s i r e to develop an a l t e r n a t i v e to the c o n v e n t i o n a l forms of tenure a r i s e s from the to the ongoing housing a f f o r d a b i 1 i t y debate. I t has been shown that over the l a s t decade housing p r i c e s and rent l e v e l s have r i s e n at a l e s s e r r a t e than incomes; consequently some commentators a s s e r t that there i s no housing problem, merely an income problem"(Goldberg, 1983; Smith, 1983). Others, however, note that while t h i s a s s e r t i o n holds at an aggregate l e v e l i t may not n e c c e s s a r i l y do so at a l o c a l i z e d , i n d i v i d u a l s c a l e (Doepner, 1979; Miron, 1981; Bourne, 1982). Bourne has demonstrated that by examining the components of housing c o s t i t becomes apparent that a f f o r d a b i l i t y i s not so c l e a r c u t . In p a r t i c u l a r the r e l a t i v e change i n mortgage i n t e r e s t i s h i g h l y c r i t i c a l (Bourne, O n t a r i o Geographer 1982). The c a r r y i n g c o s t , not the purchase p r i c e of housing, i s the c r i t i c a l element causing the d e t e r i o r a t i o n in access to homeownership (Cl a y t o n , 1982, p. 3). 7 Recent Changes i n The Nature of Mortgage Finance U n t i l r e c e n t l y the burden of mortgage payments, while heavy i n the e a r l y years, d e c l i n e d i n r e a l terms over the l i f e of the mortgage. With a f i x e d term and equal payment mortgage there was c e r t a i n t y as to debt over the f u l l a m o r t i z a t i o n p e r i o d ; homeownership was t r a d i t i o n a l l y seen as s e c u r i t y , a hedge a g a i n s t i n f l a t i o n and many r e n t e r s a s p i r e d to i t (Ungerman & Karn: Consumer Experience With Housing). The i n f l a t i o n a r y c l i m a t e of the 1970's r e s u l t e d in a major p o l i c y s h i f t on the pa r t of l e n d i n g i n s t i t u t i o n s , who had p r e v i o u s l y absorbed the l o s s e s r e s u l t i n g from repayment i n i n f l a t e d d o l l a r s . Shorter mortgage terms a d j u s t e d l e v e l s of payment up to r e a l terms. The burden of mortgage debt became r e c u r r e n t r a t h e r than d e c l i n i n g as lenders s h i f t e d i n t e r e s t r a t e r i s k to borrowers through these s h o r t e r terms. While perhaps s t i l l a hedge a g a i n s t i n f l a t i o n , ownership no longer r e p r e s e n t s s e c u r i t y as there i s no c e r t a i n t y about f u t u r e l e v e l s of debt s e r v i c e . C layton (1982) suggests that young f a m i l i e s s t i l l p r e f e r , or a s p i r e , to homeownership,however, he notes that survey r e s u l t s i n d i c a t e "investment i s not the prime m o t i v a t i o n -d e s i r e f o r more space and d e s i r e to own ( s e c u r i t y ) were found to be the most p r e v a l e n t reasons f o r home purchase" (Cl a y t o n , 1982). These o b s e r v a t i o n s suggest then, that 8 c o - o p e r a t i v e tenure might e q u a l l y meet the a s p i r a t i o n s of these young f a m i l i e s . Through the bouyant 60's and 70's e x p e c t a t i o n s played a dominant r o l e i n the economy, and i n part c o n t r i b u t e d to the i n f l a t i o n of that p e r i o d . In the r e c e s s i o n a r y environment of the 80's e x p e c t a t i o n s once again are important, only now they are shrouded i n pessimism. Under c u r r e n t economic c o n d i t i o n s c e r t a i n t y as to f u t u r e incomes i s q u e s t i o n a b l e . While the p r o p o r t i o n of homeowners has i n c r e a s e d from 60% i n 1971 to 63% i n 1981 (Goldberg, 1983) t h i s has been f a c i l i t a t e d by the i n t r o d u c t i o n of condominiums (many of which being smaller apartment u n i t s which were r e l a t i v e l y cheaper than s i n g l e f a m i l y d w e l l i n g s ) ; and i n c r e a s e d p a r t i c i p a t i o n of women i n the labour f o r c e . T h i s p r o v i d e d many households with the two incomes necessary to s u s t a i n the c o s t of ownership. C u r r e n t l y r i s i n g l e v e l s of unemployment may d i m i n i s h the o p p o r t u n i t i e s f o r a second income, and hence access to ownership. R e a l i z a t i o n that incomes may stagnate or even d e c l i n e ( i n r e a l terms) leads households to search f o r ways to curb expenditures rather than r e l y i n g on i n c r e a s i n g income. "In t h i s c o n n ection, the p o s s i b i l i t y of other forms of housing tenure in a d d i t i o n to c o n v e n t i o n a l ownership or r e n t a l may become the s u b j e c t of i n c r e a s e d i n t e r e s t . The t h i r d or n o n - p r o f i t s e c t o r may become a p a r t i c u l a r l y a t t r a c t i v e v e h i c l e f o r c u r b i n g the u n c e r t a i n t y inherent in s h e l t e r c o s t s over the next two decades and beyond. It has the advantage of homeownership s e c u r i t y and p r i v a t e r e n t a l f l e x i b i l i t y together with the prospects of containment of s e r v i c i n g and u t i l i t y charges. One may t h e r e f o r e perhaps see an upsurge i n c o - o p e r a t i v e s 9 and n o n - p r o f i t housing c o r p o r a t i o n s over the 1981-2001 p e r i o d as i n f l a t i o n a r y psychology becomes endemic" (Brown, 1981, The Demographic Future) The I n s e c u r i t y of Rental Tenure The other s i d e of the "housing squeeze" problem i s the i n s e c u r i t y of r e n t a l tenure. The i n c i d e n c e of a f f o r d a b i 1 i t y problems among re n t e r households, using the core housing need model, f a l l s almost e n t i r e l y i n the lowest two income q u i n t i l e s (CMHC, 1983). I t i s amongst these households that the negative impact of i n f l a t i o n i s f e l t most s t r o n g l y . They are o f t e n on e i t h e r f i x e d incomes (pension, Gain, etc.) or occupied i n u n s k i l l e d , low p a i d v o c a t i o n s , and incomes tend to l a g behind the g e n e r a l l y r i s i n g l e v e l s in other q u i n t i l e s . Rental accommodation has become r e l a t i v e l y more a f f o r d a b l e ( r e n t a l component of CPI rose only 54.8% between 1971-81) (Goldberg, 1983, p. 12) yet these households s t i l l have a problem which appears to have become worse. The problem c o n f r o n t i n g lower income r e n t e r households i s p a r t i c u l a r l y exacerbated by p r e v a i l i n g c o n d i t i o n s w i t h i n the r e n t a l market. Namely the p r o h i b i t i v e l y high development c o s t s ( p e r s i s t i n g p r i m a r i l y as a r e s u l t of a h i g h l y i n e l a s t i c land market) and consequent t i g h t markets c h a r a c t e r i s t i c of many Canadian urban c e n t e r s . S i m i l a r l y , upward pressure on r e n t s i s a l s o impacting many middle income r e n t e r s . Rent l e v e l s are beginning to demand a higher p r o p o r t i o n of income (the r e a l 10 c o s t of r e n t i n g i s i n c r e a s i n g ) yet ownership may s t i l l be u n a t t a i n a b l e or a l t e r n a t i v e l y u n d e s i r a b l e . These households are caught i n the housing squeeze. The Co-operative A l t e r n a t i v e The f a c t that western s o c i e t y g e n e r a l l y a s p i r e s to home ownership has been w e l l documented. T h i s i s e s p e c i a l l y true i n North America where the home ownership e t h i c i s c u l t u r a l l y e nshrined (Stryuk, 1977). G e n e r a l l y i t has been a s s e r t e d that the s o c i e t a l b e n e f i t s of encouraging home ownership i n c l u d e : s u p e r i o r maintenance; higher l e v e l s of saving and hence investment; neighbourhood s t a b i l i t y ; and p o l i t i c a l p a r t i c i p a t i o n . These a s s e r t i o n s are, however, e s s e n t i a l l y r h e t o r i c and are l a c k i n g i n con c r e t e s u b s t a n t i a t i o n . "In the hi g h e s t forums of our country a p l e t h o r a of s o c i a l b e n e f i t s have been claime d f o r homeownership and as f a r as we know the a s s e r t i o n s have not been c h a l l e n g e d . " (Stryuk, 1977, p. 4) The u n d e r l y i n g p o l i t i c a l r a t i o n a l e f o r the support of homeownership i s undoubtably the p e r c e p t i o n of a t r a d i t i o n a l and p e r s i s t a n t a s p i r a t i o n f o r homeownership. Less w e l l documented perhaps i s that c o - o p e r a t i v e tenure can e q u a l l y l a y c l a i m to these b e n e f i t s and may t h e r e f o r e s a t i s f y the a s p i r a t i o n s of many f a m i l i e s . In p a r t i c u l a r , i n a c o - o p e r a t i v e model where housing c o s t s 11 (based on h i s t o r i c development c o s t s ) are minimized, p r o p e n s i t y to save ( i n v e s t ) i s enhanced; a cohesive sense of community can develop; and s i n c e members are a l s o owners, a l b e i t c o l l e c t i v e l y , they tend to take good care of t h e i r d w e l l i n g s (Murray Report, 1964). Given the nature of c o - o p e r a t i v e tenure, combining c h a r a c t e r i s t i c s of both ownership and r e n t a l i t i s an a p p r o p r i a t e a l t e r n a t i v e to these t r a d i t i o n a l tenures. Co-operative s o c i e t i e s c u r r e n t l y e x i s t i n many forms though perhaps those best known in Canada are wheat po o l s , Co-op food s t o r e s and c r e d i t unions. These s o c i e t i e s g e n e r a l l y base t h e i r p o l i c i e s on the Rochdale P r i n c i p l e s , a f t e r the founding c o - o p e r a t i v e i n Rochdale, England in 1844. These p r i n c i p l e s were f o r m a l i z e d i n 1966 by the I n t e r n a t i o n a l Co-operative A l l i a n c e and are: 1) Open and v o l u n t a r y membership; 2) Democratic c o n t r o l ; 3) L i m i t e d i n t e r e s t on shares; 4) Return of s u r p l u s to members; 5) Co-operative education; 6) Co-operation between c o - o p e r a t i v e s . The h i s t o r y and e v o l u t i o n of c o - o p e r a t i v e s i s more f u l l y d i s c u s s e d i n Chapter 2. Forms of Housing Co - o p e r a t i v e s With respect to housing, a number of d i f f e r e n t models e x i s t , i n c l u d i n g , b u i l d i n g co-ops, c o n t i n u i n g co-ops and l i m i t e d e q u i t y co-ops. B u i l d i n g c o - o p e r a t i v e s i n v o l v e c o l l e c t i v e purchase of land and m a t e r i a l s with c o n s t r u c t i o n 1 2 through mutual s e l f help. T h i s form of co-op had i t s o r i g i n in the Maritimes, p a r t i c u l a r l y i n r u r a l areas where high or seasonal unemployment was conducive to such s e l f h elp ventures. G e n e r a l l y these i n v o l v e d s i n g l e detatched d w e l l i n g s . T i t l e was h e l d by the a s s o c i a t i o n but each f a m i l y ' s payments would be c r e d i t e d to t h e i r share of the mortgage. Upon retirement of t h e i r p r o p o r t i o n of the debt a fam i l y would a c q u i r e f r e e t i t l e . Conversely, i n c o n t i n u i n g co-ops t i t l e i s never turned over to i n d i v i d u a l occupants. A member of the a s s o c i a t i o n holds shares which e n t i t l e him to a p r o p r i e t o r y l e a s e . The l i m i t e d e q u i t y model v a r i e s only i n that the member i s r e q u i r e d to provide some e q u i t y i n the form of a share purchase. T h i s share may be indexed (to the CPI f o r example) thereby p r o v i d i n g a " f a i r " r e t u r n upon withdrawl ( i n the sense that i n r e a l terms the share value i s unchanged). Unless otherwise s p e c i f i e d the term co-op or c o - o p e r a t i v e s h a l l be used i n the context of c o n t i n u i n g c o - o p e r a t i v e s . T h i s model i n v o l v e s c o l l e c t i v e ownership with members h o l d i n g shares i n the n o n - p r o f i t a s s o c i a t i o n . . I n d i v i d u a l households n e i t h e r own t h e i r u n i t nor acq u i r e any e q u i t y . V o l u n t a r y membership and democratic c o n t r o l ensure that the members manage t h e i r own housing. They are both tenant and l a n d l o r d and, t h e r e f o r e , have s e c u r i t y of tenure su b j e c t only to the r u l e s of the c o r p o r a t i o n (which i n turn are d e m o c r a t i c a l l y d r a f t e d ) . 1 3 Economic and S o c i a l B e n e f i t s of Housing Co-ops Housing co-ops f a l l w i t h i n the purview of the v a r i o u s p r o v i n c i a l s t a t u t e s d e a l i n g with c o - o p e r a t i v e a s s o c i a t i o n s i n g e n e r a l . As such they are p e r m i t t e d to be p r o f i t a b l e e n t e r p r i s e s . The P r i n c i p l e s of Co-operation s i m i l a r l y p rovide f o r a " l i m i t e d i n t e r e s t on shares and r e t u r n of s u r p l u s to members". For housing co-ops to remain a f f o r d a b l e they should i d e a l l y be operated on a n o n - p r o f i t b a s i s with housing charges l i m i t e d to a c t u a l c o s t s not to what the market w i l l bear, as i s g e n e r a l l y the case in the p r i v a t e market (Haire, 1975, p. 25). In accordance with the p r i n c i p l e of r e t u r n i n g any s u r p l u s to members, households r e c e i v e t h i s s u r p l u s " i n k i n d . " Rather than r e c e i v e a d i v i d e n d , they r e c e i v e a c o s t saving - they b e n e f i t by paying lower re n t . The b e n e f i t s of co-ops are then both economic and s o c i a l : "In an economic sense the co-op i s a business e n t e r p r i s e , owned by those who use i t s s e r v i c e s , c o n t r o l of which r e s t s e q u a l l y with a l l the members, and the su r p l u s earnings of which are shared by the members i n p r o p o r t i o n to the use they make of the s e r v i c e s . " (Van Dyke, 1977) The essense of the c o n t i n u i n g c o - o p e r a t i v e i s i t s non-market and t h e r e f o r e n o n - i n f l a t i o n a r y nature. Housing in t h i s context i s viewed as an consumption good, a b a s i c human need and r i g h t ; i t s value as an investment good i s dis c o u n t e d f o r present b e n e f i t - namely more economical and 1 4 a f f o r d a b l e housing. In c o n t r a s t , in almost a l l housing programs housing has been used as a v e h i c l e f o r the achievement of other o b j e c t i v e s , most f r e q u e n t l y employment and economic s t a b i l i t y . "Housing pr o d u c t i o n has been a q u a n t i t a t i v e o p e r a t i o n q u a l i t a t i v e l y devoid of broad s o c i a l o b j e c t i v e s and economically i n a c c e s s i b l e to many Canadians". (Murray Report, 1964) It i s not i m p l i e d here that co-ops can i n some way av o i d the problems of mortgage r a t e f l u c t a t i o n and renewal, c e r t a i n l y they cannot. I t i s the non i n f l a t i o n a r y aspect together with member p a r t i c i p a t i o n or sweat e q u i t y which enhances a f f o r d a b i l i t y . Moreover, they do tend to e l i m i n a t e short term f l u c t u a t i o n s i n the p r i c e of housing s e r v i c e s , or at l e a s t have the p o t e n t i a l to do so; r e q u i r e no e q u i t y (except i n a l i m i t e d e q u i t y model); and have low t r a n s a c t i o n c o s t s . There i s a l s o some p o t e n t i a l to secure fav o u r a b l e mortgage r a t e s due to the more permanent c h a r a c t e r of co-ops ( N a t i o n a l Commission on Urban Problems, Washington, 1971). In the broader context, simply by c o n t r i b u t i n g to supply co-ops i n i t i a t e a range of e x t e r n a l i t i e s . Some of the acclaimed b e n e f i t s of c o - o p e r a t i v e tenure may to some i n d i v i d u a l s be co n s i d e r e d d i s b e n e f i t s ; f o r example p a r t i c i p a t i o n on committees. Notwithstanding t h i s p o s s i b i l i t y , f o l l o w i n g i s a summary of the b e n e f i t s , or i f you w i l l , s e r v i c e s p r o v i d e d by housing c o - o p e r a t i v e s : 1 5 Non-market and n o n - p r o f i t , t h e r e f o r e no c a p i t a l i z a t i o n of a p p r e c i a t i o n ; S e l f managed - S e c u r i t y of tenure; Sense of community; C o l l e c t i v e ownership; Opportunity to l e a r n ; No t r a n s a c t i o n c o s t ; Retain m o b i l i t y ; No p e r s o n a l covenant - i n c o r p o r a t e d as n o n - p r o f i t assoc i a t i o n ; Surplus returned through cheaper housing. In a d d i t i o n to these i n t e r n a l b e n e f i t s c o - o p e r a t i v e housing c o n t r i b u t e s to a more general s o c i e t a l b e n e f i t s or e x t e r n a l i t i e s . C o n f l i c t i n g O b j e c t i v e s of the Sec. 56.1 Co-op Program The c u r r e n t c o - o p e r a t i v e housing program (NHA Sec. 56.1 Co-operative and N o n - p r o f i t Housing Program) has r e c e n t l y been subject to c o n s i d e r a b l e c r i t i c i s m f o r housing "high income" households at the taxpayers expense. 1 These c r i t i c i s m s , however, f a i l to acknowledge the s u b s t a n t i a l s u b s i d i e s to homeowners and r e n t a l developers which, f o r the most p a r t , are i n d i r e c t and consequently l e s s s u b j e c t to s c r u t i n y (see Dowler (1983) f o r f u r t h e r d i s c u s s i o n of 1 Poulton, 1983; Vancouver Sun E d i t o r i a l s Sept 20, Nov 26, 30, 1983. 1 6 housing r e l a t e d tax e x p e n d i t u r e s ) . Within the context of a s o c i a l housing program, however, the c r i t i c i s m s d i r e c t e d at the c o - o p e r a t i v e program are to some extent j u s t i f i e d and emanate from the program o b j e c t i v e s themselves. The p r i n c i p a l o b j e c t i v e of the program i s the p r o v i s i o n of modest a f f o r d a b l e housing a p p r o p r i a t e to the needs of low and moderate income households (CMHC G u i d e l i n e s and Procedures Manual v o l . 9 sec. 3.1.2). The c r i t i c i s m that co-ops are housing middle and upper income households r e s u l t s from a l e s s e x p l i c i t o b j e c t i v e - to encourage mixed income groups (56.1 E v a l p. 53). The r a t i o n a l e f o r t h i s l a t t e r o b j e c t i v e i s to be found i n the report of The H e l l y e r Task Force on Housing and Urban Development (1969) and was r e i t e r a t e d i n Denis and F i s h (1973). The task f o r c e i d e n t i f i e d the p u b l i c housing p r o j e c t s of the day as "ghettoes of the poor" and observered that c l u s t e r i n g too many problem f a m i l i e s without adequate s o c i a l s e r v i c e s would simply perpetuate t h e i r problems and thus heighten neighbourhood o p p o s i t i o n . S o c i a l science l i t e r a t u r e a l s o p r o v i d e s e x t e n s i v e evidence on the negative impact of c l u s t e r i n g low income households together (Altman, 1975; Michelson, 1976; Porteous, 1977). Hence i n an attempt to "d e s t i g m a t i z e " p u b l i c housing the concept of s o c i a l mix was adopted as a p o l i c y o b j e c t i v e . To a v o i d the p r e v i o u s image of p u b l i c housing t h i s p o l i c y i s implemented w i t h i n a p r o j e c t although i t has a l s o been e f f e c t i v e l y u t i l i z e d on a 1 7 broader community b a s i s . The problem with t h i s concept i s that once i t i s o p e r a t i o n a l i z e d i n a housing program the program i n e v i t a b l e s u b s i d i z e s other than j u s t the lowest income " t a r g e t group" (a d i f f e r e n t and incompatible o b j e c t i v e ) . Notwithstanding the f a c t that many other housing programs e x i s t which e q u a l l y s u b s i d i z e other than the most needy (e.g., CHOSP; RHOSP; c a p i t a l gains exemption; MURB; each j u s t i f i e d on the b a s i s of meeting some other o b j e c t i v e - employment, economic s t a b a l i z a t i o n e t c . ) i t i s i n e v i t a b l e that the F e d e r a l government has a strong i n c e n t i v e to t i g h t e n the f i s c a l r e i n s on expensive s o c i a l housing programs, p a r t i c u l a r l y when these programs appear to s u b s i d i z e other than those i d e n t i f i e d i n the program obj e c t i v e s . 2 RELATIONSHIP TO EXISTING RESEARCH AND LITERATURE A l t e r n a t e Mortgage Instruments; The T i l t Problem While c o n s i d e r a b l e r e s e a r c h has been undertaken on the s u b j e c t of a l t e r n a t i v e mortgage instruments (Pesando, Kesselman, Gau) t h i s has been t o t a l l y i n the context of home ownership, and focuses p r i m a r i l y on the " t i l t problem." T h i s r e f e r s to the high access cost of ownership and 2 S o c i a l mix, while c l e a r l y an u n d e r l y i n g r a t i o n a l e i s , however, not an e x p l i c i t e o b j e c t i v e of the sec. 56.1 program. 1 8 mortgage q u a l i f y i n g c r i t e r i a which c o n s i d e r only c u r r e n t r a t h e r than p o t e n t i a l or "permanent" income. E s s e n t i a l l y , the o b j e c t i v e of a l t e r n a t i v e mortgage instruments (AMI's) i s to s h i f t the " t i l t " of cost and income. G e n e r a l l y t h i s i s achieved by lowering p r i n c i p a l and i n t e r e s t payments i n the e a r l y years when incomes are lower and making higher payments in l a t e r years, when nominal income i s hi g h e r . A l t e r n a t i v e F i n a n c i n g f o r Co-operative Housing T h i s t i l t problem i s e q u a l l y r e l e v a n t i n the context of c o - o p e r a t i v e housing. In f a c t the s t r u c t u r e of the cu r r e n t co-op program i m p l i c i t l y acknowledges t h i s i n ann u a l l y reducing the l e v e l of mortgage a s s i s t a n c e beginning in the t h i r d year of occupancy. However, r e s e a r c h on the a p p l i c a t i o n of AMI's i n c o - o p e r a t i v e housing i s only j u s t beginning to emerge. The M i n i s t e r r e s p o n s i b l e f o r CMHC, the Hon. Romeo LeBlanc, i n an address to the Annual Meeting of the Co-operative Housing Foundation (CHF), May 1983, urged the co-op s e c t o r to "explore ways i n which (the s e c t o r and CMHC) co u l d p o s s i b l y produce more co-op u n i t s w i t h i n the c u r r e n t l y a v a i l a b l e funding l i m i t s " (CHF, 1983). In response the CHF i n i t i a t e d a study of a l t e r n a t i v e f i n a n c i n g arrangements. The CHF r e s e a r c h program, which i s s t i l l ongoing, e v a l u a t e d s e v e r a l d i f f e r e n t schemes, a l l w i t h i n the context of the cu r r e n t program s t r u c t u r e . The op t i o n s e v a l u a t e d were: 19 1. Shortening the a m o r t i z a t i o n p e r i o d ; 2. U t i l i z i n g GPM mortgages; 3. Opting f o r a c a p i t a l g r a n t / s h e l t e r allowance approach; 4. Modifying the rent geared to income s c a l e ; 5. O b t a i n i n g member e q u i t y through RHOSP's; 6. P r i v a t e e q u i t y through co-op bonds; 7. U t i l i z i n g other AMI ' S . (CHF, 1983) Thus f a r , the CHF study has found that while none of the reviewed o p t i o n s seemed to ho l d much promise by i t s e l f , v a r i o u s combinations or h y b r i d approaches warrant f u r t h e r examination. CMHC has r e c e n t l y p u b l i s h e d i t s own e v a l u a t i o n of the S e c t i o n 56.1 Co-operative and N o n - p r o f i t Housing Programs. From the c o n c l u s i o n s of the study i t appears that CMHC has s e r i o u s r e s e r v a t i o n s about the c u r r e n t l e v e l s of t a r g e t i n g to low income households. Although, as p r e v i o u s l y noted, the program o b j e c t i v e s are c o n f l i c t i n g , i t now appears that the p r i o r i t y w i l l be on a s s i s t i n g low and moderate income households. In s h o r t , s o c i a l mix w i l l only be achieved i n p r o j e c t s where higher income households pay f u l l economic r e n t . Due to the l a r g e gap between the economic c o s t of development and the l e v e l of market ren t s in most Canadian c i t i e s i t i s extremely u n l i k e l y t h at these higher income f a m i l i e s w i l l be a t t r a c t e d to co-ops i n the absense of some subsidy, at l e a s t s u f f i c i e n t to b r i n g r e n t s down to market l e v e l s . 20 T h i s t h e s i s b u i l d s on the cu r r e n t CHF study and addresses the c u r r e n t dilemma c o n f r o n t i n g CMHC. By undertaking an a n a l y s i s o u t s i d e the context of a s o c i a l housing program i t w i l l not be c o n s t r a i n e d by e i t h e r p o l i t i c a l or p h i l o s o p h i c a l l i m i t a t i o n s as i s the case with both CMHC and CHF. In the c o n c l u s i o n s of t h i s study the relevance and i m p l i c a t i o n s of the f i n d i n g s to both of these agencies w i l l be d i s c u s s e d . Methodology In examining a l t e r n a t i v e f i n a n c i n g o p t i o n s a number of s i m u l a t i o n s are run using a 'base case' c o - o p e r a t i v e housing p r o j e c t . ( D e t a i l s of the base case are presented i n Appendix A ) . T h i s i s a r e c e n t l y completed townhouse c o - o p e r a t i v e development i n suburban Vancouver. A suburban p r o j e c t has been chosen as i t c o n s i d e r e d to be more r e l e v a n t to other Canadian c i t i e s than a more c e n t r a l l y l o c a t e d p r o j e c t - due to Vancouver's r e l a t i v e l y high land and development c o s t s . Using a c t u a l land and c o n s t r u c t i o n c o s t s (no m u n i c i p a l land writedown was involved) w i l l r e s u l t i n a c t u a l economic development c o s t s . A p p l y i n g each f i n a n c i n g a l t e r n a t i v e , both independently and i n combination, w i l l r e v e a l the degree to which each op t i o n c o n t r i b u t e s to reducing r e q u i r e d rents to market or below market l e v e l s . The p r o j e c t i o n w i l l be run over a 35 year p e r i o d . T h i s same 21 base case w i l l be used i n i l l u s t r a t i n g how the c u r r e n t co-op program works (see Appendix E ) . The d e t a i l s of the base case have been pr o v i d e d by Columbia Housing A d v i s o r y A s s o c i a t i o n , a n o n - p r o f i t company developing co-op housing in Vancouver. Another important source of primary data i s the CHF which has provided i t s working papers r e l a t e d to the a l t e r n a t i v e f i n a n c i n g study. CHAPTER ORGANIZATION The examination of a l t e r n a t i v e f i n a n c i n g f o r co-ops i s c o n t e x t u r a l i z e d by f i r s t reviewing the h i s t o r i c a l development of housing c o - o p e r a t i v e s i n Canada. As Chapter 2 r e v e a l s , housing i s the only c o - o p e r a t i v e endeavour which has become adopted by the government. As long as co-ops remain a s o c i a l housing program the f u t u r e and s t a b i l i t y of the movement i s s u s c e p t i b l e to p o l i t i c a l whim. T h i s t h e s i s i s premised on the c o n t e n t i o n that c o - o p e r a t i v e tenure i s i n h e r e n t l y a f f o r d a b l e not so j u s t as a r e s u l t of government subsidy. T h i s i s s u b s t a n t i a t e d i n Chapter 3. T h i s chapter a l s o i n t r o d u c e s the a l t e r n a t i v e f i n a n c i n g instruments and examines c r i t e r i a f o r u n d e r w r i t i n g such loans. Chapter 4 examines p o s s i b l e a l t e r n a t i v e f i n a n c i n g o p tions with Chapter 5 summarizing the most e f f e c t i v e a l t e r n a t i v e o p t i o n s . In a d d i t i o n t h i s f i n a l chapter d i s c u s s e s the i m p l i c a t i o n s of t h i s research and presents some c o n c l u d i n g comments on the f u t u r e of an independent c o - o p e r t i v e s e c t o r . T e c h n i c a l appendices f o l l o w ; these present the d e t a i l s of the base case, a m o r t i z a t i o n schedule f o r the a l t e r n a t i v e instruments, and an e x p l a n a t i o n of the e x i s t i s e c t i o n 56.1 (NHA) Co-operative Housing Program. 