Co-operative Housing Refinancing Partnership
Questions & Answers
Introduction
The purpose of this Q&A is to provide basic coverage of key issues and set out the roles and
responsibilities of various stakeholders including Credit Unions, the Co-operative Housing
Federation of Canada (CHF Canada), housing co-operatives, and the Agency for Co-operative
Housing.
Questions have been allocated into four sections.

General Information – Product / Background (common)

Agency and CHF Canada

Co-operative / Borrower

Credit Union / Lender
Certain comments, statements, and future roles and responsibilities of CHF Canada and Agency
require review and agreement. Some of these have been identified in this paper.
Product profile and due diligence content are based on standard Alterna Savings material/guidelines
for residential multi-unit mortgage lending. CHF Canada will review and identify material variances
to other Credit Union comparative offerings and suggest changes / mortgage amount ranges as
appropriate.
Housing co-operatives using Index-Linked Mortgages (“ILM”) and any discussion of co-operatives
funded under programs other than Section 95 of the National Housing Act have been excluded from
this Q&A. At a later date, CHF Canada and credit unions may develop a model to address housing
co-operatives not funded under Section 95.
One key area of uncertainty is related to what happens when the CMHC Operating Agreement is
extinguished, especially for instance, future rental subsidies. CHF Canada and other providers (e.g.
municipalities) are lobbying governments for extended support for low-income residents, so as to
ensure a stable revenue stream from low-income households.
1 General Information
1. Q - What features, pricing and loan limits will the new multi-residential mortgage offered by a
Credit Union have?
A - CHF Canada has worked with two Canadian Credit Unions toward standardizing a mortgage
product offering that meets a Section 95 housing co-operative’s need to refinance its CMHC
mortgage and provide additional funds for reinvestment in the property (“blend and extend”).
Based on preliminary discussions the following general guidelines have been proposed:

First mortgages only – minimum $1.0 million. Lower amounts will be considered on an
exceptional basis only.

Five year term.

Amortization period up to from 15-25 years based on age, condition and other assessed risk
factors.

Processing & Commitment Fees - 0.50% of the mortgage amount with a minimum of $5,000,
whereby the Processing Fee component of 0.25% is payable with the Loan Application, and
the remaining Commitment Fee component of 0.25% can be amortized over the Term of the
Credit Facility.

Renewal Fee - .25% of the mortgage balance at the renewal date.

Maximum Loan to Value ratio of 75% where the property value will be based on the lower of
(a) the appraised value or (b) the “Income Approach to Value” using stabilized / confirmed
income and an appropriate capitalization (interest) rate.

Funding available for renovations / property improvements which will increase the amount of
the new first mortgage.

Minimum Debt Service Ratio (“DSR”) of 1.2x based on a “stress test ” and a 25-year
amortization of the quoted mortgage interest rate plus 2% (not less than 7% total). Definition
of the DSR, given the “Non-Profit” nature of the co-operatives, has been redefined to take
into consideration discretionary and non-discretionary income, including, for instance,
discretionary contributions to “Capital Replacement Reserves”.
2 
Leasehold mortgages will be considered on an exceptional basis. To be considered for
refinancing, a lease must be at least five years longer than the mortgage amortization
period.

The Lender reserves the rights to syndicate larger mortgage loans.
2. Q -Are there reasons, other than increasing the principal amount of the mortgage, why Section95 co-operatives should be considering refinancing with a conventional commercial mortgage
lender?
A - Yes. There are several reasons including, for instance:

Co-operatives cannot refinance CMHC mortgages through CMHC’s Direct Lending Program
after the 35-year federal subsidy period ends; therefore an alternative financing solution is
required.

Reinvestment to improve the property is desirable before the expiry of the current 35-year
mortgage. With the availability of additional mortgage financing, improvements can be done
right away, the Co-op may benefit from economies of scale, and payments can be spread
over the term of the mortgage.
3. Q - What specific criteria will a Credit Union require that a co-operative meet to qualify for a
conventional multi-unit residential mortgage to replace its existing CMHC direct mortgage?
A - Conventional mortgage lenders, including Credit Unions, adhere to a relatively standard set
of policy guidelines related to the underwriting and approval of multi-residential mortgages.
The following policies describe the broad mortgage qualification requirements and due diligence
material that a co-operative will need to provide:

Review of Agency “Risk-Assessment Reports” for the prior 3 years and a positive
recommendation from CHF Canada.

