Causeway - Social Finance in Affordable Housing

CAUSEWAY a national collaboration Social Finance Orientation Affordable Housing Track June 6, 2007 Prepared by: Michael Lewkowitz, start-up coordinator [email_address] -:- 416.607.5643

Outline
Social Finance Orientation
Financial flow to public benefit
Across a continuum of risk and return
Gaining momentum
The Canadian Context
Coming from behind
A framework ready for renewal
Potential leverage points
Affordable Housing Track
Barriers to Affordable Development
Sources of Public/Government Funding
Examples and Models
Discussion

CAUSEWAY a national collaboration A national collaboration working on new pathways for financial investment in public benefit .

Orientation: “Social Finance”
“ Sustainable finance with a social or environmental goal”
Exists on the financial continuum between:
Traditional financial investment vehicles
High financial value but no social returns
Grants
No financial returns but
Transcending traditional silos
Blended return perspective
Financial + social + environmental
Collaborative, cross-sectoral involvement
Government + non-profit/charitable + private sector

Orientation: Financial flow to public benefit
The flow of financial capital to public benefit uses:
Affordable Housing
Bottom of the Pyramid
Clean Technology
Community Development
Education
Fair Trade
Green Building
Health
Media
Microfinance
Social Enterprise
Technology
(source: market sector listing on www.xigi.net )
Sources Intermediaries Mechanisms Recipients Uses

Orientation: Provocative examples
Venture capital
The Abell Foundation invested in a startup company that was developing a ‘blocker’ for cocaine, on the condition that the company locate in Baltimore. The company has since created 200 local jobs, gone public, and the foundation sold its stock for 12 times its initial investment.
Local community development
The Columbus Foundation used $2 million to seed an $18 million low-cost housing fund to build 1,600 new units of affordable housing.
Startup or expansion capital in underserved communities
The Heron Foundation has also invested $2.5 million in a limited partnership interest in the Yucaipa Corporate Initiatives Fund, a $577 million private equity fund that invests in businesses that locate in underserved communities. The fund has a stated goal of earning a 25% internal rate of return for its investors.
Debt mechanisms
Milestone achievement of $100m in loans to community finance institutions and social enterprises by Calvert Foundation’s Community Investment Note
Acquisition of assets
BC Pension Funds – 21 BC-based union and management pension funds pooled $27 M to form Concert Properties in 1989 (originally named VLC) with the objective of financing affordable rental housing in BC, and creating jobs in the unionized construction industry. Today the 100% pension plan owned real estate corporation has $800 million in assets, with a track record of creating 10 million hours of on-site employment for unionized construction workers.

Orientation: A continuum of risk and return
An increasingly broad range of mechanisms that blend financial and social/environmental returns

Orientation: Gaining momentum
Emerging financial products
PRI and MBI
Program Related Investments
Mission Based Investments
Approaches for foundations to leverage endowment capital toward mission related activities
Spans the continua of risk, return, focus
Well developed in the United States
Social venture capital
Applying venture capital models to social enterprise
Innovations in business models and blended value returns
Well developed in the UK including ‘Community Interest Company’ legal structure and marketplace
Issues with good asset classes
Affordable Housing
Community Energy and Efficiency

Canada: Coming from behind
Building from strong third sector
$120 B annual expenditures
Less than 10% of income is donation capital
Growing social and environmental pressures met with government and market failures
Government: Insufficient and inflexible programs/services/funding
Market: Trust issues, see no potential for profit, respond to consumer demand
Growing market opportunity for financial sector
Citizens increasingly aware of societal issues
Increasing interest in: ethical investment; ethical consumerism (fair trade); local solutions; mission based entrepreneurs and ventures
Canadian non-profit income sources