23 CHAPTER 2 HISTORY OF CO-OPERATIVE HOUSING IN CANADA Dreyfuss has observed t h a t : though emerging as a s o c i a l reform, and an i n t e g r a l p a r t of i t s h i s t o r i c a l p e r i o d , the c o - o p e r a t i v e movement has seldom been d i s c u s s e d in the context of s o c i a l and h i s t o r i c a l development. Thus, " c o - o p e r a t i v e s have lacked a sense of c o n t i n u i t y and a p o s i t i o n i n w r i t t e n h i s t o r y " (Dreyfuss, 1973, p. 2). While t h i s chapter does not purport to f i l l t h i s l i t e r a r y v o i d i t i s intended to review the emergence of co-ops i n i t i a l l y as a part of broard s o c i a l reform movement and more r e c e n t l y as a v e h i c l e f o r s o c i a l housing p o l i c y . The t i t l e of a book w r i t t e n i n 1954: The  Co-operative Road to Abundance: The A l t e r n a t i v e to  Monopolism and Communism i s i n d i c a t i v e of the p e r c e i v e d r o l e of c o - o p e r a t i v e e n t e r p r i s e d u r i n g the s o c i a l t r a n s i t i o n consequent of the r a p i d i n d u s t r i a l i z a t i o n and u r b a n i z a t i o n at the turn of the century (Bowen, 1954). The c o - o p e r a t i v e approach i s premised upon both p r a c t i c a l , or economic, and s o c i a l m o t i v a t i o n s . In a marxian i n t e r p r e t a t i o n , i t i s a r e a c t i o n a g a i n s t economic domination by the owners of the means of p r o d u c t i o n . Moreover, i t was born out of the i n t e r n a l i n c o n s i s t a n c y of the f r e e e n t e r p r i s e system. Despite Adam Smith's t r e a t i s e to the c o n t r a r y , the 24 " i n v i s i b l e hand" was unable to maintain harmony w i t h i n the system. In the e a r l y part of the century v a r i o u s s o c i a l i s t s , a n a r c h i s t s and trade u n i o n i s t s a c t i v e l y promoted c o - o p e r a t i v e s as "the only way to combat the scourge of c a p i t a l i s t i c c y c l i c a l d e p r e s s i o n s " (Dreyfuss, 1973, p. 3). While f a i l i n g to e s t a b l i s h a s t r o n g f o o t h o l d at a p o l i t i c a l l e v e l , the proponents of c o - o p e r a t i v e e n t e r p r i s e i n Europe were at l e a s t s u c c e s s f u l i n e s t a b l i s h i n g numerous c o - o p e r a t i v e s t o r e s and other ventures, guided by the p r i n c i p l e s set out by the Rochdale pioneers in 1844. Co-operative housing i s only one m a n i f e s t a t i o n of the c o - o p e r a t i v e method of economic e n t e r p r i s e . The concept was imported to Canada by immigrants f l e e i n g the t u r m o i l o c c u r i n g i n an i n d u s t r i a l i z i n g Europe in the l a t t e r p art of the n i n e t e e n t h c e n t u r y . Canada was i n f a c t an i d e a l breeding ground f o r what was e s s e n t i a l l y a reform movement. The adverse p h y s i c a l c o n d i t i o n s c o n f r o n t i n g the pioneers engendered mutual support and c o - o p e r a t i o n as a means of s u r v i v a l . "This n e i g h b o u r l i n e s s , though not u n i v e r s a l , was common and l e d n a t u r a l l y i n t o more f o r m a l i z e d kinds of c o - o p e r a t i o n " (MacPherson, 1979, p. 4). The d i v e r s e background of the immigrants i n c l u d e d those from the E n g l i s h midlands, the working c l a s s d i s t r i c t s of southern S c o t l a n d , F i n l a n d and the U k r a i n , a l l of whom had been p r e v i o u s l y exposed to the c o - o p e r a t i v e form of e n t e r p r i s e . In t h e i r r e s p e c t i v e homelands the co-op s t o r e had been a p a r t of 25 working c l a s s c u l t u r e (MacPherson, 1979, p. 7). C r e d i t Unions: The C u t t i n g Edge The e a r l y attempts at c o - o p e r a t i v e e n t e r p r i s e were very much a grass root movement. The c o - o p e r a t i v e approach emerged i n Canada in the form of c r e d i t unions, or peoples banks. These were a community response to d i s s a t i s f a c t i o n with f r e e e n t e r p r i s e , p a r t i c u l a r l y a r e a c t i o n a g a i n s t usurious money l e n d e r s . Disgusted with the p l i g h t of the Quebec poor, Alphonse D e j a r d i n , the founding f a t h e r of c r e d i t unions in North America, b e l i e v e d that teaching and e n a b l i n g the poor to save and borrow at reasonable r a t e s was fundemental to improving t h e i r c o n d i t i o n s . Thus the f i r s t " C aisse P o p u l a i r e " opened from D e j a r d i n ' s home in L e v i s , Quebec i n 1900. Under D e j a r d i n ' s i n f l u e n c e C r e d i t unions spread through Quebec and i n t o O n t a r i o . The Quebec Co-operative Syndicates Act, adopted in 1906 f o l l o w i n g a p e r s i s t e n t lobby by D e j a r d i n , i n t r o d u c e d l i m i t e d l i a b i l i t y f o r the o f f i c e r s of c r e d i t unions i n that p r o v i n c e (Kenyon, 1976). T h i s was s i g n i f i c a n t to the spread of the c r e d i t union concept. Meanwhile in O n t a r i o , George Keen an immigrant E n g l i s h u n i o n i s t was i n v o l v e d i n i n i t i a t i n g a number of consumer c o - o p e r a t i v e s . In 1908, Keen and D e j a r d i n with the a s s i s t a n c e of the Governer General, E a r l Grey (An honorary p r e s i d e n t of the I n t e r n a t i o n a l Co-operative A l l i a n c e ) , 26 attempted to get l e g i s l a t i o n through f e d e r a l p a r l i a m e n t . While a b i l l passed the lower house i t was defeated by a s i n g l e vote i n the senate. C r e d i t unions were t r u l y f i l l i n g a v o i d s i n c e c h a r t e r e d banks were l e g i s l a t i v e l y intended p r i m a r i l y to serve commerce, not as general savings and loan i n s t i t u t i o n s . The o p p o s i t i o n to the b i l l however emanated from the R e t a i l Merchants A s s o c i a t i o n who i n s i s t e d that consumer c o - o p e r a t i v e s represented i l l e g i t i m a t e t r a d i n g (Kenyon, 1976). Subsequent attempts to get l e g i s l a t i v e r e c o g n i t i o n and support f o r c o - o p e r a t i v e a s s o c i a t i o n s met with s i m i l a r o p p o s i t i o n u n t i l a f t e r the F i r s t World War. Support at the grass r o o t s l e v e l had l i t t l e impact i n a p o l i t i c a l process i n which t r a d i t i o n a l business i n t e r e s t s dominated. On the p r a i r i e s , a number of producer and consumer c o - o p e r a t i v e s o c i e t i e s emerged, s e r v i n g the needs of a p r i m a r i l y r u r a l , a g r a r i a n r e g i o n . As a r e s u l t of the broad foundation of consumer i n t e r e s t s , i n c o n t r a s t with the narrower concerns of the producer groups, the development of a cohesive movement was not without c o n f l i c t . D espite some c o n f l i c t the movement continued to grow, enhanced by the c o n d i t i o n s imposed by the Depression. "Indeed in a time when t r a d i t i o n a l p o l i t i c a l methods and i n d i v i d u a l a c t i o n seemed i n s u f f i c i e n t , c o - o p e r a t i v e s o l u t i o n s appeared to be one way i n which people c o u l d help themselves and t h e i r communities." (MacPherson, 1979, p. 12) 27 During and a f t e r the depression co-op e n t e r p r i s e expanded from i t s a g r a r i a n o r i g i n to i n c l u d e a co-op r e f i n e r y , c r e d i t unions, l i f e insurance programs and the manufacture of farm implements. In s h o r t , the Depression gave an impetus to the c o - o p e r a t i v e movement, and a c o - o p e r a t i v e philosophy became i n c r e a s i n g l y apparent. " F i r s t i t s t r e s s e d democratic s o l u t i o n s to contemporary problems, suggesting that making the economic system democratic was as important f o r the t w e n t i e t h century as the s t r u g g l e f o r p o l i t i c a l democracy had been in the n i n e t e e n t h . Second, c o - o p e r a t i v e philosophy placed great r e l i a n c e on the accumulated wisdom and m o r a l i t y of o r d i n a r y people. In the c r i s i s of the depression when others sought comfort behind l e a d e r s and i n c r e a s e d a u t h o r i t a r i a n i s m , most co - o p e r a t o r s s t r e s s e d change and development through greater.involvement by a l l c i t i z e n s . T h i r d , c o - o p e r a t o r s advocated the d e c e n t r a l i z a t i o n of economic and s o c i a l power so that l o c a l communities co u l d c o n t r o l t h e i r d e s t i n y and i n d i v i d u a l s c o u l d a v o i d the a l i e n a t i o n common i n modern s o c i e t y . f i n a l l y , the movement supported the e x t e n s i v e p r a c t i c a l education of o r d i n a r y p e o p l e . . . i n the n e g l e c t e d f i e l d of a d u l t educat i o n . " (MacPherson, 1979, p. 14) The p r i n c i p a l d i f f e r e n c e between the P r a i r i e and O n t a r i o was the p o l i t i c a l success r e s u l t i n g from a more r u r a l p o p u l a t i o n with broad p o l i t i c a l support w i t h i n p r a i r i e communities g e n e r a l l y f a m i l i a r with c o - o p e r a t i v e e n t e r p r i s e . The E a r l y Housing Co-operatives While c o - o p e r a t i v e e n t e r p r i s e was a v i a b l e f o r c e i n much of Canada f o l l o w i n g the Depression, i t s a d a p t a t i o n to housing was slow. The development of housing through 28 consumer c o - o p e r a t i v e s was hindered both by the very magnitude of the endeavour as w e l l as a g e n e r a l p e r c e p t i o n that homeownership was an a s p i r a t i o n to be pursued on an i n d i v i d u a l b a s i s . The f i r s t c o - o p e r a t i v e housing undertakings, i n both the Maritimes and Quebec, upheld the t r a d i t i o n a l a s p i r a t i o n f o r independantly owned s i n g l e detatched d w e l l i n g s . Co-operation was a means of f u l f i l l i n g the homeownership g o a l . Housing l e g i s l a t i o n passed i n Nova S c o t i a (1932) made p r o v i s i o n f o r d i r e c t government l e n d i n g to b u i l d i n g c o - o p e r a t i v e s i n that province (Roach, 1973). Under the guidance of Father James Thompkins, St F r a n c i s X a v i e r U n i v e r s i t y founded an e x t e n t i o n department to a c t i v e l y promote c o - o p e r a t i v e methods. Such methods were e s p e c i a l l y s u i t e d to poverty s t r i c k e n farmers and fishermen whose seasonal employment l e n t i t s e l f to such mutual endeavour (Dreyfuss, 1973). T h i s philosophy was manifest i n the formation of a b u i l d i n g c o - o p e r a t i v e and development of 11 houses - T o m k i n s v i l i e , N.S. was completed in 1938, and named a f t e r the eminent s o c i a l reformer and a d u l t educator (Laidlaw, 1977). C o n c u r r e n t l y , emerging from the c r e d i t union movement, in Quebec a c o - o p e r a t i v e o r g a n i z a t i o n was i n c o r p o r a t e d f o r the purpose of b u i l d i n g homes, the f i r s t development being 15 houses i n Asbestos (1941). Although spreading i n t o other p a r t s of Canada in the 1950's, b u i l d i n g co-ops continued to be evident only i n s m a l l e r communities 29 where n e i g h b o u r l i n e s s l e d more n a t u r a l l y to c o - o p e r a t i v e s e l f h elp endeavours. I t i s n o t a b l e , however, that these e a r l y c o - o p e r a t i v e housing ventures, while employing an i n n o v a t i v e procurement technique (sweat e q u i t y ) , n e v e r t h e l e s s remained l o y a l to the s i n g l e detatched d w e l l i n g . As such these co-ops were not so much a s o c i a l reform as merely an a l t e r n a t i v e means to a t r a d i t i o n a l a s p i r a t i o n . Co-operative Housing: A S o l u t i o n to Emerging Urban Problems? The c o - o p e r a t i v e approach, i n i t s p r e v a i l i n g form ( b u i l d i n g co-ops), was found to be i n a p p r o p r i a t e and i n e f f e c t u a l i n a d d r e s s i n g the emerging housing problems of the growing urban c e n t e r s . P r i m a r i l y r e s p o n s i b l e were the high land c o s t s , high employment (thereby l e a v i n g no time for -" sweat e q u i t y s e l f h e l p endeavour) and the growth of a l a r g e s c a l e b u i l d i n g i n d u s t r y . At the time of r a p i d postwar growth, the l i b e r a l i d e ology embracing i n d i v i d u a l i s m , e q u a l i t y of o p p o r t u n i t y , and p r i v a t e ownership, was a strong s o c i a l f o r c e . Amidst the p r e v a i l i n g paradigm of "growthmania" (Daly, 1973, p. 150) i n which continued growth was unquestioned, and seen as the panacea of s o c i e t i e s problems - p r i m a r i l y poverty - there was l i t t l e popular support f o r c o - o p e r a t i v e endeavour. The needs which community or c o - o p e r a t i v e e n t e r p r i s e meet are g e n e r a l l y the most b a s i c - h o u s i n g , h e a l t h c a r e , food, t r a n s p o r t a t i o n and 30 f i n a n c i a l s e r v i c e s , "People w i l l only work f o r an economic need that i s very r e a l to them" (Thompson, 1977, p. 16). L i b e r a l i s m , at l e a s t i n i t i a l l y , appeared to be s u f f i c i e n t l y endowed to a l l e v i a t e any concerns about the attainment of these b a s i c needs. While t h i s system f u n c t i o n e d f o r those with means, the p e r s i s t e n c e of urban problems soon revealed however, that t h i s was not the case f o r the l e s s f o r t u n a t e poor. Co-operative proponents acknowledged the u n s u i t a b i l i t y of b u i l d i n g co-ops i n t h i s c o n t e x t , yet r e a l i s e d the need to f r e e the growing tenant p o p u l a t i o n ( e s p e c i a l l y the poor) from the c o n t r o l s and c o n s t r a i n t s inherent in r e n t a l tenure. The concept of c o n t i n u i n g c o - o p e r a t i v e s began to germinate, i n f l u e n c e d p r i m a r i l y by a s i m i l a r reform movement i n Scandinavia (Laidlaw, 1977, p. 43) The Scandinavian model had evolved i n the years f o l l o w i n g the f i r s t world war when housing c o n d i t i o n s were poor and d e f l a t i o n rampant. State housing p o l i c y emphasized the s t i m u l a t i o n of housing c o n s t r u c t i o n by p r i v a t e bodies and n e c e s s a r i l y p e r m i t t e d dramatic r i s e s i n rent l e v e l s . At a time when wages were d e c l i n i n g t h i s i n e v i t a b l y c r e a t e d severe problems of tenant i n s e c u r i t y and prompted the formation of tenant a s s o c i a t i o n s committed to "the p r o d u c t i o n of good housing f o r members at c o s t p r i c e " The f i r s t was founded i n Stockholm i n 1923 (Lundewall, p. 4: i n H a b i t a t , 1975). These housing a s s o c i a t i o n s had long been 31 preceeded by r u r a l b u i l d i n g co-ops ( s i n c e 1872). The new urban concept however, i n t r o d u c e d what are now known as " c o n t i n u i n g co-ops - both developed and operated on an ongoing b a s i s by the members. The membership c o l l e c t i v e l y owned the b u i l d i n g , but i n d i v i d u a l l y a c q u i r e d no e q u i t y . A d d i t i o n a l l y , t h i s new approach combined the two o p e r a t i o n s of saving and b u i l d i n g i n a s i n g l e a s s o c i a t i o n . In t h i s way, member savings helped to f i n a n c e and perpetuate the growth of c o n t i n u i n g c o - o p e r a t i v e a s s o c i a t i o n s , thereby c o n t r i b u t i n g to the success of the co-op s e c t o r i n e s t a b l i s h i n g i t s e l f as a r e c o g n i z e d s o c i a l f o r c e independent of government. The C u r t i s committee (On Postwar R e c o n s t r u c t i o n i n Canada, 1944), a n t i c i p a t i n g the housing needs which would be e v i d e n t i n the forthcoming decade, i n c l u d e d i n t h e i r review an examination of c o - o p e r a t i v e housing. In a d d i t i o n to p r a i s i n g the s e l f h e l p b u i l d i n g co-ops of Nova S c o t i a , the committee o u t l i n e d the success of Denmark and Sweden in e x t e n s i v e m u l t i f a m i l y house b u i l d i n g on a m o d i f i e d c o - o p e r a t i v e b a s i s . The committee noted t h a t : " I t i s important that proper a t t e n t i o n be given to the r o l e of c o - o p e r a t i v e a s s o c i a t i o n s w i t h i n the housing f i e l d and that t h e i r nature should be understood." ( C u r t i s , 1944, p. 266) Furthermore, the committee recommended amendments to the N a t i o n a l Housing Act which would s p e c i f i c a l l y r e c o g n i z e the p o t e n t i a l c o s t savings and s o c i a l b e n e f i t s of c o - o p e r a t i v e 32 housing a s s o c i a t i o n s and extend to them the p r e f e r e n t i a l r a t e l e n d i n g c u r r e n t l y a v a i l a b l e to l o c a l housing a u t h o r i t i e s and l i m i t e d d i v i d e n d c o r p o r a t i o n s (Dennis and F i s h , 1972, p. 250). These recommendations of the committee were ignored and co-op housing f a i l e d to become an i n t e g r a l part of post-war housing i n Canada. The adoption of the c o n t i n u i n g housing c o - o p e r a t i v e i n Canada was slow and, i n i t i a l l y , unpromising. The Scandinavian model r e q u i r i n g s u b s t a n t i a l a d a p t a t i o n to s u i t Canadian experience and our s o c i a l environment. In the p r e v a i l i n g i n s t i t u t i o n a l s e t t i n g i n which the s i n g l e detatched d w e l l i n g remained the paramount a s p i r a t i o n of most Canadians, co-op housing, (a r e v o l u t i o n a r y form as w e l l as tenure) was c o n s i d e r e d "un-Canadian" (Laidlaw, 1977, p. 44). There was l i t t l e understanding of the concept and, not s u r p r i s i n g l y , most sources of f i n a n c i n g would not r i s k anything so unconventional. U n l i k e the Scandinavian model where b u i l d i n g and savings f u n c t i o n s were undertaken w i t h i n a s i n g l e a s s o c i a t i o n , the emerging Canadian model was one of a s i n g l e purpose housing a s s o c i a t i o n , r e l i a n t on c o n v e n t i o n a l sources of mortgage f i n a n c e . Moreover, the s e v e r i t y of the urban housing problem was l e s s than that experienced i n S c a n d i n a v i a . Thus, the support f o r a sweeping reform movement was absent, d e s p i t e support at the grass r o o t s l e v e l through the e x i s t i n g consumer and producer co-ops. 33 Co-ops: A Tenure fo r the Poor? Co-operative housing i n Canada was, then, part of a s o c i a l reform only to the extent that p r e v a i l i n g s o c i e t a l i n s t i t u t i o n s d i d not c a t e r to the needs of those unable to f u n c t i o n w i t h i n the system. U n l i k e the Scandinavian movement, in Canada i t d i d not permeate the vast middle c l a s s . The c o - o p e r a t i v e housing approach was seen only as a means of a l l e v i a t i n g the poor from an i n d i s c r i m i n a t e c a p i t a l i s t system which c a t e r e d only to those p o s s e s s i n g ' e f f e c t i v e demand*. A n o n - p r o f i t system was a p e r f e c t s o l u t i o n to those having few investment p r o s p e c t s anyway. As a movement focussed upon the poor, co-op housing was immediatly rendered i n e f f e c t u a l by the very poverty of i t s c o n s t i t u e n t s . In the absence of widespread p h i l a n t r o h p y the proponents of c o - o p e r a t i v e housing sought f i n a n c i a l a s s i s t a n c e from government. U n l i k e other c o - o p e r a t i v e e n t e r p r i s e , which c o u l d begin at a small s c a l e and grow from w i t h i n , a housing co-op i s i n h e r e n t l y l a r g e and r e q u i r e s s u b s t a n t i a l f i n a n c i a l support from the o u t s e t . P r i v a t e f i n a n c i n g was absent due to the r i s k i n v o l v e d i n f i n a n c i n g such an expensive but unproven venture. Thus the C o - o p e r a t i v e Union of Canada (the n a t i o n a l o r g a n i z a t i o n f o r the E n g l i s h Canadian movement, formed in the 1920's) appealed to the f e d e r a l government for f i n a n c i a l suppport. Between 1948 and 1969 numerous b r i e f s and r e p o r t s were 34 presented to the f e d e r a l government advocating the economic and s o c i a l b e n e f i t s of c o - o p e r a t i v e housing and c a l l i n g f o r the p r o v i s i o n of p r e f e r r e d r a t e loans to c o - o p e r a t i v e s o c i e t i e s . Among these p r e s e n t a t i o n s were the recommendations of the CUC, (1948, 1962) the Murray Report (1964) and the H e l l y e r Task Force (1969). Although the NHA was amended i n 1953 to provide f o r the insurance of loans by approved len d e r s to c o - o p e r a t i v e s , i t was not u n t i l 1969 that s e c t i o n 15 of the Act was amended to make co-ops e l i g i b l e f o r the low i n t e r e s t loans a l r e a d y p r o v i d e d to l o c a l housing agencies and l i m i t e d d i v i d e n d c o r p o r a t i o n s . Co-ops were, however, s t i l l not f o r m a l l y r e c o g n i z e d under a separate s e c t i o n of the Act, as proposed 25 years e a r l i e r by the C u r t i s Committee. Th e r e f o r e even i n 1969 housing c o - o p e r a t i v e s c o u l d be developed only by 'bending the r u l e s ' ( i . e . , the p r o v i s i o n s of the N a t i o n a l Housing Act, Dennis and F i s h , 1973). I t appears that the s e n i o r bureaucracy of the CMHC was opposed to any form of housing tenure other than home ownership or other market o r i e n t e d s o l u t i o n s (Haire, 1975, p. 43). T h i s u n d e r l y i n g b i a s a g a i n s t co-ops i s r e f l e c t e d i n the i n c o n s i s t a n c y with which the subject was approached. On the one hand, the p o l i c y b i a s was c l e a r l y i n favour of homeownership, yet e x t e n t i o n of p r e f e r r e d r a t e loans was r e j e c t e d on the b a s i s that c o - o p e r a t i v e s "represented a form of home ownership and t h i s was the primary a t t r a c t i o n of 35 members" (Dennis, 1973, p. 251). The p r i n c i p a l concern of the government appears to have been that the p r o v i s i o n of such loans to an e n t i t y which was c o n s i d e r e d tantamount to homeownership would set a precedent f o r s i m i l a r treatment to c o n v e n t i o n a l homeowners, and, thereby, undermine the e n t i r e i n t e r e s t r a t e s t r u c t u r e of the economy (Dennis, p. 251). Willow Park and Other "Experimental Co-ops" The f i r s t s u c c e s s f u l endeavour to develop a c o n t i n u i n g co-op commenced i n 1960. A c o a l i t i o n of v a r i o u s f e d e r a t e d producer and consumer c o - o p e r a t i v e s , together with a labour union founded the Co-operative Housing A s s o c i a t i o n of Manitoba i n 1960. T h e i r purpose was the promotion and c o n s t r u c t i o n of housing co-ops. A f t e r a lengthy s t r u g g l e with C i t y C o u n c i l the a s s o c i a t i o n a c q u i r e d , and had s e r v i c e d , a p a r c e l of l a n d i n Winnipeg. They were able t o secure a loan commitment at the r e g u l a r r a t e from a " r e l u c t a n t CMHC" (Laidlaw, 1977). Willow Park, the f i r s t c o n t i n u i n g housing c o - o p e r a t i v e was ready f o r i t s f i r s t occupants i n the summer of 1965. The co-op went through c o n s i d e r a b l e growing p a i n s , encountering i n i t i a l l y a s o f t housing market which f o r c e d i t to operate with vacancies through the f i r s t year (Laidlaw, p. 45). Supported i n these e a r l y years by the founding p r o v i n c i a l a s s o c i a t i o n , Willow Park e v e n t u a l l y went on to achieve s e l f s u f f i c i e n c y , and i s now a t h r i v i n g c o - o p e r a t i v e e n t e r p r i s e i n c l u d i n g some 426 36 d w e l l i n g s , daycare, and a small shopping c e n t e r . Concurrent with the attempts to develop c o n t i n u i n g housing co-ops, the co-op approach was employed in the development of student housing. Having employed c o - o p e r a t i v e methods i n the s a l e of textbooks s i n c e the turn of the century (Harvard, Texas, Guelph; Dreyfuss, 1973), students once again turned to c o - o p e r a t i v e e n t e r p r i s e to meet b a s i c housing needs in the e a r l y post-war years. In Toronto and Kingston students took over e x i s t i n g apartment houses and operated them on a c o - o p e r a t i v e b a s i s . Then in the 1960's students were able to take advantage of amendments to the NHA (sec. 43 p u b l i c housing, 1964; Dreyfuss, 1973). Co-op r e s i d e n c e s were c o n s t r u c t e d at Toronto and Ottawa. Apparently students were more worthy of government support than the broader co-op movement attempting to a s s i s t the poor. The major c o n t r i b u t i o n of the student co-ops was the involvement of the Canadian Union of Student with the Canadian Labour Congress and the C o - o p e r a t i v e Union of Canada in e s t a b l i s h i n g the C o - o p e r a t i v e Housing Foundation of Canada in 1968. The CHF became the n a t i o n a l o r g a n i z a t i o n f o r housing c o - o p e r a t i v e s , and c o n t i n u e d to lobby government o f f i c i a l s f o r e x p l i c i t e r e c o g n i t i o n of c o - o p e r a t i v e housing i n the N a t i o n a l Housing A c t . 37 The Quebec Experience Provides I n s p i r a t i o n Meanwhile, as p r e v i o u s l y noted, Quebec had progressed along a separate but p a r a l l e l path i n terms of i t s own c o - o p e r a t i v e movement. T h i s continued to be true i n the 1960's with Quebec e s t a b l i s h i n g a c o - o p e r a t i v e housing program with the support of the p r o v i n c i a l government i n 1968. La F e d e r a t i o n Coop-Habitat du Quebec had an impressive s t a r t , producing 1,432 u n i t s i n 13 p r o j e c t s i n i t s f i r s t three years. Notwithstanding the f a c t t h at i t was not d i r e c t l y i n v o l v e d with "the E n g l i s h Canadian movement", Quebec may w e l l have pr o v i d e d the i n s p i r a t i o n which was i n i t i a l l y l a c k i n g from the Willow Park experience. The r a p i d expansion of the Quebec Co-op f e d e r a t i o n exceeded i t s f i n a n c i a l c a p a c i t y , e v e n t u a l l y l e a d i n g to i t s demise through bankruptcy i n 1971. The f e d e r a t i o n had undertaken more p r o j e c t s than i t c o u l d reasonably develop and monitor. However, with the 1973 amendments to the N a t i o n a l Housing Act the Quebec movement once again had a funding mechanism to develop co-ops. In a d d i t i o n , P r o v i n c i a l a s s i s t a n c e was r e - i n s t a t e d ; with these two sources of funding, the Quebec movement became the most a c t i v e i n Canada ( i n excess of 300 p r o j e c t s by 1982, a two f o l d i n c r e a s e s i n c e 1979). The Quebec experience i s an e x c e l l e n t example of the p o t e n t i a l to produce a s i g n i f i c a n t stock of non-market housing i n a r e l a t i v e l y s h o r t p e r o i d . T h i s was a t t a i n e d , however through 38 strong government support. As an i n t e g r a t e d s o c i a l housing program, i t o f f e r s l i t t l e to the d i s c u s s i o n of independent t h i r d s e c t o r co-ops, except perhaps to suggest that strong support i s a necessary impetus to e s t a b l i s h both a base and momentum f o r an independent s e c t o r . "The Innovative Housing Fund" Perhaps i n s p i r e d by the e a r l y Quebec co-ops, ambitious c o - o p e r a t o r s were, i n the l a t e 1960's, s u c c e s s f u l in i n i t i a t i n g p r o j e c t s i n Vancouver, Abbotsford, Calgary, Windsor and Toronto. The Ab b o t s f o r d p r o j e c t , being r e l a t i v e l y modest i n s i z e , was sponsored by a l o c a l c r e d i t union. In Windsor, f i n a n c i n g was provided by a labour union, as r e f l e c t e d i n the p r o j e c t name - S o l i d a r i t y Tower. Both of these p r o j e c t s were t h e r e f o r e i n i t i a t e d and c o n s t r u c t e d independent of government support. The three other p r o j e c t s which were a l s o i n the plann i n g phase, together with two others i n Winnipeg and London were " b l e s s e d " by the announcement in 1970 of the $200 m i l l i o n F e d e r a l government Innovative Housing Fund. Through t h i s fund these co-ops were p r o v i d e d f i n a n c i n g at p r e f e r e d r a t e s . The development process was n e v e r t h e l e s s slowed down by b u r e a u c r a t i c c o n f l i c t s eminating from the f a c t t h a t no co-op program e x i s t e d . CMHC was reduced to "bending" the p r o v i s i o n s of the Act i n an ad hoc manner (Laidlaw, 1977, p. 47). 39 These "experimental" p r o j e c t s were e v e n t u a l l y completed with a t o t a l of 11 p r o j e c t s e v e n t u a l l y completed under t h i s i n f o r m a l process and i n a l l cases proved to be v i a b l e and a f f o r d a b l e . In one, the a s s o c i a t i o n wanted to p rovide housing to f a m i l i e s who would otherwise be i n p u b l i c housing. Thus CMHC agreed to experiment with rents based on income and rent supplements to maintain p r o j e c t v i a b i l i t y . Once these p r o j e c t s were completed and o p e r a t i n g the CHF was i n a much stronger p o s i t i o n to lobby the government f o r e x p l i c i t r e c o g n i t i o n i n the A c t . Through the co-op i n i t i a t e d experiment with "rent geared to income" supplements and v o l u n t a r y s u r c h a r g i n g of higher income members in other p r o j e c t s , the co-ops demonstated the philosophy of s o c i a l r e s p o n s i b i l i t y t r a d i t i o n a l l y i n t e g r a l to the c o - o p e r a t i v e movement. I t became i n c r e a s i n g evident that the c o - o p e r a t i v e concept, i n c o r p o r a t i n g a n o n - p r o f i t model, was an extremely amenable v e h i c l e f o r a s o c i a l housing program. 