Financial statements and Agency financial and risk-assessment reports for the prior 3 years
together with a current rent roll and financial forecasts for a minimum of 5 years or the first
term of mortgage, whichever is longer. A capital reserve fund forecast is required for the
entire amortization period of the new mortgage loan.

Satisfactory Agency and Credit Union assessment of the quality of “Property Management”,
including track record, expertise, procedures and knowledge of the various laws, legislation
and acts.
3 
A full narrative property appraisal, not more than 1-year old completed by an AACI
accredited appraisal firm acceptable to the Credit Union.

A recent (less than 1 year old) building condition report that identifies (a) significant defects
and deficiencies, (b) deferred maintenance issues and estimated cost to complete, (c)
building code violations, and (d) a Replacement Reserve Plan for the first five-year term of
the mortgage.

Confirmed adequacy of the capital replacement reserve fund to maintain the property on a
going forward basis, based on the last building report completed by an engineering
consultant.

A Level 1 Environmental Assessment report, completed not more than 3 years prior to the
expected date of funding, including the cost to remediate any problems identified.

Confirmed insurance coverage for the new loan amount. Credit Union Lender to be named as
Loss Payee in the respective new insurance policies.

Vacancy Report confirming rate stabilized at the most recent CMHC vacancy rate for similar
buildings, within the same location. Typically, a vacancy rate in excess of 5% is considered
unsatisfactory.

Other due diligence and documentation as may be required by individual Credit Unions
related to their credit underwriting process.

Agreement by the co-operative for ongoing monitoring of its financial management, and its
capital replacement plan performance during the amortization period.
4. Q -Will the interest rate be at a higher rate that what is currently being charged under the CMHC
program?
A – CMHC’s Direct Lending Program uses rates that are lower than those available to other
commercial borrowers. This program’s interest rate will depend on prevailing market rates at the
time a new conventional mortgage is approved.

The loan to security value ratio

The physical condition and location of the property

Historical financial performance and reserves management
4 
Debt servicing ability

Historical and current management and governance of the co-operative and property.
5. Q – What are other criteria for participating in this program?
A – The criteria for volunteer participation in the pilot are:

The co-operative is a member of the funding Credit Union

Administered under the CMHC Section 95 program

Stable financial situation with positive cash flow

In compliance with the operating agreement

CHF Canada member and Agency client.
CHF Canada will assume a lead communication and marketing role for this new mortgage
product, including working directly with the co-operatives to prepare for the due diligence and
loan application process.
6. Q - Will there be any changes required in the insurance policy coverage necessitated by a move
from CMHC to a conventional mortgage with a Credit Union.
A - No. Almost all of CHF Canada’s 900 member co-operatives use a comprehensive
commercial insurance program offered by CHF Canada in partnership with The Co-operators.
The terms of this coverage is reflected in the Agency’s minimum standards. These standards will
continue to apply. For clarification purposes, the following coverage is required:

Loss of housing charges

Public liability

Blanket bond or fidelity

Directors and Officers liability

Guaranteed replacement cost.
5 Current commercial insurance program coverage includes “Guaranteed replacement cost”. This is
also important to a conventional lender – “Guaranteed” means that the sum would be sufficient
to cover the full reconstruction cost in the event of loss, even if it exceeded the policy limit. With
this coverage, there is no “co-insurance” clause, so that the co-operative is not required to cover
some portion (typically 10%) of the cost of reconstruction.
Refer to the Agency’s Q&A on insurance for housing co-operatives for more detailed coverage of
the insurance requirements.
Agency & CHF Canada
1. Q - What is the present role of “The Agency for Co-operative Housing” (“Agency”) as defined by
the agreement between Canada Mortgage and Housing Corporation (“CMHC”) and the Agency?
A – Under an Agreement dated May 3, 2005, the Agency provides certain portfolio management
activities in relation to CMHC funded co-operative housing programs which are broadly
described as (a) safeguarding the lender’s investment in the co-operative housing building
assets, and (b) ensuring that public funds committed in support of program objectives are used
efficiently as intended and are properly accounted for. The Agency delivers this value through
performance of a wide range of monitoring, reporting and default remediation services
including:

Replacing CMHC as the regulatory body for some 600 federally funded housing
co-operatives in PEI, Ontario, Alberta and B.C.

