Changes to CMHC Multifamily Financing Programs (December 2024)

Article updated December 20, 2024

On November 15, 2024 CMHC announced changes to their Multi Unit Mortgage Loan Insurance programs.? These changes impact both the MLI Standard and MLI Select Programs. Details of these changes are as follows:

1.????? Risk Based Approach to Leverage During Construction for MLI Select (Through Rental Achievement Holdbacks): Rental Achievement Holdbacks are already in place for MLI Standard Construction loans, whereby those loans are limited to 75% Loan to Cost during construction and then topped up to 85% leverage once construction is complete and Rental Achievement has been met (essentially lease-up has occurred to projected rents less the market level vacancy).?

While Rental Achievement Holdbacks could have been used for MLI Select Construction loans in the past, our previous experience was that this was infrequent.? Going forward CMHC is modifying MLI Select product flexibilities for construction loans such that loan advancing may be subject to Rental Achievement Holdback more often than before, at CMHC’s discretion.?

If a Rental Achievement Holdback is applied to a loan, leverage will be reduced from a maximum of 95% Loan to Cost to 75% Loan to Cost during construction.? This leverage can then only be topped up to 95% Loan to Cost once construction is complete and Rental Achievement has been met. If rental rates end up being lower than projected/underwritten rents – the top up of the loan amount may be reduced.

We understand CMHC will be using a risk-based approach to determine whether a Rental Achievement Holdback will apply or not.? Some of these risk factors include (but are not limited to):

1.?????? Market Risks: The number of rental units coming to the market or that have recently come to the market, along with the lease-up velocity and rates of these units.? In addition, the size of the market itself (i.e. primary vs secondary vs tertiary market)

2.?????? Project Risks: The number of units being brought to the market relative to the size of the market and the complexity and type of project

3.?????? Sponsor: Experience of Sponsor and Construction Manager with similar projects, net worth/liquidity of the sponsorship group relative to loan amount.

This is one of the more notable changes to MLI Select Construction Loans since the Program launched, as it has the potential to reduce leverage on construction loans by up to 20% Loan to Cost at the outset (in cases where Rental Achievement Holdbacks apply). In these cases, construction leverage is comparable to construction financing available conventionally (i.e. through non CMHC-insured financing) which generally is 75% Loan to Cost from conventional lenders (banks and credit unions), and up to 80-85% leverage through mezzanine lenders.

Prior to the launch of MLI Select, many mezzanine lenders had products to top up MLI Standard CMHC construction loan leverage during construction.? This mezzanine loan would be paid out once Rental Achievement is met.? We expect these types of mezzanine loans to become available once again where MLI Select construction loans that have rental achievement holdbacks applied, to top up leverage from 75% Loan to Cost up to 80-85% Loan to Cost during construction and then get paid out by the CMHC loan advance top up once rental achievement has been achieved.? Note that this would be subject to CMHC and lender approval in each case.

While CMHC financing may still have some advantages for construction financing relative to un-insured construction financing (materially lower interest rates, single source of financing during construction and take-out, construction loans available for smaller markets) - this will likely reduce the proportion of CMHC insured construction mortgages relative to uninsured mortgages in the market. Non CMHC insured construction mortgages may be faster to fund and do not have to rely on current market rents to calculate debt service ratios and resulting leverage - they can instead rely on market rents at the time construction is complete (which is an advantage if market rents are expected to increase between the start and end of construction).

It is important to note that if a Borrower obtains non CMHC insured financing during construction and then obtains a CMHC mortgage at completion - the CMHC mortgage leverage at completion for a new build is still constrained to 95% of construction cost. This is until the building has obtained either 1 year of stabilized income or it has been 2 years since occupancy permit, after which it will be considered an existing building, and leverage can be obtained up to 95% of value (and 'existing building' social outcomes will apply).

* Note:

1) Any reference above to Loan to Cost is assuming that the CMHC valuation is higher than the cost.? If value is lower than cost then leverage is limited to the lower of cost or value.?

2) This policy change is effective November 15, 2024, and will be applied to applications submitted on or after this date, as well as previously submitted applications that are not yet approved.? *

2.????? Lease-up Required to Convert Construction Loan to Permanent (Term) Loan and Prior To Purchasing a Newly Constructed Building with CMHC MLI Select Financing:

The MLI Select program generally allowed lease-up requirements to be waived for new construction projects.? This has meant that developers could convert their mortgage from a construction mortgage to a permanent (term) mortgage prior to achieving lease up. It also meant that purchasing a new or recently built multifamily property has previously not required lease-up as well.?

While a Lease-up requirement could technically have been imposed for an MLI Select new Construction loan in the past, our previous experience was that this was infrequent.?

Going forward CMHC is modifying MLI Select product flexibilities for newly built properties such that loan advancing may be subject to Effective Gross Income (EGI) attainment more often than before, at CMHC’s discretion.?