1969; The Turning Point i n F e d e r a l Housing P o l i c y The success of these "experimental" p r o j e c t s in housing low income households was p a r t i c u l a r l y t i m e l y i n that the H e l l y e r report had r e c e n t l y been c r i t i c a l of the q u a l i t y of l i f e and p h y s i c a l adequacy of the e x i s t i n g p u b l i c housing programs which tended to g h e t t o - i z e "problem f a m i l i e s " (Dennis, 1972). In a d d i t i o n to the i n c r e a s i n g 40 p u b l i c o p p o s i t i o n to p u b l i c housing p r o j e c t s , the program was i n c u r r i n g r a p i d l y r i s i n g o p e r a t i n g l o s s e s . Together these f a c t o r s "spurred the f e d e r a l government to c o n s i d e r a l t e r n a t i v e techniques of p r o v i d i n g low income housing (CMHC, 1983). The p o t e n t i a l of co-ops to f a c i l i t a t e i n t e g r a t e d , or " s o c i a l mix" housing was r e a d i l y apparent. C a p i t a l i z i n g on t h e i r recent success and the i n c r e a s i n g d i s i l l u s i o n m e n t with the product of e x i s t i n g p u b l i c housing programs, the c o - o p e r a t i v e movement, through the CHF, prepared a number of submissions f o r both CMHC and the newly c r e a t e d M i n i s t r y of State f o r Urban A f f a i r s . These b r i e f s r e i t e r a t e d the advantages of the c o - o p e r a t i v e and approach and made s p e c i f i c p r o p o s a l s f o r an NHA amendment which would e x p l i c i t l y recognize and f a c i l i t a t e f u r t h e r co-op development. The 1973 Amendments to the N a t i o n a l Housing Act The b i l l of amendments to the NHA introduced by the M i n i s t e r of State f o r Urban A f f a i r s was, however, i n t e r u p t e d by the d i s s o l u t i o n of parliament i n the f a l l of 1972. The r e - e l e c t i o n of the L i b e r a l p a r t y i n a m i n o r i t y government p o s i t i o n p r o v i d e d support f o r the CHF through the New Democratic Party who h e l d the balance of power. I t was w e l l known that the NDP had roo t s i n the labour movement and a strong i n t e r e s t i n a l l forms of s o c i a l l e g i s l a t i o n , thereby 41 ensuring that new housing l e g i s l a t i o n would be t r e a t e d e x p e d i e n t l y by the new government (Rose, 1981, p. 55). As a n t i c i p a t e d , an ex t e n s i v e b i l l of amendments was presented to the house i n e a r l y 1973. The major t h r u s t of the new l e g i s l a t i o n was to i n c l u d e n o n - p r o f i t s and c o - o p e r a t i v e s i n the p r o v i s i o n s p r e v i o u s l y extended only to l o c a l housing agencies and l i m i t e d d i v i d e n d c o r p o r a t i o n s . The amendments added s e c t i o n s 15.1 ( n o n - p r o f i t ) and 34.18 ( c o - o p e r a t i v e s ) and p r o v i d e d f o r : 100% d i r e c t loans at p r e f e r r e d r a t e s ; 10% c a p i t a l g r a n t s , or a l t e r n a t i v e l y , land purchase and leaseback; s t a r t - u p funds to proponent resource groups; and rent supplements to low income households (through sec. 44) Thus the co-op s e c t o r had f i n a l l y succeeded i n g a i n i n g e x p l i c i t r e c o g n i t i o n i n the A c t . The v i c t o r y of the CHF i n g a i n i n g these amendments to the Act was even more s i g n i f i c a n t given the continued r e l u c t a n c e of CMHC o f f i c i a l s to accept c o - o p e r a t i v e housing. While the p r o v i s i o n of low rent housing had p r e v i o u s l y been l e f t to p r i v a t e i n t e r e s t s , through l i m i t e d d i v i d e n d c o r p o r a t i o n s , the t h r u s t i n 1973 was d e l i v e r y through p u b l i c s p i r i t e d , community based o r g a n i z a t i o n s . Moreover, CMHC's o v e r a l l s o c i a l housing o b j e c t i v e s were a l s o amended with the a d d i t i o n o f : "... and by encouraging the establishment of n o n - p r o f i t and c o - o p e r a t i v e housing o p e r a t i o n s " (CMHC 42 Program E v a l u a t i o n , 1983). The e x p l i c i t c o - o p e r a t i v e program p r o v i d e d the necessary momentum for the r a p i d growth of c o - o p e r a t i v e housing. The co-op (sec. 34.18) and n o n - p r o f i t (sec. 15.1) programs together developing some 32,484 housing u n i t s (and 17,491 h o s t e l beds - based on u n i t commitments) through the d u r a t i o n of the program (1973-78). Perhaps a more important outcome of the program was the development of an e x t e n s i v e i n f r a s t r u c t u r e of n o n - p r o f i t resource groups which provided the e x p e r t i s e with which to implement the program. While sec. 37.1 of the Act p r o v i d e d s t a r t - u p funds f o r s p e c i f i c p r o j e c t s , the Community Resource O r g a n i z a t i o n Program (CROP) a l s o p r o v i d e d funding to a s s i s t i n the establishment of ongoing resource o r g a n i z a t i o n s . An important f u n c t i o n p r o v i d e d by these groups i s the education of co-op members for the management of an ongoing business e n t e r p r i s e - a housing p r o j e c t . Co-ops No Longer a 'Grass Root' Movement While these resource groups were i n s t r u m e n t a l i n the program take-up and d e l i v e r y , the combination of a f e d e r a l s o c i a l housing program with l o c a l implementation through branch o f f i c e s (CMHC) and resource groups, d e v i a t e d from the t r a d i t i o n a l grass r o o t s development of the c o - o p e r a t i v e movement. The program approach represented a top down process whereby co-ops were o f t e n t i m e s "imposed" on a 43 community, r a t h e r than growing out of the community i n response to b a s i c need, as had been the case with the e a r l y consumer co-ops. C e r t a i n l y , in some cases, p a r t i c u l a r l y r e h a b i l i t a t i o n p r o j e c t s , co-ops evolved through the ded i c a t e d e f f o r t s of e x i s t i n g r e s i d e n t s . B u i l d i n g s threatened by d e m o l i t i o n or s a l e by absentee l a n d l o r d s were ac q u i r e d , with CMHC a s s i s t a n c e , by tenants who formed a co - o p e r a t i v e a s s o c i a t i o n " i n s i t u " . In a d d i t i o n , while the expansion of the co-op s e c t o r may have lacked the t r a d i t i o n a l bottom-up approach, the resource groups g e n e r a l l y had strong t i e s to the "movement" and i n s t i l l e d the c o - o p e r a t i v e philosophy i n many of the members through the e d u c a t i o n a l p o r t i o n of the development p r o c e s s . The sec. 34.18 co-op program continued i n i t s o r i g i n a l form f o r f i v e y e a r s . During t h i s time both the CMHC and the CHF monitored t h i s nascent form of tenure c l o s e l y . The CHF acted as a l a i s o n with CMHC, prov i d e d t r a i n i n g programs ac r o s s the country, and a s s i s t e d any co-ops who ran i n t o d i f f i c u l t y o p e r a t i n g as a business e n t e r p r i s e . CMHC, while c o n t i n u i n g to pursue " s o l u t i o n s " to the housing problem through market programs (e.g., ARP, AHOP) appeared to be gen u i n l y impressed with the i n i t i a t i v e shown by the n o n - p r o f i t and co-op groups. However, the design of the programs (15.1 & 34.18) was such that problems arose f i r s t with the i n c r e a s i n g c a p i t a l c o s t s to CMHC and second, i n c r e a s i n g f e d e r a l / p r o v i n c i a l t e n s i o n s with respect 44 to cost s h a r i n g of rent supplements under sec. 44 (CMHC, 1983). C o n c u r r e n t l y , the CHF were i n c r e a s i n g l y concerned with the c o n s t r a i n t on housing f a m i l i e s with incomes f a r below the average. The low i n t e r e s t loans (8%) were not s u f f i c i e n t l y low to permit p e n e t r a t i o n to the lower income l e v e l s , even with the rent supplememts. In the s p r i n g of 1977 the M i n i s t e r requested a review of s o c i a l housing p o l i c y . The 1978 N a t i o n a l Housing Act Amendments In the subsequent review, the CHF was very a c t i v e i n r e p r e s e n t i n g the p o s i t i o n of the co-op s e c t o r . CMHC planned a r e - o r g a n i z a t i o n of s o c i a l housing programs, i n c l u d i n g the co-op and n o n - p r o f i t programs. The CHF was i n s t r u m e n t a l i n d e s i g n i n g a new program (sec. 56.1); succeeding i n reducing f r o n t end f i n a n c i n g c o s t s ; and g a i n i n g r e c o g n i t i o n of the co-ops a b i l i t y to keep o p e r a t i n g c o s t s to a minimum through sweat e q u i t y . The 1978 amendments to the NHA r e f l e c t e d the c o n s t i t i o n a l t e n s i o n s which have permeated Canadian housing p o l i c y s i n c e i t s e a r l i e s t i n c e p t i o n (Dominion Housing Act, 1935). While c o n s t i t u t i o n a l r e s p o n s i b i l i t y f o r housing c l e a r l y f a l l s w i t h i n the purview of the p r o v i n c e s , t h i s r e s p o n s i b i l i t y has more o f t e n f a l l e n to the f e d e r a l government, due p a r t l y to the s u p e r i o r power of the f e d e r a l purse. In a d d i t i o n , there has been a g e n e r a l r e l u c t a n c e on 45 the part of pr o v i n c e s i n a c c e p t i n g t h i s r e s p o n s i b i l i t y f o r housing. The f e d e r a l response to t h i s j u r i d i c t i o n a l c o n f l i c t has g e n e r a l l y been to use i t s f i n a n c i a l r e s o u r c e s to act as f a c i l i t a t o r while r e l y i n g on the p r o v i n c e s to accept the r o l e of i n i t i a t o r . Given t h i s p o l i t i c a l c o n t e x t , a f e d e r a l / p r o v i n c i a l p a r t n e r s h i p became an inherent element in most housing programs (see Dennis, 1972; Rose, 1981). Indeed, the sec. 15.1 co-op program was t i e d i n t o sec. 44 cos t s h a r i n g on rent supplements. The f e d e r a l p o l i c y with respect to program p a r t n e r s h i p s h i f t e d somewhat i n the l a t e 70's. T h i s was p a r t l y due to p o l i t i c a l reasons (low f e d e r a l p r o f i l e ) and p a r t l y , p r a c t i c a l problems r e l a t e d to the i n a b i l i t y of some p r o v i n c e s to a f f o r d t h e i r share; h i g h demand on the f e d e r a l c a p i t a l budget; and other f e d e r a l / p r o v i n c i a l t e n s i o n s (CMHC, 1983). The S e c t i o n 56.1 Program Amendments to the N a t i o n a l Housing Act (NHA) were int r o d u c e d i n 1978 and i n c l u d e d a r e v i s e d co-op and n o n - p r o f i t program ( c o n s o l i d a t e d under a s i n g l e s e c t i o n -56.1). Another notable amendment was the t e r m i n a t i o n of sec. 43 p u b l i c housing. Sec. 40 ( p u b l i c housing) was however r e t a i n e d i n those p r o v i n c e s where i t had been used e x t e n s i v e l y (Maritimes, Sask, NWT ). The C o - o p e r a t i v e and N o n - p r o f i t Program became the p r i n c i p a l element of f e d e r a l s o c i a l housing p o l i c y , a dramatic s h i f t from i t s p o s i t i o n 46 only 5 years e a r l i e r . U n l i k e i t s predecessor, the 56.1 program d i d not r e l y on sec. 44 rent supplements. A rent supplement component was i m p l i c i t i n the design of the new program. The sec. 56.1 program i s ex p l a i n e d i n d e t a i l i n Appendix E. E s s e n t i a l l y , the co-op component i n v o l v e d : T o t a l a s s i s t a n c e equal to the d i f f e r e n c e between mortgage payment at the p r e v a i l i n g market rate and 2%; Part of t h i s a s s i s t a n c e used to bridge the gap between the economic cost of development and "low end of market r e n t s ; The remaining a s s i s t a n c e used for subsidy payments to low income members; Rents set at a maximum 25% of income; Annual i n c r e a s e i n rent of 5% p.a. p l u s any i n c r e a s e i n op e r a t i n g expenses (5% i n c r e a s e commences i n 3rd y e a r ) . The new program, f o l l o w i n g months of n e g o t i a t i o n s between CMHC and the CHF, was co n s i d e r e d a s u b s t a n t i a l improvement by both p a r t i e s : "The new program responds i n every way to the d e s i r e s of members of the c o - o p e r a t i v e housing movement to j o i n together and work together to b u i l d and maintain housing they can a f f o r d and of which they can be proud" (Glen H a d d r e l l , CHF) "We are most anxious to see c o - o p e r a t i v e housing continue to develop as an important means of o f f e r i n g yet another c h o i c e of accommodation and tenure to f a m i l i e s of v a r i o u s income groups". (Ray Hession, Pres. CMHC) (MSUA press r e l e a s e , 1979) 47 O p p o s i t i o n to the Co-op and Non P r o f i t Program The new p o s i t i o n of co-op and n o n - p r o f i t housing i n CMHC's s o c i a l housing package was a strong a d d i t i o n to an al r e a d y expanding form of tenure. S o c i a l Housing i s , however, only one part of the NHA and of CMHC's p o l i c y mandate. An a l l u s i o n was made e a r l i e r to the pervading p o l i c y b i a s i n favour of market o r i e n t e d s o l u t i o n s to the housing problem. I t i s c l e a r that there was s t i l l some o p p o s i t i o n w i t h i n both the government and the sen i o r bureaucracy. In f a c t the 1977 s o c i a l p o l i c y review had argued f o r the d i s m i s a l of the non-market programs i n favour of s h e l t e r allowances (CMHC, 1983). T h i s approach was purported, from an economists p o i n t of view, to be the most d i r e c t way of g e t t i n g at the root cause of the a f f o r d a b i l i t y problem - i n s u f f i c i e n t income. Although Dennis and F i s h (1973) had a l s o recommended s h e l t e r allowances, t h e i r recommendation was p r e f a c e d with a c a l l f o r concurrent n o n - p r o f i t supply programs. With housing r e l a t e d expenditures accounting for 18.2% (Goldberg, 1983) of GNP i n 1980 there was c l e a r l y a very s i g n i f i c a n t i n t e r e s t group w i t h i n the housing i n d u s t r y (e.g., HUDAC, UDI). Moreover, given the relev a n c e of housing to the economy, there was good reason f o r the government to l i s t e n to t h e i r concerns. Although at a conceptual l e v e l s o c i a l housing i s a r e s i d u a l f u n c t i o n of 48 government, intended to compensate where the market f a i l s to f u n c t i o n adequately, s o c i a l housing programs are p e r c e i v e d not as a complement, but as c o m p e t i t i o n . T h e r e f o r e , d e s p i t e the i n t e r n a l merit of the sec. 56.1 program as a s o c i a l housing program, i t came under c o n s i d e r a b l e c r i t i c i s m from i n d u s t r y lobby groups ( p r i m a r i l y r e n t a l developers and l a n d l o r d s ) who were somewhat dismayed at the t e r m i n a t i o n of v a r i o u s p r i v a t e market supply s i d e i n c e n t i v e programs, (e.g., MURB'S terminated in 1980 Budget, though t e m p o r a r i l y extended; ARP terminated in 1978). E v i d e n t l y , the co-op program was not d e s t i n e d f o r smooth s a i l i n g . Within government, proponents of s h e l t e r allowances continued to pursue t h i s approach. CMHC commissioned a number of s h e l t e r allowance s t u d i e s and i s s t i l l g i v i n g i t some c o n s i d e r a t i o n (see f o r example, Clayton,1981; Gau, 1981). The co-op s e c t o r , though s a i l i n g through stormy seas was, nonetheless, able to expand, producing through the-sec. 56.1 program some 6,000 u n i t s each year (1979-82, Table 2.2). The program (both n o n - p r o f i f and co-op= 18,761 u n i t s ) represented 9.9% of r e n t a l s t a r t s i n Canada i n the p e r i o d 1979-81 i n c l u s i v e (and 13.1% i n 1980-81). During t h i s p e r i o d of high i n t e r e s t r a t e s the 56.1 program was one of the few s e c t o r s of the housing i n d u s t r y which was a c t i v e . I r o n i c a l l y , while HUDAC, UDI and other i n d u s t r y lobby groups were opposing the program i n favour of a more d i r e c t approach, the program was p r o v i d i n g employment f o r numerous 49 c o s t r u c t i o n and r e l a t e d employees. Tables 2.1, 2.2, and 2.3 i l l u s t r a t e the r e l a t i v e a c t i v i t y under the program. 1983 Program E v a l u a t i o n A f t e r f i v e years the sec. 56.1 program was su b j e c t e d to an e x t e n s i v e review. Though monitoring and review of government programs i s d e s i r a b l e i n terms of p r o t e c t i n g the p u b l i c from government impropriety i t appears that the ext e n s i v e review of s o c i a l housing p o l i c y and the s p e c i f i c e v a l u a t i o n of the sec. 56.1 program was p r i m a r i l y a p o l i t i c a l response to the p e r s i s t e n t lobby of market o r i e n t e d i n t e r e s t groups. The sec. 56.1 e v a l u a t i o n r e l e a s e d i n November, 1983 once again sets the stage f o r another round of NHA amendments. The f u t u r e of the co-op program has encountered i t s f i r s t major setback s i n c e g a i n i n g acceptance as a worthy v e h i c l e f o r s o c i a l housing p o l i c y i n 1973. While i t s f u t u r e i s somewhat u n c e r t a i n at t h i s time, the M i n i s t e r has at l e a s t p u b l i c a l l y i n d i c a t e d that the cu r r e n t government w i l l not r e t r o g r e s s to the p u b l i c housing programs of the 60's. Support i n p r i n c i p a l may w e l l p r e v a i l although a new m o d i f i e d program meeting the o b j e c t i v e s of lower c o s t and more s p e c i f i c t a r g e t i n g to low income households appears to be i n the o f f i n g . The c o n c l u s i o n s of the 56.1 E v a l u a t i o n are reviewed i n Chapter 3. 50 Table 2.1 Housing Co-qperatives Developed in Canada (1964 - 1983) Province Occupied Under Development Planning TOTALS co-ops units co-ops units co-ops units co-ops unit Newfoundland 18 304 3 56 3 47 24 407 Nova Scotia 44 678 4 127 15 456 63 1,261 New Brunswick 6 258 1 46 1 26 8 330 Prince Edward Island 2 10 1 6 1 5 4 21 Quebec 298 6,610 42 983 196 3,921 536 11,514 Ontario 135 10,264 30 2,240 38 3,431 203 15,935 Manitoba 15 1,299 — — 2 176 17 1,475 Saskatchewan 7 344 1 43 5 229 13 616 Alberta 28 1,672 4 128 9 213 41 2,013 British Columbia 93 5,521 13 865 32 1,570 138 7,956 Northwest Territories 1 50 1 20 — 30 2 100 CANADA 647 27,010 100 4,514 302 10,104 1,049 41,628 Source: Co-operative Housing Foundation, 1983 T A B L E 2 . 2 RENTAL DWELLING STARTS, SECTION 56.1 AND TOTAL CANADA, 1979-31 (1) (2) (3) Section 56.1 Dwellinq Starts Estimated Tota l Dwelling Starts Proportion (1) to (2) (units) (units) (percent) 1979 2,378 65,896 3.6 1980 7,684 54,264 14.2 1981 8,702 69,258 12.6 TOTAL 18,764 189,418 9.9 Source: CMHC Adminis trat ive Data. T A B L E 2.3 DWELLING STARTS, INTENDED FOR THE RENTAL MARKET BY CMA 1980 AND 1981 P r o p o r t i o n of S e c t i o n 56.1 to T o t a l Renta l S e c t i o n 56.1 T o t a l Rental S t a r t s S t a r t s S t a r t s  (un i t s ) (un i t s ) (percent) Ca lgary 8,001 312 3.9 CHIC-Jonq. 397 189 47.6 Edmonton 9,308 211 2.3 H a l i f a x 686 22 3.2 Hamilton 628 429 68. 3 K i t c h e n e r 1,208 246 20. 4 London 1,945 71 3.7 Montreal 7,823 1,435 18.3 Oshawa 411 321 78.1 Ot tawa-Hul l 2,933 525 21.3 Quebec 3,212 595 18. 5 Regina 1,062 62 5.8 S t e . C a t h . - N i a g . 334 124 37. 1 S a i n t John 18 - -S t . John's 1,175 284 24. 2 Saskatoon 1,841 - -Sudbury 147 24 16. 3 Thunder Bay 407 133 32.7 Toronto 12,108 4,574 37.8 Vancouver 13,493 1,814 13.4 V i c t o r i a 1,310 - -Windsor 1,421 71 5.0 Winnipeg 687 325 47. 3 TOTAL 70,555 11,867 16.8 Source: CMHC A d m i n i s t r a t i v e Data . 52 Lessons From H i s t o r y L i k e the e a r l y s t r u g g l e s of the movement under D e j a r d i n and Keen, housing c o - o p e r a t i v e s continue to be opposed by organized market i n t e r e s t s . Attempts both to o b t a i n and r e t a i n l e g i s l a t i v e and f i n a n c i a l support continue to be undermined by a p e r s i s t e n t p o l i t i c a l lobby by opponents to the c o - o p e r a t i v e approach. While other co-op e n t e r p r i s e s have s u c c e s s f u l l y expanded, the magnitude and c o s t of a c o - o p e r a t i v e housing ventures leaves t h i s form of co-op in a much more v u l n e r a b l e p o s i t i o n . Other co-op endeavours, f o r the most part independent of d i r e c t government support, have germinated and perpetuated themselves; c o n v e r s e l y , housing co-ops continue to be almosty t o t a l l y dependent on government a s s i s t a n c e . F e d e r a l housing p o l i c y has t y p i c a l l y tended toward minimal i n t e r v e n t i o n and r e l i a n c e upon p r i v a t e s e c t o r i n i t i a t i v e (Dennis & F i s h , 1973); t h i s p o l i c y approach has manifest i t s e l f i n a p l e t h o r a of short term 'band-aid' programs. C l e a r l y , a c o - o p e r a t i v e housing s e c t o r i n e x t r i c a b l y i n t e g r a t e d with such an ad hoc p o l i c y framework w i l l always be l a c k i n g the s e c u r i t y i t p u r p o r t s to provide to i t s c o n s t i t u e n t s . T h i s t h e s i s goes on to examine means through which the c o - o p e r a t i v e s e c t o r c o u l d meet i t s o b j e c t i v e of e s t a b l i s h i n g a long term a f f o r d a b l e housing tenure with a minimum of government a s s i s t a n c e . Only by 53 e x t r i c a t i n g i t s e l f from t h i s h i s t o r i c dependence w i l l the s e c t o r become s e l f p e r p e t u a t i n g . 54 CHAPTER 3 REDISTRIBUTING CC-OP AFFORDABILITY THROUGH ALTERNATE MORTGAGE INSTRUMENTS T h i s chapter w i l l examine the p o t e n t i a l f o r co-ops to provide a f f o r d a b l e housing by s u b s t i t u t i n g f i n a n c i n g a l t e r n a t i v e s f o r government s u b s i d i e s . Given that the cost of p h y s i c a l l y b u i l d i n g housing, i n the absense of sweat e q u i t y or developer p r o f i t , i s independant of tenure i t must f i r s t be demonstrated that the c o s t of occupying that housing can be made r e l a t i v e l y lower as a r e s u l t of c o - o p e r a t i v e tenure. Secondly, i t i s then necessary to determine whether the long run b e n e f i t inherent i n n o n - p r o f i t c o - o p e r a t i v e tenure can be r e d i s t r i b u t e d so as to lower 'front-end' c o s t s to a l e v e l a f f o r d a b l e to moderate income households. In s h o r t , does c o - o p e r a t i v e tenure i n c o n j u n c t i o n with a l t e r n a t i v e f i n a n c i n g techniques have anything to c o n t r i b u t e to the "economic gap" problem. R e l a t i v e Long Term A f f o r d a b i l i t y of Co-operative Housing The fundamental premise of t h i s t h e s i s i s t h a t , r e l a t i v e to home-ownership, a f o r d a b i l i t y and a c c e s s i b i l i t y are inherent c h a r a c t e r i s t i c s a t t r i b u t a b l e to the c o - o p e r a t i v e form of tenure. S i m i l a r l y , i n comparison with r e n t a l tenure, co-ops may be of comparable c o s t but o f f e r a d i f f e r e n t l e v e l of housing s e r v i c e s , p a r t i c u l a r l y s e c u r i t y 55 of tenure. T h i s a s s e r t i o n i s based on a n o n - p r o f i t model where members pay housing charges on breakeven b a s i s . I n d i v i d u a l s r e c e i v e no penuniary b e n e f i t , and by c o n t r i b u t i n g t h e i r own time (sweat e q u i t y ) can minimize i n c r e a s e s i n a d m i n i s t r a t i v e and o p e r a t i n g c o s t s . T h i s premise i s s u b s t a n t i a t e d through a time s e r i e s comparison of market r e n t s and c o - o p e r a t i v e housing charges. Since the purpose here i s to demonstrate the inherent a f f o r d a b i l i t y of c o - o p e r a t i v e tenure i t would be unreasonable to compare a s u b s i d i z e d co-op with market r e n t a l s (see Table 3.1). Therefore the co-op occupancy charges are simulated u t i l i z i n g a c t u a l c a p i t a l c o s t s and o p e r a t i n g expenses f o r a co-op developed i n 1971. A 100% loan to value r a t i o i s used with 5 year terms and 35 year a m o r t i z a t i o n . The i n t e r e s t r a t e i s based on the maximum NHA r a t e p r e v a i l i n g at the end of December i n the renewal y e a r s . Combining the mortgage payments with o p e r a t i n g expenses generates occupancy charges which would have p r e v a i l e d i n the absense of any subsidy. (In f a c t by using the maximum NHA i n t e r e s t r a t e these simulated charges represent the maximum). The a c t u a l charges i n the p r o j e c t were based on a subsidy i n i t i a l l y from the Innovative Housing Fund and subsequently through the sec. 34.18 co-op program. Consequently charges were even lower than those presented (but are not f a i r l y comparable). The p r o j e c t used was a 110 u n i t townhouse development; charges have been p r o - r a t e d f o r a 3 bedroom TABLE 3.1i EX-P08TE PROJECT SIMULATION COMPARISON OF (3Br unit) CO-OP OCCUPANCY CHARGES WITH TYPICAL MARKET RENTS FDR A CO-OPERATIVE DEVELOPED IN 1972 (1) UPPER MINIMUM INCOME FOR MAX YR 0PERATIN6 OCCUPANCY TYPICAL BOUNDARY 25% HOUSING EXPENDITURE EXPENSES CHAR6E MARKET 2nd QUINTILE--(2) (3) RENT (4) (5) CO-OP ' MARKET 1972 $57 (222 (230 (8,941 (10,665 -1973 $61 (226 (240 (9,948 (10,866 (11,520 1974 (65 (231 (260 (11,765 (11,081 (12,480 1973 170 (236 (285 (12,997 (11,312 (13,680 1976 175 (241 (313 (14,557 (11,560 (15,024 1977 $81 (280 (340 (16,025 (13,463 (16,320 1978 187 (286 (365 (17,604 (13,74B (17,520 1979 (93 (293 (383 (19,214 (14,055 (18,480 1980 (100 (300 (415 (21,695 (14,385 (19,920 1981 (108 (307 (435 (23,767 (14,738 (21,840 1982 (115 (435 (535 - (20,904 (25,680 NOTES (1) U t i l i z i n g actual developaent and operating c o i t i for a co-op project constructed 1971) costs pro-rated for 3 Br unit (2) Operating expenses 1972" (72,600) 1983=1158,400) annual increase used • 7.34X p.a. (Excludes P+I) (3) Based on operating plus debt service costs, (see appendix table D.l) (4) Typical average rent for 3 Br apt in Richaond, the only comparable area with consistent data co l l e c t i o n (sources Trends, 1972-83) Note however that the co-op units are 3Br tollhouses while typical Market units are apartaents generally, (therefore underestiaate aarket) (5) National incoae q u i n t i l e s for census f a a i l i e s Coopiled froai Project data provided by Coluabia Housing Advisory Association. S t a t i s t i c s Canada , Catalogue 13-206. Greater Vancouver Real Estate Board, Trends, 1972-82 57 u n i t and compared with ' t y p i c a l ' market r e n t s . The market comparable used i s the average 3 bedroom rent f o r apartments in Richmond (the only area f o r which adequate data have been c o l l e c t e d on a c o n s i s t e n t b a s i s ) . The use of 3 bedroom apartment re n t s w i l l cause an underestimate of market rents as townhouse rents would g e n e r a l l y be higher than the average apartment u n i v e r s e . Despite the overestimate of co-op housing charges and underestimate of market r e n t s , Table 3.1 c l e a r l y demonstrates the r e l a t i v e a f f o r d a b i 1 i t y of the c o - o p e r a t i v e tenure. The d i f f e r e n c e between co-op and market widens over time, i n favour of the co-op. C o n c u r r e n t l y the co-op becomes a f f o r d a b l e at lower income l e v e l s as i l l u s t r a t e d by the r e l a t i v e change i n the income r e q u i r e d at a 25% income/housing r a t i o i n comparison with the upper boundary of the second income q u i n t i l e ( f o r census f a m i l i e s ) . The Need f o r A l t e r n a t e Mortgage Instruments: The T i l t  Problem While co-ops may b e n e f i t from r e l a t i v e long term a f f o r d a b i l i t y as demonstrated above, the i n i t i a l development c o s t s today are p r o h i b i t i v e l y high, e f f e c t i v e l y c o n s t r a i n i n g development. T h i s d i s e q u i l i b r i u m between the high development cost and the longer term a f f o r d a b i l i t y of co-op tenure i s e s s e n t i a l l y the same as the t i l t problem experienced by home owners. The high l e v e l s of i n f l a t i o n e xperienced i n the 1970's and 1980's had the e f f e c t of 58 a l t e r i n g the time p r o f i l e of r e a l mortgage payments, i n i t i a l l y i n c r e a s i n g them and then reducing them in l a t e r y ears (Smith and Carr, 1982:2). T h i s ' t i l t ' problem a r i s e s from the i n c o r p o r a t i o n of a n t i c i p a t e d i n f l a t i o n i n t o nominal i n t e r e s t r a t e s . Hence, the stream of payments r e q u i r e d to repay the mortgage debt i s determined on the b a s i s of a n t i c i p a t e d i n f l a t i o n while the borrower's income i s not s i m i l a r l y assessed (Smith and C a r r , 1982). Consequently, hi g h i n i t i a l payments are r e q u i r e d of the borrower and access to ownership i s c o n s t r a i n e d due to the i n a b i l i t y of p o t e n t i a l owners to q u a l i f y under p r e v a i l i n g debt s e r v i c e r a t i o s (GDSR) ( c u r r e n t l y i n the region of 30% depending on lender - Ryba, 1983). The impact of i n f l a t i o n on the GDSR i s i l l u s t r a t e d i n Table 3.2 and F i g u r e 3.1. Despite the d e c l i n i n g r e a l payment c h a r a c t e r i s t i c of a standard l e v e l payment mortgage (where nominal payment i s f i x e d f o r term) p o t e n t i a l homeowners are denied access i f unable to q u a l i f y with c u r r e n t income. H i s t o r i c a l l y , the f i x e d term mortgage instrument had a s i n g l e c o n t r a c t rat e throughout the 20 or 25 year term ( a m o r t i z a t i o n p e r i o d ) , thus r e s u l t i n g i n a s i g n i f i c a n t d e c l i n e i n the l e v e l of r e a l payments duri n g the i n f l a t i o n a r y c o n d i t i o n s which have e x i s t e d s i n c e the mid 60's (Goldberg, 1983). Lender problems i n matching long term a s s e t s (mortgages) and short term l i a b i l i t i e s (savings d e p o s i t s and guaranteed investment c e r t i f i c a t e s ) r e s u l t e d i n pressure f o r s h o r t e r mortgage 59 Table 3.2 Comparison of Mortgage Payments and Payment to Income Ratios Under Zero and 10% Inflation Under Level Payment Mortgages (LPMs) (Calculations based upon a $50,000 mortgage, amortized over 25 years, assuming a 5% real rate of interest,* and i n i t i a l borrower income of $25,000, assumed to increase at the rate of inflation plus 2%.) Annual Zero Inflation; 5% Nominal Interest 5% Real Interest 10% Inflation: 15% Nominal Interest 5% Real Interest Annual Borrower Mortgage Payment Year Payment Income to Income Ratio 1 $3,490 $ 25,000 13.96 5 $3,490 $ 27,061 12.90 10 $3,490 $ 29,877 11.68 15 $3,490 $ 32,987 10.58 20 $3,490 $ 36,420 9.58 25 $3,490 $ 40,211 8.70 1 $7,685 $ 25,000 30.74 5 $7,685 $ 39,338 19.54 10 $7,685 $ 69,327 11.09 15 $7,685 $122,178 6.29 20 $7,685 $215,319 3.57 25 $7,685 $379,466 2.03 * This example assumes that the expected rate of inflation equals the actual rate, and that the nominal rate of interest i s the sum of the real rate of interest and the expected rate of inflati o n . FIGURE3.1(a) IMPACT OF INFLATION ON NOMINAL PAYMENTS ii T J 5 « J B -6 S - S -s -4 . J 5 4 -• 3 J 5 - Q B B B : B B T | 1 1 1 1 1 1 1 1 1 1— O 4 & 1 2 1 6 2 0 2 4 Y E A R S D Z E R O I N F L A T I O N 4 1 0 * I N F L A T I O N FIGURE3.1(b) IMPACT OF INFLATION ON PAYMENT-INCOME RATIO S3. 