Helping co-operatives understand their funding program(s)

Ensuring compliance with co-operative operating agreements

Helping co-operatives in difficulty and drafting financial workout plans for CMHC’s approval

Providing a service to allow co-operatives to share best practices.
Note that the Agency is a co-operative whose sole member is CHF Canada. Although CHF Canada
appoints all Agency directors, the Agency operates at arm’s length from CHF Canada.
2. Q - What specific services does the Agency currently provide under the CMHC agreement and
which of these would be carried forward under any new agreement with CHF Canada?
6 A – The activities provided by the Agency with respect to analysis of creditwortiness and the
monitoring of borrower performance will be continued by CHF Canada as part of a new service
agreement between CHF Canada, the Credit Unions, and the borrower. However, the Agency’s
role as direct regulator on behalf of CMHC will end when a co-op’s operating agreement with
CMHC ends.
CHF Canada will focus on balancing the basic requirements of all stakeholders, retention of
services delivering significant value-added to the co-operatives and meeting the risk
management requirements of Credit Unions.
The following broad categories will be included in the initial list of services that will continue to
be provided:

Provide default prevention services.

Perform physical inspections; visual every two years and full physical inspection if the visual
inspection or annual compliance analysis indicates one is needed, to be performed at the
co-operatives’ expense.

Monitor replacement reserve management and expenditures.

Completion of an annual information return from annual audited financial statements.

Perform on-site reviews if the risk assessment of the co-operative or other indicators have
raised compliance concerns, for example:
a)
Review the books and records
b) Meet with the co-operative board, manager and/or committees
c)
Inspect the property of the units
d) Carry out other examinations and analysis as necessary
e)

Complete an on-site review report for the Board.
Prepare an annual report to the co-operative which includes comparative information
comparing performance against the average performance of similar co-operatives.
Certain other functions related to CMHC involvement become redundant concurrent with
refinancing arranged with a Credit Union.
7 Subsidies: these co-operatives no longer receive mortgage assistance, only income tested
assistance (ITA), which they receive in a bulk monthly amount and allocate among their
households based on income testing. The amount is calculated based on the mortgage interest
rate that a co-operative would pay under the CMHC Direct Lending Program.
Low-income households in the co-op will continue to receive subsidies until the expiry of the
co-op’s current operating agreement with CMHC.
3. Q - Will CHF Canada assume responsibilities currently performed by the Agency for CMHC?
A - Yes. At the present time, the Agency is responsible for taking actions necessary to mitigate
risks to CMHC within the portfolio as well as providing default management services. These
responsibilities will be assumed by CHF Canada.
In addition to the risk management role, CHF Canada will consult with and advise individual cooperatives on how to qualify for conventional mortgage financing with the Credit Union and
assist with the application process.
4. Q - Will the Agency continue to provide all monitoring, reporting and remedial services, currently
provided under contract to CMHC, once Credit Unions replace CMHC as the mortgage lender?
A - Yes. The Agency will continue to monitor and report to CMHC until a co-op’s operating
agreement expires. CHF Canada will negotiate an agreement with the Agency to provide similar
services which will be shared, under an umbrella agreement, with Credit Unions holding cooperative housing mortgages. CHF Canada may in the future choose to take some or all of these
functions in-house.
5. Q - The cost of providing Agency services is currently funded by CMHC. How will the cost of
continuing these services for Credit Union mortgages be provided for, and under what
administrative mechanism?
A – CHF Canada will negotiate a fee-for-service arrangement directly with the Agency, the cost
of which will be borne by CHF Canada and funded by the mortgage borrower. The administrative
mechanism to recover these user costs will be a sliding scale of upfront fees charged to co-ops
on closing, based on the total amount of the new first mortgage. The percentage fee will be
capped at 1% for loans over $4 million.
8 Housing Co-operative - Refinancing with a Credit Union
1. Q - What is the advantage of refinancing a CMHC mortgage with a Credit Union?
A - Moving from CMHC to a conventional mortgage lender is an alternative to seeking secondary
financing to renovate or improve the building assets. Arranging secondary financing may prove
problematic for a number of reasons including, for instance:

Interest rates charged for loans secured by a “second’ mortgage on property are higher than
the interest rate on a first mortgage. The debt servicing costs for an increased first
mortgage would be less.

