September 18, 1998

CHIEF OPERATING OFFICER:

The Board of Directors of The City of Toronto Non-Profit Housing Corporation (Cityhome) and theBoard of Directors of The Metropolitan Toronto Housing Company Limited (MTHCL) on September 14, 1998, had before them a report (September 9, 1998) from the Acting Chief Operating Officer, Toronto Housing Company, advising that the City's "Property House" portfolio consists of 60 properties, comprising 105 units acquired/expropriated between 1930 and 1974 for parks purposes; that the properties were never used for parks purposes and in 1975, Cityhome took over the management of the portfolio, with City Council adopting a business plan in 1992 which leased these properties to Cityhome for terms of 49 and 25 years for 22 and 38 of the properties respectively; further advising that as requested by the City of Toronto Budget Committee at its meeting in March, 1998, the Commissioner of Corporate Services prepared a report (dated May 11, 1998) with recommendations for a process to sell the Property Houses; that the Corporate Services Committee has deferred consideration of such report until its meeting scheduled for October 9, 1998; stating that it is clear from the waiting lists that the need for affordable housing for families is currently greater in magnitude than for any other group in the City; that the management or disposition of these houses must assist in addressing the current gap between supply and demand for affordable family housing; that these properties present an opportunity for the City to provide affordable family housing units which can generate an internal operating subsidy and maintain affordability without the need for on-going operating subsidies from the City; detailing three optionswhich would increase the number of rent-geared-to-income family units; submitting Appendices I to V, and Figures I, II, and III in connection therewith; and recommending that the Boards of Directors:

(1)recommend to the City of Toronto that the ownership of all the "Property Houses" be transferred at no cost to the new amalgamated Municipal Housing Company so that this portfolio can be used to provide affordable housing for families directly or through any sale proceeds;

(2)forward a copy of this report, together with any Board Resolutions related thereto, to the Corporate Services Committee, for information, at its meeting scheduled to be held on October 9, 1998; and

(3) authorize the appropriate officials to take the necessary action to give effect thereto.

The Boards of Directors recommended that the Corporate Services Committee recommend to Council the adoption of Recommendations Nos. (1) and (3) contained in the aforementioned report (September 9, 1998) from the Acting Chief Operating Officer.

The Boards of Directors also decided to advise the Corporate Services Committee that the Boards would appreciate the City's support of the request to have the ownership of these property houses transferred to the amalgamated Toronto Housing Company, and to allow staff to further explore the options for such housing stock in order to maximize its potential for social housing purposes, given:

(a)the extent of the current waiting lists for affordable family housing; and

(b)that City Council has previously advised the Minister of Municipal Affairs and Housing and the Chairs of the Boards of the Ontario Housing Corporation (OHC) and the Metropolitan Toronto Housing Authority (MTHA) of its opposition to the sale of the scattered houses owned by OHC in the City of Toronto.

Corporate Secretary

R. MacKenzie/in

Item No. J-7

Sent to:Corporate Services Committee

Chief Operating Officer, Toronto Housing Company

c:Commissioner of Corporate Services

(Report dated September 9, 1998,

addressed to the Boards of Directors,

The City of Toronto Non-Profit Housing Corporation and

The Metropolitan Toronto Housing Company Limited,

from the Acting Chief Operating Officer, Toronto Housing Company.)

Recommendations:

It is recommended that the Boards of Directors:

(1)recommend to the City that the ownership of all the "Property Houses" be transferred at no cost to the new amalgamated Municipal Housing Company so that this portfolio can be used to provide affordable housing for families directly or through any sale proceeds;

(2)forward a copy of this report, together with any Board Resolutions related thereto, to the Corporate Services Committee, for information, at its meeting scheduled to be held on October 9, 1998; and

(3)authorize the appropriate officials to take the necessary action to give effect thereto.