3 0 2 8 2© 2 4 -2 2 -2 0 -1 8 -1 6 1 4 -12 -1 0 -& -6 -4 -2 \ \ \ \ \ \ \ ""Sw. —-a r 1 1 1 1 1 1 1 1 1 1 1' ' , r r + O 4 a . 1 2 1 a 2 0 2 4 O Z E R O I N F L A T I O N 4 1 C * B I N F L A T I O N 61 terms with r o l l - o v e r mortgages. These, i t was f e l t , would serve to a t t r a c t a more steady supply of funds f o r f i n a n c i n g housing (Resselman, 1981, p. 83). Changes to the I n t e r e s t Act i n 1969 a l l o w i n g a term of 5 years on an NHA r o l l o v e r mortgage, have eroded the s i g n i f i c a n t d e c l i n e i n l e v e l of r e a l payments c h a r a c t e r i s t i c of the t r a d i t i o n a l 25 year term f i x e d mortgage. N e v e r t h e l e s s , even over the s h o r t e r 5 year term, r e a l payments tend to d e c l i n e throughout the term (Kaplan, 1975). I n t r o d u c t i o n of New Mortgage Instruments In response to the t i l t problem a number of new mortgage instruments have been designed. T h e i r purpose has been p r i m a r i l y to b r i n g i n i t i a l payments to a manageable l e v e l . T h i s has been achieved by d e f e r r i n g some payment to f u t u r e years when incomes have r i s e n (due to i n f l a t i o n ) and a b i l i t y to pay i s t h e r e f o r e g r e a t e r . Two instruments which i n v o l v e deferment are the Graduated Payment Mortgage (GPM) and P r i c e L e v e l Adjusted Mortgage (PLAM). Two other designs which have been suggested as means of lowering i n i t i a l payments are the Shared A p p r e c i a t i o n Mortgage (SAM) and the bonused mortgage. Another recent i n n o v a t i o n i s the V a r i a b l e Rate Mortgage (VRM). Addressed to the impact of v o l a t i l e i n f l a t i o n , the VRM i s designed to d e a l with i n t e r e s t r a t e r i s k , r a t h e r than the t i l t problem. I t may however have some u t i l i t y i n combination with the GPM although i s l i k e l y 62 to be made redundant by the proposed mortgage rate insurance (Fed e r a l Budget, Feb. 1984). 1 These instruments are d i s c u s s e d below p a r t i c u l a r l y in terms of t h e i r relevance to the f i n a n c i n g of c o - o p e r a t i v e h o u s i n g . 2 P r i o r to reviewing the instruments, however, an examination of lender u n d e r w r i t i n g c r i t e r i a i s undertaken, both with respect to c o n v e n t i o n a l home ownership and co-operat i v e s . Underwriting C r i t e r i a When advancing a mortgaged loan, the lender i s e s s e n t i a l l y buying a stream of income. Equating the sum of t h i s stream of income to the amount of the loan advanced determines the y i e l d , or r e t u r n on c a p i t a l . The lender d e s i r e s some s e c u r i t y or p r o t e c t i o n to ensure that e i t h e r the stream of payments w i l l be made as scheduled, or i n the event that they are not, some form of compensation w i l l be r e c e i v e d . Consequently the lender i s concerned f i r s t with 1 Mortgage rate insurance w i l l provide g r e a t e r c e r t a i n t y with respect to f u t u r e payments and co s t than do VRM's which leave the borrower with great u n c e r t a i n t y . 2 No f u r t h e r examination of Shared A p p r e c i a t i o n , bonussed or buy down mortgages i s presented. These are a l l means of adapting the standard mortgage and r e l a t i v e to the d e f e r r e d i n t e r e s t i n n o v a t i o n s are i n e f f e c t i v e . 63 the a b i l i t y of the borrower to repay the debt as scheduled, and secondly with the value of the c o l l a t e r a l which w i l l be s e i z e d as a consequence of d e f a u l t . Lending p r a c t i c e has evolved to a s o p h i s t i c a t e d l e v e l wherein f a i r l y standard c r i t e r i a have been e s t a b l i s h e d when u n d e r w r i t i n g mortgage loans on r e a l p r o p e r t y . These c r i t e r i a f a l l i n t o two c a t e g o r i e s : those d e a l i n g with the borrowers a b i l i t y to repay the loan; and those d e a l i n g with the value of the a s s e t . I d e a l l y , the lender does not wish to r e s o r t to the v a r i o u s l e g a l remedies a v a i l a b l e to a c q u i r e a property upon d e f a u l t . Such an a c t i o n i n e v i t a b l y i n c u r s both l e g a l and t r a n s a c t i o n c o s t s which e f f e c t i v e l y reduce the r e t u r n ( y i e l d ) . A wary lender w i l l t h e r e f o r e take a l l necessary steps to minimize what i s termed ' d e f a u l t r i s k ' ( M a i s e l , 1976). D e f a u l t r i s k i s a f u n c t i o n of both the borrower's gross debt s e r v i c e r a t i o (GDSR: the p r o p o r t i o n of h i s income expended on debt s e r v i c e ) and e q u i t y (the l e v e l of the borrowers ownership i n the a s s e t ) . G e n e r a l l y a debt s e r v i c e r a t i o of 30% i s employed today although t h i s may vary between l e n d e r s (Ryba, 1983). U n t i l mortgage insurance was i n t r o d u c e d i n 1954, loan to value r a t i o s seldom exceeded 75% of a p p r a i s e d v a l u e . With the advent of insurance, r a t i o s of 95% are not uncommon3 (under some s o c i a l housing programs loans are advanced at 100% of value (CMHC, 1983)). 3 Introduced i n NHA amendments, 1954. 64 D e f a u l t Risk U n d e r w r i t i n g c r i t e r i a are employed at loan o r i g i n a t i o n . Subsequently the borrower's GDSR and/or l e v e l of e q u i t y may f l u c t u a t e depending on many d i f f e r e n t circumstances, not l e a s t of which i s the a f f e c t of i n f l a t i o n on earnings and prop e r t y a p p r e c i a t i o n . While negative e q u i t y i s p o s s i b l e i n a f a l l i n g market, t h i s alone may not n e c e s s a r i l y l e a d to d e f a u l t u n l e s s the borrower's GDSR i s hig h . Even then, i t has been argued that the borrower w i l l be r e l u c t a n t to d e f a u l t f o r the f o l l o w i n g reasons: (Ryba, 1 983) ( i ) May not be aware of negative e q u i t y u n l e s s property i s valued on the market; ( i i ) The moving expenses i n r e l o c a t i n g (2 - 4% of v a l u e ) ; ( i i i ) . D e f a u l t w i l l have a negative impact on c r e d i t r a t i n g , p o s s i b l y p r e c l u d i n g purchase of another home; and ( i v ) The i n d i v i d u a l i s p e r s o n a l l y l i a b l e and c o u l d be sued by lender i f c o l l a t e r a l i n s u f f i c i e n t to cover l o s s . In the event of d e f a u l t the p r o b a b i l i t y of the lender r e c o v e r i n g a s u f f i c i e n t amount to maintain h i s y i e l d (or minimize r e d u c t i o n i n y i e l d ) i s a f u n c t i o n of e q u i t y . If the owner has a l a r g e e q u i t y i n the asset t h i s p r o v i d e s a cushion to f l u c t u a t i o n s i n market value ( d e p r e c i a t i o n w i l l reduce e q u i t y before c o l l a t e r a l ) . Under i n f l a t i o n a r y c o n d i t i o n s e q u i t y b u i l d - u p w i l l be a c c e l e r a t e d (Economic 65 C o u n c i l of Canada: 1982); at the same time however, as i n t e r e s t r a t e s a d j u s t to i n f l a t i o n renewal c o u l d d r a m a t i c a l l y i n c r e a s e borrower's GDSR. D e f a u l t Risk and A l t e r n a t e Mortgage Instruments Since the l e n d e r ' s primary concern i s minimizing d e f a u l t r i s k he w i l l emphasise the importance of GDSR over e q u i t y (Ryba, 1983). To the extent that a l t e r n a t e mortgage instruments e f f e c t i v e l y lower the i n i t i a l payments (and hence GDSR) they expose the lender l e s s to d e f a u l t r i s k , d e s p i t e the negative a m o r t i z a t i o n c h a r a c t e r i s t i c i n both GPM's and PLAM's ( p r o v i d i n g incomes keep pace with r i s i n g payments). Moreover, while the o u t s t a n d i n g p r i n c i p a l amount may i n c r e a s e i n the e a r l y years t h i s does not n e c e s s a r i l y mean that the e q u i t y to value r a t i o turns n e g a t i v e . With an indexed mortgage where i n f l a t i o n exceed the r e a l r a t e , the a f f e c t of i n f l a t i o n w i l l be both to r a i s e the value of the p r o p e r t y and the o u t s t a n d i n g balance. C a l c u l a t i n g the e q u i t y - v a l u e r a t i o on the a d j u s t e d value may w e l l r e s u l t i n p o s i t i v e e q u i t y growth, d e s p i t e i n c r e a s i n g debt (Economic C o u n c i l of Canada, 1982). The r e l a t i v e l e v e l s of r i s k a s s o c i a t e d with GPM and PLAM instruments would, however, l e a d the lender to favour PLAM's. In a d d i t i o n to e l i m i n a t i n g i n t e r e s t r a t e r i s k (repayment in d e f l a t e d or i n f l a t e d d o l l a r s ) , PLAM's " r e c r e a t e as c l o s e as p o s s i b l e the f i n a n c i a l c h a r a c t e r i s t i c s 66 that long term f i x e d r a t e loans had i n per i o d s of p r i c e s t a b i l i t y (Ryba, 1983, p. 45). Ther e f o r e , i t i s argued that an indexed instrument doesn't r e s u l t i n a r i s k i e r investment than the standard mortgage. Moreover, as w i l l be demonstrated, the lower, and p o s s i b l y d e c l i n i n g GDSR may i n f a c t reduce d e f a u l t r i s k . Conversely, the GPM, c o n t r a c t e d with nominal i n t e r e s t r a t e s and employing a predetermined graduation r a t e i s r e l a t i v e l y s u s c e p t i b l e to d e f a u l t r i s k i n the event that income growth f a i l s to keep up with the predetermined payment schedule. In u n d e r w r i t i n g GPM's some assessment of p o t e n t i a l income growth of the borrower i s necessary. While t h i s can be reasonably achieved f o r s i n g l e households, p r o j e c t i o n of the expected earning p o t e n t i a l of a, dynamic, c o l l e c t i v e group i s much more d i f f i c u l t . Although CMHC's survey of lender a l t i t u d e s r e v e a l e d l e n d e r s to be more fav o u r a b l y disposed, in p r i n c i p l e , to r e n t a l GPM's than f o r homeowner's (Clayton, 1980b) recent experience suggests that they may become i n c r e a s i n g l y r e l u c t a n t to extend such instruments to r e n t a l developers i n the f u t u r e . 4 * Rental GPM's were used e x t e n s i v e l y i n Calgary i n 1978-81. Due to these instruments, l a n d l o r d s are locked i n t o r i s i n g debt s e r v i c e l e v e l s ; meanwhile the bottom f e l l out of the market r e s u l t i n g i n high vacancy l e v e l s . Competitive b i d d i n g f o r tenents l e f t the GPM l a n d l o r d s with i n s u f f i c i e n t r e n t a l revenue to s e r v i c e debt. Under c o n d i t i o n s of both negative e q u i t y and high DSR, d e f a u l t s were i n e v i t a b l e . 67 Underwriting Co-operative Housing In extending f i n a n c i n g t o c o - o p e r a t i v e housing p r o j e c t s l e n d e r s are d e a l i n g with a h y b r i d of the s i n g l e homeowner and the r e n t a l p r o j e c t . The magnitude of the p r o j e c t i n v o l v e s s u b s t a n t i a l funds (almost $6 m i l l i o n i n the example used as a base c a s e ) . U n l i k e the s i n g l e homeowner the c o l l e c t i v e nature of a co-op together with the p o t e n t i a l for membership to change over time p r e c l u d e s the use of a gross debt s e r v i c e r a t i o . S i m i l a r l y the borrower's c r e d i t r a t i n g cannot be used as a c r i t e r i a . R e l a t i v e to the home owner, the co-op member has no p e r s o n a l l i a b i l i t y ( p r o v i d e d the co-op i s i n c o r p o r a t e d and he i s l e g a l l y only a share holder and has no pe r s o n a l covenant) (Clurman, 1970); i n the event of d e f a u l t the i n d i v i d u a l s c r e d i t r a t i n g i s l e f t u n t a r n i s h e d ; and he has m o b i l i t y a k i n to a r e n t a l tenant. Together with the s e c u r i t y of c o - o p e r a t i v e tenure these may be very s t r o n g i n c e n t i v e s f o r j o i n i n g a co-op. They may not, however, appear so a t t r a c t i v e to a l e n d e r . Undoubtably co-op p r o j e c t s would be underwritten using c r i t e r i a s i m i l a r to those used i n income-properties (Clurman, 1970). CMHC's survey of lender a t t i t u d e s i n d i c a t e s that n o n - p r o f i t and co-op a p p l i c a n t s c o u l d be eval u a t e d on the same b a s i s as market r e n t a l p r o p e r t i e s . The only e x c e p t i o n may be an assessment of the sponsor group's a b i l i t y to b u i l d and operate the p r o j e c t ( C l a y t o n , 68 1980 ( B ) ) . Here then, the p r i n c i p a l c r i t e r i a would be debt coverage r a t i o (DCR): the r a t i o of net o p e r a t i n g income to debt s e r v i c e . Since the o b j e c t i v e of the co-op i s to minimize housing charges, these would be set at a break even l e v e l . Consequently the DCR would be 1.0. G e n e r a l l y , f o r r e n t a l p r o p e r t i e s lenders r e q u i r e a DCR of 1.10 - 1.15 and may t h e r e f o r e look unfavourably at a co~op o p e r a t i n g at the margin ( i . e . , 1.0). C u r r e n t l y , co-ops o p e r a t i n g under the sec. 56.1 program ob t a i n 100% f i n a n c i n g and generate revenues s u f f i c i e n t to cover only 30 - 40% of the debt. However, the p a r t i c i p a t i o n of CMHC in p r o v i d i n g supplements to r a i s e the DCR to 1.0, together with mortgage insurance p r o v i d e s s u f f i c i e n t s e c u r i t y to the le n d e r . While an u n s u b s i d i z e d co-op c o u l d s t i l l o b t a i n mortgage insurance the lender i s l i k e l y to be r e t i c e n t to forward f i n a n c i n g under only a 1.0 DCR. — On the p o s i t i v e s i d e , the value upon which the co-op mortgage i s p l a c e d i s the a c t u a l development cost of the p r o j e c t , not the i n f l a t e d value of an investment good (where a n t i c i p a t e d income i s c a p i t a l i z e d i n t o p roperty v a l u e ) . Consequently, i n a s o f t market the value of the ass e t i s u n l i k e l y to d e c l i n e in the way an income p r o p e r t y , purchased in an i n f l a t e d market might. While the lender i s concerned about the value of the p r o p e r t y i n terms of recovery on d e f a u l t , the p o t e n t i a l f o r d e f a u l t may be lower under the c o l l e c t i v e nature of a co-op i n comparison to the s i n g u l a r 69 i n t e r e s t of an i n v e s t o r . Because the co-op i s non-market i t i s u n l i k e l y that the members e i t h e r know or care about the e q u i t y - v a l u e r a t i o . A CMHC report (on the un d e r w r i t i n g of n o n - p r o f i t loans) noted that the c o - o p e r a t i v e program i s more home ownership o r i e n t e d with occupants c r e a t i n g greater p r o j e c t s t a b i l i t y (than p r i v a t e r e n t a l s ) ; furthermore the co-ops are organized and can look to the CHF f o r f i n a n c i a l and a d m i n i s t r a t i v e a s s i s t a n c e (CMHC, 1981). A s u c c e s s f u l co-op, generating a sense of community and secure tenure w i l l provide members with a stake i n t h e i r home, d e s p i t e the lack of, or at l e a s t l i m i t e d e q u i t y commitment. Under such a s c e n a r i o the co-op members may go to extremes to r e t a i n t h e i r homes. Conversely, the p r o f i t motivated i n v e s t o r , o f t e n h i g h l y leveraged, may simply walk away from a p r o j e c t which becomes u n v i a b l e . The blended income nature of co-ops prov i d e s assurance to the lender concerned both with a b i l i t y to meet payments and p h y s i c a l d e t e r i o r a t i o n of the b u i l d i n g . In an i n f l a t i o n a r y environment the r e a l payments r e q u i r e d of the members may d e c l i n e while the value of the as s e t may a p p r e c i a t e . T h i s w i l l both i n c r e a s e the s e c u r i t y of the mortgage as w e l l as decrease the c o l l e c t i v e GDSR of the co-op members. In a p e r i o d of d e f l a t i o n the adjustment to p r i n c i p a l w i l l cause the lend e r s y i e l d to d e c l i n e . In the same circumstances, with a standard mortgage, the c o n t r a c t y i e l d would be r e t a i n e d , but only as long as the borrower can honour h i s covenant. The p r o p e n s i t y to d e f a u l t 70 would be higher under a standard instrument where r e a l payments are i n c r e a s i n g , perhaps to an onerous l e v e l . On the other hand, with a PLAM, d e f l a t i o n w i l l a c c e l e r a t e a m o r t i z a t i o n and thereby reduce payments. I t f o l l o w s that the r i s k of d e f a u l t i s less e n e d when payments a d j u s t i n c o r r e l a t i o n with the degree of d e p r e s s i o n . F i n a l l y , i n a n o n - i n f l a t i o n a r y environment the lender w i l l be i n d i f f e r e n t to the two instruments. In summary, lend e r s presented with f i n a n c i n g non-NHA a s s i s t e d p r i v a t e c o - o p e r a t i v e s may develop d i f f e r e n t c r i t e r i a than those used i n r e n t a l u n d e r w r i t i n g . While the i n i t i a l impression of lenders may be to a v o i d f i n a n c i n g such a venture i t can be shown that the r i s k (and hence the y i e l d ) may be comparable or p o s s i b l y l e s s (and y i e l d g r e a t e r ) than r e n t a l l o a n s . Moreover, i n c o n d i t i o n s of v o l a t i l e i n f l a t i o n , p a r t i c u l a r l y d e f l a t i o n the d e f a u l t r i s k to the lender may be lessened through an indexed instrument T h i s may compensate the lender f o r the reduced y i e l d caused by the d e f l a t i o n . 71 CHAPTER 4 A REVIEW OF FINANCING ALTERNATES FOR CO-OPERATIVE HOUSING The p r e v i o u s chapter i n t r o d u c e d some of the in n o v a t i v e mortgage instruments and d i s c u s s e d the und e r w r i t i n g c r i t e r i a which would be c o n s i d e r e d in unde r w r i t i n g c o - o p e r a t i v e developments. T h i s chapter now extends the review of f i n a n c i n g o p t i o n s which might o f f e r some p o t e n t i a l f o r the f i n a n c i n g of c o - o p e r a t i v e housing. PART ONE: ALTERNATIVE MORTGAGE INSTRUMENTS The Graduated Payment Mortgage (GPM) The GPM i s an instrument which lowers the i n i t i a l payment below that which would p r e v a i l with a standard l e v e l payment mortgage (SLPM). Subsequently the payments r i s e by predetermined graduations (Figure 4.1(a)). A number of formulae have been developed with which to c a l c u l a t e the GPM a m o r t i z a t i o n schedule. In a l l cases t h i s i n v o l v e s s e t t i n g the graduation r a t e and the p e r i o d over which payments w i l l r i s e . In the pure form, payments i n c r e a s e s t e a d i l y every payment p e r i o d (e.g., monthly). In m o d i f i e d v e r s i o n s an annual graduation i s employed. S i m i l a r l y , the pure form i n v o l v e s a graduation throughout the a m o r t i z a t i o n p e r i o d of the mortgage; m o d i f i e d v e r s i o n s employ a graduation f o r only 4-FIGURE 4.1(a) PAYMENT PROFILE OF STANDARD VS GRADUATED MORTGAGE 5 . ft 3 . 4 ^ 3 . 2 3 -I 8*2 2.<B I t l V 2.4. SL V * J ^ —'I- 1 ft if 1.6 -1 .4 -1 J2 -1 --O J S O . C n n r-i »-t u U U U " S • • • • • • • • • • • • • • • • • • • L | U 1 J g ^ g o I— 1 o D 3 L P M 2 0 Y E A R P U R E G F M —,— S O N H A G F M 4 0 FIGURE 4.1(b) PRINCIPAL AMORTIZATION: STANDARD VS PURE GPM 1 2 D 3LFM Y E A R + P U R E G P M 4 0 73 p a r t of the a m o r t i z a t i o n p e r i o d with l e v e l payments there a f t e r , such as the NHA v e r s i o n (Baxter, 1980). In the e a r l y years when the payment has been lowered i t i s i n s u f f i c i e n t to f u l l y amortize the p r i n c i p a l , or meet i n t e r e s t payments, hence any d e f i c i e n c y i s added to the outstan d i n g p r i n c i p a l . T h i s c r e a t e s negative a m o r t i z a t i o n ( F i g u r e 4.1(b)) and where the property does not a p p r e c i a t e at a rate equal to, or g r e a t e r than, the graduation r a t e , the borrower's e q u i t y w i l l be negative (he w i l l owe more than he borrowed, and, depending on the s i z e of down payment, p o s s i b l y more than the value of the a s s e t ) . S i m i l a r i l y , i f the borrower's income f a i l s to r i s e i n l i n e with the graduation r a t e the GDSR w i l l i n c r e a s e . Hence i n a d d i t i o n to more gen e r a l d e f a u l t r i s k the GPM adds two other dimensions of r i s k : income r i s k and r e l a t i v e p r i c e r i s k (Pesando, 1981) A combination of high (and r i s i n g ) GDSR and negative a m o r t i z a t i o n are a p r e s c r i p t i o n f o r high d e f a u l t r i s k (Ryba 1983). Consequently, l e n d e r s are somewhat s e l e c t i v e i n un d e r w r i t i n g GPM's (Clayton, 1980b). In p a r t i c u l a r , a c o n s e r v a t i v e graduation r a t e , r e l a t i v e to experienced and a n t i c i p a t e d i n f l a t i o n w i l l be employed. Moreover, 1980 saw the i n t r o d u c t i o n of p o l i c y changes to t i g h t e n the un d e r w r i t i n g of r e n t a l GPM loans - max loan/value r a t i o decreased (75%); minimum term 5 years; maximum a m o r t i z a t i o n 35 years (CMHC, 1981). 74 In a s i t u a t i o n where i n f l a t i o n exceeds the graduation r a t e (and should f a v o u r a b l y improve incomes and home values) the asset i s more secure. Meanwhile, the r e a l value of payments w i l l d e c l i n e , and, a GPM with a f i x e d , long term r a t e of i n t e r e s t would not adequately compensate the lender f o r the l o s s of purchasing power (Gau, 1981). The time p r o f i l e of nominal payments c o u l d leave the lender cash-poor i n the e a r l y years even though the y i e l d w i l l be maintained by compensating higher payments l a t e r (Gau, 1981). Moreover, the problem of lender matching of a s s e t s and l i a b i l i t i e s i s s t i l l a f a c t o r and i s l i k e l y to preclude the use of GPM's except i n c o n j u n c t i o n with r o l l o v e r mortgages (Kesselman, 1981). In such a circumstance mortgage renewal at a higher r a t e c o u l d s i g n i f i c a n t l y i n c r e a s e d e f a u l t r i s k as the out s t a n d i n g balance has been' n e g a t i v e l y amortized i n the e a r l y y e a r s . Notwithstanding these v a r i o u s short comings, the GPM i s q u i t e e f f e c t i v e i n lowering i n i t i a l nominal payments and hence reducing the i n i t i a l GDSR. In attempts to address the t i l t problem CMHC s e l e c t e d t h i s instrument and introduced i t in a m o d i f i e d form i n 1978. The GPM has subsequently been used both by home-owners and r e n t a l d evelopers. The NHA-GPM uses a formula which reduces the SLPM payment by $2.25 per $1000 of p r i n c i p a l borrowed (Appendix B-1). A graduation r a t e of 5% per annum i s used f o r the f i r s t 10 years with remaining payments c a l c u l a t e d so as to f u l l y amortize the 75 outstanding p r i n c i p a l over the remaining p e r i o d . Given t h i s 5% annual graduation the GPM would, i n t u i t i v e l y be adaptable to the c u r r e n t sec. 56.1 Co-op Housing Program. Since an a b i l i t y to absorb a 5% i n c r e a s e i n payment l e v e l s i s i m p l i c i t i n the Co-op Program, the use of GPM's i n the context of non - s u b s i d i z e d co-ops a l s o warrants r e v i e w 1 . GPM F i n a n c i n g of Co-op Housing U t i l i z i n g GPM's with c o - o p e r a t i v e housing c o u l d e f f e c t i v e l y reduce the monthly rent to a l e v e l manageable by lower middle income households. The extent to which t h i s c o u l d be achieved depends of course on the c o n t r a c t i n t e r e s t r a t e , and rate of payment g r a d u a t i o n . S i m u l a t i o n s have been run on the base case using both a m o d i f i e d pure GPM (annual graduation over 35 year a m o r t i z a t i o n p e r i o d ) and an NHA-GPM (5% graduation f o r f i r s t 10 years with l e v e l payments there a f t e r (Appendix B). As i n a l l s i m u l a t i o n s o p e r a t i n g expenses were i n c r e a s e d at 5% per annum and a 5% graduation r a t e was u s e d 2 . T h i s was c o n s i d e r e d i n the CHF A l t e r n a t i v e F i n a n c i n g Study. 2 T h i s equates with the c u r r e n t NHA GPM formula; i n a d d i t i o n , a CMHC survey of lenders suggest the maximum a c c e p t a b l e r a t e to be 5 - 7% (C l a y t o n , 1980 ( b ) ) . 76 A pure GPM c o n t r a c t e d at 10% nominal i n t e r e s t r a t e (per annum, semi annual compounding, not i n advance) would lower the 3 bedroom rent to $605 (see Table 4.5) (compared with a market l e v e l of $625 as determined by CMHC a p p r a i s a l f o r the base c a s e ) . S i m i l a r l y , the NHA-GPM with a 0.90 loan/value r a t i o a l s o f a c i l i t a t e s occupancy charges below market rent l e v e l s when c o n t r a c t e d with a 10% mortgage. However, at the higher mortgage rate (13%) n e i t h e r GPM i s s u f f i c i e n t (see Appendix B, T ables B.1 and B.2, year 1). I t i s c l e a r that the success of f i n a n c i n g co-ops with GPM's would be c o n t i n g e n t on c o n t r a c t i n g a low (by today's standards) mortgage r a t e (e.g., 10% or l e s s ) . A d d i t i o n a l l y , t h i s r a t e must remain low to p r o t e c t f u t u r e a f f o r d a b i l i t y . Since the GPM d e f e r s i n t e r e s t to f u t u r e years, the o u t s t a n d i n g p r i n c i p a l grows (negative a m o r t i z a t i o n ) . If i n t e r e s t r a t e s r i s e c o n c u r r e n t l y , mortgage renewal with the l a r g e r p r i n c i p a l amount c o u l d cause a s i g n i f i c a n t jump i n mortgage payments. T h i s u n d e r l i n e s the p r i n c i p a l s h o r t f a l l of GPM's. They are based on p r e v a i l i n g nominal i n t e r e s t r a t e s and employ a graduation r a t e assumed to be manageable (on the b a s i s of a n t i c i p a t e d i n f l a t i o n ) . Where a n t i c i p a t e d i n f l a t i o n i s not r e a l i z e d and a borrower ( i n t h i s case the co-op) i s locked i n t o g r a d u a l l y r i s i n g payments the r i s k of d e f a u l t would be h i g h . To minimize d e f a u l t r i s k a higher down payment (equity) cushion 77 would be r e q u i r e d by the l e n d e r 3 . Under c o n d i t i o n s of high (or u n c e r t a i n ) nominal i n t e r e s t r a t e s GPM's would appear to be both i n s u f f i c i e n t and u n d e s i r a b l e means of f i n a n c i n g co-op housing. Given that i n f l a t i o n and high nominal i n t e r e s t r a t e s are the root cause of the a f f o r d a b i l i t y problem means of addressing t h i s should be exhausted before r e s o r t i n g to GPM's. The P r i c e L e v e l Adjusted Mortgage (PLAM) L i k e the GPM, the PLAM r e d i s t r i b u t e s the time p r o f i l e of nominal payments. Under the PLAM, t h i s r e d i s t r i b u t i o n i s accomplished by employing a r e a l i n t e r e s t r a t e to c a l c u l a t e payments (see Appendix C ) . D e f l a t i o n i n the purchasing power of f u t u r e d o l l a r s i s addressed by a d j u s t i n g the outsta n d i n g balance f o r a c t u a l i n f l a t i o n . E s s e n t i a l l y , an indexed instrument (such as PLAM) r e c r e a t e s the f i n a n c i a l c o n d i t i o n s which would be i n e f f e c t under a f i x e d r a t e mortgage i n a s t a b l e i n f l a t i o n a r y environment (Economic C o u n s i l of Canada, 1982). The d i s t i n q u i s h i n g f e a t u r e of t h i s instrument i s that i t i s t i e d to r e a l i n t e r e s t r a t e s , which i n p e r i o d s of high i n f l a t i o n are c o n s i d e r a b l y l e s s than nominal l e v e l s . Furthermore, the i m p l i c i t graduation i n payments i s based on a c t u a l p r i c e 3 Even with NHA insurance a maximum loan-value r a t i o of 0.90 i s a p p l i e d to GPM loans ( C l a y t o n , 1980 ( b ) ) . 78 adjustment". The PLAM e f f e c t i v e l y e l i m i n a t e s i n t e r e s t rate r i s k ( i . e . , the impact of repayment i n i n f l a t e d or d e f l a t e d d o l l a r s ) by removing a n t i c i p a t e d i n f l a t i o n from i n t e r e s t r a t e s . A d d i t i o n a l l y i t makes a s u b s t a n t i a l c o n t r i b u t i o n to the r e d u c t i o n i n income r i s k and r e l a t i v e p r i c e r i s k 5 . The ch o i c e of an index w i l l c r i t i c a l l y a f f e c t the l a t t e r two forms of r i s k , however, r e l a t i v e to the GPM the PLAM i s a s u b s t a n t i a l improvement. In terms of improving access to housing the PLAM has the most favourable impact of a l l a l t e r n a t i v e s examined (Table 4.5). T h i s instrument e f f e c t i v e l y lowers i n i t i a l payment l e v e l s as w e l l as s t a b a l i z i n g the GDSR of the borrower. Over the long term the PLAM c r e a t e s a stream of monthly payments which remain constant i n r e a l terms, (Gau, 1981) d e s p i t e s i g n i f i c a n t growth in the s i z e of nominal payments under i n f l a t i o n a r y c o n d i t i o n s (see Appendix C ) ) . * Subject to the p a r t i c u l a r index u t i l i z e d : e.g., CPI, Wage Index, MLS House P r i c e Index. 5 The only r i s k remaining i s that both incomes and property value w i l l not be impacted to the same degree by i n f l a t i o n . T h i s , of c o u r s e , i s a f u n c t i o n of which index i s chosen. 