In loans where EGI attainment applies, it would entail only allowing for the conversion of a construction mortgage to a permanent (term) mortgage once lease-up is at market occupancy. Similarly, if EGI attainment applies for purchase financing of a recently built property, it will require lease-up to market occupancy levels prior to the loan funding.

If Effective Gross Income (EGI) attainment is applied to an MLI Select mortgage used to purchase a newly built multifamily property, sellers and buyers may need to cooperate in ensuring lease-up prior to the transaction closing with CMHC financing. ?Alternatively bridge loans may be required to allow for faster closings, though they come with additional costs.

If rental rates end up being lower than projected/underwritten rents - loan amounts may get reduced prior to funding.

We understand CMHC will be using a risk based approach to determine whether a Effective Gross Income attainment will apply or not.? Some of these risk factors include (but are not limited to):

1.?????? Market: The number of other rental units coming to the market and that have recently come to the market, along with the lease-up velocity and rates of these units.? In addition, the size of the market itself (i.e. primary vs secondary vs tertiary market)

2.?????? Project: The number of units that would need to be leased relative to the size of the market

3.?????? Sponsor: The experience, net worth and liquidity of the sponsorship group to manage lease-up and cover costs while leasing up the property

This policy change is effective November 15, 2024, and will be applied to applications submitted on or after this date, as well as previously submitted applications that are not yet approved.

3. Bonding Requirements for Construction Projects: Bonding was generally a requirement for CMHC construction loans.? This requirement was 50% labour and material bonding and 50% performance bonding on all major contracts, with the Approved Lender appropriately designated beneficiary of the bond. ?Depending on the risk of the file however, CMHC often allowed lenders the discretion to waive the requirement for bonding if it deemed prudent on new construction projects after assessment of credit worthiness of sub-trades and the Project Monitor (Quantity Surveyor) confirming acceptability of the major sub-trades with regard to reputation, experience and track record..?

Going forward CMHC has indicated that bonding (or an alternative to bonding) will generally be required prior to a construction loan funding.? CMHC has provided clarity on alternatives to bonding, which include:

?a) An irrevocable and unconditional letter of credit (in the amount of 10% of hard costs)

?b) Collateral security (which we understand to be in the amount of 10% of the hard costs and can be a first or second mortgage taking leverage on the collateral up to a maximum of 75% of value)

?c) A reduction of the construction loan amount (which we understand to be equivalent to 10% of the hard costs)

Note that if bonding is required on a file, it may result in construction costs increasing (as obtaining bonding for construction projects comes with a cost). It may also result in effective leverage decreasing either directly through loan decreases if bonding isn't obtained, or indirectly with collateral security (other assets being pledged as having the mortgage registered).

As was previously the case, we understand that CMHC may provide more flexibility for lenders to waive bonding for construction loans with 24 units and fewer.

We understand CMHC will be using a risk-based approach to whether bonding will be required with particular focus on the size, type and complexity of the project relative to the sponsor and construction managers experience.? In addition the number of simultaneous projects a sponsor may have on the go may be a consideration.

This policy change is effective November 15, 2024, and will be applied to applications submitted on or after this date.

4.????? Appraisals:

?a) CMHC previously only required appraisals for properties with 24 units and fewer.? They have now expanded this requirement and an appraisal is now required for all properties submitted to CMHC for insurance (regardless of size).

?b) CMHC has also added clarity to appraisals requirements and have indicated that appraisal reports must be produced in accordance with the applicable industry standards, contain three market valuation methods, and be completed within 12 months from the application submission date.

We understand that the 3 valuation methods appraisers use are the income approach, direct comparison and cost approach.? If the cost approach is not applicable to an older building for example, the appraiser would need to include justification as to why that approach is not applicable.?

While appraisals were generally obtained for many CMHC applications, the requirement for appraisals on all properties being required will likely result in submissions into CMHC taking longer as appraisals would be required before underwriting can be completed and submitted to CMHC.

CMHC’s primary objective of extending appraisal requirements to all properties is to ensure consistency, efficiency, and rigour in the approach to property valuation across all building types and sizes.

This policy change is effective November 15, 2024, and will be applied to applications submitted on or after this date.

5.????? Accessibility Criteria: CMHC has updated the Accessibility requirements to reflect more current accessibility standards – specifically the Canadian Standards Association (CSA) B651:23 and the Rick Hansen Foundation Accessibility Certification (RHFAC) Version 4.0.

These new standards have deeper accessibility requirements than the previous standards and as such may require additional planning, design considerations and potentially increased costs to meet the updated standards.

For example the new CSA standard includes detailed specifications for tactile direction indicators and controls for power-assisted doors, while the new RHFAC includes enhanced mobility criteria. From CMHC's perspective this change will ensure that the Accessibility social outcome is more current and impactful going forward.

