Understanding Operating Agreement Terms

These are some of the more common terms found in the Operating Agreement for the Non Profit Rental Housing Pre-1997 and Post-1996 Programs.

Common to Both Pre-1997 and Post-1996 Non-Profit Rental Housing Portfolio

Replacement Reserve

A specified amount is deposited annually to a separate restricted interest bearing bank account. The funds are withdrawn to cover the cost of replacing worn out capital items. Learn more about Capital Replacement Planning.

Subsidy

This is the federal assistance provided to a First Nation from CMHC to help meet project operating costs and reduce the required revenue contribution.

Specific to the Post-1996 Non-Profit Rental Housing Portfolio

Operating Reserve

Any accumulated operating surplus after all costs and expenses are paid is deposited to a separate restricted interest bearing bank account called an Operating Reserve. The funds in the Operating Reserve are withdrawn to offset future year operating deficits.

Minimum Revenue Contribution (MRC)

This is the amount minimum required revenue contribution to the program and is used in the subsidy calculation. It must be funded annually to a specified level through collection of occupancy charges, other First Nation funds, or a combination of both.

The MRC is set at the time the project is committed. The MRC is funded in any of the following ways:

  1. Allocating First Nations funds from other sources;
  2. Establishing rent or occupancy charge which is collected from the tenant
  3. A combination of (a) and (b).

MRC is an important source of funds for a Section 95 housing project. Along with the monthly subsidy payments received from CMHC, it forms the revenue base from which all project expenses are paid.

The MRC is a set amount by unit type (amount per month depending on number of bedrooms in the unit). Please refer to Schedule B of your Project Operating Agreement to verify the levels.

Calculating the Total Annual MRC Required

The total annual MRC for a project depends on the number of bedrooms per unit and the number of units in a project.

Five 1-bedroom units x MRC for 1 bedroom units x 12 months = A
Five 1-bedroom units x MRC for 2 bedroom units x 12 months = B
Five 1-bedroom units x MRC for 3 bedroom units x 12 months = C

TOTAL MRC for a 15 unit project = A + B + C

Client Selection Criteria – The criteria developed by the First Nation under a Band Council Resolution to determine eligibility and selection of occupants for housing. The selection criteria and any subsequent changes must be made known to all Band members and be approved by a Band Council Resolution and shared with CMHC.

Operating Cost Benchmark (OCB) – This is used by CMHC in the subsidy calculation. It is an estimate of project operating costs including the Replacement Reserve fund allotment. The OCB is established by the First Nation at project commitment and is set for the life of the agreement with the exception of principal and interest changes that result from changes in loan interest rates.

Specific to the Pre-1997 Non-Profit Rental Housing Portfolio

Subsidy Surplus Fund

Operating surpluses after all costs and expenses are paid up to a maximum of $500 per unit are to be deposited to a separate restricted interest bearing account. Funds are withdrawn to offset operating deficits.

Rent-Geared-to-Income

The schedule of rents charged according to the income of a tenant. The benefit of rent-geared-to-income is that rents are affordable for lower income households. Families with higher incomes will pay more for their housing and families with lower incomes will pay less.

Maximum Rent

First Nations must ensure that rents are increased on an annual basis by the Consumer Price Index (CPI) or an amount they deem sufficient to ensure all project operating expenses are covered, whichever is greater.

The First Nation should conduct income verification to determine rent levels or charge Maximum Rent. Rent revenue can be a combination of Rent Geared to Income (RGI), Maximum Rent and Social Assistance Shelter Allowances. A First Nation that does not income test must charge Maximum Rent to all households. Alternatively, a First Nation may choose not to charge tenants any rent, and instead contribute an amount to the housing project that is equal to what would otherwise be charged to the tenant (RGI or MR). The actual contribution must be made by the First Nation and cannot be reported as a receivable on the balance sheet.

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