Abstract/Overview
Like other non-profi t landlords in the province, the Ott awa Community Housing
Corporati on (OCH) was working to balance day-to-day obligati ons, provide safe communi-ti es, manage costs and maintain its aging housing assets. Despite modest adjustments in operati onal funding, a growing backlog of unfunded capital work and uncertainty about renovati on/rehabilitati on funding triggered the need for a more concerted and strategic response to managing fi nancial pressures. In 2011, OCH initi ated the development of a Long Range Financial Strategy to help build a solid foundati on from which to bett er ad-dress fi scal realiti es. While not yet formally adopted, the Strategy has already established key areas of focus, set out proposed acti ons and piloted asset leveraging techniques. In this way, the fi nancial foundati on set out by the Strategy has created a strong fi scal foot-ing on which to pursue future asset regenerati on.
The Organization
The Ott awa Community Housing Corporati on (OCH) is the City’s designated local housing corporati on. While the City of Ott awa is the sole shareholder of the corporati on, OCH remains an arm’s length enti ty, formed in 2002 aft er the merger of the Ott awa Housing Corporati on and CityLiving. It is one of the largest non-profi t housing providers in the province and has a diverse portf olio of over 14,800 units scatt ered in communiti es and clusters across the city.
OCH’s housing stock is comprised of multi ple housing types including single detached homes, townhouses, rooming houses, multi -residenti al forms and apartments. By far, high rise apartments account for most of the OCH stock (55%) with townhouses a notable next (35%). This stock was developed/acquired over ti me under multi ple senior government programs. The lion’s share of the stock was developed under the Public Housing program (1970s and 80s) and the Provincial Reformed suite of programs (1980s and 90s). OCH also has a notable component of so called ‘equity’ stock which falls outside traditi onal pro-grams; therefore OCH has signifi cant lati tude in managing these units. As a result, there are a range of administrati ve agreements and funding structures that OCH oversees.
Portfolio Mix By Program
Public Housing 58% Prov. Reformed 18% Municipal NP 7% Federal 7% Equity10%
The Organization
The Ott awa Community Housing Corporati on (OCH) is the City’s designated local housing corporati on. While the City of Ott awa is the sole shareholder of the corporati on, OCH remains an arm’s length enti ty, formed in 2002 aft er the merger of the Ott awa Housing Corporati on and CityLiving. It is one of the largest non-profi t housing providers in the province and has a diverse portf olio of over 14,800 units scatt ered in communiti es and clusters across the city.
OCH’s housing portf olio is home to more than 32,000 tenants, most of whom are of low or moderate income. Many tenants are from vulnerable sub-groups including seniors, the disabled and those fl eeing domesti c violence. Eff ecti vely serving this broad consti tuency of tenants, providing assistance and maintaining the aff ordable housing they live in is a signifi cant undertaking.
The annual operati ng budget for OCH is in the order of $139M with about 51% of this funding being secured through various operati ng subsidies provided by City of Ott awa as the designated local Service Manager. The balance of funds to off set operati ng costs are raised through tenant rents, non-rental revenue and other grants or funding. Ensuring a safe quality of life for tenants, maintaining assets and managing long term capital liabili-ti es within the fi scal realiliabili-ti es of exisliabili-ti ng funding presents a number of fi nancial challenges for the organizati on.
funding being secured through various operati ng subsidies provided by City of Ott awa as the designated local Service Manager. The balance of funds to off set operati ng costs are raised through tenant rents, non-rental revenue and other grants or funding. Ensuring a safe quality of life for tenants, maintaining assets and managing long term capital liabili-ti es within the fi scal realiliabili-ti es of exisliabili-ti ng funding presents a number of fi nancial challenges
The Issue
The esti mated current valuati on of the extensive OCH portf olio is in the order of $2B and there is a strong desire to maintain the public investments that have been made in these assets over the years. In 2008, a comprehensive building conditi on assessment (BCA) was completed for the aging portf olio and it identi fi ed an existi ng requirement of $211.4M to address backlogged capital works that required immediate att enti on. If unfunded, this backlog would conti nue to grow and compound over ti me. The BCA also fl agged that if funding of $66.5M per year was dedicated for the next 5 years, the backlog would be reduced and the on-going annual requirement to meet lifecycle replacements thereaft er could be reduced to $26M annually. However, the 2011 annual capital contributi ons to OCH via subsidy were $11.6M, far less than the $26M baseline requirement identi fi ed in the BCA. As a result, if annual capital contributi ons are not increased or other grants provided, the capital backlog will again accumulate steadily over ti me.
