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Time to bring back the limited dividend company model to build affordable housing

by Richard Lyall on 30 Aug 2022

There’s no silver bullet to end the housing supply crisis but an initiative called the limited dividend company (LDC), if resurrected, might be a good way to gain traction for affordable rental housing projects.

The idea comes from Phil Rubinoff of Laurier Homes who is well known in construction and home building circles. He is a chartered accountant, former chair of the Residential Construction Council of Ontario, and founding chair of the Residential and Civil Construction Alliance of Ontario.

I was speaking to Phil about the housing situation the other day and he suggested it might be time to revive the LDC model as a way of tackling the affordable housing problem. The concept worked before in the 1960s and 1970s and resulted in tens of thousands of new rental units being built.

The Canada Mortgage and Housing Corporation (CMHC) previously used the LDC program with much success to get shovels in the ground for affordable housing. The model encouraged private investors to build and operate housing that was geared to low- and moderate-income individuals and families.

Owners of an LDC who built affordable housing benefited from government loans at interest rates that were below normal lending rates. In return, the company had to offer units at rental rates that were below certain income levels. Additionally, restrictions were placed on rent increases.

Rental rate increases were based on a model that limited a rate of return on the building to five per cent a year or less. Under the deal, LDCs did not have to pay tax on income earned from the building. 

The deal between the LDCs and CMHC remained in place throughout the mortgage which ranged from 30 to 50 years. There was an option whereby the owner could prepay and terminate the mortgage.

It was a win-win as the agreement benefitted both builders and those who needed affordable housing.

The LDC is very much like the approach used by water and energy utility companies, whereby the providers charge a specified amount for the service that reflects costs incurred for the commodity, its delivery and depreciation, plus an allowance for a reasonable return on investment.

Unfortunately, The LDC initiative is no longer active. It would require action by all levels of government. According to CMHC, to operate any government program, the agency needs legislative, policy and financial approvals. “There would need to be a process followed and approvals obtained by the Government of Canada in order for CMHC to implement a new program,” a spokesperson said. 

Today, many working families can no longer gain a foothold in the housing market due to high prices and limited supply. By the same token, rental units are also in short supply and rates are going up rapidly. 

According to data from the Toronto Regional Real Estate Board, rent for the average one-bedroom unit is up 20.2 per cent year-over-year to $2,269 a month, while the average rent for a two-bedroom unit is up 15.3 per cent to $2,979.

Developers and builders are facing a perfect storm of challenges these days which make it difficult to get shovels in the ground. Rising interest rates are affecting the market. Builders are contending with inflation, supply chain issues, increasing costs for materials and labour, as well as shortages of trades.

There are also other very serious, self-inflicted issues affecting the build of new housing and rental units.

Government fees and charges impact the cost of building a home by as much as 24 per cent in major Canadian cities. Government charges in the GTA are by far the highest in North America. The cost of a dwelling in Toronto would be 10-to-24-per-cent lower if the government charges were removed.

The City of Toronto has added to the problem by raising development charges by a whopping 46 per cent. Development charges for detached and semi-detached houses are being raised to $137,040 from $93,978 by May 2023. For an apartment with two or more bedrooms, the charge will rise to $80,218 from $55,012.

We were pleased to see Toronto Mayor John Tory come out with a re-election plan that included initiatives to streamline the development approvals process and get homes built faster.

He also pledged to incentivize the construction of purpose-built rental housing by reducing fees and development charges as well as prioritizing the applications. This will certainly help the situation. However, we still have concerns about development charges and fees on condos and other forms of housing.

If we are to solve the housing supply problem, governments at all levels must work together to remove barriers and help builders get shovels in the ground. Resurrecting the LDC model would be a start.

 

Richard Lyall is president of the Residential Construction Council of Ontario (RESCON). He has represented the building industry in Ontario since 1991. Contact him at [email protected].



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