Life Lease as Tool in Funding Social Housing

1. What is a Life Lease?

• We tend to think of real estate in two distinct boxes: outright ownership (participation in real estate speculation if you can afford to enter the lottery) or rental (if you cannot). Life leases are a third box with features of both.

• A life lease is a lease in every sense except: Instead of monthly, rent is pre-paid by way of a lump sum entry fee.

• This amount (no more, no less) is returned to the life leaseholder or his or her estate at the end of the lease; it is the same amount, whether the use has been for three years or for thirty years, and regardless of market conditions.

• Entry fee can be calculated as a percentage below the market value of a comparable condo purchase (say 40% to 60%) or, by way of a capitalized value of market rent. e.g. at $1,250 per month, $ 15,000 per annum at 6% =$250,000; 5%= $300,000.

2. Benefits to the leaseholder:

• Affordable compared to a conventional purchase.

• Instead of selling their home, investing the proceeds, paying rent with the interest income after paying income tax on it, a life leaseholder invests directly in the project and pays no tax on the pre-paid rent in the form of the entry fee.

• Base rent cannot be increased throughout leaseholder’s life, although the maintenance fee (like a strata fee) can be.

• Pre-paid rent is returned at end of lease: while no profit, little risk of loss either, provided the project is well managed.

• Life leaseholders may sub-let if they do not want to live in the project right away.

• “Life” can include the life of a surviving co-resident as well.

3. Benefits to the social housing project:

• An attractive funding source for members of the particular community being housed.

• As an example, PAL (Performing Arts Lodge) Vancouver in Coal Harbour raised almost half of its equity requirement of $6,700,000 by approaching 12 of those community members who were fortunate enough to own homes – both those not ready to move, but wanting to make a social investment in their community many times larger than they could afford to donate, and those ready to move and wishing to live within the theatre community.

• Key – City of Vancouver allowed PAL to “count” towards its required equity the 10% non-refundable deposits on the life leases, so the $300,000 actually in the bank from 12 deposits counted as the full $3,000,000 for equity purposes.

• The life lease concept means all are tenants of the project. Keeps the community of residents equal – no tiers of ownership.

• At end of lease, the landlord may take advantage of any increase in the rental market by increasing the entry fee for the next leaseholder: if the initial $1,250 market rent becomes $1,500, then $18,000 @ 5% becomes $360,000, for a “profit” of $60,000 for the landlord.

• OR – landlord may choose to add the life lease unit to its supply of subsidized rental units.

4. Challenges/ Limitations:

• A limited market – almost certainly limited to members of a particular community group who want to make a social investment or live within a community.

• Faith groups, cultural industry workers are examples.

• Must have a minimum age (including partner) PAL used 55, could be 65.

• Life lease is treated as a real estate purchase under Real Estate Development Marketing Act and therefore requires disclosure statement in a form approved by Superintendent of Real Estate.

• Superintendant won’t approve unless some security for repayment of the entry fee is provided – otherwise, just the covenant of the landlord is available.

• Registration of the lease in the LTO would be acceptable but this is very cumbersome unless building is strata titled.

• Without registration, landlord must either:
create a fund sufficient to cash out if replacement life leaseholders are not available; or provide a second mortgage in favour of a third party who acts as a trustee on behalf of life – leaseholders, and maintain sufficient equity space to allow for a lender to advance against the second mortgage if necessary. BC Housing, CMHC and the socially active Credit Unions need to develop appropriate loan and trust instruments to make this work.

• The ratio of life leases to rentals must be just right, because when the life lease units are removed from the income stream, rents on the balance must be sufficient to support any mortgage. In theory, a project could be 100% life leases.

Link to Vancouver Sun Article

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