Capital Repair Backlog
100 200 300 400 500 600 700 800 900 1,000 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 M ill io ns o f $
Capital Repair Backlog Capital needs Capital investment
The Issue
The esti mated current valuati on of the extensive OCH portf olio is in the order of $2B and there is a strong desire to maintain the public investments that have been made in these assets over the years. In 2008, a comprehensive building conditi on assessment (BCA) was completed for the aging portf olio and it identi fi ed an existi ng requirement of $211.4M
Since 2007, renovation and rehabilitation funding from City and senior government (including programs like SHRRP) have helped address some of the backlog by providing $61M but this still falls well short of the accumulated backlog. With the recent sunsetting of the SHRRP program, concerns exist about the ability to address the backlog going forward and how to prevent the backlog from compounding further (i.e. the accumulating cost effect of deferred repairs).
The condition of some stock has also raised questions about the viability of continuing to repair them versus redevelopment. As part of prudent asset management, OCH uses a Facility Condition Index (FCI) as a tool for evaluating this viability . OCH established that of the 160 ‘communities’ in its portfolio, 57% are in fair condition, 37% in poor condition (i.e. FCI > 10%) and 6% are in critical condition (FCI > 30%). The age and construction of the stock also means that significant opportunities exist to improve energy efficiency and better control utility costs.
Continued efforts have been made by OCH staff to repair and maintain stock, support volunteers, undertake energy retrofits and create better public spaces in OCH communi-ties. A stable funding agreement has also been negotiated with the City and has helped provide more certainty around the funding of the public housing part of portfolio but again, the adequacy of funding to properly maintain this stock is a concern. With the aging of the portfolio, there is a longer term interest in renewal/redevelopment of a number of communities but significant resources to support initiatives like this are required. Current initiatives by senior governments for new supply are limited and not able to address these needs. As a result, OCH has determined a need to look more closely at asset leveraging as a tool for regeneration and increasing affordable supply. To address the sizable financial gap, a more thoughtful financing strategy is required.
1 The FCI is the ratio of required repair expenses to current asset value, expressed as a percentage. A lower FCI indicates that repairs are generally in sync with building valuation. A higher FCI indicates more costly repairs versus value and at a certain point, there is no longer an incentive to reinvestment in the building.
Planning for tomorrow – Developing a
Long Range Financial Plan today
To maintain resident quality of life and more strategically manage the sizable portfolio it owns, OCH embarked on the development of a Long Range Financial Strategy (LRFS) in 2011. Based on financial forecasting, OCH was able to project major capital require-ments over the next 30 years, supported by a comprehensive BCA analysis. The ability to meet these needs was also assessed through a reserve fund forecast conducted by OCH. Financial forecasting was also done in-house for other costs and revenues to help inform the Strategy. As a result, a number of key areas for potential improvement were identified by OCH.
The objectives of the LRFS are to:
• Ensure the sustained operation of the portfolio • Identify the resources needed to maintain and repair • Improve the availability and suitability of affordable housing
• Improve organizational capacity to more effectively manage the portfolio • Support redevelopment and the leveraging of OCH assets
As part of the LRFS process, OCH explored each of these areas in detail, undertook a review of possible opportunities and identified potential actions related to each.
Achieving Sustainable Funding Long Range Developing Sustained Debt Financing Controlling Expenses, Reducing Costs Leveraging Assets Increasing Other Revenues
A. Achieving Sustainable Funding
Overall strategy – Seek adequate funding through streamlined operating agree-ment, grants and other sources in order to maintain and repair housing while providing service to tenants
The City of Ott awa, as Service Manager, currently provides just over 50% of OCH’s operati ng budget in form of program subsidies. Per program funding formulae, annual indexing allowances are made and the City has also provided some base funding adjustments to OCH to support sustainability but further dialogue is required to secure sustainable funding. The diversity of programs in OCH’s portf olio oblige more complex administrati on and discussions with the City are being pursued to support an OCH portf olio-wide approach to management.