Background:

The "Property House" portfolio consists of 60 properties, comprising 105 units acquired/expropriated between 1930 and 1974 for parks purposes. The properties were never used for park purposes and in 1975, Cityhome took over the management of the portfolio. In 1992, City Council adopted a business plan which leased these properties to Cityhome. The lease terms are 49 and 25 years for 22and 38 of the properties respectively. The business plan included a process to bring the rents up to the low end of market levels by the end of 1997 and a provision to provide rent assistance to a number of low income households using the surplus from the portfolio. The Property Houses were managed conservatively by Cityhome, given that there was no City subsidy or reserve available. A $2.5 million mortgage on the 22 properties leased for 49 years was taken out to fund a rehabilitation program. Although major capital work was done on many of the buildings, the capital budget for repairs to the Property Houses is not substantial. The main purpose of the capital program was to provide short term capital funding to address immediate capital repair needs and minor improvements related to increasing rentabilty of the units at market rent levels. ¹

¹If this portfolio were to be retained for rental housing the owner will need to set aside funds for a longer term capital reserve.

At a City of Toronto Budget Committee meeting held on March 9, 1998, the Committee asked the Commissioner of Corporate Services to submit recommendations to dispose of the Property Houses. On May 11, the Commissioner of Corporate Services submitted to the Corporate Services Committee a plan detailing the process to sell the Property Houses.

At the Board of Directors meeting held on May 25,1998, the Board passed a resolution requesting that the Corporate Services Committee defer dealing with the City's Property Houses, and directing staff from Cityhome/MTHCL to look at alternatives methods to retain these houses for social housing purposes. At its meeting on May 11, 1998, the Corporate Services Committee deferred its consideration of the issue until October 9, 1998. City staff have been asked to report on a "win-win approach", i.e.,options that will serve the interests of the City and the existing tenants. City staff have been surveying tenants to determine their interest in purchasing the houses and seeking ideas on alternative community uses of the houses.

The current report presents the position of the municipal housing company; a separate report to the Corporate Services Committee outlining the issues described above is being prepared by city staff from the Property and Shelter Housing Support Divisions. A copy of the report prepared earlier this year by the Commissioner of Corporate Services outlining the City's reasons for wanting to sell the Property Houses, as well as providing background on the Property Houses portfolio has been included in Appendix I for background information.

Discussion:

The proposal to sell the Property Houses and to take the proceeds into general revenue would result in a loss of affordable rental housing stock in the City. Based on information from Housing Connection's waiting list, the largest group (53.8 percent) in need of housing in the City is families. Of the 42,624 households registered in March 1998, 22,955 were families. Of these families, 39percent required 3 bedroom units and 10 percent required 4 bedroom units. The combined Toronto Housing Company (THC) portfolio contains only 5,086 family units (17.8 percent), predominantly 2 bedrooms. The number of 3+ bedrooms in the portfolio is only 1,784 units.

Although the existing family stock in the social housing portfolio is quite small, the more relevant information to consider is housing availability. The THC net turnover for families requiring RGI (rent-geared-to-income) units is almost insignificant in relation to the size of the waiting list. In 1997, only 154 units (8 percent of THC net turnover) were available to house families. Only 55 of the 1997 units were 3+ bedroom. The gap between the growing trend of housing needs in the family group and the annual availability of RGI units for families is extremely large.

The Interim Report of the Mayor's Homelessness Action Task Force (July 1998) identified families as being one of the "at-risk of becoming homeless" population groups. In 1996, families represented 46 percent of the people using hostels with more than 5,000 of these users being children. The Property Houses are ideally suited to serve families since over 70 percent of the units are two bedroom or larger. The chart below summarizes the number of properties and units by unit type, including the current number and type of subsidized rental units.

Options:

There are several alternatives to the simple disposal of the Property Houses. The underlying assumption of this report is that the very few larger units in the City's affordable social housing stock should be maintained. The current status of these 56 properties indicates that 10 units are rented at RGI levels and 90 units at below market rent levels. In light of the current lack of affordable rental housing for families in the City, we propose that the City's objective in disposing of its real estate assets should be, at a minimum, to maintain the level of the existing affordable rental housing.