79 O b s t a c l e s to Adoption of PLAMS Notwithstanding the apparent advantages of PLAM's over GPM's, a F e d e r a l Interdepartmental Task Force recommended adoption of the GPM i n 1973 as a means of add r e s s i n g the t i l t problem (Kesselman, 1981). T h i s recommendation was based on two c o n s i d e r a t i o n s : f i r s t , i n s t i t u t i o n a l acceptance of PLAM'S would r e q u i r e the inn o v a t i o n of p r i c e l e v e l a d j u s t e d l i a b i l i t i e s to ensure matching - these were not r e a d i l y a v a i l a b l e . Secondly, GPM's were a d m i n i s t r a t i v e l y simpler s i n c e GPM's d i d not r e q u i r e the de t e r m i n a t i o n of an index a p p r o p r i a t e to index mortgage debts as would be necessary with PLAM's (Kesselman, 1981). As noted e a r l i e r , GPM's were subsequently introduced i n 1978. Another o b s t a c l e to the adoption of PLAM's i s an i n s t i t u t i o n ' s f a m i l i a r i t y , and hence p r e f e r e n c e , i n d e a l i n g with nominal i n t e r e s t r a t e s (Gau, 1981). More important perhaps i s the u n f a m i l i a r i t y of the general p u b l i c with r e a l i n t e r e s t . R i s i n g nominal payments would shock most borrowers away from indexed or other d e f e r r e d i n t e r e s t mortgages. Gau suggests that " i n f l a t i o n has not been s u f f i c i e n t l y h i g h and p e r s i s t a n t i n Canada to make market p a r t i c i p a n t s f u l l y aware of the p i t f a l l s of money i l l u s i o n " 80 (Gau, 1981, p.24). 6 In terms of lender r e t i c e n c e to p a r t i c i p a t e i n PLAM'S, another c h a r a c t e r i s t i c of the PLAM i s d e c e l e r a t e d e q u i t y b u i l d u p . While negative a p p r e c i a t i o n may be o f f set by property a p p r e c i a t i o n , e q u i t y accumulation f o r the borrower would s t i l l be slower than under a SLPM. Many lenders would weigh t h i s f a c t o r ( i . e . , p o t e n t i a l abandonment) a g a i n s t p o t e n t i a l l y lower GDSR's i n determining d e f a u l t r i s k (Ryba, 1983). Recent Support f o r PLAMS Having experienced GPM's s i n c e 1978, the CMHC has expressed, u n o f f i c i a l l y at l e a s t , some r e s e r v a t i o n s about t h i s i n s t r u m e n t 7 . A l s o , the lender survey i n d i c a t e d that l e n d e r s are opposed i n p r i n c i p a l to the use of GPM's fo r home owners (Cl a y t o n , 1980 ( b ) ) . I t i s perhaps not s u r p r i s i n g , t h e r e f o r e , that a paper accompanying the June 1982 Budget contemplated o f f e r i n g p r i c e l e v e l indexed mortgages to some borrowers (Economic C o u n c i l of Canada, V a r i o u s forms of indexed mortgage instruments have been in t r o d u c e d i n t e r n a t i o n a l l y , p a r t i c u l a r l y i n c o u n t r i e s e x p e r i e n c i n g high and p e r s i s t a n t i n f l a t i o n ; e.g., B r a z i l , A r g e n t i n a , I s r a e l , and to a l e s s e r extent i n the Scandinavian n a t i o n s (Ryba, 1983; Howenstine, 1983). 7 Based on d i s c u s s i o n with CHMC o f f i c i a l s . 81 1982). The Economic C o u n c i l of Canada noted that the apparent home ownership a c c e s s i b i l i t y problem of the past few years was not n e c e s s a r i l y e x p l a i n e d by inadequate incomes but may have r e s u l t e d from the lack of an a p p r o p r i a t e mortgage f i n a n c i n g instrument (1982). Pursuing the renewed i n t e r e s t i n indexed mortgages, Ryba argues that i n i t i a l o b s t a c l e s l e a d i n g to the r e j e c t i o n of such an instrument can i n f a c t be overcome (Ryba, 1983). Matching problems - the apparent need f o r indexed d e p o s i t s might be circumvented by o f f e r i n g such instruments only to i n s t i t u t i o n s o p e r a t i n g on long term h o r i z o n s - pension funds and l i f e insurance companies. Tax i m p l i c a t i o n s such as t a x a t i o n of accrued but d e f e r r e d i n t e r e s t might be avoided by u t i l i z i n g tax exempt i n s t i t u t i o n s (such as RRSP's and Pension Fund's) 8. Another b a r r i e r to be overcome i s the c h o i c e of an a p p r o p r i a t e index. "The main d i f f i c u l t y i n d e v e l o p i n g indexed loans seems to stem from opposite r e s u l t s of i d e n t i c a l r i s k - a v e r a g e behavior of both borrowers and lenders"- (Ryba, 1983, p.69). In examining the use of i n d i c e s based on the CPI; wages; and house p r i c e s , Ryba concluded that the preference of l e n d e r s i s the o p p o s i t e to that of borrowers. A s o l u t i o n While the payments r e s u l t i n negative a m o r t i z a t i o n i n e a r l y years, cash income to the lender i s d e f i c i e n t . Being taxed on a c t u a r i a l b e n e f i t while having low cash-flow i s a d i s i n c e n t i v e to l e n d e r s . 82 proposed would be to develop i n d e x - i n t e r m e d i a t i o n : A t h i r d p a r t y to buy and s e l l indexed bonds and d e p o s i t s . I n i t i a l l y , government c o u l d f u l f i l l t h i s r o l e . Another s o l u t i o n , u t i l i z e d i n Denmark i s the choice of the p r i c e index p r e f e r a b l e to le n d e r s but with an upper l i m i t on the i n c r e a s e i n payment where wages (the p r e f e r r e d index of the borrower) f a i l to a d j u s t at the same rate as the chosen p r i c e index (Ryba, 1983). F i n a n c i n g Co-ops with PLAMS Running the base case s i m u l a t i o n (Appendix C) with PLAM f i n a n c i n g r e v e a l s that t h i s instrument i s the most e f f e c t i v e i n lowering i n i t i a l housing charges (Table 4.1). The monthly charges f o r 3 bedroom base case u n i t are reduced to $529 T h i s l e v e l i s below both a p p r a i s e d market l e v e l s and the low end of market charge u t i l i z e d i n the c u r r e n t sec. 56.1 program. Furthermore, the a b i l i t y of the PLAM to achieve t h i s low l e v e l i s independent of i n f l a t i o n and hence nominal i n t e r e s t r a t e s 9 . U t i l i z i n g the PLAM with some form of e q u i t y or grant so as to lower the loan to value r a t i o ( i . e . , reduce amount borrowed) f u r t h e r i n c r e a s e s the p o s i t i v e impact of t h i s 9 The l e v e l of housing charges demonstrated i n the s i m u l a t i o n i s based on a r e a l r a t e of i n t e r e s t of 4% (see Appendix C ) . While the i n i t i a l payments are independent of a n t i c i p a t e d i n f l a t i o n , l a t e r payments are d i r e c t l y impacted by a c t u a l i n f l a t i o n . 83 instrument (Table 4.5). The lower l e v e l break-even c o s t r e s u l t i n g from reduced loan to value r a t i o s c o u l d be ad j u s t e d with a surcharge to c r e a t e a s u r p l u s which would then be a p p l i e d to f u t u r e expenses or debt s e r v i c e . T h i s might be d e s i r a b l e f o r households who c u r r e n t l y have l e s s than a 25% s h e l t e r expenditure to income r a t i o s but would face a higher r a t i o upon r e t i r e m e n t . B a s i c a l l y the d e s i r a b i l i t y of t h i s measure (which would be ev a l u a t e d and d e m o c r a t i c a l l y decided i n each i n d i v i d u a l co-op) a r i s e s because of the d e f e r a l of i n t e r e s t payments to f u t u r e y e a r s . While such d e f e r a l i s b e n e f i c i a l i n improving housing c o s t s and access i n e a r l y years i t would however p l a c e a burden on r e t i r e d people whose income c o u l d no longer be expected to keep pace with i n f l a t i o n (to which f u t u r e payments are t i e d , see Appendix C ) . Such households c o u l d i n c r e a s e c u r r e n t expenditure r a t i o s up to 25 or 30% (and remain below market rent l e v e l s ) i n the e a r l y years and thereby save for r e t i rement. The r i s i n g nominal payment c h a r a c t e r i s t i c of PLAM's i s r e v e a l e d i n Appendix C. Although the r e a l payment does not i n c r e a s e , (based on d i s c o u n t i n g at the assumed i n f l a t i o n r a t e ) an i m p l i c i t assumption i s that a l l incomes w i l l r i s e at l e a s t reasonably c l o s e to the i n f l a t i o n r a t e . Pension incomes however are u n l i k e l y to experience such a corresp o n d i n g i n c r e a s e and f o r t h i s reason PLAM f i n a n c i n g f o r co-ops may appear u n a t t r a c t i v e to any household 84 a n t i c i p a t i n g residency subsequent to retirement, unless m i t i g a t i n g measures such as d i s c u s s e d above are implemented. A c h a r a c t e r i s t i c of PLAM's which may make these instruments more a t t r a c t i v e f o r co-op f i n a n c i n g , r e l a t i v e to c o n v e n t i o n a l housing, i s the slow e q u i t y b u i l d up. Ryba has contended that slower e q u i t y accumulation under PLAM's may "deprive the c o n v e n t i o n a l home owner of some non-pecuniary b e n e f i t s of home ownership" (Ryba, 1983, p. 47). Since a c o - o p e r a t i v e o p e r a t i n g under a non p r o f i t model pre c l u d e s e q u i t y (except perhaps in a l i m i t e d model) t h i s would not be a problem fo r co-ops. T h i s d e f i c i e n c y can be countered, for c o n v e n t i o n a l home-owners, by the lower debt s e r v i c e r a t i o f a c i l i t a t e d under PLAM's which i n c r e a s e s p o t e n t i a l to i n v e s t in non-housing a s s e t s (Ryba, 1983) 1 0 . Once a g a i n , t h i s lower housing expenditure and i n c r e a s e d cash a v a i l a b i l i t y i s a b e n e f i t to co-op members. In f a c t a co-op would combine the b e n e f i t s of home ownership s e c u r i t y , p o s s i b l y higher d i s p o s a b l e income (net of housing charge) and r e l a t i v e l i q u i d i t y (of share purchase f u n d s ) . Moreover, the n e c e s s i t y f o r lender matching (of a s s e t s and l i a b i l i t i e s ) and hence l i m i t e d number of i n s t i t u t i o n s l i k e l y to adopt PLAMs are another f a c t o r f a v o u r i n g PLAMS f o r co-op housing. Union pension funds with an i n h e r e n t long term h o r i z o n are a 1 0 Of course investment i n a p r i n c i p a l r e s i d e n c e has the advantage of tax exempt s t a t u s on a c a p i t a l gain upon d i s p o s i t i o n . 85 p o t e n t i a l source of co-op f i n a n c e as a r e s u l t of the h i s t o r i c a l a l l i e g a n c e of co-ops and union members. If the noted i n s t i t u t i o n a l b a r r i e r s can be overcome PLAM's appear to have c o n s i d e r a b l e u t i l i t y f o r co-op f i n a n c i n g . V a r i a b l e Rate Mortgage (VRM) T h i s instrument addresses the problem of i n t e r e s t r a t e r i s k , by v a r y i n g the c o n t r a c t rate (term,payment) in accordance with market change i n the i n t e r e s t r a t e . I t i s p a r t i c u l a r l y a t t r a c t i v e d u r i n g mortgage renewal, or i n i t i a t i o n at high i n t e r e s t r a t e s s i n c e the borrower i s not t i e d i n t o that high f i x e d r a t e . A d d i t i o n a l l y , the borrower does not in c u r the t r a n s a c t i o n c o s t s of r e f i n a n c i n g at a lower r a t e . On the other hand i f r a t e s r i s e the borrower i s f u l l y encumbered with the i n t e r e s t r a t e r i s k and r e s u l t a n t i n c r e a s e d payments. The lender i s t o t a l l y f r e e of i n t e r e s t r a t e r i s k and, t h e r e f o r e , the c o n t r a c t r a t e i s g e n e r a l l y 1/2 - 3/4% lower than the rate on a f i x e d term mortgage. There are a number of a l t e r n a t e designs of t h i s instrument aimed at reducing some of i t s inherent d e f i c i e n c i e s . One form i s the c o n s t r a i n e d , VRM which allows v a r i a t i o n only between s p e c i f i e d l i m i t s (e.g., ± 2.0%). A l t e r n a t i v e l y , the rate may be h e l d constant with changes i n mat u r i t y to r e f l e c t the v a r y i n g r a t e ( a m o r t i z a t i o n p e r i o d adjusted) (Gau, 1981). A dual r a t e VRM has a l s o been 86 i n t r o d u c e d i n order to l e v e l out the payments i n each term. T h i s i n v o l v e s the use of a payment f a c t o r and a d e b i t i n g f a c t o r , u s u a l l y set f o r a 3 to 5 year term; i n the i n t e r i m , o u t s t a n d i n g balance i s a d j u s t e d to r e f l e c t the r e l a t i v e l e v e l s of these two r a t e s . U t i l i t y of VRM's i n Co-op Housing Within the context of the c u r r e n t d i s c u s s i o n the p r i n c i p a l b e n e f i t of VRM's would be by u s i n g these i n combination with graduated payment mortgages. By themselves VRM's do nothing to address the t i l t problem (Pesando, 1981). R e c a l l , however, the d e f i c i e n c y of the GPM - the dependance upon a n t i c i p a t e d i n f l a t i o n . Combining a VRM and GPM would i n e f f e c t simulate a PLAM but a v o i d i t s i n s t i t u t i o n a l o b s t a c l e s . The mortgage c o n t r a c t would be w r i t t e n at the c u r r e n t market r a t e and the GPM schedule c a l c u l a t e d on t h i s b a s i s over a 3 - 5 year term. The VRM would then be 'piggybacked' onto the c o n t r a c t such that a drop i n the f l o a t i n g i n t e r e s t r a t e ( r e f e r e n c e d to the prime l e v e l f o r example) would pr o v i d e f o r g r e a t e r payment of p r i n c i p a l . S i m i l a r l y , an i n c r e a s e i n the f l o a t i n g rate would r e q u i r e higher i n t e r e s t payment, accomplished through negative a m o r t i z a t i o n . Such a h y b r i d instrument as that d i s c u s s e d here would overcome the p r i n c i p a l d e f i c i e n c y of GPM's: the independence of payment schedule and income change. The 87 borrower would not be faced with r e f i n a n c i n g a l a r g e o u t s t a n d i n g balance i n the absense of income i n f l a t i o n . The obvious draw back of t h i s h y b r i d o p t i o n i s the s c e n a r i o where i n f l a t i o n i s on an upward t r e n d . The combination of defe r e d i n t e r e s t from the GPM schedule and that i n c u r e d i n the VRM (where the f l o a t i n g rate exceeds the c o n t r a c t r a t e ) would be l a r g e r than that under a GPM alone, and, may c r e a t e a higher d e f a u l t r i s k . With such an instrument then, the i n t e r e s t r a t e r i s k i s s h i f t e d e n t i r e l y onto the borrower. The l e n d e r , c o n v e r s e l y , may be a f f e c t e d by a p o t e n t i a l l y higher d e f a u l t r i s k i n r e t u r n . T h i s h y b r i d o p t i o n i s suggested only as a f a l l back i n the event that i n s t i t u t i o n a l c o n s t r a i n t s preclude the adoption of a PLAM. The recent i n t r o d u c t i o n of mortgage ra t e insurance ( F e d e r a l Budget, Feb. 1984) 1984) may i n f a c t make VRM's redundant. N e v e r t h e l e s s , i n t u i t i v e l y , i t seems that a GPM with mortgage rate insurance would be l e s s e f f e c t i v e than a GPM/VRM. The l a t t e r h y b r i d would reduce the independance between c o n t r a c t payments and income growth p o t e n t i a l whereas the MRI would have no such a f f e c t . PART TWO: OTHER FINANCING ALTERNATIVES The d i s c u s s i o n thus f a r has centered on r e d i s t r i b u t i n g the long run b e n e f i t s of c o - o p e r a t i v e tenure so as to reduce ' f r o n t end' or access c o s t . The o b j e c t i v e 88 in t h i s second part i s to review means of reducing r a t h e r than j u s t r e d i s t r i b u t i n g f i n a n c i n g c o s t s . The two areas which have the g r e a t e s t p o t e n t i a l to reduce f i n a n c i n g c o s t are lowering the loan to value r a t i o (amount of p r i n c i p a l b o r r o w e d ) 1 1 and secondly, borrowing at lower i n t e r e s t r a t e s 1 2 . Lowering the amount of loan c o u l d be achieved e i t h e r through member e q u i t y c o n t r i b u t i o n s or a l t e r n a t i v e l y grants from the government or sponsor a s s o c i a t i o n s . The subject of grants w i l l be addressed i n the next chapter. Lower i n t e r e s t , or f i n a n c i n g c o s t s may be obtained by tapping cheaper money sources. Bond f i n a n c i n g or d i r e c t government loans are the two sources which w i l l be d i s c u s s e d . Without d i s c u s s i n g how the v a r i o u s l e v e l s of eq u i t y or i n t e r e s t are achieved, Table 4.1 demonstrates the a f f e c t of v a r i o u s r a t e s on the monthly mortgage payment of a 3 bedroom base case u n i t . I t i s apparent that at c u r r e n t development c o s t s even 30% e q u i t y and r e l a t i v e l y low i n t e r e s t r a t e s (10% or l e s s ) are i n e f f e c t i v e i n reducing 1 1 In a d d i t i o n t h i s may be c r i t i c a l to lender acceptance of un d e r w r i t i n g p r i v a t e c o - o p e r a t i v e s . 1 2 In p a r t , the PLAM achi e v e s t h i s by e l i m i n a t i n g premiums f o r a n t i c i p a t e d i n f l a t i o n inherent i n nominal i n t e r e s t r a t e s . 89 housing charges to, or below market l e v e l s 1 3 . However, in combination with the mortgage instruments p r e v i o u s l y d i s c u s s e d these o p t i o n s may be u s e f u l . TABLE 4.1: I HPACT OF VARIOUS INTEREST AND EQUITY LEVELS Equity as percent of capital cost INTEREST 0 5! 10! 15! 20! 25! 30! RATE n •574 $545 $517 $488 $459 $431 $402 8! $638 $606 $574 $542 $510 $478 $446 n $704 $66B $633 $598 $563 $528 $492 101 $771 $732 $694 $655 $617 $578 $540 m $839 $798 $756 $714 $672 $630 $5BB 12! $909 $864 $818 $773 $727 $682 $636 131 $980 $931 $682 $833 $784 $735 $686 14! $1,051 $999 $946 $894 $841 $789 $736 15! $1,124 $1,067 $1,011 $955 $899 $843 $786 l i t $1,196 $1,136 $1,076 $1,017 $957 $897 $837 171 $1,269 $1,206 $1,142 $1,079 $1,015 $952 $888 18! $1,342 $1,275 $1,208 $1,141 $1,074 $1,007 $940 Market rents * $625 - Operating Expenses s $128 Max PHT « $497 (1) Noeinal annual rate, no compounding Member E q u i t y Co - o p e r a t i v e members in some p r o v i n c e s , p a r t i c u l a r l y B.C. purchase shares i n the c o r p o r a t i o n which e n t i t l e them to a p r o p r i e t a r y l e a s e in the co-op. In the e x i s t i n g sec. 56.1 co-ops these shares c u r r e n t l y vary between $500 -1 3 Given f i r s t year o p e r a t i n g expenses of 128, 10% i n t e r e s t and 30% e q u i t y , a monthly charge of 668 r e s u l t s ; i n comparison, market r e n t s i n the area are 625. 90 $1500. As such they serve a u s e f u l f u n c t i o n as working c a p i t a l , damage dep o s i t and member commitment. However, t h i s l e v e l of eq u i t y i s i n s u f f i c i e n t to reduce the amount of funds to be purchased. In a non-NHA, n o n - p r o f i t model t a r g e t t e d at a lower middle income group (2nd and 3rd q u i n t i l e s ) some member e q u i t y would a l s o be r e q u i r e d . Member RHOSP's as a Source of Member Equ i t y The R e g i s t e r e d Home Owner Savings Plan (RHOSP) was introduced i n 1974 to encourage young f a m i l i e s to save toward the purchase of a home. The i n c e n t i v e p r o v i d e d was the tax exempt s t a t u s of funds d e p o s i t e d i n a r e g i s t e r e d plan (maximum $1000 each year; $10,000 over the l i f e of the p l a n ) . Hence, f o r example, a taxpayer i n a 35% tax bracket c o u l d o b t a i n a tax saving of $350 i n a d d i t i o n to saving $1000 f o r home purchase. The major disadvantage of the plan i s that d u r i n g the 10 years s i n c e RHOSPs were in t r o d u c e d , housing p r i c e s and consequent down payments i n many markets have i n c r e a s e d at a f a s t e r r a t e than accumulated saving i n RHOSPs (CHF, 1983). Moreover, un l e s s the maximum annual tax savings exceed the annual i n c r e a s e in the s i z e of the downpayment r e q u i r e d (assumed to be a constant p r o p o r t i o n of p r i c e ) , the taxpayer w i l l be no more able to purchase at a l a t e r date than at present. The f a c t that the b e n e f i t of RHOSPs to home-owner access i s i l l u s i o n a r y suggests that these plans c o u l d 91 n e v e r t h e l e s s a s s i s t p o t e n t i a l co-op members to aquire member e q u i t y . In p a r t i c u l a r , i t has been premised i n t h i s paper that co-op tenure c o u l d be t a r g e t t e d to those households below the margin of homeownership a f f o r d a b i l i t y . I t i s notable t h e r e f o r e that the m a j o r i t y of RHOSP c o n t r i b u t i o n s are i n the $10,000 - $25,000 income bracket (1980 = 66%, Table 4.2). Furthermore, the average annual c o n t r i b u t i o n of p a r t i c i p a n t s i s $953 (CHF, 1983). While t h i s does not imply that these households would opt f o r co-op tenure, i t does demonstrate the p r o p e n s i t y of the lower-middle income group to save. C l e a r l y , however, any household c o n t r i b u t i n g to an RHOSP plan a s p i r e s to homeownership. Since a household i s only permitted one RHOSP plan i n t h e i r l i f e t i m e , many would be r e l u c t a n t to ' f o l d ' t h e i r plan toward co-op e q u i t y u n l e s s they were c e r t a i n of earning an e q u i v a l e n t r e t u r n on that e q u i t y which c o u l d be l a t e r a p p l i e d to home purchase. P r e r e q u i s i t e s to Co-op E q u i t y Through RHOSPS Given that the m a j o r i t y of RHOSP c o n t r i b u t o r s correspond to the (proposed) t a r g e t group f o r co-op tenure, the use of RHOSPs as an e q u i t y d e v i s e has me r i t . C u r r e n t l y the Income Tax Act t r e a t s co-ops as a form of homeownership and allows RHOSP funds to be a p p l i e d a g a i n s t both share purchase and the purchase of new f u r n i s h i n g s f o r a co-op home. Th e r e f o r e , there e x i s t s no l e g i s l a t i v e impediment to such a p r o p o s a l . In order to a t t r a c t these p o t e n t i a l Table 4.2 92 Contributions to Registered Borne Ownership Savings Plans by Income Level of Contributor, 1980  Number of Average Assessed income contributors Total contributions contributions thousands % millions of dollars % dollars 1 2 3 4 5 6 Under $5,000 13.3 2.4 11.3 2.2 850 $5,000-10,000 54.2 9.9 4.9 9.5 918 $10,000-15,000 121.5 22.1 114.1 21.8 940 $15,000-20,000 131.3 23.9 133.1 25.4 956 $20,000-25,000 109.0 19.9 104.9 20.1 962 $25,000-30,000 51.8 9.4 50.6 9.7 978 $30,000-35,000 26.6 4.8 26.3 5.0 989 $35,000-40,000 11.8 2.1 11.7 2.2 992 $40,000-50,000 11.6 2.1 11.5 2.2 990 $50,000 and over 9.3 1.7 9.3 1.8 995 Total 548.7 100.0 523.0 100.0 953 Source: Canada, Department of Revenue, Taxation, Taxation Statistics (Ottawa: Supply and Services, 1982). Table 14. 93 c o - o p e r a t o r s , however, treatment of e q u i t y upon withdrawl must be c l e a r l y predetermined. The o r g i n a l member should not be p e n a l i z e d or burdened i n favour of f u t u r e r e s i d e n t s , and v i c e v e r s a . The p r e f e r a b l e s o l u t i o n would be to index the share purchase such that i t remains constant i n r e a l terms. T h i s would not compromise the long run a f f o r d a b i l i t y of co-op tenure since the mortgage payments would not i n any way be a f f e c t e d by change i n membership (although a b i l i t y to meet payments would be). The permanent r e s i d e n t would be immune; only the access to incoming members and compensation to withdrawing members i s a f f e c t e d (and even then treatment i s constant i n r e a l terms). P o t e n t i a l f o r Generation of E q u i t y Funds C l e a r l y , any c o - o p e r a t i v e housing model based on l i m i t e d e q u i t y p a r t i c i p a t i o n s u f f e r s the disadvantage of p r e c l u d i n g those households without s u f f i c i e n t savings who may w e l l be those most i n need of the s e c u r i t y of co-op tenure. In the event that a household has i n s u f f i c i e n t funds they would have to borrow these. In the f i r s t p l a c e , t h i s may impose a higher housing expenditure r a t i o on the household. More r e l e v a n t however, i s the f a c t that the very nature of c o l l e c t i v e c o - o p e r a t i v e tenure p r e c l u d e s the members from h o l d i n g i n d i v i d u a l t i t l e . Hence, the p o t e n t i a l member has no t i t l e a g a i n s t which to secure such funds. F i n a n c i n g would have to be a c q u i r e d through a c h a t t e l 94 mortgage (personal loan) secured by p e r s o n a l property (Marks, 1980). T h i s in i t s e l f might c r e a t e a b a r r i e r to en t r y . The Case f o r Member E q u i t y C o - o p e r a t i v e tenure o f f e r s many of the b e n e f i t s of homeownership, with the exce p t i o n of e q u i t y . In e f f e c t i t provid e s the non-pecuniary b e n e f i t s : s e c u r i t y of tenure, p a r t i c i p a t i o n i n management and c o n t r o l of environment, and good standard accomodation (Drover, 1981). In a d d i t i o n , the co-op member b e n e f i t s from l i m i t e d p e r s o n a l l i a b i l i t y , an independent c r e d i t r a t i n g , and to a g r e a t e r or l e s s e r degree, high l i q u i d i t y and m o b i l i t y 1 * . On t h i s b a s i s , a case can be made that p o t e n t i a l co-op members should be w i l l i n g to pay f o r these b e n e f i t s . I n i t i a l l y , a w i l l i n g n e s s to purchase such a p p a r e n t l y i n t a n g i b l e benefits^may be an o b s t a c l e to such a p r o p o s a l . Over a l o n g e r term, with the establishment of a v i a b l e c o - o p e r a t i v e s e c t o r and grea t e r p u b l i c awareness, t h i s would be l e s s of a problem. The US experience which i n v o l v e s both s u b s i d i z e d and p r i v a t e c o - o p e r a t i v e s suggests that a v i a b l e secondary market f o r co-op accomodation i s q u i t e w i t h i n e x p e c t a t i o n (Clurman, 1 970) 1 * Depending on how e q u i t y payments are t r e a t e d upon withdrawl 95 Ob s t a c l e s to Member E q u i t y : The Condominium A l t e r n a t i v e While an argument can be made suppo r t i n g the p r i n c i p l e of share purchase or member e q u i t y as a premium f o r the b e n e f i t s r e c e i v e d by co-op members, a counter argument can e q u a l l y be pursued. If the e q u i t y c o n t r i b u t i o n were 15 - 25% of the u n i t value, why would any household, ab l e to save s u f f i c i e n t funds not apply t h i s to a downpayment on a condominium 1 5. Given the r e l a t i v e tax advantage of homeownership and the p o t e n t i a l f o r e q u i t y accumulation, a household on the margin of a f f o r d a b i l i t y i s l i k e l y to opt for the condominium a l t e r n a t i v e . The c o - o p e r a t i v e option would, however, o f f e r an a l t e r n a t i v e c h o i c e to such h y p o t h e t i c a l households. A d d i t i o n a l l y , while o v e r l a p p i n g somewhat with the condominium market, the a n t i c i p a t e d co-op market c o u l d be p r i m a r i l y focussed at and below the 'margin'. For t h i s reason i t i s c l e a r that the e q u i t y c o n t r i b u t i o n r e q u i r e d must be kept r e l a t i v e l y low; i n which case i t may be i n e f f e c t i v e i n reducing the loan amount. In essense, there i s l i t t l e d i f f e r e n c e i n the mortgage payment (or pro r a t a share t h e r e o f ) of a s i m i l a r 1 5 Of course, t h i s presumes that modestly p r i c e d , s i m i l a r u n i t s are a v a i l a b l e on the market. 96 newly c o n s t r u c t e d condominium and a c o - o p 1 6 . For the i n i t i a l occupants of e i t h e r tenure, (assuming e q u i v i l e n t f i n a n c i a l means the c h o i c e i s between v a r i o u s non-pecuniary advantages and disadvantages of the c o - o p e r a t i v e versus the e q u i t y a p p r e c i a t i o n p o t e n t i a l and tax exempt c a p i t a l gain p o t e n t i a l of the condominium. On p u r e l y economic grounds, a household a b l e to save s u f f i c i e n t downpayment and meet the monthly mortgage payment would probably chose the condominium a l t e r n a t i v e . They would favour the co-op only i f they valued the non-pecuniary b e n e f i t s higher than the economic b e n e f i t a t t r i b u t a b l e to the condominium. When the co s t of the co-op i s reduced through a l t e r n a t i v e f i n a n c i n g the economic advantage of the condominium i s eroded, except i f i t too c o u l d u l i l i z e the f i n a n c i n g mechanism. The p r i n c i p a l advantage of c o - o p e r a t i v e s tenure i s r e l a t i v e to r e n t a l tenure. Over time, the b e n e f i t of a n o n - p r o f i t (or even l i m i t e d e q u i t y ) c o - o p e r a t i v e i s evident (Drover, 1981). The co-op mortgage i s always based on the o r i g i n a l p r i n c i p a l amount; in c o n t r a s t , a change i n ownership of a r e n t a l p r o p e r t y would r e s u l t i n a market t r a n s a c t i o n , (except through i n h e r i t a n c e , e t c . ) . Any a p p r e c i a t i o n would be c a p i t a l i z e d i n t o the market p r i c e and 1 6 The market c o s t of the condominium would be higher due to the a d d i t i o n of developer p r o f i t but t h i s c o u l d be o f f s e t by a higher down payment. Hence, the assumption of s i m i l a r mortgage i s reasonable with the ex c e p t i o n of a m o r t i z a t i o n p e r i o d . 