Based on reserve fund forecasts completed by OCH, annual capital funding falls well short of BCA requirements and unfunded amounts only add to the growing capital backlog. While grants like SHRRP and City capital initi ati ves have helped reduce the backlog, an uncertain future regarding capital funding means a clear potenti al for a widening fi nancial gap. Conti nued eff orts by OCH are needed to secure sustainable capital funding from the City and senior levels of government. Recent ‘green’ grants of $3.5M have been secured by OCH to help improve energy effi ciency, support energy management initi ati ves and help generate on-going revenues through the sale of generated energy (i.e. renewable energy initi ati ves). OCH will conti nue to seek out funding initi ati ves like this to defray energy costs and generate revenues.
OCH also plans to pursue the establishment of a charitable foundati on to support the healthy communiti es concept within its portf olio. Community interest in contributi ng, donati ng and volunteering at both an individual and corporate level have grown and OCH does not have charitable status for accepti ng or uti lizing these funds. OCH has investi gated the feasibility of establishing such an enti ty and is now moving to create a separate, adjunct non-profi t charitable corporati on with parti cipati on from key community leaders. The corporati on will be seeded with start-up funding from OCH and their objecti ve will be to raise funds for tenant-centred initi ati ves (e.g. scholarship programs, social initi ati ves, etc.)
B. Developing a Sustainable Debt Financing
Strategy
Overall strategy – In collaboration with the City and senior government, promote and implement financing arrangements that generate funds for capital repairs while maintaining debt payments that are affordable
The majority of OCH mortgage debt is secured through a ‘pooled’ approach administered by the Province (Provincial reformed + MNP projects). This process yields lower than market interest rates but payments vary from term to term depending on rate fl uctuati ons (these commonly renew in successive 5-year terms). A second chunk of mortgages that are held by OCH are in the form of debentures and long term mortgages (federal + public housing projects) – this debt is of fi xed durati on, has fi xed annual payments and does not allow for prepayment. For the remaining part of the OCH stock, conventi onal mortgage or new debenture fi nancing is in place.
Given its constrained fi nancial maneuvering room, OCH has limited ability to consider any higher current debt service costs than it already incurs. For that reason, OCH is targeti ng mortgage debt that is within the ‘pooled’ group and seeking opportuniti es to re-fi nance these properti es to generate capital. Through this process, the current mortgage eff ecti ve-ly gets paid down at renewal and a new lower-rate mortgage with the same annual debt payments is put in its place but with a fi xed interest rate for up to a 30-year amorti zati on period. Pushing out the amorti zati on period and capitalizing on savings due to lower interest rates helps leverage project equity and translate into immediate working capital. The benefi ts of this approach are current lower mortgage rates, reduced downstream mortgage risk due to potenti al interest rate increases at each renewal and realizati on of capital that can be applied to capital repairs or redevelopment.
Extended amorti zati on periods and current interest rate savings are a defi nite key to making this approach att racti ve. However, the approach also relies on the concurrence/ facilitati on of some primary stakeholders:
• The Province is responsible for ‘pooled’ fi nancing and has to concur with placing revised debt outside the pool
• Infrastructure Ontario (IO) has to agree to place the new long term debt
A criti cal component of this approval is IO’s obligati on that the City be a payment
guarantor, providing the loan payment directly to IO on behalf of OCH. To counter balance this impact, the City (as Service Manager) would deduct annual loan payments from the annual subsidy that is to be disbursed to OCH. This enables the debt to remain on OCH’s books while allowing the City to meet IO’s guarantee on payments over the life of the mortgage.
