Life Lease FAQ
There are five different styles of Life Lease in Canada. The Life Lease model that we use is based upon a non-profit corporation obtaining a bulk long term mortgage and the Life Lease residents providing a Refundable Entrance Fee and paying a proportionate share of the monthly operating costs.
This “Life Lease” model requires the residents contribute a sizeable “deposit” to help finance the cost of developing and constructing the Project. Payment of this “Refundable Entrance Fee” not only provides security of tenure but also reduces the resident’s monthly payments. The “initial residents” commitment and deposits to the project prior to construction allows the sponsors of the development to design building features specifically for the residents needs and to lower the monthly rents.
A “Life Lease” may be terminated with notice the same way as any regular residential lease. The entrance fees are refundable upon termination from the Entrance Fee Refund Fund and by replacement from the waiting list under conditions outlined in the lease agreement (and governed by legislation in Manitoba).
The Entrance Fee is the amount of a “deposit” required to purchase the Life Lease. Minimum entrance fees range depending upon the cost of construction and the suite size.
In most projects – yes. An increased Entrance Fee would directly reduce your monthly costs. For example, if you participate in a Second Security Fund, and the fund is invested in GIC’s or something similar, 100% of the “non-taxable” interest earned on the additional deposit would be applied toward lowering the monthly operating costs of your suite. Similarly if the Second Security Fund is set up to reduce debt servicing, 100% of the debt servicing would be credited to your rent. The second security fund money would be refunded 100% upon termination of the lease.
The major portion of the Minimum Entrance Fee goes directly toward the construction cost of the building. As such, this money collects no interest but reduces the debt associated with the building, therefore reducing the monthly payment amount required to be paid by the resident.
The balance of your Minimum Entrance Fee is deposited in a trust account called the Entrance Fee Refund Fund. This fund is established to allow a tolerance for repayment of terminated leases prior to releasing. The Refund Fund collects interest, and this money is used to offset the Life Lease residents monthly operating costs.
This interest on the Entrance Fee Refund Fund is not paid directly to the resident but is applied toward the total operating costs of the building. Interest earned by the corporation is not deemed as taxable income.Interest is earned by the corporation, not the tenant.
Participation in the optional Second Security fund over and above the Minimum Entrance Fee generates income to the corporation. The Not-For-Profit Housing Corporation uses this interest to reduce your monthly operating cost. The Not-For-Profit Housing Corporation’s income in “non-taxable income”.
Historically, in the Manitoba Life Lease Model which we use most often, the Minimum Entrance fees have neither appreciated nor depreciated in value over time. The purpose of these developments is to provide stable, viableand affordable, not-for-profit housing for the life of the Project. In Manitoba Life Lease Projects Minimum Entrance fees are normally refunded at their original value regardless of time and or market conditions. In other Life Lease models where “appreciation” is allowed, residents normally finance the total cost of their suites independently without the assistance and benefits of a bulk long term mortgage – in a similar fashion to a condominium.
The Manitoba Life Lease model was developed by the Provincial Government in an attempt to provide a non-profit housing vehicle to offset the ever-rising need for housing from an aging population. Consider the following:
- Today 3.2 million Canadians are 65-plus (12% of the Canadian population).
- By the year 2025 the 65-plus group is expected to reach 7 million (20% of the total Canadian population).
- By 2036 the 65-plus group is expected to be one-in-every-four Canadians (25%).
Your Minimum Entrance Fee is protected by your share in the Project through an interest registered against the Property Title in your name, held by an independent trustee. Your Second Security Fund will be protected by the Sponsor Group’s investment policy (and by legislation in Manitoba).
Yes, however there is no motivation on the Non Profit Sponsor’s behalf to increase these costs because there is no income to be made by the owner (the non profit landlord) from the monthly rents.
Whether you are a home owner or a renter, the chances are in favour of your monthly operating costs rising in the future. Likewise, the monthly operating costs of a non profit Life Lease Project can increase. For example, property taxes and/or utilities will likely increase, therefore the charges would have to cover these costs.
Again, there is no motivation for the rents to increase as the building is managed on a non-profit basis for the life of the Project. No one can make a profit from increasing the rents.
Non-Profit housing provides the most stable form of rental structure available in the market. To demonstrate this stability, consider the following:
Non-Profit Life Lease
Assume a one bedroom monthly rent of $550. (Including heat, light, water, etc.). Assume a worst case scenario – the operating portion of the monthly rent (30% of the rent) to increase at the governments’ projected long term rate of inflation of 5%. Operating costs would include heat, light, water, building and grounds maintenance, administration and management, vacancy and capital replacement reserves. If the total operating portion of the $550. rent is increased at 5% per year for ten years, the rent in year eleven would be $638. An increase of only $88.per month in ten years.
Private Commercial Rental
Assume a one bedroom monthly rent of $550. (Including heat, light, water, etc.) Assume a Government maximum rent increase guideline of 3% per year. A monthly rent of $550. increased at 3% per year, excluding the inflation of utilities at 5% per year, would result in a monthly rent of $739. in year eleven; an increase of $189. per month in ten years.
This example results in a difference of $1,212.00 per year difference between the Non-Profit Project and the Private Rental Project for the same one bedroom suite in year eleven.
The maximum monthly rental will be prorated using the floor area of the type of suite you choose. The rent will include at a minimum all utilities, taxes, maintenance, administration costs, common costs and mortgage payments. If an amount more than the Minimum Entrance Fee has been purchased, a proportionate amount of the optional Second Security Fund interest will be used to further reduce the Life Lease residents operating costs. Some life lease projects have the additional ability to provide a monthly rental subsidy via government programming to eligible households.
A schedule outlining the minimum and maximum entrance fees and corresponding estimated monthly operating costs should be included in your Project specific Prospectus.
Most projects are intended for “55-plus dependent less adults”. Both couples and individuals are eligible.
This differs from project to project. If residents are allowed to sublet their apartments, the resident is not permitted to increase or decrease of the rent amount of the apartment, nor profit in any other way from the sublease. If subleasing and/or assignments are allowed, they will require prior Board approval.
Personal accounts can be set up by the corporation’s trustee to administer this “deposit” prior to commencement of construction. In most projects interest will accrue to your benefit up until the time when construction commences. After construction commencement until Legal Occupancy, most projects will refund an amount in consideration of the potential “interest differential” during this period. Prior to construction commencement, a letter of Credit is the vehicle most commonly used to secure the required Minimum Entrance Fee. Most of our Corporations resolve to “capitalize” the first residents carrying costs of the Letter Of Credit prior to construction.
In most cases, prior to construction completion of a new complex, you mayreserve your suite in the Life Lease project prior to the sale of your existing home by providing a deposit of $1,000.00 (certified cheque) accompanied by a Letter of Credit (or letter of guarantee from Credit Unions) for the balance of the Minimum Entrance Fee. A Letter of Credit is a form of guarantee that the remaining balance to complete the purchase of the Life Lease will be available to assist in the cost of construction when required by the Non Profit Sponsor. Letters of Credit can be obtained by contacting the financial institution which you normally conduct your banking. There is usually a nominal charge associated with obtaining a Letter of Credit which may vary depending on which institution you deal with.
Most financial institutions will usually hold a term deposit or title to your house or some other form of investment as security in return for issuing the Letter of Credit. The benefit of using a Letter of Credit is that you are able to leave your existing investment portfolio undisturbed until the date when the money is actually to be disbursed (Occupancy).
The Letters of Credit and the agreements between yourself and the Non Profit Sponsor will be held in trust by an Independent Trustee to assure that both parties adhere to the commitments which they have made.