It should be noted that selling the properties and re-investing the proceeds in social housing is an acceptable plan of action under this assumption. Perhaps one of the most compelling economic reasons to consider selling the portfolio as part of a re-investment strategy is related to the concept of highest and best use in the valuation of real estate properties. From an appraisal point of view, the highest and best use of single family detached houses in the city core is owner occupied residential and not rental. Valuation of rental property is a function of the property's net operating income stream. Under current market conditions, this rental property value is much lower than the property as an owner occupied home. By selling these houses, the net proceeds would realize a higher gain than if the same number of units were sold as rental properties.

This report proposes that the ownership of houses be transferred at no cost to the new Toronto Housing Company to maximize the number of RGI units that can be rented to families directly or through any full or partial sale proceeds. The management of the portfolio or any new units built from its sale proceeds by THC will insure operating costs are maintained at cost effective levels and that all current or future RGI units would operate without municipal subsidies.

It is clear that the use of houses for rental is not the highest and best use of the asset from a financial perspective and that from a social perspective the dollars can be used to create new multi-residential family units. The alternatives that the housing company could consider are as follows:

(1)Keep the portfolio and increase the number of units receiving rental assistance generated from the portfolio's surplus funds.

(2)Sell the portfolio and use the funds to build new affordable and below market family housing units (2, 3 and 4 bedrooms).

(3)Sell the portfolio and use the funds to redevelop affordable and below market family housing units (2, 3 and 4 bedrooms) on Housing Company existing properties.

Option 1:Keep the portfolio and increase the number of units receiving rental assistance using surplus funds from the portfolio.

The portfolio generated a surplus of about $240,000.00 in 1997 at current rent levels. The average rent for the portfolio is $747.00 per month, about $200.00 per month on the average below the low end market rents. In addition, there are still unused funds from the original $2.5 million mortgage for the rehabilitation program. The current finances of the portfolio are therefore sufficient to increase the number of rental assistance using surplus funds from the portfolio and continue with the rehabilitation program. The attached Appendix II shows the proforma and the maximum number of rental assistance under current rent levels and low end of market levels. Based on historical expenditure profiles and allowing for an average reserve contribution of $2,500.00 per house, the following are the maximum number of rental assistance units under current rent levels and low end of market levels:

Monthly Monthly Maximum

Rent AssistanceAssisted Units

Current Rent$800$47033

Low End of Market$1,020$62062

A review of the turnover statistics with the property manager indicates an average annual turnover rate of about 14 percent. Currently there are 9 vacant units of which one unit may require substantial capital repairs. It is therefore possible to increase the number of units receiving rental assistance from10 to 33 within the next 12 months. At the current rate of increase, market levels can be achieved within the next 18 to 24 months. Given the current turnover rate, it should be possible to provide another 29 units with rental assistance within the same time frame.

Option 2:Sell the portfolio and use the funds to build new affordable and below market family housing units (2, 3 and 4 bedrooms).

While there are no recent appraisals done for each property, the attached Appendix I shows Current Value Assessment (CVA) for each property. Using assessment values as a proxy for market value is a very conservative approach. Nevertheless, the CVA for the portfolio is approximately $10.955million². We will assume net proceeds from sales of $11.0 million. New housing can be developed using the proceed from sales and a mortgage on the development. The amount of mortgage is such that the rent can be kept at an affordable level. Therefore, the various possibilities will range from the building of 100 percent low end market units to 100 percent RGI units with the former yielding the highest number of units and the latter the least. At the other extreme of 100percent RGI units, the development will not be able to support a mortgage, and part of the proceeds from the sale would have to be set aside in order to provide ongoing rent-geared to income subsidies to some units in the development.

² Last known estimate from City Real Estate based on CVA for the sale of 55 units.