97 notwithstanding changes i n i n t e r e s t l e v e l s , the mortgage payments would be c a l c u l a t e d on the new market va l u e . C l e a r l y , m u l t i p l e t r a n s a c t i o n s would enlarge the d i f f e r e n c e between the c o - o p e r a t i v e and the r e n t a l p r o p e r t y over time. Although member e q u i t y would, c o n c e p t u a l l y , provide for a lower payment l e v e l , the i n i t i a l c o m p e t i t i o n with the condominium market would appear to preclude t h i s alone as a v i a b l e f i n a n c i n g a l t e r n a t i v e . N e v e r t h e l e s s , even a low e q u i t y c o n t r i b u t i o n would provide some r e l i e f to the s i z e of the payment r e q u i r e d as w e l l as show a commitment on the part of the membership. Bond F i n a n c i n g Bond f i n a n c i n g f o r low income housing development has been e x t e n s i v e l y u t i l i z e d i n the U.S. whose L o c a l Housing Agencies are empowered to i s s u e bonds secured by the government of the US. Debentures have a l s o been issued f o r the f i n a n c i n g of p r o v i n c i a l non p r o f i t p r o j e c t s i n Quebec (CMHC,1983). A review of the r e l a t i v e i n t e r e s t r a t e s on mortgages and s e l e c t e d s e c u r i t i e s (Table 4.3(a) & (b)) r e v e a l s that mortgage f i n a n c i n g i s the most expensive source of funds, p a r t i c u l a r l y i n recent years (see Table 4.3(b)). While the spread between government bonds and c o n v e n t i o n a l mortgages f l u c t u a t e d i n the 1 - 2% range between 1961-80 (Goldberg, 1983), t h i s d i f f e r e n c e widened i n 1981-83 to between 3 - 4.5% (Bank of Canada Review, Table 4.3(b)). The Table 4.3 (a) Bond Yields and Mortgage Interest Rates, 1961 - 1981 Interest Rate Federal Conventional (maximum) Government Corporate Mortgage on NHA Insured Year* Bonds Bonds Loans Mortgage Loans (1) (2) (3) (4) 1961 4.95 5.31 6.50 1962 5.12 5.35 6.50 1963 5.17 5.45 6.25 1964 5.03 5.48 6.25 1965 5.44 6.03 7.40 6.25 1966 5.76 6.77 7.95 7.25 1967 6.54 7.52 8.52 8.25 1968 7.30 8.11 9.10 8.75 1969 8.33 9.32 10.50 9.375 1970 6.99 8.87 10.16 9.79 1971 6.56 8.30 9.10 8.91 1972 7.12 8.17 9.22 9.00 1973 7.70 8.85 10.01 9.88 1974 8.77 10.76 11.88 11.75 1975 9.49 11.02 11.89 11.89 1976 8.47 9.80 11.27 11.18 1977 8.77 9.64 10.33 10.16 1978 9.68 10.35 11.53 10.97 1979 11.33 12.06 13.58 12.93 1980 12.67 13.62 15.60 14.07 1981 15.27 16.54 17.79 — * figures taken for the end of December Source: Canadian Housing Sta t i s t i c s (Ottawa: CHMC, 1979), Table 86. Canadian Housing Statistics (Ottawa: CMHC, 1980), Table 77. Canadian Housing Statistics (Ottawa: CMHC, 1981), Table 75. 99 Table 4.3 (b) Comparison of 5-Year Conventional Mortgage Rates with Selected Canadian Rates Government of Canada Bonds End of Period Conventional Mortgages 5 - 1 0 Over 10 Years Years Provincial Bonds Trust Loan Certificate Chartered Bank Deposit Rate on 5-year Personal Fixed Term 1 2 3 4 5 6 7 1978 March June Sep Dec 10.33 10.32 10.67 11.53 8.90 9.11 8.95 9.23 9.03 9.15 9.81 9.68 9.79 9.80 9.74 10.17 8.96 9.23 9.32 9.96 8.25 8.75 9.00 9.75 1979 March June Sep Dec 11.11 11.16 12.25 13.58 9.88 9.91 9.54 9.73 10.36 10.38 11.29 11.32 10.38 10.19 10.98 11.87 9.75 9.86 11.04 11.29 9.75 9.50 10.00 11.00 1980 March June Sep Dec 14.69 12.92 14.50 15.60 13.66 13.45 10.74 11.29 12.70 12.98 12.63 12.67 14.03 11.76 13.58 13.21 13.61 11.04 12.75 13.25 12.50 10.00 11.25 12.50 1981 March June Sep Dec 15.75 18.55 21.46 17.79 13.61 13.48 15.24 15.03 17.94 17.66 15.29 15.27 14.27 15.83 18.70 16.47 13.79 15.57 17.39 15.14 13.00 16.50 17.00 13.50 1982 March June Sep Dec 19.41 19.10 17.49 14.34 14.99 15.06 15.90 16.03 13.10 13.48 11.03 11.69 16.65 17.38 14.45 12.51 16.18 15.71 11.54 12.32 14.25 14.25 12.25 9.25 1983 March 13.45 10.59 11.70 12.58 11.39 8.00 Source: Bank of Canada Review 100 divergence between mortgage and bond r a t e s i s p a r t l y due to the r e l a t i v e l i q u i d i t y of bonds and a d m i n i s t r a t i v e c o s t s a s s o c i a t e d with mortgage investment. A l s o , government monetary p o l i c y has s t r o n g l y i n f l u e n c e d the i n t e r e s t r a t e market. To a t t r a c t investment, f i n a n c i n g instruments must r e t a i n a c o m p e t i t i v e p o s i t i o n . In order to be c o m p e t i t i v e yet provide f o r lower c o s t f i n a n c i n g , bonds c o u l d be tax exempt, thereby i n c r e a s i n g a f t e r tax y i e l d . A l t e r n a t i v e l y , the co-op se c t o r c o u l d f l o a t i t s own bonds, secured by the vast land h o l d i n g s of i t s member co-ops, and operated on a n o n - p r o f i t b a s i s . If t h i s short term t r e n d toward a wide spread p r e v a i l s , then employing bond f i n a n c i n g c o u l d p o t e n t i a l l y c o n t r i b u t e s u b s t a n t i a l l y to reducing the f i n a n c i n g cost of c o - o p e r a t i v e housing. For example, by r e d u c i n g f i n a n c i n g c o s t from 13% to 10% the occupancy charge i n the 3-bedroom base-case u n i t c o u l d be reduced by 18.5% ($881 vs. $1081; i n c l u d i n g equal o p e r a t i n g c o s t s of $128). Mechanics of Bond F i n a n c i n g E s s e n t i a l l y bond f i n a n c i n g i n v o l v e s the issuance of a s e c u r i t y or promise to pay. I n v e s t o r s w i l l buy t h i s promise of f u t u r e income which u s u a l l y i n c l u d e s the payment of a s p e c i f i e d amount on a s p e c i f i e d day. A d d i t i o n a l l y , predetermined p e r i o d i c payments may be r e q u i r e d at a s p e c i f i e d r a t e . Bonds are f r e q u e n t l y used to r a i s e c a p i t a l by most l e v e l s of government, agencies t h e r e o f , and p r i v a t e 101 o r g a n i z a t i o n s . Depending on the o b j e c t i v e s of the i s s u e r , bonds may be e i t h e r short or long term. G e n e r a l l y a bond may be i s s u e d to a s p e c i f i c payee ( r e g i s t e r e d bond) and i s n o n - t r a n s f e r a b l e ; a l t e r n a t i v e l y the bond may be t r a n s f e r a b l e (bearer bonds). Secondly, in the case of t r a n s f e r a b l e bonds, the face value, maturity date and i n t e r e s t (or coupon) rate are s p e c i f i e d . The r e t u r n to the i n v e s t o r , however, depends on the amount p a i d f o r the bond. A bond purchased at face value and h e l d to maturity (e.g., $1000 bond; 5 year term; 10% coupon r a t e p.a.) would y i e l d the coupon r a t e (10% p . a . ) . However, i f a c q u i r e d f o r an amount l e s s than face value (e.g., $800) the i n v e s t o r has purchased a s p e c i f i e d stream of payments ($100 per year p l u s $1000 at matu r i t y ) f o r a 'discount'. In such a case the i n v e s t o r s y i e l d i s i n c r e a s e d (to approximately 1 6 % ) 1 7 . Conversely, purchasing a bond at g r e a t e r than face value, termed paying a premium, produces a y i e l d lower than the coupon r a t e . Types of Bond Bonds are c l a s s i f i e d a c c o r d i n g to the method of redemption and are of two main types: (1) term or s i n k i n g fund bonds; and (2) s e r i a l bonds. Term bonds are f u l l y 10% 15.9% 1 7 $1000 = $100—, + ( 1 + i ) " 5 ; i = 5 | i % $800 = $100 5~| i % + ( 1 + i ) ' 5 ; i = 1 02 redeemable at maturity and r e q u i r e annual payments to a s i n k i n g fund which i f w e l l managed w i l l meet the debt o b l i g a t i o n upon m a t u r i t y . S e r i a l bonds on the other hand are r e t i r e d by annual i n s t a l l m e n t . Moreover, s e r i a l bonds come in the form of annuity s e r i a l s and s t r a i g h t s e r i a l s . The former, annuity s e r i a l i s e q u i v a l e n t to the standard l e v e l payment mortgage and i s r e t i r e d by blended payments of p r i n c i p a l and i n t e r e s t . A s t r a i g h t s e r i a l i n v o l v e s a constant p r i n c i p a l i n s t a l l m e n t with i n t e r e s t c a l c u l a t e d on the d e c l i n i n g balance. Consequently, the s t r a i g h t s e r i a l bond commences with a higher debt s e r v i c e p r o g r e s s i v e l y reducing t h e r e a f t e r as o u t s t a n d i n g p r i n c i p a l d e c l i n e s . Since the s t r a i g h t s e r i a l bond makes l a r g e r c o n t r i b u t i o n s to retirement of p r i n c i p a l in the e a r l y years, the t o t a l i n t e r e s t ( i n c u r r e n t d o l l a r s ) i s lower than under an annuity s e r i a l . While lower t o t a l i n t e r e s t c o s t s are d e s i r a b l e , the higher i n i t i a l payments under the s t r a i g h t s e r i a l would have a negative impact on access to housing ( s i n c e e a r l y payments are h i g h e r ) . Meanwhile, the annuity s e r i a l bond reproduces the standard l e v e l payment mortgage but at lower i n t e r e s t r a t e s (and t h e r e f o r e lower debt s e r v i c e payments) than that i n c u r r e d under t r a d i t i o n a l l y higher mortgage i n t e r e s t r a t e s (Table 4.3) For these reasons the annuity s e r i a l bond i s c o n s i d e r e d most d e s i r a b l e f o r the f i n a n c i n g of c o - o p e r a t i v e housing. 1 03 I n s t i t u t i o n a l P r e r e q u i s i t e s to Adoption of Bond F i n a n c i n g In order to u t i l i z e bond f i n a n c i n g , a c e n t r a l i n t e r m e d i a r y would be necessary. I t would be u n d e s i r a b l e for each i n d i v i d u a l co-op to issue bonds independently, p a r t l y due to a d m i n i s t r a t i v e c o n s t r a i n t s , but more s i g n i f i c a n t l y f o r reasons of s e c u r i t y and m a r k e t a b i l i t y . Bonds are g e n e r a l l y secured by the a p p r a i s e d a b i l i t y of the i s s u e r to honour the promise of redemption. For t h i s reason government bonds are c o n s i d e r e d the most secure (due to the t a x i n g powers of government) ( C a l v e r t , 1969). Corporate bonds secured by the ea r n i n g power and a s s e t s of the c o r p o r a t i o n are g e n e r a l l y r a t e d lower than government bonds and a c c o r d i n g l y c a r r y a higher i n t e r e s t r a t e . T y p i c a l l y the higher i n t e r e s t r a t e s are commenserate with higher l e v e l s of r i s k . Given the r e l a t i o n s h i p between r i s k and r e t u r n on an investment, co-op housing c o u l d be fa v o u r a b l y f i n a n c e d by bonds only i f they are p e r c e i v e d as being a r e l a t i v e l y secure a s s e t . Moreover, the a s s e t s of the i s s u e r must exceed the value of ou t s t a n d i n g bonds - s i m i l a r to a loan to value r a t i o . As r i s k i s reduced through d i v e r s i t y , both s p a t i a l and temporal, i t would be advantageous to have a c e n t r a l , or r e g i o n a l c o - o p e r a t i v e a s s o c i a t i o n i s s u e bonds with a p o r t f o l i o of co-ops as a s s e t s . Over time, as the value of the r e a l p r o p e r t y a p p r e c i a t e s , the s e c u r i t y of the 1 04 a s s e t s would i n c r e a s e , with new co-ops o b t a i n i n g f i n a n c i n g from the c e n t r a l intermediary rather than independently i s s u i n g bonds. C l e a r l y , however, i t would take a number of years to e s t a b l i s h such an i n s t i t u t i o n . Furthermore, i f the c e n t r a l i n t e r m e d i a r y d i d not have a cash s u r p l u s and was c a l l e d to redeem a bond the q u e s t i o n of which co-op to l i q u i d a t e becomes a s e r i o u s i s s u e . The problem remains i n the short term, of making such a mechanism o p e r a t i o n a l . The r o l e may be f u l f i l l e d i n i t i a l l y by goverment and w i l l be d i s c u s s e d i n the next c h a p t e r . Tax Exempt Co-op Bonds An a d d i t i o n a l means of u t i l i z i n g bond f i n a n c i n g as a l e s s expensive source of development c a p i t a l would be to o b t a i n tax exempt s t a t u s f o r these bonds. T h i s would r a i s e the a f t e r tax y i e l d to the i n v e s t o r and t h e r e f o r e f a c i l i t a t e a lower coupon rate ( i n t e r e s t ) . The obvious o b s t a c l e here i s , however, c o n v i n c i n g government that i t should extend such p r e f e r e n t i a l treatment to the c o - o p e r a t i v e housing s e c t o r . Such a case w i l l be presented i n the next chapter. A precedent does however e x i s t i n the many tax expenditures h i s t o r i c a l l y a v a i l i b l e i n the p r i v a t e r e n t a l and homeowner s e c t o r s . T h i s u n f o r t u n a t e l y would not reduce the cost to government, merely c o n c e a l i t . 1 05 SUMMARY T h i s chapter has examined two broad approaches to the f i n a n c i n g of u n a s s i s t e d (by government) housing c o - o p e r a t i v e s . F i r s t l y , v a r i o u s a l t e r n a t i v e mortgage instruments were adapted in an attempt to address the p r e v a i l i n g gap between economic development c o s t s and market rent l e v e l s - the c u r r e n t tenure of most p o t e n t i a l c o - o p e r a t o r s . Secondly, v a r i o u s means of reducing f i n a n c i n g c o s t s were reviewed. Table 4.4 summarizes the monthly 'rent' of a 3 bedroom u n i t from the base case p r o j e c t (Table 4.5 presents mortgage payments o n l y ) . The monthly rent i s determined under l e v e l s of e q u i t y ranging from 0 - 15% each in c o n j u n c t i o n with c o n v e n t i o n a l , graduated payment and p r i c e l e v e l a d j u s t e d mortgages. I t i s apparent from the t a b l e that the v a r i o u s d e f e r r e d mortgage instruments are most e f f e c t i v e i n lowering i n i t i a l payment (and hence rent) l e v e l s . Moreover, these d e f e r r e d mortgage instruments r e s u l t i n comparable r e a l r e n t s over the long term d e s p i t e the dramatic growth in nominal payments (Table 4.5). At a conceptual l e v e l , the p r i c e l e v e l a d j u s t e d mortgage (PLAM) appears most e f f e c t i v e , both in lowering access c o s t and spreading housing c o s t s e q u i t a b l y over the long term (such that short term r e s i d e n t s are not burdened in favour of TABLE 4.4 SUMMARY OF ALTERNATE FINANCING OPTIONS COMPARATIVE OCCUPANCY CHARGES UNDER ALTERNATE FINANCINGi (Base Case Project| 3BR Unit) Capital Cost -$5,893,714 ( project) Hortgagei 33yr amortization) Syr terms) eeai annual compounding renewal assumed at constant rate of 13X Operating Expenses increase assuamed at 5X p.a. Equityi Member contribution or grant (various optionsi 0 - 13X) Market rents i n area * $623 CONVENTIONAL GPM (PURE) GPM (NHA) PLAH (1) (2) (3) LOAN/VALUE 0.9 0.85 YR NOMINAL REAL NOMINAL REAL NOMINAL REAL , NOMINAL REAL (4) (4) (4) (4) 1 $1,081 $1,081 $799 $799 4880 $880 $529 $529 3 $1,109 $786 $972 $689 $1,070 $758 $724 $513 30 $1,481 $122 $3,291 $270 $1,618 $133 $5,957 $489 33 $1,627 $87 $4,200 $224 $1,764 $94 $10,216 $545 1 $986 $986 $732 $732 $805 $805 $489 $489 5 $1,014 $718 $898 $636 $979 $694 $667 $473 30 $1,386 $114 $3,015 $248 $1,509 $124 $5,414 $445 33 $1,532 $82 $3,847 $205 $1,655 $88 $9,262 $493 1 $938 $938 $699 $699 $768 $768 $469 $469 3 $966 $684 $849 $601 $933 $661 $639 $433 30 $1,338 $110 $2,876 $236 $1,455 $120 $5,143 $423 33 $1,484 $79 $3,671 $196 $1,601 $85 $8,785 $469 notes (1) 6PM at 13X | 3X graduation over f u l l amortization period (2) GPM at 13X| 5X graduation over f i r s t 10 yrs, level payment thereafter s u f f i c i e n t to amortize remaining principal (3) PLAH calculated with real payment at 4X| i n f l a t i o n at 9X nominal rate • 13X (4) Discount rate • 9X TABLE 4,3i SUMMARY OF ALTERNATE FINANCING OPTIONBi H0RT6A6E PAYMENTS ONLY COMPARATIVE H0RT6A6E CHAR6E8 UNDER ALTERNATE FINANCINBl ( B m C a n P r o j i c t i 3BR Unit) Capital Cost * 13,893,714 ( projact) Hortgagu 33yr aaortizationi Syr t e r a i | m i annual coapounding rtnaNal anuasd at conttant rate of 131 Oporating Expantei incraaie aasuaied at 3X p.a. Equityt Hubtr contribution or grant (varioui optional 0 - 13X) CONVENTIONAL 6PM (PURE) 6PH (NHA) PLAH LOAN/VALUE 1.0 0.9 0.83 YR NOMINAL REAL NOMINAL REAL NOMINAL REAL NOMINAL REAL 1 $933 $933 $671 $671 $732 $732 $401 $401 3 •933 $673 $816 $378 $914 $648 $568 $402 30 $933 $78 $2,763 $227 $1,090 $90 $5,429 $446 33 $933 $31 $3,326 $188 $1,090 $38 $9,542 $309 1 $638 $838 $604 $604 $677 $677 $361 $361 5 $838 $607 $742 $326 $823 $383 $511 $362 30 $BSB $70 $2,487 $204 $981 $81 $4,886 $401 33 $838 $46 $3,173 $169 $981 $32 $8,588 $459 1 $810 $810 $571 $371 $640 $640 $341 $341 3 $810 $374 $693 $491 $777 $350 $483 $342 30 $810 $67 $2,348 $193 $927 $76 $4,615 $379 33 $810 $43 $2,997 $160 $927 $49 $8,111 $433 N o t m sat t a b l i 4.4 108 previous or f u t u r e r e s i d e n t s ) . Although both member e q u i t y and bond f i n a n c i n g have some p o t e n t i a l , in the short term and i n the absense of government a s s i s t a n c e t h i s i s somewhat l i m i t e d . At a cost to government t h i s c o u l d be f a c i l i t a t e d through tax exempt bonds. Over the longer term, co-op se c t o r bonds c o u l d be developed as a v e h i c l e to a t t r a c t funds f o r b u i l d i n g housing c o - o p e r a t i v e s at a lower cost than that of mortgage funds. 1 09 CHAPTER 5 DISCUSSION AND CONCLUSIONS OF RESEARCH P r e f e r r e d A l t e r n a t i v e s The p r e v i o u s chapters have proposed that housing c o - o p e r a t i v e s operated on a n o n - p r o f i t b a s i s e x h i b i t an inherent c h a r a c t e r i s t i c of long term a f f o r d a b i l i t y . The recent phenomenon of the 'economic gap' which plagues the m u l t i p l e housing development i n d u s t r y has been presented as the p r i n c i p a l impediment to the supply of a f f o r d a b l e housing. With the o b j e c t i v e of overcoming t h i s problem a number of f i n a n c i n g a l t e r n a t i v e s have been examined. The focus has been upon i d e n t i f y i n g means of ha r n e s s i n g the inherent b e n e f i t s of n o n - p r o f i t c o - o p e r a t i v e tenure, (as i d e n t i f i e d on p. 15) in combination with a l t e r n a t i v e f i n a n c i n g to c o n v e n t i o n a l mortgages. Of the a l t e r n a t i v e s examined, using c u r r e n t market rent l e v e l s as a p r i n c i p a l c r i t e r i a , only indexed mortgages (PLAM'S) and bonds appear to o f f e r r e a l p o t e n t i a l . While both PLAM'S and bonds are i d e n t i f i e d as the best a l t e r n a t i v e s , these two mechanisms are not n e c e s s a r i l y mutually e x c l u s i v e . In p a r t i c u l a r , bonds were reviewed as a means of a c t u a l l y reducing f i n a n c i n g c o s t s ; indexed mortgages are presented as a means of r e d i s t r i b u t i n g these f i n a n c i n g c o s t s . I d e a l l y then, a combination of these two 1 1 0 instruments would achieve an optimal e f f e c t : lower cost f i n a n c i n g and more even d i s t r i b u t i o n over time ( i n r e a l terms). P o t e n t i a l f o r Bond F i n a n c i n g Notwithstanding the p o t e n t i a l of a PLAM/BOND combination, bonds alone, while reducing c o s t s would not overcome the 'economic gap problem'. It has been suggested that the c o - o p e r a t i v e s e c t o r c o u l d f l o a t bonds secured by the vast land h o l d i n g s of member c o - o p e r a t i v e s . Administered on a n o n - p r o f i t b a s i s , t h i s c o u l d provide the s e c t o r with a source of funds o b t a i n e d at l e s s than market c o s t , through which the c o - o p e r a t i v e s e c t o r c o u l d move toward the more mature, s e l f p e r p e t u a t i n g c o - o p e r a t i v e housing s e c t o r e x i s t i n g i n Scandanavian c o u n t r i e s . An a d d i t i o n a l means of s e c u r i n g l e s s expensive f i n a n c i n g would be through tax exempt bonds. While p r o v i d i n g c o m p e t i t i v e a f t e r tax y i e l d s to i n v e s t o r s , these would reduce the c o s t of a t t r a c t i n g funds f o r the c o - o p e r a t i v e housing s e c t o r . T h i s of course would impose a c o s t , through tax e x p e n d i t u r e s , on government. As the i n t e n t of t h i s r e s e a r c h i s to i d e n t i f y means of minimizing subsidy c o s t of government, t h i s o ption r e q u i r e s more i n t e n s i v e a n a l y s i s i n order to determine the tax c o s t as w e l l as q u a n t i f y i n g what b e n e f i t s o c i e t y d e r i v e s i n r e t u r n f o r such a government investment. 1 1 1 Advantages of L i n k i n g Co-operative Tenure and Indexed  Financ ing The review of the c h a r a c t e r i s t i c s of c o - o p e r a t i v e tenure, d i s c u s s i o n of u n d e r w r i t i n g c r i t e r i a , and design of a P r i c e L e v e l Adjusted Mortgage (PLAM) together suggest that c o - o p e r a t i v e tenure p r o v i d e s perhaps the best complement for PLAM f i n a n c i n g . I t has been shown t h a t , l o g i c a l l y , the d e f a u l t r i s k of a PLAM fi n a n c e d co-op would be l e s s than that of a s i m i l a r l y f i n a n c e d p r i v a t e home or p r i v a t e r e n t a l . T h i s i s based on the absence of e q u i t y and a p r o f i t motive in the c o - o p e r a t i v e model which e f f e c t i v e l y leaves the co-op i n d i f f e r e n t to negative a m o r t i z a t i o n and d e c e l e r a t e d e q u i t y accumulation. Moreover, the c o l l e c t i v e nature of a c o - o p e r a t i v e m i t i g a t e s a g a i n s t the r i s k of income l a g . Obviously, the p o t e n t i a l f o r the income l e v e l of a l a r g e group of households to c o r r e l a t e with the i n f l a t i o n index i s g r e a t e r than that of a s i n g l e homeowner. T h i s a s s e r t i o n does however i m p l i c i t e l y assume that the c o - o p e r a t i v e i s able to r e c o n c i l e i n t e r n a l v a r i a t i o n s i n income l e v e l s . The Long Term, Real Cost of Housing In t h i s a n a l y s i s c u r r e n t market rent l e v e l s f o r a s i m i l a r u n i t to that i n the base case have been used as a c r i t e r i a f o r determining a f f o r d a b i l i t y . Having shown that the PLAM can f a c i l i t a t e the development of housing which 1 12 would i n i t i a l l y c o s t l e s s than t h i s c r i t e r i a i t remains to determine whether t h i s r e l a t i v e a f f o r d a b i l i t y w i l l continue over time. R e c a l l Table 3.1 which compared simulated co-op occupancy charges with market re n t s d u r i n g the p e r i o d 1972-82. T h i s t a b l e demonstrated the r e l a t i v e a f f o r d a b i l i t y of the c o - o p e r a i v e . 1 The same case study i s now reproduced i n Table 5.1 with the a d d i t i o n of a column showing occupancy charges under a PLAM (with 4% r e a l r a t e of i n t e r e s t ) . In t h i s 10 year ex-poste case study the r e l a t i v e a f f o r d a b i l i t y of the co-op u n i t i s maintained. In terms of the impact on i n d i v i d u a l members the lower p o r t i o n of Table 5.1 compares income l e v e l s with r e n t s . U t i l i z i n g a s h e l t e r expenditure-income r a t i o of 25%, q u a l i f y i n g incomes are determined f o r the three o p t i o n s : co-op with standard l e v e l payment mortgage (PLAM); Co-op with a PLAM; and t y p i c a l market r e n t s . These are compared with the upper boundary of the second income q u i n t i l e . The PLAM both begins c o n s i d e r a b l y lower than t h i s q u i n t i l e boundary and c o n s i s t e n t l y remains w e l l below over the f u l l 10 y e a r s . In f a c t the comparable market rent shown i n the t a b l e underestimates a c t u a l market l e v e l s s i n c e i t i s based on 3 bedroom apartments g e n e r a l l y while the a c t u a l p r o j e c t i s a townhouse development. Ther e f o r e the r e l a t i v e a f f o r d a b i l t y of the co-op u n i t i s most probably g r e a t e r than shown. 1 1 3 R e l a t i v e housing cost w i l l depend a l s o on the p o i n t of o r i g i n a t i o n . Although r e n t a l accommodation dur i n g the 1970's became r e l a t i v e l y a f f o r d a b l e , (Rental index rose only 54.8% 1 9 7 1 - 8 1 as compared with 136% i n the CPI. - Goldberg, 1983), Table 5.1 i l l u s t r a t e d that the simulated co-op u n i t remained more a f f o r d a b l e throughout that p e r i o d . There i s no doubt that cheaper housing u n i t s c o u l d have been found dur i n g that time, however, the i n d i v i d u a l u n s u c c e s s f u l i n o b t a i n i n g one of these would s t i l l have found t h i s co-op u n i t r e l a t i v e l y a t t r a c t i v e i n terms of a f f o r d a b i l i t y . S i m i l a r l y , over the long term the PLAM f i n a n c e d co-op should continue to a t t r a c t new members when vac a n c i e s a r i s e . Only i f both r e n t a l and ownership markets stagnate while i n f l a t i o n c o n t i n u e s at a moderate-high l e v e l (an u n l i k e l y long term s c e n a r i o ) w i l l the PLAM f i n a n c e d co-op be in a p o s i t i o n of r e l a t i v e disadvantage. Income Risk A concern to both the lender and co-op member a l i k e w i l l be the r i s k that income w i l l not r i s e i n accordance with the chosen index r a t e . Table 5.2 summarizes annual movements i n the income q u i n t i l e s i n comparison with i n f l a t i o n , as determined by the a l l item CPI, from 1971-83. t h i s t a b u l a t i o n r e v e a l s that even the lower income q u i n t i l e s have, over the long-term kept ahead of i n f l a t i o n . W i t hin i n d i v i d u a l years there have however been i n s t a n c e s where the TABLE S.l EX-POSTE PROJECT SIMULATION. COMPARISON OF OCCUPANCY CHARGES UNDER SLPN vt PLAH FOR A CO-OPERATIVE DEVELOPED IN 1972 (1) YR OPERATING OCCUPANCY CHARGE TYPICAL EXPENSES - MARKET (2) 6LPH (3) PLAH (3) RENT (4) 1972 •57 (222 (149 (230 1973 161 (226 (161 (240 1974 165 (231 (173 (260 1975 170 (236 (191 (285 1976 175 (241 (209 (313 1977 $81 (282 (228 (340 1978 $87 (288 (245 (365 1979 $93 (294 (264 (385 19BO $100 (301 (284 (415 1981 $108 (309 (309 (455 1982 $115 (436 (346 UPPER MINIMUM INCOME FOR HAX YR BOUNDARY 25X H0U6IN6 EXPENDITURE (5) 6LPH PLAH HARKET 1972 $8,941 (10,665 (7,176 -1973 (9,948 (10,866 (7,741 (11,520 1974 $11,765 (11,081 (8,310 (12,480 1975 (12,997 (11,312 (9,152 (13,680 1976 $14,557 (11,560 (10,044 (15,024 1977 (16,025 (13,540 (10,946 (16,320 1978 $17,604 (13,826 (11,746 (17,520 1979 (19,214 (14,133 (12,656 (18,4B0 1980 (21,695 (14,462 (13,627 (19,920 1981 (23,767 (14,816 (14,825 (21,840 1982 (20,912 (16,617 NOTES (1) U t i l i z i n g actual dtvilopaint and operating c o i t i for a co-op project comtructed 19711 c o i t i pro-rated for 3 Br unit (2) Operating expenses 1972> (72,600; 19B3> 158,400| annual increaie uied * 7.34X p.a. Pro-rated for 3 bedroom unit. 13) Include, operating and debt tervice c o i t i . (See Appendix D). (4) Typical average rent for 3 Br apt in Richmond, the only comparable area with comiitent data co l l e c t i o n dourcei Trendi, 1972-83) (5) National income q u i n t i l e i for centui f a a i l i e i Compiled froai Project data provided by Columbia Homing Adviiory A u o c i a t i i S t a t i s t i c s Canada , Catalogue 13-206. Qvataaar U m r i y i u a r D » » l Cata+ai D n a r i l T r a n r l a 1 0 7 7 . 