Direct loans are not available from CMHC and their approval is required for a co-operative to
borrow from a NHA approved secondary lender such as a Bank or Credit Union.

During the term of its operating agreement, a co-operative may not charge, mortgage or
otherwise encumber any part of its property unless it has prior written approval from its
lender and CMHC.

Lenders providing secondary financing may request CMHC mortgage insurance. While the
decreased lender risk will result in a better interest rate (a) CMHC will charge a per unit
application fee, even if CMHC decides not to insure the secondary loan and (b) a percentage
of the mortgage premium must be paid if the loan is advanced.
2. Q - What will the total incremental cost to a co-operative be to move from a CMHC mortgage to
a conventional multi-unit residential mortgage?
A - An Excel based spreadsheet will be available to calculate the differential between CMHC and
conventional lender financing, taking into account all variables including:

Increased first mortgage amount

Interest rate differential and fees

Savings on higher rate secondary financing that would be required to renovate or effect
needed repairs.
Co-operatives may also wish to calculate the impact of self-financing major capital repairs
through member housing charge increase.
9 3. Q - Have eligibility guidelines been established for co-operatives seeking to refinance their
mortgage with a Credit Union?
A - To qualify for Credit Union funded conventional mortgage financing, co-operatives will be
required to meet the following minimum criteria:

Be a Credit Union member or become one in the Province in which the co-operative is
located

Be a member of CHF Canada and where they exist, the local federation of housing co-ops

Have an existing Section 95 (Pre-1986) CMHC mortgage

Have a stable history of financial performance and positive cash flow

Be in compliance with the CMHC project Operating Agreement.
4. Q – With respect to “Net Operating Revenue Policy” for Section 95 (“S95”) co-operatives, are there
any potential benefits in moving from CMHC to conventional mortgage financing?
A - S95 policy guidelines currently require that “net operating revenue” (which includes “income
tested assistance – subsidies for low-income households) be allocated in the following order:
a)
b)
c)
To reduce or wipe out prior year operating deficits
Added to the capital replacement reserve fund to avoid borrowing for capital repairs
Added to the subsidy surplus fund (considered special purpose reserves (encumbered) and
not to be used in the calculation of creditworthiness).
While allocations (a) and (b) are the best use of surplus funds under any scenario, funds added to
the subsidy fund (c) under S95 must be returned to CMHC if the balance is more than $500/unit
plus interest AND if membership needs for income tested assistance decline.
The end of the co-op’s operating agreement, along with conventional financing, eliminates the
complexity of the subsidy surplus fund management and encourages annual surpluses to insure
against unexpected expenses.
5. Q -What Annual Information Return (“AIR”) information will a new lender focus on as part of their
initial mortgage loan underwriting process and periodic reviews?
10 A - Credit Union lenders will focus on the same financial information and analysis that CMHC
requires. This includes, but is not limited to, liquidity and net income financial ratios,
management of reserves and reserve adequacy and spending to maintain the property.
6. Q - After CMHC is no longer involved, will an AIR and a visual inspection every two years still be
required?
A - Yes. Following discussions with selected Credit Unions and the Agency, it was decided that
the AIR, which is filed with the Agency by each co-operative, and regular physical inspections,
are excellent management tools. The AIR provides critical information for both the
co-operatives’ boards as well as lenders, to analyze and assess co-operative risk levels and
respond proactively to changes in risk levels.
7. Q -How will the AIR information and more importantly, the “Annual Risk Rating” affect the
interest rate charged by a Credit Union lender?
A - Credit Union lenders establish mortgage interest rates at a level based on their cost of funds
for the term requested plus a risk premium appropriate to the borrower’s financial
circumstances and the condition of the property. A lender will conduct its own thorough due
diligence and the AIR will be taken into consideration as part of the underwriting process. The
AIR composite risk rating will provide the recognition the co-operative deserves when it is
operating well.
8. Q -What degree of confidentiality will exist between Credit Union lenders, the Agency and CHF
Canada relating to the sharing of information?
A - The existing “Confidentiality and Access to Information” policies of the Agency and CHF
Canada will continue to apply. The “Consent to Share Information” for authorizing the Agency to
share information will be modified to include Credit Union lenders. As is the case now, the
consent form does not and will not authorize sharing of any personal information about
individuals.
Credit Union – Lender
1. Q -What is the opportunity for Credit Unions to provide multi-unit residential mortgage
financing to Section 95 co-operatives.
A - CHF Canada, the national association of approximately 900 housing co-operatives (58,000
homes) outside Quebec, provides the following statistics:
11 
2/3rds of the 900 housing co-operatives are located in Ontario