This re-fi nancing approach was used by OCH in 2010 to negoti ate a $18.7M loan from IO that was used for capital repairs. The approach was piloted again in 2011, this ti me on a single property from the equity part of the portf olio (i.e. no operati ng agreement). In ad-diti on to creati ng mortgage funding for a new project acquisiti on, this re-fi nancing yielded an additi onal $1.3M in equity for deposit to the capital reserve fund. In both cases, the amorti zati on period used was coincident with the prior mortgage expiry date. OCH’s plan for 2012 is to re-fi nance 8 properti es that have upcoming renewal dates. Using the same debt payments but amorti zed over 30 years, additi onal debt room is created – OCH has projected that this refi nancing could generate up to $18.3M in working capital for repairs and redevelopment. A key disti ncti on for this batch of re-fi nancing (as compared to the prior rounds) is the City’s agreement to sign on for mortgage payments that go beyond original mortgage end dates (i.e. the full 30 years). This extends the City’s subsidy obliga-ti ons but from an accountability perspecobliga-ti ve, can be governed by the current operaobliga-ti ng agreement between the City and OCH.
C. Controlling Expenses and Reducing Costs
Overall strategy – To pursue partnerships and practices that support best value for goods and services, to realize energy savings on a priority basis and to rationalize legacy agreements
Given funding pressures in the operating budget, continued promotion of cost controls and appropriate reductions is an important financial strategy, especially as a hedge against inflation. As part of the LTFS, a number of specific initiatives have been identified by OCH to support cost controls including:
• Undertaking a comprehensive review of purchasing practices to ensure best value for dollars spent on goods and services
• Supporting best value practices through enhancing purchasing oversight, improving information systems and reporting practices in the process
• Forming an internal audit function to bolster fiscal oversight & responsibility
• Exploring and expanding the use of group procurement opportunities available through City as well as housing sector organizations and public sector purchasing initiatives
• Pursuing implementation of the OCH Green Plan to support energy efficiency initia-tives that help reduce costs through lower energy and utility consumption (priority focus on water efficiency)
• Clarifying and re-aligning asset ownership in legacy agreements with the City (e.g. leased vehicles, property leases, private road maintenance) to rationalize costs
D. Increasing Other Revenue Streams
Overall strategy – To grow revenue opportunities that align with OCH missions/ values, help support operations and foster redevelopment opportunities As part of the LRFS, OCH also plans to pursue additi onal revenues from a number of sources, specifi cally in the non-rental side of the revenue equati on. These sources cur-rently generate about $3M in revenue annually for OCH.Specifi c areas where OCH is looking to enhance revenue generati on is through: • Parking revenues - both from tenant and non-tenant sources
• Laundry revenues - evaluati on of need to re-tender to get bett er revenue returns • Communicati ons agreements – conti nued expansion of rooft op satellite and related
revenues sharing agreements
• Non-residenti al leases - maximizing space leasing to other agencies/organizati ons • Other - maximizing renewable energy sales, commercial adverti sing opportuniti es
and other revenue generati on opportuniti es
While maximizing revenue generati on is key, OCH has established principles around these opportuniti es, sti pulati ng that they must align with the values and mandate of the orga-nizati on. OCH has also fl agged a key factor in expanding these revenues; managing these acti viti es requires corporate capacity and appropriate policies to properly administer.
E. Leveraging assets
Overall strategy – to rationalize assets and advance partnerships with the sectors (public & private) in order to support redevelopment and renewal of OCH projects The leveraging of existi ng assets (land & buildings) is key to unlocking the equity potenti al in the current portf olio over the longer term and is seen by OCH as a primary tool for as-set regenerati on. Areas where OCH is looking to advance leveraging opportuniti es include: • Developing corporate capacity to evaluate portf olio performance against resident
needs, capital needs and operati ng costs (i.e. asset rati onalizati on)
• Exploring opportuniti es to intensify the use of lower density OCH property, especially with public or private sector clients (i.e. P2 and P3 opportuniti es)
• Use of intensifi cati on, redevelopment and re-design to transform projects into bett er mixed, bett er integrated and more accessible communiti es
0 Example #1 (work in progress) – replacement of run down duplex with new ten unit building by leveraging asset equity and other funding sources - net housing benefi t here would be additi on of 8 new units
0 Example #2 (work in progress) – intensifi cati on of existi ng public housing site by adding 24 units and bett er round out community mix – opportunity to leverage with sales of 2 scatt ered units, so net housing benefi t would be the additi on of 22 units
0 Older public townhouse developments are likely candidates for next considerati on
A core principle of this approach for OCH is to ensure a net housing benefi t in terms of units. OCH’s objecti ve here is to use resources to create additi onal units, not just fi nance repairs to existi ng. This has been handled on a case-by-case basis thus far but experiences to date have been positi ve for OCH. There is appeti te now to establish a process frame-work for incrementally addressing this going forward. Staff are currently developing a plan to come forward this fall to more formally develop an asset leveraging framework.