0 9 115 TABLE 5.2 SUMMARY OF INFLATION INDEX AND INCOME QUINTILES Inflation (%) Quintiles (Upper Boundary) Based on CP1 ( a l l item) (Families & Individual Households) Year Canada Vancouver 1st 2nd 3rd 4th 1971 $3,110 $6,275 $9,295 $12,941 1971 100 100 100 100 100 100 1972 104.8 105.3 73 112.7 112.9 128.0 121.4 121.4 123.2 74 124.94 126.1 75 138.4 140.1 162.6 156.02 156.5 159.2 76 148.8 153.7 77 160.7 164.7 192.78 191.39 193.5 197.8 78 175.2 177.4 79 191.1 191.1 236.6 225.4 230.0 234.9 80 210.4 209.0 266.03 254.91 250.6 260.8 81 236.7 238.9 318.6 289.6 291.1 294.4 82 262.3 264.0 331.6 302.5 305.8 315.4 83 277.5 278.5 Annual % Change in Income and Inflation Levels 72 4.8 5.3 10.0 7.3 9.1 8.2 73 7.5 7.2 16.3 13.1 11.3 13.8 74 10.9 11.7 16.3 17.1 15.7 14.4 75 10.8 11.1 8.9 9.7 11.4 12.9 76 7.5 9.7 15.1 13.5 14.5 15.4 77 8.0 7.2 3.0 8.1 8.0 7.6 78 9.0 7.7 5.3 2.9 4.8 4.7 79 9.1 7.7 16.6 14.5 13.4 13.5 80 10.1 9.4 12.4 13.1 8.9 11.0 81 12.5 14.3 19.7 13.6 16.5 12.9 82 10.8 10.5 3.6 4.5 4.6 7.2 83 5.8 5.5 Source: Compiled from Statistics Canada, Catalogue 13-207, 13-206, 1971-1983 1 1 6 r a t e of change in incomes has been at v a r i a n c e with i n f l a t i o n . A d d i t i o n a l l y , not a l l incomes r i s e at the average r a t e . Overcoming these f l u c t u a t i o n s w i l l be the r e a l t e s t of c o - o p e r a t i v e s . At the same time however, i n d i v i d u a l co-ops and not even the l a r g e r c o - o p e r a t i v e s e c t o r should be expected to r e l i e v e government of i t s s o c i a l w e l f a r e r o l e . C o n s i d e r a t i o n s A r i s i n g from Research Both u n d e r w r i t i n g c r i t e r i a and member e q u i t y have been d i s c u s s e d independantly i n p r e v i o u s c h a p t e r s . Loan-value r a t i o s and member e q u i t y are however i n t e g r a l l y r e l a t e d . In c o n v e n t i o n a l mortgage l e n d i n g , ( r e g u l a t e d by the i n t e r e s t a c t ) ; loan to value r a t i o s are l i m i t e d to .75 of value except where mortgage insurance i s purchased in which case the maximum i s 0.95. Given the annual adjustment which i s designed i n t o the PLAM, lend e r s w i l l be p a r t i c u l a r l y wary of t h i s u n d e r w r i t i n g c r i t e r i a . F a i l u r e of property value to a p p r e c i a t e i n accordance with i n f l a t i o n w i l l change the loan-value r a t i o . During p e r i o d s of high i n f l a t i o n i n property v a l u e s , p a r t i c u l a r l y through the l a t e 1970's, l e n d e r s were r e l a t i v e l y assured of an improved p o s i t i o n , even in the short term. Under such c o n d i t i o n s high loan-value r a t i o s were common. T h i s t r e n d i s l i k e l y to reverse i n the more stagnant economy p r e v a i l i n g today. Both lend e r s and the agencies which i n s u r e mortgages (both CMHC 1 17 and the Mortgage Insurance Company of Canada) are l i k e l y to reassess t h e i r r i s k . In the case of indexed mortgages assessment of d e f a u l t and f o r e c l o s u r e r i s k i s l i m i t e d to t h e o r e t i c a l s i m u l a t i o n s . P r i o r experience with Graduated Payment Mortgages, p a r t i c u l a r l y i n the A s s i s t e d Home Ownership Program (AHOP) are l i k e l y to be i n c l u d e d in t h i s assessment. While i t has been argued (chapter 4) that the PLAM r e s o l v e s the d e f i c i e n c y of GPM'S by d i r e c t l y l i n k i n g the annual adjustment to i n f l a t i o n , the a s s e r t i o n cannot be s u b s t a n t i a t e d . Any loans c o n t r a c t e d through PLAM'S w i l l i n e v i t a b l y r e q u i r e a s u b s t a n t i a l e q u i t y cushion simply as a r e s u l t of the instrument de s i g n . The e a r l i e r d i s c u s s i o n of member eq u i t y suggested that co-ops t a r g e t t e d at the lower-middle income p o p u l a t i o n c o u l d not r e l y on very s i g n i f i c a n t l e v e l s of member e q u i t y , p a r t i c u l a r l y i f no r e t u r n i s earned on t h i s investment. Despite the f a c t that a n o n - p r o f i t housing co-op r e t u r n s s u r p l u s ' i n kind' which should o f f s e t the lack of e q u i t y accummulation, our s o c i e t y i s u n l i k e l y to accept such a concept in pr e f e r e n c e to the condominium a l t e r n a t i v e . C e r t a i n l y , the lower payments consequent of the PLAM fi n a n c e d c o - o p e r a t i v e would be a t t r a c t i v e , but the r e q u i s i t e high share purchase (eq u i t y l e v e l ) c o u l d e f f e c t i v e l y c r e a t e a b a r r i e r to access. In sh o r t , the market f o r the PLAM fi n a n c e d c o - o p e r a t i v e would be excee d i n g l y l i m i t e d . Only i f t h i s e q u i t y cushion c o u l d be generated through other sources 118 would the PLAM f i n a n c e d co-op be p o s s i b l e on an e x t e n s i v e b a s i s . I n e v i t a b l y , the co-op s e c t o r must t u r n back to government and seek some form of subsidy. CONCLUSIONS: I m p l i c a t i o n s f o r Both Government and the  Co-operative Housing Sector At the o u t s e t , the o b j e c t i v e of t h i s t h e s i s was to "examine means of e s t a b l i s h i n g co-ops as a r e l a t i v e l y a f f o r d a b l e tenure while minimizing dependance upon f e d e r a l s u b s i d i e s " . The f a c t that PLAM f i n a n c e d co-ops c o u l d not, on an extended b a s i s achieve t o t a l independence does not le s s e n the u t i l i t y of t h i s r e s e a r c h . T h i s r e s e a r c h presents two p o s s i b i l i t i e s . F i r s t l y , indexed f i n a n c i n g c o u l d be employed i n a m o d i f i e d v e r s i o n of the e x i s t i n g sec. 56.1 program as a means of reducing or even e l i m i n a t i n g the bridge subsidy n e c e s s i t a t e d by the 'economic gap problem'. In t h i s context, i t would o f f e r the p o t e n t i a l to government to improve the c o s t - e f f e c t i v e n e s s of the sec. 56.1 program, while t a r g e t i n g the i m p l i c i t rent supplement component of the program s p e c i f i c a l l y to lower income groups who c o u l d not a f f o r d the breakeven c o s t s under a PLAM. The cost to government c o u l d be the p r o v i s i o n of a c a p i t a l g r a n t . Secondly, the PLAM provi d e s the co-op s e c t o r with a mechanism to achieve a f f o r d a b l e housing and thereby provide government with a v e h i c l e with which to u t i l i z e a rent supplement program. T h i s research has i d e n t i f i e d c o - o p e r a t i v e tenure as perhaps the best complement f o r 1 1 9 indexed f i n a n c i n g . I t i s now incumbent upon the c o - o p e r a t i v e s e c t o r to f i r m l y e s t a b l i s h t h i s and thereby j u s t i f y i t s e x c l u s i v e e l i g i b i l i t y f o r indexed f i n a n c i n g . In a d d i t i o n , the s e c t o r would r e q u i r e the p r o v i s i o n of a c a p i t a l g rant, which together with a reasonable (but not onerous) l e v e l of member e q u i t y would provide a s u f f i c i e n t e q u i t y cushion f o r loan s e c u r i t y . T h i s second p o s s i b i l i t y s t i l l r e l i e s upon government p a r t i c i p a t i o n through c a p i t a l grants and p r e f e r e d l e n d i n g s t a t u s . R e l a t i v e to c u r r e n t government programs t h i s would not be d i s i m i l a r to the Canada Ren t a l Supply Program: In r e t u r n f o r an i n t e r e s t f r e e loan the government r e c e i v e s a o b l i g a t i o n from a r e n t a l l a n d l o r d f o r the use of 33% of the u n i t s i n a rent supplement program. E q u a l l y , the c o - o p e r a t i v e s e c t o r c o u l d s e l l the use of a p r o p o r t i o n of the u n i t s back to government for a s i m i l a r rent supplement program. As such, the c o - o p e r a t i v e s e c t o r would be o u t s i d e the context of a s o c i a l housing program yet s t i l l f u l f i l l a r e s p o n s i b l e s o c i a l f u n c t i o n . Moreover, a rent supplement program used i n c o n j u c t i o n with a n o n - p r o f i t model i s both c o s t e f f e c t i v e and ensures that the subsidy b e n e f i t s the a s s i s t e d household e n t i r e l y r a t h e r than f l o w i n g through to the l a n d l o r d . In essense then, government would be i n v e s t i n g i n a supply of a f f o r d a b l e housing which as a r e s u l t of non-market s t a t u s would remain a v a i l a b l e throughout i t s u s e f u l l i f e . 1 20 In d e f i n i n g the scope of t h i s r e s e a r c h , the c o - o p e r a t i v e housing s e c t o r was chosen as the context f o r the examination of a l t e r n a t i v e f i n a n c i n g mechanisms which might a l l e v i a t e the housing a f f o r d a b i l i t y problem which has emerged i n the l a s t decade. The instrument which appears to have the g r e a t e s t p o t e n t i a l , the p r i c e l e v e l a d j u s t e d mortgage, i s one which e l i m i n a t e s the impact of i n f l a t i o n , perhaps the root cause of the housing a f f o r d a b i l t y problem. In a s o c i e t y i n which i n f l a t i o n became endemic (1970's) housing and r e a l e s t a t e i n g e n e r a l became the p r i n c i p l e v e h i c l e f o r hedging, or compensating, f o r i n f l a t i o n . Through t h i s process, housing has taken on a new set of c h a r a c t e r i s t i c s f a r beyond s h e l t e r . In seeking s o l u t i o n s , or at l e a s t some improvement, to the a f f o r d a b i 1 i t y problem i t i s then a p p r o p r i a t e to look to a form of tenure which acknowledges housing as a b a s i c need and r i g h t . I r o n i c a l l y , t h i s form of tenure has, throughout i t s h i s t o r y i n Canada, been unable to stand independent of government support. In p r o v i d i n g housing as s h e l t e r , c o - o p e r a t i v e housing has been unable to compete with the t r a d i t i o n a l tenures of ownership and r e n t a l which, fo r the most p a r t , are developed'and exchanged on the b a s i s of t h e i r n o n - s h e l t e r a t t r i b u t e s . T h i s r e s e a r c h has i d e n t i f i e d a s t r o n g p o t e n t i a l f o r housing c o - o p e r a t i v e s together with PLAM f i n a n c i n g to p r o v i d e a f f o r d a b l e s h e l t e r . T h i s , however, w i l l be a t t a i n a b l e only through support from j 1 2 1 government, whether c o n t i n u i n g as p a r t of a s o c i a l housing program or independent but n e v e r t h e l e s s c l o s e l y l i n k e d through a rent supplement program. 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W.M., 1974, Co-operative Housing i n Nova S c o t i a  1938-1973, H a l i f a x : Nova S c o t i a Housing Commission. Rose, A., 1980, Canadian .Housing P o l i c i e s 1935-1980, Toronto: Butterworth. Ryba, A., S. Damus, and J . C a r r i e r e , 1983, P r a c t i c a l Issues  i n Mortages Finance with A p p l i c a t i o n s to the Standard  and Indexed Mortgage, D i s c u s s i o n Paper No. 228, Ottawa: Economic C o u n c i l of Canada. Smith, L.B., 1983, Housing A f f o r d a b i l i t y : Some Myths and Some R e a l i t i e s , Unpublished, Paper presented to the New Neighbourhood Symposium, Toronto, February 1983. Stewart, I.R., 1978, Housing: Now a Problem f o r the Middle  C l a s s , Ithaca, New York: C o r n e l l U n i v e r s i t y , Urban and Regional S t u d i e s , O c c a s i o n a l Paper #7. Struyk, R., 1977, Should Government Encourage Homeownership, Washington, D.C: The Urban I n s t i t u t e . UBC, 1981, Mortgage U n d e r w r i t i n g and R e s i d e n t i a l Borrower Q u a l i f i c a t i o n s from Mortgages: A Course f o r Lenders  and Brokers, UBC. 1 27 Van Dyk, N., 1978, P a r t i c i p a t i o n i n the Development of  Co-operative Communities, Ottawa: C a r l e t o n U n i v e r s i t y . Appendix A Base Case Data 1 29 Base Case Data Land Cost ( i n c l u d i n g s e r v i c i n g ) = $1,789,307 S i t e Area = 3.9 acres No. u n i t s = 7 2 u n i t s T o t a l C a p i t a l Cost = $5,893,714 F i r s t Year Operating Expenses = $101,720 Mortgage Data: 35 year A m o r t i z a t i o n 5 year term at 13% p.a. semi annual compounding not in advance. Monthly Payment = $62,951 T o t a l Payments year 1 = $755,419 U n i t Mix and S i z e : Type F l o o r Area 1 Bed T/H 2 Bed T/H 3 Bed T/H 4 Bed T/H T o t a l 59.6m2 87.2m2 107.1m2 122.9m2 7076.0m2 Number 8 1 6 44 _4 72 Fa c t o r = t o t a l area u n i t area .00842 .01232 .01514 .01737 In the t e s t i l l u s t r a t i o n s , the u n i t f a c t o r f o r the 3 bedroom u n i t i s used to p r o - r a t e mortgage payment and o p e r a t i n g expenses. Hence: P r o j e c t C a p i t o l cost P+I (month) 3 Br Unit = $5,893,714 X .01514 = $89,205 = $62,591 X .01514 = $952.81 Oper. Exp. (yr 1) = $101,720 01514 = $128.30 Appendix B Graduated Payment Mortgages 131 Graduated Payments Mortgages (A) NHA GPM I n i t i a l Payment (Pmtt* ) i s e s t a b l i s h e d by a p p l y i n g the f o l l o w i n g formula to the monthly payment (Pmtft ) which would r e s u l t from a standard l e v e l payment mortgage (SLPM) Subsequently the payment r i s e s by 5% p.a. each year fo r ten years at which p o i n t i t l e v e l s o f f . T h i s i s demonstrated i n Table B - l ( a ) . Note that s i n c e the graduation r a t e i s e s t a b l i s h e d independent of i n t e r e s t r a t e that the l e v e l i n g o f f i n year 11 w i l l not always be a smooth one. In t h i s case, a d e c l i n e in payment occurs s i n c e i n years 9 and 10 the payments were gr e a t e r than the amount necessary to amortize the l o a n . Pmt-= Pinto - P r i n c i p a l X 2.25 4 1000 (B) Pure GPM (modified f o r annual graduation) U n l i k e the NHA GPM, the pure form i n v o l v e s a graduation at any predetermined r a t e over the a m o r t i z a t i o n p e r i o d . The i n i t i a l payment i s c a l c u l a t e d a c c o r d i n g to the formula: P, = PV(i-k) where: PV = amount of loan P, = i n i t i a l payment n = number of payment p e r i o d s i = p e r i o d i c i n t e r e s t r a t e k = p e r i o d i c graduation r a t e Table B-2(a) i l l u s t r a t e s payments with an annual graduation of 5%. 132 TABLE B . l i 6PM PROJECTIONS WITH NHA FORHULA Principalt*3,893,714| 33 year aaortization) 3 yr t e n | «eii-annual compounding Operating expeniei (yr 1) •$101,720 Econoeic rent iyr 1) with itandard mortgage • $837,139 Occupancy charge (yr 1) uiing 6PM • $698,008 Monthly P i t (P+I) » $62,932 6PH i n i t i a l pet(annual • $596,228) NHA 6PHi PHTtaonthly, y r l ) - F u l l P+I -(principal/1000)»2.2S Pet increases for lOy r i then l e v e l i off to aeortize 08B (end yr 10) ASSUMPTIONS! Oper. exp increaie 8 5Xp.a. Mortgage renewal every 5 yean I 13X IR OPERATING 6PN OCCUPANCY 3 BR UNIT REQUIRED . REQUIRED EXPENSES PAYMENT CHARGE OCC.CHARGE INCOHE INCOHE (HONTH) 30X R6I BRONTH (X) 1 $101 720 $596 286 $698,008 $880 $35 216 5.00Z 2 $106 806 $626 103 $732,909 $924 $36 977 5.00X 3 $112 146 $657 408 $769,554 $971 $38 826 5.00X 4 $117 754 $690 278 $806,032 $1,019 $40 767 5.00X 5 $123 641 $724 792 $848,433 $1,070 $42 805 5.00X 6 $129 823 $761 032 $890,855 $1,124 $44 946 5.00X 7 $136 315 $799 083 $935,398 $1,180 $47 193 5.00X B $143 130 $839 037 $982,168 $1,239 $49 553 5.00X 9 $150 287 $880 989 $1,031,276 $1,301 $52 030 5.00X 10 $157 801 $925 039 $1,082,840 $1,366 $54 632 -4.72X 11 $165 691 $866 040 $1,031,731 $1,301 $52 053 0.80X 12 $173 976 $866 040 $1,040,016 $1,312 $52 471 0.84X 13 $182 675 $866 040 $1,048,715 $1,323 $52 910 0.87X 14 $191 608 $866 040 $1,057,846 $1,334 $53 371 0.91X 15 $201 399 $866 040 $1,067,439 $1,346 $53 855 0.94X 16 $211 469 $866 040 $1,077,509 $1,359 $54 363 0.98X 17 $222 042 $866 040 $1,068,082 $1,372 $54 896 1.02X 18 $233 144 $866 040 $1,099,184 $1,386 $55 456 1.06X 19 $244 801 $866 040 $1,110,841 $1,401 $56 045 1.10X 20 $257 041 $866 040 $1,123,081 $1,417 $56 662 1.141 21 $269 893 $866 040 $1,135,933 $1,433 $37 310 1.191 22 $283 388 $866 040 $1,149,428 $1,450 $57 991 1.23X 23 $297 558 $866 040 $1,163,598 $1,468 $58 706 1.28X 24 $312 435 $866 040 $1,178,475 $1,486 $59 457 1.33X 25 $328 057 $866 040 $1,194,097 $1,506 $60 245 1.371 26 $344 460 $866 040 $1,210,500 $1,527 $61 073 1.42X 27 $361 683 $866 040 $1,227,723 $1,549 $61 941 1.47X 26 $379 767 $866 040 $1,245,807 $1,571 $62 854 1.52X 29 $398 756 $866 040 $1,264,796 $1,595 $63 612 1.58X 30 $418 693 $866 040 $1,284,733 $1,620 $64 618 1.63X 31 $439 628 $866 040 $1,305,668 $1,647 $65 874 1.68X 32 $461 609 $866 040 $1,327,649 $1,675 $66 983 1.74X 33 $484 690 $866 040 $1,350,730 $1,704 $68 147 1.79X 34 $508 924 $866 ,040 $1,374,964 $1,734 $69 370 1.85X 35 $534 371 $866 ,040 $1,400,411 $1,766 $70 654 1.85X End of graduation 133 TABLE B.1(A) I BABE CASE AMORTIZATION SCHEDULES NHABPH PrincipalilS,893,714| 35 year aaortizationi 5 yr t e n I 13Xp.a. aeai-annual expounding Graduated payaent aortgagei I n i t i a l (annual) payaent "1596,288 NHA GPMi PHTIeonthly yr l ) • Standard pat (-principal/1000)»2.23 ASSUMPTIONSi Mortgage renewal every 5 years 8 13X (ie. Fixed rate) TH 8PM PRINCIPAL NTEREST 0UTSTANDIN6 PAYMENT BALANCE (YR END) 0 $5,893,714 1 $49,691 ($12,494) $62,185 $5,906,208 2 $49,691 ($12,626) $62,317 $5,918,834 3 $49,691 ($12,759) $62,450 $5,931,594 4 $49,691 ($12,894) $62,585 $5,944,488 3 $49,691 ($13,030) $62,721 $5,957,518 6 $49,691 ($13,168) $62,858 $5,970,685 7 $49,691 ($13,306) $62,997 $5,983,992 8 $49,691 ($13,447) $63,138 $5,997,439 9 $49,691 ($13,589) $63,279 $6,011,027 10 $49,691 ($13,732) $63,423 $6,024,739 11 $49,691 ($13,877) $63,568 $6,038,636 12 $49,691 ($14,023) $63,714 $6,052,660 13 $52,175 ($11,687) $63,862 $6,064,347 14 $52,175 ($11,810) $63,985 $6,076,157 15 $52,175 ($11,935) $64,110 $6,088,092 16 $52,175 ($12,061) $64,236 $6,100,152 17 $52,175 ($12,188) $64,363 $6,112,340 18 $52,175 ($12,317) $64,492 $6,124,657 19 $52,175 ($12,446) $64,622 $6,137,103 20 $52,175 ($12,578) $64,753 $6,149,681 21 $52,175 ($12,711) $64,886 $6,162,392 22 $52,175 ($12,845) $65,020 $6,175,236 23 $52,175 ($12,980) - $65,155 $6,188,216 24 $52,175 ($13,117) $65,292 $6,201,333 25 $54,784 ($10,647) $65,431 $6,211,980 26 $54,784 ($10,759) $65,543 $6,222,739 27 $54,784 ($10,873) $65,657 $6,233,612 28 $54,784 ($10,987) $65,771 $6,244,599 29 $54,784 ($11,103) $65,887 $6,255,702 30 $54,784 ($11,220) $66,004 $6,266,923 31 $54,784 ($11,339) $66,123 $6,278,262 32 $54,784 ($11,458) $66,242 $6,289,720 33 $54,784 ($11,579) $66,363 $6,301,299 34 $54,784 ($11,701) $66,485 $6,313,001 35 $54,784 ($11,825) $66,609 $6,324,826 36 $54,784 ($11,950) $66,734 $6,336,775 134 TABLE B.1(A) I BABE CASE AMORTIZATION SCHEDULES NHA6PH YEAR MONTH 8PM PRINCIPAL INTERE8T 0UT8TANDIN6 PAYMENT BALANCE (YR END) 61 •43,419 ($5,729) $69,148 $6,559,408 62 $63,419 ($5,789) $69,209 $6,565,198 63 $63,419 ($5,851) $69,270 $6,571,048 64 $63,419 ($5,912) $69,332 $6,576,961 65 $63,419 ($5,975) $69,394 $6,582,935 66 $63,419 ($6,038) $69,457 $6,588,973 67 $63,419 ($6,101) $69,521 $6,595,074 68 $63,419 ($6,166) $69,585 $6,601,240 69 $63,419 ($6,231) $69,650 $6,607,471 70 $63,419 ($6,297) $69,716 $6,613,768 71 $63,419 ($6,363) $69,782 $6,620,131 72 $63,419 ($6,430) $69,849 $6,626,561 73 $66,590 ($3,327) $69,917 $6,629,888 74 $66,590 ($3,362) $69,952 $6,633,250 75 $66,590 ($3,398) $69,988 $6,636,648 76 $66,590 ($3,433) $70,024 $6,640,081 77 $66,590 ($3,470) $70,060 $6,643,551 78 $66,590 ($3,506) $70,097 $6,647,057 79 $66,590 ($3,543) $70,134 $6,650,600 80 $66,590 ($3,581) $70,171 $6,654,181 81 $66,590 ($3,618) $70,209 $6,657,800 82 $66,590 ($3,657) $70,247 $6,661,456 83 $66,590 ($3,695) $70,286 $6,665,152 84 $66,590 ($3,734) $70,325 $6,668,886 85 $69,920 ($444) $70,364 $6,669,330 86 $69,920 ($449) $70,369 $6,669,779 87 $69,920 ($454) $70,373 $6,670,232 88 $69,920 ($458) $70,378 $6,670,691 89 $69,920 ($463) $70,383 $6,671,154 90 $69,920 ($468) $70,388 $6,671,622 91 $69,920 ($473) $70,393 $6,672,095 92 $69,920 ($478) $70,398 $6,672,573 93 $69,920 ($483) $70,403 $6,673,036 94 $69,920 ($488) $70,408 $6,673,544 95 $69,920 ($493) $70,413 $6,674,037 96 $69,920 ($498) $70,418 $6,674,536 97 $73,416 $2,992 $70,424 $6,671,543 98 $73,416 $3,024 $70,392 $6,668,519 99 $73,416 $3,056 $70,360 $6,665,464 100 $73,416 $3,088 $70,328 $6,662,376 101 $73,416 $3,121 $70,295 $6,659,255 102 $73,416 $3,153 $70,262 $6,636,102 103 $73,416 $3,187 $70,229 $6,652,915 104 $73,416 $3,220 $70,195 $6,649,694 105 $73,416 $3,254 $70,161 $6,646,440 106 $73,416 $3,289 $70,127 $6,643,151 107 $73,416 $3,323 $70,092 $6,639,828 108 $73,416 $3,358 $70,057 $6,636,470 TABLE B.KAIi BABE CASE AMORTIZATION SCHEDULES NHA6PH fEAR HONTH 6PH PRINCIPAL INTEREST 0UT8TANDIN6 PAYHENT BALANCE (YR END) 10 109 $77,087 $7,065 $70,022 $6,629,405 110 $77,087 $7,139 $69,947 $6,622,266 U l $77,087 $7,215 $69,872 $6,615,051 112 $77,087 $7,291 $69,796 $6,607,760 113 $77,087 $7,368 $69,719 $6,600,393 114 $77,087 $7,445 $69,641 $6,592,947 115 $77,087 $7,524 $69,563 $6,585,424 i i 6 $77,087 $7,603 $69,483 $6,577,820 117 $77,087 $7,684 $69,403 $6,570,137 118 $77,087 $7,765 $69,322 $6,562,372 119 $77,087 $7,846 $69,240 $6,554,526 11 120 $77,087 $7,929 $69,157 $6,546,596 121 $72,170 $3,097 $69,074 $6,543,500 122 $72,170 $3,129 $69,041 $6,540,371 123 $72,170 $3,162 $69,008 $6,537,208 124 $72,170 $3,196 $6B,975 $6,534,013 125 $72,170 $3,229 $68,941 $6,530,783 126 $72,170 $3,263 $68,907 $6,527,520 127 $72,170 $3,298 $68,872 $6,524,222 128 $72,170 $3,333 $68,838 $6,520,890 129 $72,170 $3,368 $68,802 $6,517,522 130 $72,170 $3,403 $68,767 $6,514,119 131 $72,170 $3,439 $68,731 $6,510,679 39 408 $72,170 $62,965 $9,205 $809,460 409 $72,170 $63,629 $8,541 $745,830 410 $72,170 $64,301 $7,869 $681,529 411 $72,170 $64,979 $7,191 $616,550 412 $72,170 $65,665 $6,505 $550,885 413 $72,170 $66,358 $5,812 $484,527 414 $72,170 $67,058 $5,112 $417,470 415 $72,170 $67,765 $4,405 $349,704 416 $72,170 $68,480 $3,690 $281,224 417 $72,170 $69,203 $2,967 $212,021 418 $72,170 $69,933 $2,237 $142,088 419 $72,170 $70,671 $1,499 $71,417 420 $72,170 $71,417 $754 $0 TABLE B.2i BASE CASE PROJECTION "PURE 6PM' Principalt$3,893,714| 33 year a i o r t l z a t i o n i 3 yr t i n | ni l - a n n u a l compounding Opirating expenses (yr 1) •$101,720 Econoilc rent (yr 1) with standard mortgage • $837,139 Occupancy charge (yr 1) using 6PH • $633,860 Interest rate * 13X Annual graduation * 32 ASSUHPTIONSi Oper. exp increase 8 Slp.a. Mortgage renewal every 5 years I 13X YEAR 0PERAT1N6 8PM OCCUPANCY 3 BR UNIT REQUIRED REQUIRED EXPENSES PAYMENT CHAR6E 0CC.CHAR6E INCOHE INCOHE (MONTH) 30X R6I GROWTH (X) 1 $101,720 $532,140 $633,860 $799 $31,980 5.00X 2 $106,806 $558,747 $665,553 $839 $33,579 5.00X 3 $112,146 $586,684 $698,831 $881 $35,258 5.00X 4 $117,734 $616,019 $733,772 $926 $37,021 5.00X 3 $123,641 $646,820 $770,461 $972 $38,872 5.00X 6 $129,823 $679,161 $808,984 $1,020 $40,815 5.00X 7 $136,313 $713,119 $849,433 $1,071 $42,856 5.00X 8 $143,130 $748,775 $891,905 $1,125 $44,999 5.00X 9 $130,287 $786,213 $936,500 $1,181 $47,249 5.00X 10 $157,801 $825,524 $983,325 $1,240 $49,611 5.00X 11 $163,691 $866,800 $1,032,491 $1,302 $52,092 5.00X 12 $173,976 $910,140 $1,084,116 $1,367 $54,696 5.00X 13 $182,673 $955,647 $1,138,322 $1,436 $37,431 3.001 14 $191,808 $1,003,429 $1,195,238 $1,508 $60,303 5.00X 13 $201,399 $1,053,601 $1,255,000 $1,583 $63,318 5.00X 16 $211,469 $1,106,281 $1,317,750 $1,662 $66,484 5.00X 17 $222,042 $1,161,595 $1,383,637 $1,745 $69,808 5.00X 18 $233,144 $1,219,675 $1,452,819 $1,832 $73,296 5.00X 19 $244,801 $1,280,659 $1,525,460 $1,924 $76,963 5.00X 20 $257,041 $1,344,691 $1,601,733 $2,020 $60,611 5.00X 21 $269,893 $1,411,926 $1,681,819 $2,121 $84,852 5.00X 22 $283,388 $1,482,322 $1,765,910 $2,227 $89,094 5.00X 23 $297,558 $1,556,648 $1,854,206 $2,339 $93,549 5.00X 24 $312,435 $1,634,481 $1,946,916 $2,456 $98,226 5.00X 23 $328,057 $1,716,205 $2,044,262 $2,578 $103,138 5.00X 26 $344,460 $1,802,015 $2,146,475 $2,707 $108,295 5.00X 27 $361,683 $1,892,116 $2,253,799 $2,843 $113,709 5.00X 28 $379,767 $1,986,722 $2,366,489 $2,985 $119,395 5.00X 29 $398,756 $2,086,058 $2,484,813 $3,134 $125,365 5.00X 30 $418,693 $2,190,361 $2,609,054 $3,291 $131,633 5.00X 31 $439,628 $2,299,879 $2,739,507 $3,455 $138,215 5.00X 32 $461,609 $2,414,873 $2,876,482 $3,626 $143,125 5.00X 33 $484,690 $2,535,616 $3,020,306 $3,810 $152,381 5.00X 34 $508,924 $2,662,397 $3,171,321 $4,000 $160,001 5.00X 33 $534,371 $2,795,517 $3,329,887 $4,200 $168,001 5.00X TABLE B.KAIi BASE CASE AMORTIZATION SCHEDULE I * PURE 6PM" Principalis,893,7Hj 35 year aaortizationi 5 yr tera | seal-annual compounding Graduated payaent aortgagei I n i t i a l (annual) payaent 0 $532,140 Interest rate * 13X Annual graduation rate • 5X ASSUHPTIQNSi Oper. exp increase 8 5Xp.a. Mortgage renewal every 5 years I 13X )R 6PH PRINCIPAL INTEREST 0UTSTANDIN6 OSB/VALUE PAYMENT BALANCE (lOOXloan) (YR END) 1 $532,140 ($238,944) $791,084 $6,132,658 1.0439 2 $558,747 ($267,093) $823,840 $6,419,751 1.0893 3 $586,684 ($273,007) $861,691 $6,694,758 1.1359 4 $616,019 ($282,385) $898,604 $6,977,343 1.1839 5 $646,620 ($289,714) $936,534 $7,267,057 1.2330 6 $679,161 ($296,260) $975,421 $7,563,318 1.2833 7 $713,119 ($302,068) $1,015,186 $7,865,385 1.3345 8 $748,775 ($306,957) $1,055,731 $8,172,342 1.3866 9 $786,213 ($310,719) $1,096,933 $8,483,061 1.4393 10 $825,324 ($313,115) $1,138,639 $8,796,176 1.4925 11 $866,800 ($313,867) $1,180,667 $9,110,043 1.5457 12 $910,140 ($312,655) $1,222,796 $9,422,699 1.5988 13 $935,647 ($309,115) $1,264,762 $9,731,813 1.6512 14 $1,003,429 ($302,823) $1,306,253 $10,034,636 1.7026 15 $1,053,601 ($293,298) $1,346,899 $10,327,934 1.7524 16 $1,106,281 ($279,986) $1,386,267 $10,607,921 1.7999 17 $1,161,593 ($262,253) $1,423,848 $10,870,174 1.8444 IB $1,219,675 ($239,374) $1,459,049 $11,109,548 1.8850 19 $1,280,639 ($210,521) $1,491,179 $11,320,068 1.9207 20 $1,344,691 ($174,745) $1,519,436 $11,494,813 1.9504 21 $1,411,926 ($130,965) $1,542,891 $11,625,779 1.9726 22 $1,482,522 ($77,948) $1,560,470 $11,703,726 1.9858 23 $1,356,648 ($14,284) $1,570,933 $11,718,011 1.9882 24 $1,634,481 $61,631 $1,572,850 $11,656,380 1.9778 25 $1,716,205 $151,627 $1,564,578 $11,504,732 1.9520 26 $1,802,015 $257,790 $1,544,225 $11,246,963 1.9083 27 $1,892,116 $382,492 $1,509,624 $10,864,470 1.8434 28 $1,986,722 $326,436 $1,458,284 $10,336,032 1.7537 29 $2,086,058 $698,704 $1,367,334 $9,637,328 1.6352 30 $2,190,361 $896,790 $1,293,570 $8,740,538 1.4830 31 $2,299,879 $1,126,680 $1,173,199 $7,613,658 1.2919 32 $2,414,673 $1,392,903 $1,021,970 $6,220,955 1.0555 33 $2,533,616 $1,700,609 $833,008 $4,520,347 0.7670 34 $2,662,397 $2,055,654 $606,744 $2,464,693 0.4182 33 $2,793,317 $2,464,693 $330,823 ($0) .0000 1 38 Appendix C P r i c e L e v e l Adjusted Mortgage 1 39 P r i c e L e v e l Adjusted Mortgage The d e t e r m i n a t i o n of payments under a PLAM r e q u i r e s knowledge of a r e a l r a t e of i n t e r e s t (r) and an i n f l a t i o n premium ( p ) . These are the two components of the nominal i n t e r e s t r a t (y) and are r e l a t e d by the formula 1+y = (1+r) (1+p) In the case of an indexed loan, the r e a l r a t e (r) i s predetermined and the index r a t e (p) then determines y as i t becomes known. (Conversely, i n a standard loan y i s set i n i t i a l l y on the b a s i s of e x p e c t a t i o n s of r and p.) The i n f l a t i o n r a t e (p) can be determined using a v a r i e t y of index - the CPI, a wage index, or a house p r i c e index. C l e a r l y a homeowner (or co-op) would p r e f e r to use a wage index s i n c e t h i s would r e l a t e d i r e c t l y to incomes. Ryba (1983) has observed that l e n d e r s on the other hand would p r e f e r an index l i n k e d to house p r i c e s . The CPI employed i n a s i m u l a t i o n i s presented i n Appendix D. In the s i m u l a t i o n run here a r e a l r a t e of 4% and constant i n f l a t i o n of 9% have been assumed. T h i s corresponds with the nominal r a t e of 13% u t i l i z e d with the other instruments. A m o r t i z a t i o n of PLAM Yr 1 Yr2 Begin P r i n c i p a l 5,893,714 6,344,768 + i n t e r e s t (at 4%) 238,106 256,329 l e s s payment (at 4%) 317,486 346,450 P r i n . r e v a l u a t i o n f o r i n f l a t i o n (9%) 530,434 571,029 End P r i n c i p a l 6,344,768 6,825,675 TABLE C . l l BABE CASE PROJECTIONS WITH PLAH FORMULA Principali$5,893,714) 33 year aaortization * tera ) Operating expensei (yr 1) ••101,720 Econoaic rent (yr 1) with standard aortgage • $857,139 Occupancy charge (yr 1) using PLAH • 1417,489 (»527 for 3Br Unit) PLAH ASSUMPTIONS! REAL INTERE8T RATE « 4X ANNUAL INFLATION • 9X ASSUMPTIONS! Oper. exp increase 8 5Xp.a. Hortgage renewal every 5 years I 13X Year 1 incoae established at SOX expenditure ratio) increasing thereafter at the i n f l a t i o n rate (9X) R OPERATING ACTUAL OCCUPANCY 3 BR UNIT REQUIRED ANNUAL EXPENSES P+I CHARGE 0CC.CHAR8E INCOME INCOME (MONTH) SOX R6I GROWTH (9X) 1 •101,720 •317,486 •419 206 •529 •21,130 •21 160 2 •106,806 •346,450 •453 256 •572 •22,868 •23 064 3 •112,146 •378,080 •490 226 •618 •24,733 •25 140 4 •117,754 •412,625 •530 379 •669 •26,759 •27 403 5 •123,641 ••450,359 •574 000 •724 •28,960 •29 869 6 •129,823 •491,581 •621 405 •784 •31,351 •32 557 7 •136,315 •536,621 •672 936 •849 •33,951 •35 487 8 •143,130 •585,840 •728 971 •919 •36,778 •38 681 9 •150,287 •639,636 •789 923 •996 •39,833 •42 163 10 •157,801 •698,445 •856 246 •1,080 •43,200 •45 957 11 •165,691 •762,748 •928 439 •1,171 •46,842 •50 093 12 •173,976 •833,075 •1,007 051 •1,270 •50,808 •54 602 13 •182,675 •910,010 •1,092 685 •1,378 •55,128 •59 516 14 •191,808 •994,199 •1,186 007 •1,496 •59,837 •64 872 15 •201,399 •1,086,355 •1,287 754 •1,624 •64,970 •70 711 16 •211,469 •1,187,270 •1,398 739 •1,764 •70,570 •77 075 17 •222,042 •1,297,821 •1,519 863 •1,917 •76,681 •84 012 18 •233,144 •1,418,987 •1,652 131 •2,084 •83,354 •91 573 19 •244,801 •1,551,858 •1,796 659 •2,266 •90,646 •99 814 20 •237,041 •1,697,657 •1,954 698 •2,465 •98,619 •108 798 21 •269,893 •1,857,758 •2,127 652 •2,684 •107,343 •118 589 22 •283,388 •2,033,718 •2,317 106 •2,923 •116,903 •129 262 23 •297,338 •2,227,307 •2,524 864 •3,185 •127,383 •140 896 24 •312,433 •2,440,55B •2,752 993 •3,472 •138,893 •153 577 25 •328,057 •2,675,830 •3,003 887 •3,769 •151,553 •167 399 26 •344,460 •2,935,899 •3,280 359 •4,138 •165,502 •182 464 27 •361,683 •3,224,089 •3,585 772 •4,523 •180,911 •198 886 28 •379,767 •3,544,482 •3,924 249 •4,950 •197,988 •216 786 29 •398,756 •3,902,259 •4,301 014 •5,425 •216,996 •236 297 30 •418,693 •4,304,303 •4,722 996 •5,957 •238,286 •257 563 31 •439,628 •4,760,380 •5,200 008 •6,559 •262,353 •280 744 32 •461,609 •5,285,731 •5,747 340 •7,249 •289,967 •306 Oi l 33 •484,690 •5,907,866 •6,392 556 •8,063 •322,519 •333 552 34 •508,924 •6,690,045 •7,198 969 •9,080 •363,205 •363 572 35 •534,371 •8,551,743 •9,086 114 •11,460 •458,416 •396 293 141 TABLE C.1(A) I PLAN AMORTIZATION SCHEDULE PRINCIPAL • 15,893,714 AMORTIZATION PERIOD • 35 YRS TERN > 35 PLAHl ASSUMPTIONS REAL INTEREST RATE >4X (p.a.