Canada: A framework ready for renewal
Limiting regulatory framework ready to catch-up
Income Tax Act and charity law significantly restrict flow of capital
International examples from US and UK provide relevant reference models:
US
IRS allowance of charitable investment in non-charities
Community Reinvestment Act
New Markets Tax Credits
UK
Community Interest Company designation
Already over 800 registered CIC’s
43% of respondents said that they became a CIC because it was the most appropriate form between business and charity. 19% cited less regulation and 16% cited social purpose.
Other survey results:
43% of CICs said that the most important factor in their decision was to prove their social purpose.
37% of CICs felt that the biggest barrier facing their company was access to finance
90% of CICs surveyed were stand-alone companies, 7% were trading arms of charities, 1.5% were company subsidiaries and 1.5% were public sector spin-offs.
15%of CICs surveyed said becoming a CIC had made it easier to interact with other organisations such as local authorities, foundations, banks and government departments.
11% said it had given them, their directors and staff a clearer focus on their combined business and social aims.
Average turnover of CICs surveyed is £144,000.
Two-fifths of CICs said that 76-100% of their income was from trading and fewer than one-fifth said trading accounted for less than 50% of their income.
Source: http://www.socialenterprise.org.uk/Page.aspx?SP=1626

Canada: Potential leverage points
Policy?
Corporate structure
i.e. CIC (UK)
Tax
i.e. New Markets Incentive (US)
Products?
Social venture capital
Specialized investment products
Issues with substantial assets
Affordable Housing
Community Energy and Efficiency
New capital pathways
???

AH: Barriers to Affordable Development
Potential non-profit partners lack required skills/experience in development and ongoing management of housing projects
Increasing development and raw material costs
Limited equity funding
Potential low income homeowners
lack down-payment
require education and counselling on home buying
Risk profile does not fit most lending requirements
Lack of standardization of legal contracts with current funding sources delays development process and is a further deterrent to seeking debt financing

AH: Sources of Public/Government Funding
Federal Government
provide funding that is primarily administered by municipalities
announced $680M for AHP to be administered at provincial level in 2001
AHP committed federal government to provide $301M to Ontario over 5 years to develop at least 15,000 affordable housing units
CMHC, federal crown corporation which provides mortgage insurance for home owners is in cooperation
Provincial Government
provide funding of programs that partially rebate PST for rental housing and Land Transfer tax for first time homebuyers
2003 Canada Ontario housing agreement - province committed to match $301 M in fed funds over 5 years, provide $80 M for 5000 housing rent supplement/housing allowances

AH: Land use planning related mechanisms
Inclusionary zoning
requires that a development project includes a special component desired by municipality (affordable housing)
typically multiple-unit residential projects, of which the inclusionary units must be sold at affordable prices
City of Vancouver, 20% social housing
inexpensive municipal mechanism
Linkage Programs
commercial developers are required to pay into a municipal fund dedicated to building affordable housing
also gives option to build affordable houses
very prominent in Western Canadian municipalities
most useful in municipalities with high level of commercial development
Density bonusing
allows developers to add more floor area/additional density in exchange for provision of certain facilities benefiting the community
currently widely used in municipalities across Canada
Housing Trust funds
currently 170 housing trust funds in US

AH: Financial Innovations in the US (1)
Low Income Housing Tax Credit (LIHTC)
all states receive annual allocation of tax credits to award to affordable housing developers
federal government provides state and local LIHTC allocating agencies nearly $5 billion in annual budget authority to issue tax credits for affordable housing
most LIHTC properties are owned by limited partnership groups put together by syndicators allowing for companies and private investors to invest in housing development and receive credit against their federal tax liability in return
GO Zone Tax Credits
for the areas hit by the Hurricane Katrina and offer accelerated depreciation resulting in earlier tax benefits to investors at a premium
this has generated a huge equity investment in the area due to the greater pool of tax credits available
Tax credit equity is a very popular investment alternative, attracting huge private equity groups and corporate interest

AH: Financial Innovations in the US (2)
Home Ownership Zones
designed to test the idea that cities can transform blighted areas into sustainable communities through the creation of mixed income single family homes
provides seed money for revitalization efforts
HOME
provides state and local government funding for housing programs
SHOP
provides funds for non-profit orgs to purchase home sites

AH: Other Examples
The Columbus Foundation used $2 million to seed an $18 million low-cost housing fund to build 1,600 new units of affordable housing.
F.B. Heron Foundation: 8 year $500,000 loan, at 3% interest, to the $20 million Community Loan Fund of New Jersey to finance the development, construction, and renovation of 2,500 child care centers for low-income families.
The MacArthur Foundation guaranteed a $15 million financing facility to enable the construction of mixed-income homes to replace public housing in a Chicago neighbourhood. The city had pledged future tax increments to finance the construction, but without the guarantee, funds would not have been immediately available.
Structuring of a $10m debt facility by the social housing non-profit Common Ground of NYC, involving $2m in unsecured debt from foundations and $8m in senior commercial financing secured by properties acquired by Common Ground