80% of Canadian housing co-operatives are CHF Canada members

95% of Ontario housing co-operatives are CHF Canada members

A large percentage of these were financed in the 1980’s under 30 to 35 year operating
agreements and mortgages with five-year terms

A small number have been transferred to provincial jurisdiction however 90% remain with the
federal government

The majority of these are direct financed by CMHC and have already passed the 25-year
mark

CHF Canada estimates the Canadian Section-95 mortgage portfolio balance at $1.0 billion of
which $600 million is under Agency administration. This amount, inclusive of new funds for
expansion and renovation, could reasonably increase to the $3.0 to $4.0 billion level within a
few years.
The Credit Union’s opportunity is based on the need for large capital reinvestment in many
properties to fund renovation and improvement projects. Since CMHC is receptive to being paid
out, Credit Unions have the opportunity to provide increased first mortgage loans to financially
stable and well managed co-operatives.
2. Q – Co-operatives with CMHC mortgages benefit from a considerable range of monitoring and
corrective action services provided by the Agency and CHF Canada. Will these risk mitigating
services be withdrawn if a CMHC mortgage is repaid, potentially increasing the risk profile of the
borrower from the perspective of a new conventional lender?
A - The value of the Agency and CHF Canada’s contribution to success of the co-operatives is
significant and their continued role will be viewed as a material value-add by Credit Unions and
other conventional multi-unit residential lenders. This document provides a preliminary range
of Agency and CHF Canada functions that can be legally and practically carried forward once a
CMHC mortgage is repaid and the Operating Agreement is extinguished. Further work is
required to refine the roles and responsibilities of the various stakeholders that would result in a
net benefit to the co-operative. CHF Canada recommends that Credit Unions adopt the
maximum content, conditions and monitoring requirements as legally possible into the
mortgage covenants. A Schedule to the main mortgage document seems practical.
12 3. Q -What important requirements of Section 95 co-operatives are there that Credit Unions should
be aware of that will fall away under non-CMHC conventional mortgage financing.
A - Firstly, while the Section 95 policies and the CHMC operating agreement will become
redundant at the date of expiry of the co-operative’s existing operating agreement,
co-operatives will be required to follow the provincial laws and regulations that govern how
co-operatives lease housing units.
A copy of the Policy Guidelines in Plain Language for Section 95 co-operatives (Pre-1986) is
attached for reference purposes. The guidelines provide generic coverage of standard
management, governance, administration, occupancy agreements and reporting procedures.
In addition, certain of the Section 95 rules and policy guidelines administered by the Agency are
excellent. Although the Agency would no longer have the authority to take corrective action, they
will monitor and report unacceptable conditions observed to CHF Canada which will
communicate with the Credit Union as appropriate:

Clause 2.3 – Poor Management – if the co-operative is not maintaining and repairing the
buildings to a professional management that standard that would reduce operating risk
below acceptable levels, the Agency can require the co-operative to make changes to
management.