(compounding s e i i annually) INFLATION >91 NOMINAL INTEREST -131 PROPERTY APPRECIATION AT INFLATION RATE (92) YEAR BE6IN INTEREST PRINCIPAL ACTUAL BALANCE P+I 1 15,893,714 $238,106 $79 ,380 $317 486 2 $6,344,768 $256,329 $90 122 $346 ,450 3 $6,825,675 $275,757 $102 ,323 $378 ,080 4 $7,337,663 $296,442 $116 ,184 $412 ,625 5 $7,881,869 $318,428 $131 931 $450 359 6 $8,459,306 $341,756 $149 823 $491 581 7 $9,070,819 $366,461 $170 160 $536 621 8 $9,717,032 $392,568 $193 272 $585 ,840 9 $10,398,293 $420,091 $219 545 $639 636 10 $11,114,594 $449,030 $249 415 $698 445 11 $11,865,492 $479,366 $283 362 $762 748 12 $12,650,004 $511,060 $322 015 $833 075 13 $13,466,490 $544,046 $365 964 $910 010 14 $14,312,510 $578,225 $415 974 $994 199 15 $15,184,662 $613,460 $472 895 $1,086 355 16 $16,078,387 $649,567 $537 703 $1,187 270 17 $16,987,738 $686,305 $611 517 $1,297 821 IB $17,905,118 $723,367 $695 620 $1,418 987 19 $18,820,958 $760,367 $791 491 $1,551 858 20 $19,723,353 $796,823 $900 833 $1,697 657 21 $20,597,622 $832,144 $1,025 614 $1,857 758 22 $21,425,794 $865,602 $1,166 116 $2,033 718 23 $22,185,999 $896,314 $1,330 992 $2,227 307 24 $22,851,747 $923,211 $1,517 347 $2,440 558 25 $23,391,057 $944,999 $1,730 831 $2,675 830 26 $23,765,421 $960,123 $1,975 776 $2,935 899 27 $23,928,533 $966,713 $2,257 376 $3,224 089 28 $23,824,725 $962,519 $2,581 963 $3,344 482 29 $23,386,987 $944,834 $2,957 424 $3,902 259 30 $22,534,392 $910,389 $3,393 913 $4,304 303 31 $21,168,574 $655,210 $3,905 170 $4,760 380 32 $19,168,575 $774,410 $4,511 320 $5,265 731 33 $16,382,427 $661,850 $5,246 016 $5,907 866 34 $12,610,830 $509,478 $6,180 567 $6,690 045 35 $7,565,237 $303,636 $8,246 108 $8,551 743 ADJUSTED ENDIN6 PROPERTY EQUITY PRINCIPAL BALANCE APPRECIATION (YR END) $6 424 ,148 $6,344 768 $6 ,424,148 1.242 $6 ,915 ,797 $6,825 ,675 $7 ,002,322 2.522 $7 439 ,986 $7,337 ,663 $7 ,632,531 3.862 $7 ,998 ,053 $7,881 ,869 $8 ,319,458 5.262 $8 591 238 $8,459 306 $9 ,068,210 6.712 $9 220 644 $9,070 819 $9 ,884,348 8.232 $9 887 192 $9,717 032 $10 ,773,940 9.812 $10 591 ,563 $10,398 293 $11 ,743,594 11.462 $11 334 139 $11,114 594 $12 ,800,518 13.172 $12 114 907 $11,865 492 $13 ,952,564 14.962 $12 933 366 $12,650 004 $15 208,295 16.822 $13 788 504 $13,466 490 $16 ,577,042 18.762 $14 678 474 $14,312 510 $18 ,068,976 20.792 $15 600 636 $15,184 662 $19 695,183 22.902 $16 551 282 $16,078 387 $21 467,750 25.102 $17 525 441 $16,987 738 $23 399,847 27.402 $18 516 635 $17,905 118 $25 505,834 29.802 $19 516 578 $1B,B20 958 $27 801,359 32.302 $20 514 844 $19,723 353 $30 303,481 34.912 $21 498 455 $20,597 622 $33 030,794 37.642 $22 451 408 $21,425 794 $36 003,566 40.492 $23 354 115 $22,165 999 $39 243,887 43.472 $24 182 739 $22,851 747 $42 775,836 46.582 $24 908 404 $23,391 057 $46 625,662 49.832 $25 496 252 $23,765 421 $50 821,971 53.242 $23 904 308 $23,926 533 $55 395,949 56.802 $26 082 101 $23,824 725 $60 381,584 60.542 $25 968 950 $23,386 987 $65 815,927, 64.472 $25 491 816 $22,534 392 $71 739,360 68.592 $24 562 487 $21,168 574 $78 195,902 72.932 $23 073 745 $19,168 575 $85 233,534 77.512 $20 893 747 $16,382 427 $92 904,552 82.372 $17 856 845 $12,610 830 $101 265,961 87.552 $13 745 804 $7,565 237 $110 379,898 93.152 $8 246 108 $0 $120 314,089 100.002 1 Appendix D Poste S i m u l a t i o n : A m o r t i z a t i o n Tables f o r Standard and Indexed Mortgages TABLE 0.1 EX-PQ8TE SIMULATION AMORTIZATION SCHEDULES. COMPARISON OF H0RT6A6E PAYMENTS UNDER 6LPH v i PLAN FOR A CO-OPERATIVE DEVELOPED IN 1972 (1) STANDARD LEVEL PAYMENT H0RT8ABE (2) YEAR pat prin int oib 1972 1 $211,293 $9,996 $201,297 $2,200,004 1973 2 $211,293 $10,907 $200,387 $2,189,097 1974 3 $211,293 $11,900 $199,393 $2,177,197 1973 4 $211,293 $12,984 $198,309 $2,164,212 1976 3 $211,293 $14,167 $197,127 $2,150,046 1977 6 $256,921 $9,827 $247,094 $2,140,218 1978 7 $256,921 $10,957 $245,964 $2,129,262 1979 $256,921 $12,216 $244,703 $2,117,046 1980 9 $256,921 $13,620 $243,301 $2,103,426 1981 10 $256,921 $15,185 $241,736 $2,088,241 1982 11 $409,098 $4,906 $404,192 $2,083,335 1983 12 $409,098 $5,856 $403,242 $2,077,479 PRICE LEVEL ADJUSTED H0RT8ABE (3) YEAR Pat Prin Int I n f l Index Prin Adjust OSB 1972 $118,406 $30,006 $88,400 0.08 $178,730 $2,358,744 1973 $128,115 $33,765 $94,350 0.07 $171,156 $2,496,135 1974 $137,546 $37,701 $99,845 0.12 $290,248 $2,748,683 1975 $153,785 $43,838 $109,947 0.11 $301,939 $3,006,784 1976 $170,952 $30,680 $120,271 0.10 $292,469 $3,248,372 1977 $187,865 $57,922 $129,943 0.07 $232,402 $3,423,052 1978 $201,549 $64,627 $136,922 0.08 $268,280 $3,626,705 1979 $217,649 $72,581 $145,068 0.08 $278,226 $3,832,350 I960 $234,688 $81,394 $153,294 0.09 $359,283 $4,110,239 1981 $257,167 $92,757 $164,410 0.14 $587,177 $4,604,659 1982 $294,753 $110,567 1184,184 0.11 1483,489 $4,977,581 1983 $326,464 $127,361 $199,103 0.05 $270,276 $5,120,496 NOTES (1) This ex poite i l l u s t r a t i o n u t i l i z e s actual developaent costs incurred in 197i 5 Capital cost » 2,210,000. (2) Calculated on 35 yr aaortization, 5 yr tera at prevailing NHA interest (end Dec.) 1971 • 8.91X) 1976 " U.lSXf 1981 « 18.5Z (3) Based on a real rate of interest of 4Xi Outstanding principal adjusted using the Vancouver a l l i t e a CPI 1 44 Appendix E Examination of S e c t i o n 56.1 (NHA) Co-operative Program 1 45 APPENDIX E EXPLANATION OF THE SECTION 56.1 (NHA) CO-OPERATIVE PROGRAM PART 1 Government A s s i s t a n c e To Housing Co-operatives Under the a u t h o r i t y of s e c t i o n 56.1 of the N a t i o n a l Housing Act CMHC may provide funding f o r n o n - p r o f i t housing. N o n - p r o f i t c o - o p e r a t i v e s are one of the groups e l i g i b l e f o r t h i s a s s i s t a n c e . The major o b j e c t i v e of the program i s to provide a f f o r d a b l e housing to low and moderate income households and to produce such housing at minimum c o s t by implementing a p p r o p r i a t e c o s t c o n t r o l s (MSUA Press Release 1978). T h i s i s achieved by p r o v i d i n g ongoing funding to s u b s i d i z e the mortgage payments (based on 100% of approved c a p i t a l c o s t s ) as w e l l as p r o v i d i n g deeper a s s i s t a n c e to those low income households most in need. A f u r t h e r o b j e c t i v e of the program i s to encourage a mix i n s i z e , type, and income l e v e l s of member households in order to a v o i d problems of s t i g m a t i z a t i o n t r a d i t i o n a l l y a s s o c i a t e d with ' p u b l i c housing'(CMHC, 1983). A s s i s t a n c e i s i n i t i a l l y p r o v i d e d i n the form of two s t a r t up loans under s e c t i o n 37.1. The f i r s t (phase I up to $10,000) all o w s the group to c a r r y out a f e a s i b i l i t y study and r e c r u i t and t r a i n members. The second phase of the 1 46 s t a r t - u p program (up to $65,000) allows the development of working drawings, permit a p p r o v a l s , d e t e r m i n a t i o n of estimated o p e r a t i n g expenses, e t c . and culminated at the loan approval stage. To achieve CMHC ap p r o v a l , the group must be able to demonstrate that the p r o j e c t can remain ec o n o m i c a l l y v i a b l e in the long-term and can be developed w i t h i n the c o n s t r a i n t s of the Maximum Unit P r i c e (MUP), set fo r u n i t s i z e and region by CMHC. The maximum funding f o r t h i s s t a r t up program i s $75,000 which i s i n c l u d e d i n the t o t a l c a p i t a l c o s t and i f the p r o j e c t commences r e p a i d to CMHC through the mortgage funds should the p r o j e c t not proceed the loan i s f o r g i v e n . No f u r t h e r d i s c u s s i o n i s given to t h i s phase of the program. The co-op may e i t h e r purchase an e x i s t i n g b u i l d i n g which may r e q u i r e some re n o v a t i o n or develop a new p r o j e c t . In the case of r e h a b i l i t a t i o n , a f o r g i v a b l e RRAP grant up to $3,750 per u n i t i s a v a i l a b l e . T h i s amount of f o r g i v a b l e grant i s deduced from the p r o j e c t loan thereby reducing mortgage payments and p o t e n t i a l l y i n c r e a s i n g the number of a s s i s t e d occupants. E x p l a i n a t i o n of the 56.1 Funding Mechanism The f o l l o w i n g i l l u s t r a t i o n i s based on a new development although the mechanism i s i d e n t i c a l f o r an e x i s t i n g b u i l d i n g (See Appendix A for d e t a i l s of base c a s e ) . The a s s i s t a n c e provided by CMHC has two components. The 147 f i r s t i s a supply component - a subsidy to bridge the gap between economy l e v e l c o s t s and market re n t s ( A c t u a l l y to meet the income mix o b j e c t i v e and encourage p a r t i c i p a t i o n of middle income households 'rents' are set at the low end of market for comparable accommodation). I l l u s t r a t i o n 1 i n d i c a t e s how t h i s i s achieved. Terminology i s that used by CMHC (See g l o s s a r y of terms - appendix). At the loan approval stage of the process an agreement i s reached between CMHC and the Co-op on the approved c a p i t a l c ost of the p r o j e c t . These i n c l u d e land a c q u i s i t i o n and s e r v i c i n g c o s t s , b u i l d i n g c o s t s , and a l l s o f t c o s t s ( i n t e r i m f i n a n c i n g , a r c h i t e c t f e e s , permits, e t c . ) . The mortgage i s based on 100% c a p i t a l c o s t s (although the co-op may reduce t h i s with t h e i r own e q u i t y , land, a l t e r n a t e source of funds, e t c . ) . I t i s obtained through an i n s t i t u t i o n a l lender and f u l l y guaranteed by CMHC under the NHA mortgage insurance p r o v i s i o n s . A l s o at t h i s stage, the co-op submits an estimated o p e r a t i n g budget for CMHC a p p r o v a l . Included i n the op e r a t i n g budget are such items as taxes, insurance, u t i l i t i e s , maintenance and a monthly c o n t r i b u t i o n to a s i n k i n g fund f o r replacement r e s e r v e s . The replacement reserve fund may be used f o r c a p i t a l replacement such as ap p l i a n c e s , mechanical, r o o f s , plumbing, e t c . The t o t a l c a p i t a l c o s t i s p r o - r a t e d amongst a l l u n i t s ( a c c o r d i n g to r e l a t i v e s i z e ) as are the o p e r a t i n g 1 48 ILLUSTRATION 1: CALCULATION OF MORTGAGE ASSISTANCE Based on a u n i t c o s t of $89,205, and a 35 year mortgage at 13%. p.a. semi-annual compunding. 1 A. A s s i s t a n c e Required a) Monthly Mortgage Pmt (P + I ) 2 $952 (Ac t u a l P + I) b) Monthly Operating Expenses 2 $128 1 2 c) Economic Rent (a) + (b) $1080 d) Occupancy Charge $1080 (based on L.E.M. see t e x t ) ( i ) C o n t r i b u t i o n to oper. exp. $128 ( i i ) C o n t r i b u t i o n to P + I $467 (Reduced P + I) $595 - $595 e) A s s i s t a n c e r e q u i r e d to bridge gap between Economic Rent and L.E.M. i . e . , (c) - (d) $485 $485 (Predetermined A s s i s t a n c e ) B. Maximum A s s i s t a n c e A v a i l a b l e Maximum a s s i s t a n c e based on the d i f f e r e n c e between: f) P + I on approved c a p i t a l c o s t s @ 2% $295 and g) P + I on approved c a p i t a l c o s t s at the mortgage r a t e obtained - here 13% $952 h) Max. A s s i s t a n c e = d i f f e r e n c e (g) - ( f ) $657 ( T o t a l A s s i s t a n c e ) The c a p i t a l c o s t i s p r o - r a t e d on a u n i t area b a s i s from the t o t a l p r o j e c t cost of $5,893,714. Mortgage payments and o p e r a t i n g expenses are s i m i l a r l y p r o - r a t e d on a u n i t area b a s i s from the t o t a l p r o j e c t data. See Appendix A). U t i l i t i e s not i n c l u d e d as these are the r e s p o n s i b i l i t y of the i n d i v i d u a l household. 1 49 c o s t s . T h i s y i e l d s a per u n i t 'break-even' or 'economic occupancy charge' - $1,080 i n I l l u s t r a t i o n 3.1. The a c t u a l occupancy charge i s based on Low End of Market (LEM) rent s f o r market housing in the ar e a . Regional p o l i c y on e s t a b l i s h i n g LEM v a r i e s . In the B.C. region i t i s c a l c u l a t e d using a c t u a l market r e n t s f o r other comparable p r o j e c t s , adjustment i s make f o r age, and amenity l e v e l s of these and through t h i s a p p r a i s a l a market rent i s determined f o r the co-op p r o j e c t . T h i s i s then reduced by 5% to get the LEM occupancy charge to be used by the co-op. The r a t i o n a l e f o r low end of market rent i s that the 5% r e d u c t i o n r e l a t i v e to comparable market housing w i l l a t t r a c t medium income households i n t o the co-op, thereby e n a b l i n g the o b j e c t i v e of s o c i a l mix to be achieved. In the base case the LEM f o r a 3-bedroom u n i t i s $595 (compared with an economic break even rent of $T,080). In order to operate at t h i s l e v e l a monthly b r i d g i n g subsidy of $485 i s necessary, c a l l e d pre-determined a s s i s t a n c e ( r e f e r to I l l u s t r a t i o n 1). The S o c i a l Housing Component: Income Tested A s s i s t a n c e Many c r i t i c s of the co-op program base t h e i r comments on the f a c t that the co-ops r e c e i v e funding to reduce the e f f e c t i v e mortgage r a t e to 2%. I l l u s t r a t i o n 3.1 shows that t h i s i s not i n f a c t the case. The 2% i n t e r e s t r a t e i s used to determine the maximum a s s i s t a n c e which w i l l be made a v a i l a b l e to the co-op should i t be r e q u i r e d . The 1 50 example r e v e a l s that a t o t a l a s s i s t a n c e of $657 i s a v a i l a b l e but only $485 of t h i s i s used to achieve LEM occupancy charges. The remaining $172 i s a v a i l a b l e f o r the second l e v e l subsidy d e s c r i b e d i n I l l u s t r a t i o n 2 - the a s s i s t a n c e a v a i l a b l e to income t e s t e d households. T h i s remaining amount forms the 'subsidy p o o l ' . I l l u s t r a t i o n 2(c) demonstrates how the s u r p l u s p o o l i s used to f u r t h e r supplement income t e s t e d households so that they pay a maximum of 25% rent-income. Any remaining surplus i s allowed to accumulate i n a ' s u r p l u s subsidy fund u n t i l maximum su r p l u s of $500/unit accrues i n the fund'. In the base case of a 72 u n i t p r o j e c t t h i s would permit the accumulationof $36,000. Anytime the p r o j e c t i n c u r s a d e f i c i t (vacancy, change in income of member, etc.) draws may be made from the Surplus Subsidy Fund. Once t h i s fund has been maximized any s u r p l u s i s r e t u r n e d to CMHC. In the base case - a 72 u n i t p r o j e c t i n c l u d i n g 44 3-Br town-homes with a monthly charge of $595 - i t i s assumed the 15% of the u n i t s r e c e i v e d a d d i t i o n a l a s s i s t a n c e beyond the LEM l e v e l . I f the remaining 85% (15 households) pay no more than 25% rent-income then an annual income of $28,560 would be necessary. T y p i c a l l y more than the 6 c i t e d households would t h e r e f o r e be e l i g i b l e f o r some a s s i s t a n c e . (CMHC e v a l u a t i o n found i n excess of 40% income t e s t e d ) . The program ac h i e v e s both v e r t i c a l e q u i t y (those most in need r e c e i v e the g r e a t e s t a s s i s t a n c e ) and h o r i z o n t a l e q u i t y 151 ILLUSTRATION 2: ADDITIONAL ASSISTANCE FOR INCOME-TESTED MEMBERS A. C o n t i n u i n g with the example used i n I l l u s t r a t i o n 1: Maximum A s s i s t a n c e A v a i l a b l e (h) $657 Predetermined A s s i s t a n c e $485 ( i . e . , amt r e q u i r e d to bridge gap between a c t u a l P + I and reduced P + I (e) i ) R e s i d u a l a v a i l a b l e to income-tested. members $172 B. Expanding the example to represent a p r o j e c t r a t h e r than a s i n g l e u n i t : given 44 u n i t s ( a l l 3-Br with LEM charge: 595/month) j) Max. monthly a s s i s t a n c e 44 X 657 $28,908 k) P o r t i o n used f o r predetermined a s s i s t a n c e a p p l i e d to a l l u n i t s 44 X 485 $21,340 1) P o r t i o n remaining: a l l o c a t e d to Subsidy Pool ( j ) - (k) , $7,568 C. Assume 6 u n i t s (15%) are used to house income-test households and these households have annual incomes of 8,000, 10,000, 12,000, 15,000, 1 8 , 0 0 0 , and 20,000, r e s p e c t i v e l y . In order to pay a maximum 25%° rent-income r a t i o : Household Income Max. Rent LEM Subsidy Required $ 8,000 $1 67 $595 $428 10,000 208 595 387 12,000 250 595 345 15,000 313 595 282 18,000 375 595 220 20,000 417 595 178 T o t a l subsidy r e q u i r e d from subsidy p o o l : $1840 A v a i l a b l e i n subsidy p o o l : $7568 Surplus $5728 Max 500/unit goes to Surplus Subsidy Fund (SSF) Once SSF maximized (at 500 X no. u n i t s ) , remaining s u r p l u s re t u r n e d to CMHC. 1 52 (households having s i m i l a r s i z e and income are t r e a t e d the same). The co-ops are o b l i g a t e d to have at l e a s t 15% of the u n i t s a l l o c a t e d to income t e s t e d households, provided that s u f f i c i e n t funds are a v a i l a b l e to permit t h i s . In the a c t u a l p r o j e c t from which the base case i s taken 60 of the 72 u n i t s (83%) are i n f a c t a s s i s t e d i n order to keep t h e i r monthly payments at a maximum 25% of income. The l e v e l of a s s i s t e d f a m i l i e s i s almost always g r e a t e r than the minimum o b l i g a t i o n of 15%. CMHC's program e v a l u a t i o n found 41% to be r e c e i v i n g such a s s i s t a n c e (CMHC, 1983). The f a c t t h at t h i s p r o p o r t i o n i s f a r i n excess of the minimum 15% i s not i n i t s e l f s u f f i c e n t evidence to support the p o s i t i o n that the program p e r e t r a t e s to very low income l e v e l s . From the example of the 3 Bedroom u n i t at $595/month i t i s c l e a r t h a t a f a m i l y with an income of $28,560 would be i n c l u d e d i n t h i s s t a t i s t i c ( i . e . , 25% of income - 12 months) Program Mechanism A f t e r Year One The d i s c u s s i o n thus f a r has d e a l t with the d e t e r m i n a t i o n of a s s i s t a n c e f o r the f i r s t year of o p e r a t i o n . I l l u s t r a t i o n s 3 and 4 show how t h i s a s s i s t a n c e i s a p p l i e d i n subsequent years. The Co-op c o n t r i b u t i o n to the a m o r t i z a t i o n of the mortgage (reduced P + I) remains constant f o r the f i r s t three y e a r s . During t h i s time the second l e v e l a s s i s t a n c e i s a l l o c a t e d , as r e q u i r e d between income t e s t e d households. R e c i p i e n t s of t h i s a s s i s t a n c e are ILLUSTRATION 3i BASE CASE 3Br UNIT PROJECTION (MONTHLY VALUES) Principeli$89,710| 35 Year amortization) 5 Year Tere I 13Xp.a. teai-annual compounding Monthly Pat (P+I) -$932 Monthly Operating Expeniei (year 1)«$128.30 Econoaic Rent (year 1) •$1,080.30 LON End of Market Rent (LEH)> $595 Haxiaua A i i i i t a n e e (P+I «13I - P+I I2X)-952-295 =$457. Reduced P+l >LEH - Operating Expensei • 595 - 128 »*467 Predetereined A i i i i t a n e e ' F u l l P+I -Reduced P+I -932-467 «$465 Ai i i i t a n e e available for Incoae Tested >Hax - Predetereined "657 -485 >$172 YEAR OPERATINB FULL ECONOHIC REOUCED OCCUPANCY PREDETERHINED INCOME TOTAL EXPENSES P+t CHAR6E P+I CHAR6E ASSISTANCE TESTED ASSISTANCE MONTHLY ASSISTANCE 1 $128 $952 $1,080 $467 $595 $485 $172 $657 2 $134 $952 $1,086 $467 $601 $485 $172 $657 3 $141 $952 $1,093 $467 $608 $485 $172 $657 4 $148 $952 $1,100 $490 $639 $462 $195 $657 5 $156 $952 $1,108 $515 $670 $437 $220 $657 6 $163 $952 $1,113 $541 $704 $411 $246 $657 7 $172 $952 $1,124 $568 $739 $384 $273 $657 8 $180 $952 $1,132 $596 $776 $356 $301 $657 9 $189 $952 $1,141 $626 $815 $326 $331 $657 10 $199 $952 $1,151 $657 $856 $295 $362 $657 11 $208 $952 $1,160 $690 $898 $262 $395 $657 12 $219 $952 $1,171 $724 $943 $228 $429 $657 13 $230 $952 $1,182 $761 $991 $191 $466 $657 14 $241 $952 $1,193 $799 $1,040 $153 $504 $657 15 $253 $952 $1,205 $839 $1,092 $113 $544 $657 16 $266 $952 $1,218 $881 $1,147 $71 $566 $657 17 $279 $952 $1,231 $925 $1,204 $27 $630 $657 IB $293 $952 $1,245 $952 $1,245 $0 $657 $657 19 $308 $952 $1,260 $952 $1,260 $0 $657 $657 20 $323 $952 $1,275 $952 $1,275 $0 $657 $657 21 $340 $952 $1,292 $952 $1,292 $0 $657 $657 22 $337 $952 $1,309 $952 $1,309 $0 $657 $657 23 $374 $952 $1,326 $952 $1,326 $0 $657 $657 24 $393 $952 $1,345 $952 $1,345 $0 $657 $657 25 $413 $952 $1,365 $952 $1,365 $0 $657 $657 26 $433 $952 $1,385 $952 $1,385 $0 $657 $637 27 $435 $952 $1,407 $952 $1,407 $0 $657 $657 28 $478 $952 $1,430 $952 $1,430 $0 $657 $657 29 $302 $952 $1,454 $952 $1,454 $0 $657 $657 30 $527 $952 $1,479 $952 $1,479 $0 $657 $657 31 $553 $952 $1,505 $952 $1,505 $0 $657 $657 32 $581 $952 $1,533 $952 $1,533 $0 $657 $657 33 $610 $952 $1,562 $952 $1,562 $0 $657 $657 34 $640 $952 $1,592 $952 $1,592 $0 $657 $657 35 $672 $932 $1,624 $952 $1,624 $0 $657 $657 154 ILLUSTRATION 4i BASE CASE PROJECTION Principali$5,893,714) 33 year aaortization; 3 yr tera I 13Xp.a. seai-annual coapounding Monthly Pat IP+I) > $62,932 Operating expeniea (yr 1) =$101,720 Econoaic rent (yr 1) « $837,139 Total lot* end of Market rent collected (yr 1) • $486,960 Haxiaua aiaiatance (P+I 813X - P+I I2Z -755,419 - 233,984 -521,435 Reduced P+I • LEM - Operating expenses » 486,960 - 101,720 > 383,240 Predetorainad a i i l i t a n c e • F u l l P+I - Reduced P+I • 733,419 - 383,240 « 370,179 Assistance available for incoae tested • Max - Pradeterained • 521,433 - 370,179 •151,256 A88UNPTION81 Oper. exp increase 8 SXp.a. Mortgage renewal every 5 years I 13X Discount rate • 10X VEAR OPERAT INB FULL ECONOMIC REDUCED OCCUPANCY PREDETERMINE INCOME TOTAL EXPENSES P+I CHARGE P + I CHARGE ASSISTANCE TESTED ANNUAL ASSISTANCE ASSISTANCE $101 720 $755,419 $857 139 •385 240 •486 960 •370,179 •151 ,256 •521 435 $106 ,806 $755,419 •862 225 •385 240 •492 ,046 •370,179 •151 ,256 •521 ,435 $112 146 $755,419 $867 363 •385 240 •497 386 •370,179 •151 256 •521 ,433 $117 754 $755,419 •873 172 •404 502 •522 256 •350,917 •170 ,518 •521 ,433 $123 641 $755,419 $879 060 •424 727 •548 368 •330,691 •190 744 •521 ,435 $129 823 $755,419 •885 242 •445 963 •575 787 •309,455 •211 ,980 •521 ,435 $136 315 $755,419 $891 733 •468 262 •604 576 •287,157 •234 278 •521 435 $143 130 $755,419 •898 549 •491 675 •634 805 •263,744 •257 691 •521 435 $150 287 $755,419 $905 705 •516 258 •666 545 •239,160 •282 275 •521 433 $157 801 $755,419 •913 220 •542 071 •699 872 •213,347 •308 088 •521 435 $165 691 $755,419 $921 110 •569 175 •734 866 •186,244 •335 191 •521 435 $173 976 $755,419 $929 394 •597 634 •771 609 •157,785 •363 650 •521 435 $182 675 $755,419 $938 093 •627 515 •810 190 •127,903 •393 532 •521 435 $191 808 $755,419 $947 227 •658 891 •850 699 •96,527 •424 908 •521 435 $201 399 $755,419 $956 817 •691 836 •893 234 •63,583 •457 852 •521 435 $211 469 $755,419 $966 887 •726 427 •937 896 •28,991 •492 444 •521 435 $222 042 $755,419 $977 461 •755 419 •977 461 •0 •521 435 •521 435 $233 144 $755,419 $988 563 •755 419 •988 563 •0 •521 ,435 •521 435 $244 801 $755,419 $1,000 220 •755 419 •1,000 220 •0 •521 435 •521 435 $257 041 $755,419 $1,012 460 •755 419 •1,012 460 •0 •521 435 •521 435 $269 893 $755,419 $1,025 312 •755 419 •1,025 312 •0 •521 435 •521 435 $283 388 $755,419 $1,038 807 •755 419 •1,038 807 •0 •521 435 •521 435 $297 558 $755,419 $1,052 976 •755 419 •1,052 976 •0 •521 ,435 •521 435 $312 435 $755,419 $1,067 854 •755 419 •1,067 854 •0 •521 ,435 •521 435 $328 057 $755,419 $1,083 476 •755 419 •1,083 476 •0 •521 435 •321 435 $344 460 $755,419 $1,099 879 •755 419 •1,099 879 •0 •521 ,435 •521 435 $361 683 $755,419 $1,117 102 •755 419 •1,117 102 •0 •521 ,435 •521 435 $379 767 $755,419 $1,135 186 •755 419 •1,135 186 •0 •521 435 •521 435 $398 756 $755,419 $1,154 174 •755 419 •1,154 174 •0 •521 435 •521 435 $418 693 $755,419 $1,174 112 •755 419 •1,174 112 •0 •521 ,435 •521 435 $439 628 $755,419 $1,195 047 •755 419 •1,195 047 •0 •521 ,435 •521 433 $461 609 •755,419 $1,217 028 •755 419 •1,217 028 •0 •521 ,435 •521 ,435 $484 690 $755,419 $1,240 108 •755 419 •1,240 108 •0 •521 435 •521 435 $508 924 •755,419 $1,264 343 •755 419 •1,264 343 •0 •521 ,435 •521 ,435 $334 371 $755,419 •1,289 789 •755 419 •1,289 789 •0 •521 ,435 •521 ,435 NPV (810X) •2,193,900 •2,834,901 •5,02B,B02 1 55 g e n e r a l l y e s t a b l i s h e d at the beginning of the year when income statements are submitted. I t i s p o s s i b l e f o r the number of r e c i p i e n t s and amount of subsidy to each to change durin g the year to r e f l e c t changes i n income l e v e l s as w e l l as changes i n the co-op membership. Where a number of members i n c u r an income r e d u c t i o n f o r some reason (e.g., unemployment) the demand on subsidy funds may inc r e a s e and even exceed the a v a i l a b l e a s s i s t a n c e . T h i s may n e c e s s i t a t e drawing from the Surplus Subsidy Fund, i f s u f f i c i e n t funds are a v a i l a b l e , or a r e d u c t i o n i n the l e v e l of a s s i s t a n c e to some households (such that rent-income may exceed 25%). In the f o u r t h and subsequent years the co-ops c o n t r i b u t i o n to mortgage a m o r t i z a t i o n (reduced P + I ) in c r e a s e s at a rate of 5% per year. I l l u s t r a t i o n 3 demonstrates t h i s on a per u n i t b a s i s using the same 3-Br u n i t as i n I l l u s t r a t i o n 1; I l l u s t r a t i o n 4 pr e s e n t s the same process using the aggregated f i g u r e s f o r the e n t i r e base case co-op p r o j e c t . While i t i s perhaps e a s i e r to r e l a t e to these f i g u r e s on a per u n i t b a s i s the a c t u a l a d m i n i s t r a t i o n of the s u b s i d i e s i s c a r r i e d out f o r the e n t i r e p r o j e c t with the i n d i v i d u a l co-ops each r e s p o n s i b l e f o r i n t e r n a l f i n a n c i a l management and subsidy a l l o c a t i o n . In t h i s sense co-ops are p o t e n t i a l l y more co s t e f f i c i e n t than other n o n - p r o f i t p r o j e c t s a d m i n i s t e r e d by a c e n t r a l agency. While the co-op a c q u i r e s i n c r e a s i n g r e s p o n s i b i l i t y f o r the mortgage payments with a concurrent r e d u c t i o n i n the CMHC 1 56 c o n t r i b u t i o n the t o t a l amount of a s s i s t a n c e n e v e r t h e l e s s remains constant ($657 i n I l l u s t r a t i o n 3). Therefore as the co-op becomes i n c r e a s i n g l y s e l f s u s t a i n i n g the s i z e of the subsidy pool a v a i l a b l e f o r income t e s t e d households a l s o i n c r e a s e s . T h i s enables the low income members to keep up with the burden of i n c r e a s e d payments. In t h i s case the co-op pays f u l l P + I i n year 17, so a l l the a s s i s t a n c e goes to income t e s t e d households (note however, that the year i n which t h i s occurs may change i f mortgage renewal i s at other than the 13% assumed). Impact of Mortgage Renewal Although a f i x e d mortgage (at 13%) has been assumed throughout t h i s d i s c u s s i o n i t i s l i k e l y t h a t the rate would normally change at r o l l o v e r . At renewal, the c a l c u l a t i o n of maximum a s s i s t a n c e i s r e c a l c u l a t e d based on P + I at the new rate l e s s the P + I on the o r i g i n a l p r i n c i p a l at 2%. Th i s r e s u l t s i n a new amount of maximum a s s i s t a n c e and corresponding change i n the amount of predetermined a s s i s t a n c e . The amount a v a i l a b l e to income t e s t e d households remains unchanged (from what i t would have been in the absense of a mortgage r o l l o v e r ) . T h i s i s demonstrated i n I l l u s t r a t i o n 5. C l e a r l y , when renewal occurs at a higher r a t e maximum a s s i s t a n c e and predetermined a s s i s t a n c e i n c r e a s e , and v i c e versa i n the case of a d e c l i n e in r a t e . The co-op however i s immune to i n t e r e s t changes 1 57 ILLUSTRATION 5 ( a ) : IMPACT OF MORTGAGE RENEWAL A l l p r o j e c t data as noted i n I l l u s t r a t i o n 5 ( b). Assume mortgage renewal, year 6 at 16% p.a. (semi-annual compounding) Outstanding Balance (end year 5) $5,829,990 (a) Annual Pmt at 10% $912,152 (b) l e s s : Annual Pmt at 2% on o r i g i n a l p r i n c i p a l -$233,984 (c) New Maximum A s s i s t a n c e (a-b) $678,169 (d) Predetermined A s s i s t a n c e : ( i ) F u l l P + I (a) ( i i ) l e s s Reduced P + I ( u n a f f e c t e d by renewal) (from I l l u s t r a t i o n 4; yr6 = 445,963) Predetermined A s s i s t a n c e : F u l l P + I = $912,152 -Red. P + I = $445,963 $466,189 (e) A s s i s t a n c e to Income Tested: Max. A s s i s t , (c) = $678,169 l e s s Pre. A s s i s t , (d) = $466,189 $211,980 Reference to I l l u s t r a t i o n 4, year 6 r e v e a l s that the amount of income t e s t e d a s s i s t a n c e i s unchanged at $211,980. s i n c e reduced P + I i s e s t a b l i s h e d independently of i n t e r e s t r a t e s (based on LEM year 1 plus annual 5% i n c r e a s e beginning year 4). The net e f f e c t of the mortgage renewal i s i n the t o t a l subsidy c o s t to CMHC and the number of years which i t takes the co-op to reach f u l l P + I. Comparing the present value of subsidy in i l l u s t r a t i o n s 4 and 5(b) r e v e a l s that Illustration 5(b) PROJECT PROJECTION (MORTGAGE RENEWAL) Prlr\ripal;5,893,714; 35 year amortization; 5 yr ter* I 13"/p.a. seai-annual compounding Monthly P«t (P+I) = $62,952 Ooerating expenses (yr 1) =$101,720 Econoiic rent (yr 1) = 1857,139 Total ION end of aarket rent c o l l e c t e d (yr 1) = $486,960 fexinui assistance (P+I §131 - P+I 821 =755,419 - 233,984 =521,435 Reduced P+I = LEM - Operating expenses = 486,960 - 101,720 = 385,240 Predetermined assistance = F u l l P+I - Reduced P+I = 755,419 - 385,240 = 370,179 Assistance available for incose tested = Nax - Predeterained = 521,435 - 370,179 =151,256 ASSUMPTIONS: Oper. exp increase I 5Xp.a. Mortgage renewal year 6 8 162; year 11 § 102; reaains at 102 thereafter Discount rate = 102 YEAR OPERATING F U L L ECONOMIC REDUCED OCCUPANCY PREDETERMINED INCOME EXPENSES P+I CHARGE P • I CHARGE ASSISTANCE TESTED ASSISTANCE (132)1 $101,720 $755,419 $357 ,139 $385 ,240 $436 ,960 $370,179 $151,256 2 $106,806 $755,419 $962 ,225 $385 ,240 $492 ,046 $370,179 $151,256 3 $112,146 $755,419 $867 ,565 $385 ,240 $497 ,386 $370,179 $151,256 4 $117,754 $755,419 $873 172 $404 ,502 $522 256 $350,917 $170,51B 5 $123,641 $755,419 $879 060 $424 ,727 $548 368 $330,691 $190,744 (162)6 $129,823 $912,152 $1,041 976 $445 963 $575 787 $466,189 $211,980 7 $136,315 $912,152 $1,048 467 $468 ,262 $604 576 $443,891 $234,278 8 $143,130 $912,152 $1,055 283 $491 ,675 $634 305 $420,478 $257,691 9 $150,287 $912,152 $1,062 439 $516 258 $666 545 $395,394 $282,275 10 $157,801 $912,152 $1,069 953 $542 071 $699 872 $370,081 $308,083 '102)1 $165,691 $618,548 $784 240 $569 175 $734 866 $49,373 $335,191 12 $173,976 $618,548 $792 524 $597 634 $771 609 $20,915 $363,650 13 $182,675 $618,548 $801 223 $618 548 $801 223 $0 $334,565 14 $191,808 $618,546 $810 357 $618 548 $810 357 $0 $384,545 15 $201,399 $618,548 $819 947 $616 548 $819 947 $0 $334,545 16 $211,469 $618,548 $830 017 $618 548 $830 017 $0 $334,545 17 $222,042 $618,548 $840 590 $613 548 $840 590 $0 $384,545 18 $233,144 $618,548 $851 692 $618 548 $851 692 $0 $384,565 19 $244,801 $618,548 $363 350 $613 548 $363 350 $0 $334,565 20 $257,041 $618,548 $875 590 $616 548 $875 590 $0 $334,565 21 $269,893 $618,548 $868 442 $618 548 $889 442 $0 $384,545 22 $283,388 $618,548 $901 936 $618 548 $901 936 $0 $384,565 23 $297,558 $618,548 $916 106 $618 548 $916 106 $0 $384,565 24 $312,435 $618,548 $930 9B4 $618 548 $930 984 $0 $384,565 25 $328,057 $618,548 $946, 606 $618 548 $946 606 $0 $334,545 76 $344,460 $618,548 $963 008 $618 548 $963 008 $0 $384,565 27 $361,683 $618,548 $980 231 $618 548 $980 231 $0 $334,545 28 $379,767 $618,546 $996 316 $618 548 $996 316 $0 $334,565 29 $398,756 $619,548 $1,017 304 $616 548 $1,017 304 $0 $384,565 30 $418,693 $618,548 $1,037 242 $618 548 $1,037 242 $0 $384,565 31 $439,628 $613,548 $1,058 176 • $619 548 $1,058 176 $0 $384,565 32 $461,609 $618,543 $1,080 158 $618 548 $1,060 158 $0 $384,565 33 $484,690 $613,548 $1,103 238 $618 548 $1,103 238 $0 $384,545 34 $508,924 $618,548 $1,127 473 $616 548 $1,127 473 $0 $384,565 35 $534,371 $618,549 $1,152, 919 $618 548 $1,152, 919 $0 $384,565 NPV (§102) $2,337,236 $2,531,493 159 the 16% i n t e r e s t r a t e in years 5-10 r a i s e d predetermined a s s i s t a n c e but t o t a l subsidy was reduced as a r e s u l t of a 10% rate i n years 11-35. 

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