This policy change is effective November 15, 2024, and will be applied to applications submitted on or after this date.

6.????? Lender Designations: Further to the changes effective September 3 regarding CMHC Approved Lenders and Correspondents (Brokers), CMHC has clarified that ‘dual designations’ with CMHC (i.e. organizations that do both CMHC lending and brokerage) will not be allowed to do both with CMHC going forward.? As such organizations can only have one status of either being an Approved Lender or an Approved Correspondent (Broker) with CMHC.

This will mean that all brokers and borrowers will have to obtain quotes from, select a lender, and have that chosen lender apply to CMHC for approval. ?This will provide certainty and clarity as to who the lender will be that will ultimately fund the loan.

When it comes to costs - lenders have continued to provide lower rates and fees to brokers (compared to loans done directly with a Borrower) as a significant portion of the work has already been completed by the broker when the file gets to the lender.? We expect this lower pricing structure to continue – especially for the better brokerages with strong experience with CMHC, comprehensive loan packages and seamless integration with lenders.

We believe that this enhances the value proposition of 'pure-play' commercial mortgage brokerages in the market and provides more transparency for Borrowers.

The change pertaining to this topic is effective November 15, 2024.

7.????? Commitment to Insure:

?a) In a related clarification to lender designations, CMHC has also confirmed that when a Certificate of Insurance (COI) is issued – it is with the expectation that the originating Approved Lender intends to fund the loan.

?b) In exceptional circumstances and within policy parameters, the originating Approved Lender can submit a request for a new Certificate of Insurance to be issued to a subsequent Approved Lender. Written requests must include the originating Approved Lender’s rationale for the release of the CMHC loan insurance commitment. Acceptance continues to be at the discretion of CMHC.

?c) Transfers of the CMHC COI from one lender to another (in exceptional circumstances) would only be permitted if:

?i. The original Certificate of Insurance has not expired

?ii. No funds have been advanced on the loan or the funds have been fully advanced (i.e. a certificate cannot be transferred part way though construction for example)

?iii. The Interest Adjustment Date has not yet passed (i.e. the loan has not been converted to a term/permanent loan)

?d) A CMHC-insured loan may be transferred to another Approved Lender only after the Interest Adjustment Date (this generally means at the end of the term of a permanent loan – for example at the end of a 5 or 10 year term – you may be able to transfer lenders).

One notable item here is that there are lenders in the market that focus on construction lending and aren't able to offer or aren't competitive in offering permanent (term) mortgages. ?Our experience so far is that CMHC has allowed for transfers in these situations.

The policy changes pertaining to this topic are effective November 15, 2024, and will be applied to all applications, including previously submitted applications.

8.????? Qualifying Interest Rates: For applications with terms of 10 years or greater, CMHC is returning to a dual debt service ratio test approach whereby the higher of the market interest rate or the contract interest rate will be applied when establishing the qualification (ceiling) rate in calculating the debt service ratio. ?This is similar to the approach with 5 year terms and this change aligns CMHC’s approach for both 5 and 10 year terms.

This policy change is effective November 15, 2024, and will be applied to applications submitted on or after this date.

9. Environmental Site Contamination: CMHC has completed the review of its environmental site contamination policy with the objective of improving alignment with standard industry practices and ensuring sufficient flexibility to facilitate new purpose-built rental housing supply. As such, going forward CMHC will be accepting applications for construction financing with known site contamination. Mortgage loan insurance will however be conditional on confirmation of a contamination-free site prior to first advance.

This is a welcome change and provides flexibility for sites with contamination for CMHC approval to be received prior to its full remediation and will allow for construction to occur faster in these cases.

This policy change is effective November 15, 2024, and will be applied to applications submitted on or after this date, as well as previously submitted applications that are not yet approved.

In Closing:

In their Financial Report for Q2 2024, CMHC indicated that they had paused their quarterly dividend to their shareholder the Government of Canada due to anticipated increased demand for multi-unit insurance, as well as the regulator OSFI being expected to announce new capital requirements for multi-unit residential exposures. We believe many of the more conservative measures announced are a result of this.

A number of the changes above mean that key flexibilities for loan approvals are now at CMHC’s discretion.? As such we believe it is more important than ever to ensure you work with experienced professionals that can represent you and your project as well as possible to ensure your CMHC approval is as favourable as possible.

In this ever-changing financing landscape, our team is at your disposal to address any questions you may have and work with you to optimize your multifamily financing based on these new rule changes.

We have obtained over 200 MLI Select approvals since the program launched 2.5 years ago.? This includes term, construction and renovation based CMHC backed multifamily mortgages. We collectively have over 7 decades of experience with $10 billion in combined career mortgages funded. We look forward to putting our expertise to use in helping you realize your real estate goals.

As always, we remain committed to your success!