To support the work around the City's Affordable Housing Strategy, staff have developed estimates for construction and operating costs data for the various housing forms (walk-up, townhouse, high-rise, shared single, rental hotel, etc). The following analysis uses these data to estimate the number of units that can be developed under the following two scenarios:

(a)a typical two, three and four bedrooms walk-up development for family housing under various market and RGI rents combination; and

(b)50/50 market/RGI family housing development for three building forms (walk-up, townhouse and high-rise).

The maximum number of units and the project financing for a typical two, three and four bedrooms walk-up family housing development under various market and RGI units combination is shown in Figure 1 and Appendix III. For a project with 100 percent low end of market units ($1,040 per month), 145 units can be built using the $11.0 million from the sales plus an 8 percent mortgage of about $8.6 million for a total project cost of about $20 million. The debt ratio is about 44 percent. Construction cost per unit is estimated at $135,000. At the other end of the spectrum, only 66 RGI units can be built for a project cost of about $9.0 million. The remaining $2.0 million will be reserved to provide rental subsidies in order to maintain a RGI rent of $350 per month. This illustration demonstrates that the rental units provided by the Property Houses can be replaced in full if they are all low end of market units. At a 50 percent RGI units level, 46 RGI and 46 market units can be built for a total of 92 units.

The reason to use a walk-up development for the above illustration is that this building form is found to be the most cost effective among three City standard building forms, namely, lowrise/walk-up, townhouse and high-rise apartment buildings. Figure II and Appendix IV show the maximum number of units and the project financing at a 50/50 market/RGI ratio for typical lowrise/walk-up, townhouse and high-rise apartment buildings. At this ratio, 92 walk-up units can be built compared with 88townhouse and 76 high-rise apartment units.

To summarize, a walk-up development of up to 145 low end of market units may be built using the proceeds from selling the Property Houses plus appropriate mortgage financing. Mortgage financing may be used if affordable to maximize the total number of units built and, at the same time, to support the maximum number of RGI units on a self-financing basis. By reducing the number of market units, up to a maximum of 66 subsidized units can be created without external subsidies.

Option 3:Sell the portfolio and use the revenue to redevelop affordable and below market family housing units (2, 3 and 4 bedrooms) on the Housing Company's existing low density sites properties.

This option is identical to Option 2 with the exception of building on existing Housing Company land. By providing free land to the new development, the estimated construction cost for a walk-up building will be reduced by about $25,000 to $110,000 per unit. This assistance may also be in the form of City land. The Housing Company has a couple of low density projects nearing the end of the 50 years mortgage term. Redevelopment of these sites has been discussed.

Due to the lower construction cost, more units can be built under this option as illustrated in FigureIII and Appendix V. For example, walk-up project development of up to 216 low end of market units or a maximum of 78 subsidized units may be built using the proceeds from selling the Property Houses plus appropriate leverage or reserve. Linking the selling of the Property Houses with the redevelopment of Housing Company properties may be a strategic approach to deal with the lack of capital funding for redevelopment.

Conclusions:

It is clear from the waiting lists information that the need for affordable rental housing for families is currently greater in magnitude than any other group in the City. We believe it is urgent that the City take a position of leadership in the preservation of the existing affordable rental housing stock. The management or disposition of these houses must assist in addressing the current gap between supply and demand of affordable housing for families. All the options discussed above would increase the number of rent-geared-to-income family units while fulfilling "more affordable housing" - one of the nine strategies stated by the Mayor's Homelessness Action Task Force to break the cycle of homelessness.

The municipal housing company with over 220 properties (28,500 units) under management, has the expertise and commitment to ensure that the public benefits are maximized while effectively levering these assets with a social objective. The scale of its operations ensures that existing tenants can be accommodated at no financial hardship and its community-wide approach to housing provides linkages with a wide variety of community agencies serving specific housing needs.

(A copy of each of Appendices I to V, and Figures I, II and III, referred to in the foregoing report (September 9, 1998) from the Acting Chief Operating Officer, is on file in the office of the City Clerk.)