Clause 2.6 – Weak Governance – If the Agency believes that the co-operative is not meeting
governance standards, the co-operative may be asked to (a) get training for board members
(b) require directors to resign if they are in breach of their duty (c) hold elections for new
directors to fill vacancies on the board and/or (d) appoint temporary directors from outside
the co-operative.

Section 10.0 – Replacement Reserve – Presently, the co-operative must maintain a
replacement reserve fund to replace or make all major repairs to capital items. Conventional
lenders will require a capital replacement plan that is reviewed annually to ensure adequate
funding since the annual contribution will have a direct impact on the budget and occupancy
charges. Credit Union lenders may stipulate for higher reserves for capital expenditures that
will impact debt service coverage.
4. Q -Does Federal Assistance – per Section 12.0 of Section 95 policy guidelines continue if the
CMHC loan is paid out? Clause 12.3 records that if there is no loan, the assistance is based on a
35-year period or on the useful life of the buildings if less than 35 years.
13 A - When Section 95 co-operatives were built they received two types of subsidy. One was an
overall mortgage subsidy and the other was “income tested assistance” for low-income
households. The overall mortgage subsidy was planned to decline (no longer needed) as time
passed (“stepped out”) and revised downward at the end of each five year term. At this point in
the life cycle Section 95 co-operatives, all federal assistance is used for income-tested
assistance.
5. Q -Does Federal Assistance – per Section 13.5 of Section 95 policy guidelines continue if the
CMHC loan is paid out? Specifically, does Income-Tested Assistance (ITA) used to bridge the gap
between the regular occupancy charge and the amount being paid by income-tested occupants
continue?
A - Co-operatives will continue to receive ITA, calculated based on their Direct Lending Rate,
adjusted at the end of each five-year term, until the stipulated end of the current operating
agreement, which is invariably the same period as the current first mortgage. For purposes of
calculating co-operative financial coverage and other ratios, Credit Unions will take into account
that ITA will at some stage disappear and the co-operative will have to seek alternative sources
or make up the difference within their operating budget.
6. Q -What is the purpose of the “Operating Agreement” between the co-operative and CMHC and
will it be extinguished once a co-operative refinances with a conventional mortgage lender and
the existing CMHC mortgage is repaid?
A - The “Operating Agreement” between the co-operative and CMHC, sets out how the
co-operative must operate to obtain financial assistance under the National Housing Act (“NHA”).
The Operating Agreement is in effect from the interest adjustment date which is the first day of
the first month of the original first mortgage up to a maximum of 35 years or the useful life of
the buildings.
It does not expire earlier, even if the CMHC mortgage is prepaid using this refinancing
instrument.
7. Q -Will Credit Unions be able to access the Agency’s Co-op Data Reports to acquire comparative
information from the consolidated AIR reports that would be useful for the credit underwriting
and review processes? For example:

Key ratios

Vacancy loss

Local area vacancy rates

Arrears and Bad debts
14 
Maintenance Spending as a percentage of Operating Costs

Maintenance Spending per Unit

Replacement – Reserve Balance and Contributions

Energy Costs

Water and Sewage charges

Administrative Spending

Housing Charges as compared to market
A - Yes. Arrangements will be made for Credit Unions to access co-operative data reports.
8. Q - What is the extent of the building inspection that is performed every two years and the
qualifications of the firm or individual that conducts the inspection?
A - The Agency has signed a contract with a professional inspection firm and trained the
inspectors in the use of Agency inspection form, a copy of which will be provided for Credit
Union (lender) approval.
9. Q - Can the physical condition report replace the thorough building condition assessment that
forms the basis of the replacement reserve plan?
A - No. A building condition assessment is not meant to replace, only augment a detailed
capital reserve plan. Calculation of the Replacement Reserve Fund is based on the Building
Conditions Report. The Capital Replacement Plan is constructed based on the results, which
requires Agency approval which the co-operative then adheres to in funding its Replacement
Reserve Fund.
Assistance in the development, and ongoing monitoring of funding and expenditures according
to the co-operative’s Capital Replacement Plan will be provided by CHF Canada as part of its
agreement with the co-operative in support of the refinancing.
Copyright © 2012 Co‐operative Housing Federation of Canada. All Rights Reserved. 15