Status of Long-Range Financial Strategy
and Outcomes thus far
Since incepti on in 2011, the process of developing the LRFS has evolved for OCH. A revised draft of the LRFS recently went to OCH’s Audit and Finance Committ ee for review. Based on comments, the Strategy will be further revised and is expected to go forward for Board considerati on later this summer (2012). The experience to date of certain initi a-ti ves, especially in the area of debt fi nancing, has helped the Board consider a broader applicati on of leveraging opportuniti es in the portf olio. In additi on, the expansion of debt fi nancing has set out a path for other Provincial Reformed and MNP projects in the OCH portf olio to follow.
The fi nal version of the LRFS is expected to be translated into a future plan with specifi c, measurable acti ons, outlined responsibiliti es, and milestones for completi on. In the mean-ti me, OCH has an established staff work plan and is conmean-ti nuing to areas of concern fl agged in the LRFS. It integrates readily into corporate acti on given the focus on fundamental business principles such as controlling costs and increasing revenues).
OCH is also implementi ng the LRFS to generate immediate improvements in its fi nancial positi on and to establish a solid foundati on for future improvements. As a criti cal next step, staff at OCH propose to bring forward the asset leveraging plan this fall, which will include a review of asset rati onalizati on opportuniti es.
Status of Long-Range Financial Strategy
and Outcomes thus far
Since incepti on in 2011, the process of developing the LRFS has evolved for OCH. A revised draft of the LRFS recently went to OCH’s Audit and Finance Committ ee for review. Based on comments, the Strategy will be further revised and is expected to go forward for Board considerati on later this summer (2012). The experience to date of certain initi a-ti ves, especially in the area of debt fi nancing, has helped the Board consider a broader
Lessons for regeneration
• A strong fi nancial footi ng is valuable to any housing provider in terms of operati onal viability and is essenti al to managing day-to-day
• This same fi nancial footi ng is even more important over the longer term in a climate where new funds are fi nite and capital needs conti nue to grow
• Having indicators and tools to support informed asset-based decisions is key – facil-ity conditi on index, building conditi on assessments, forecasti ng tools, performance indicators - these all contribute to measuring project performance.
• The Board has crucial roles in establishing and driving strategic visions to guide the process - OCH’s commitment to a ‘net housing benefi t’ is an absolute priority over just repairing what’s on the ground and this has shaped the approach taken on redevelopment initi ati ves thus far
• The role of system stakeholders is essenti al to achieve fi nancial ‘fl exibiliti es’ (e.g. City, senior government and sector agencies)
• Collaborati ve eff orts of staff , stakeholders, and community partners are criti cal, especially when it comes to investments on the resident side of the equati on
Lessons for regeneration
• A strong fi nancial footi ng is valuable to any housing provider in terms of operati onal viability and is essenti al to managing day-to-day
• This same fi nancial footi ng is even more important over the longer term in a climate where new funds are fi nite and capital needs conti nue to grow
For more information about the Long Range Financial Strategy:
David McCarron, Executive Director - Corporate Services
Ottawa Community Housing Corp.
Phone: (613) 731-7223 ext 2282 E-mail: [email protected]
For more information about the organization:
David McCarron, Executive Director - Corporate Services
Ottawa Community Housing Corp.
39 Auriga Drive Ottawa, ON K2E 7Y8