AH: Canadian Examples
Spence Neighbourhood Revitalization, Winnipeg
Partners: RBC, CMHC, and community group
Goal: To share and lower risk of affordable housing financing
RBC:
supports development of materials for homebuyer education and counselling programs
supports investment and improvement of neighbourhood
ultimately improves underlying asset value, improves security on banks mortgage loans and help families to accrue assets and net worth
What does RBC get?
potential to expand client base and build lasting relationships for future business generation resulting in a win-win situation
The HOME program in Edmonton
Provides education and counselling, underwriting assistance and ongoing mentoring to help low- and moderate-income buyers become owners.
In addition, with the initial funding, HOME has created a downpayment pool

AH: Potential Alternatives proposed by SHIP
SHIP: Saskatoon Housing Initiatives Partnership
Investment fund
helping affordable housing proponents access financing by marketing affordable housing to potential lenders and investors
identifying and trying to gain access to various funding sources
Land Trust
soliciting contributions of land, property or cash, which will then be held in trust and made available to developers of affordable housing
potentially provide incentives in the form of tax credits and charitable receipts
currently Tax Act provides larger write off for land donated to environmental trusts and conservation areas
potential for seeking amendment to Tax Act to provide comparable write-off to provide incentives to donors
Community Investment Deposit
GIC-type investment marketed as an ethical or socially responsible investment, paying a lower rate of interest regular GIC
VanCity Credit Union has successfully created savings accounts with a lower deposit rate and put the difference between these and regular accounts into an ethical investment fund for community initiatives
Ethical investment GIC within an RRSP structure
would provide a tax benefit to investors
marketing with a financial institution and investment dealer that already has distribution and sales infrastructure to market it

AH: Potential Leverage Points from VHFMR
VHFMR: Vancouver Homelessness Funding Model Report
Strategic Elements
Establishment of housing targets and funding programs for interim upgrades of existing SRO hotels and construction of new supportive housing based on the City’s plans;
Continued effort through bylaw and legislated changes to provide additional resources for the creation of non-market housing;
Bylaw enforcement to maintain standards throughout the system when adequate supportive housing resources are in place;
Creation of a limited partnership to attract private and charitable investment in the development of supportive housing, and provide a role for the business community in addressing this issue;
Creation of a new foundation, with community and government representation, to receive charitable contributions, and provide a vehicle for coordination of multiple community interests to improve the city-wide environment, with a focus on the inner city;
Upgrading support levels through increased government funding (via BC Housing and VCHA); and
“ Civility programs” provided by the City and non-profit organizations.

AH: Proposed Vancouver Homelessness LP
from Vancouver Homelessness Funding Model Report

Discussion
Which barriers most limit your funding potential?
What’s most missing in your financial picture?
Which models most address your needs?
What other emerging notions, work, or solutions have you encountered?
What’s next?

CAUSEWAY a national collaboration Thank you! A national collaboration working on new pathways for financial investment in public benefit .

CAUSEWAY a national collaboration
Strategies
Learning and Knowledge Development
Improve knowledge and awareness of Canada’s social finance opportunity
Convening and Engaging
Social finance pioneers, financial market masters, and policy developers
Catalyze New Financial Pathways
Product and policy development
Support capacity building for social capital users and providers
Key activities
National forum being planned for October 2007
Online platform coming summer 2007
Product/Policy working groups emerging throughout 2007
Founders Circle currently being assembled

CAUSEWAY a national collaboration Michael Lewkowitz Start-up Coordinator Phone: (416) 607-5643 (778) 329-0021 Email: [email_address] Tim Draimin Chair, Steering Committee Phone: (604) 647-6611 x244 (416) 481-8652 Email: [email_address] CONTACT Volunteer Contributor Radha Subramania: radha.subram@gmail.com

Causeway - Social Finance in Affordable Housing

by Michael Lewkowitz on Jun 04, 2007

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Causeway - Social Finance in Affordable Housing — Presentation Transcript