Causeway - Social Finance in Affordable Housing


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A primer on social finance's application and potential in affordable housing.

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  • Causeway - Social Finance in Affordable Housing

    1. 1. 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
    2. 2. Outline <ul><li>Social Finance Orientation </li></ul><ul><ul><li>Financial flow to public benefit </li></ul></ul><ul><ul><li>Across a continuum of risk and return </li></ul></ul><ul><ul><li>Gaining momentum </li></ul></ul><ul><li>The Canadian Context </li></ul><ul><ul><li>Coming from behind </li></ul></ul><ul><ul><li>A framework ready for renewal </li></ul></ul><ul><ul><li>Potential leverage points </li></ul></ul><ul><li>Affordable Housing Track </li></ul><ul><ul><li>Barriers to Affordable Development </li></ul></ul><ul><ul><li>Sources of Public/Government Funding </li></ul></ul><ul><ul><li>Examples and Models </li></ul></ul><ul><li>Discussion </li></ul>
    3. 3. CAUSEWAY a national collaboration A national collaboration working on new pathways for financial investment in public benefit .
    4. 4. Orientation: “Social Finance” <ul><li>“ Sustainable finance with a social or environmental goal” </li></ul><ul><li>Exists on the financial continuum between: </li></ul><ul><ul><li>Traditional financial investment vehicles </li></ul></ul><ul><ul><ul><li>High financial value but no social returns </li></ul></ul></ul><ul><ul><li>Grants </li></ul></ul><ul><ul><ul><li>No financial returns but </li></ul></ul></ul><ul><li>Transcending traditional silos </li></ul><ul><ul><li>Blended return perspective </li></ul></ul><ul><ul><ul><li>Financial + social + environmental </li></ul></ul></ul><ul><ul><li>Collaborative, cross-sectoral involvement </li></ul></ul><ul><ul><ul><li>Government + non-profit/charitable + private sector </li></ul></ul></ul>
    5. 5. Orientation: Financial flow to public benefit <ul><li>The flow of financial capital to public benefit uses: </li></ul><ul><ul><li>Affordable Housing </li></ul></ul><ul><ul><li>Bottom of the Pyramid </li></ul></ul><ul><ul><li>Clean Technology </li></ul></ul><ul><ul><li>Community Development </li></ul></ul><ul><ul><li>Education </li></ul></ul><ul><ul><li>Fair Trade </li></ul></ul><ul><ul><li>Green Building </li></ul></ul><ul><ul><li>Health </li></ul></ul><ul><ul><li>Media </li></ul></ul><ul><ul><li>Microfinance </li></ul></ul><ul><ul><li>Social Enterprise </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>(source: market sector listing on ) </li></ul></ul>Sources Intermediaries Mechanisms Recipients Uses
    6. 6. Orientation: Provocative examples <ul><li>Venture capital </li></ul><ul><ul><li>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. </li></ul></ul><ul><li>Local community development </li></ul><ul><ul><li>The Columbus Foundation used $2 million to seed an $18 million low-cost housing fund to build 1,600 new units of affordable housing. </li></ul></ul><ul><li>Startup or expansion capital in underserved communities </li></ul><ul><ul><li>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. </li></ul></ul><ul><li>Debt mechanisms </li></ul><ul><ul><li>Milestone achievement of $100m in loans to community finance institutions and social enterprises by Calvert Foundation’s Community Investment Note </li></ul></ul><ul><li>Acquisition of assets </li></ul><ul><ul><li>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. </li></ul></ul>
    7. 7. Orientation: A continuum of risk and return <ul><li>An increasingly broad range of mechanisms that blend financial and social/environmental returns </li></ul>
    8. 8. Orientation: Gaining momentum <ul><li>Emerging financial products </li></ul><ul><ul><li>PRI and MBI </li></ul></ul><ul><ul><ul><li>Program Related Investments </li></ul></ul></ul><ul><ul><ul><li>Mission Based Investments </li></ul></ul></ul><ul><ul><ul><li>Approaches for foundations to leverage endowment capital toward mission related activities </li></ul></ul></ul><ul><ul><ul><li>Spans the continua of risk, return, focus </li></ul></ul></ul><ul><ul><ul><li>Well developed in the United States </li></ul></ul></ul><ul><ul><li>Social venture capital </li></ul></ul><ul><ul><ul><li>Applying venture capital models to social enterprise </li></ul></ul></ul><ul><ul><ul><li>Innovations in business models and blended value returns </li></ul></ul></ul><ul><ul><ul><li>Well developed in the UK including ‘Community Interest Company’ legal structure and marketplace </li></ul></ul></ul><ul><li>Issues with good asset classes </li></ul><ul><ul><li>Affordable Housing </li></ul></ul><ul><ul><li>Community Energy and Efficiency </li></ul></ul>
    9. 9. Canada: Coming from behind <ul><li>Building from strong third sector </li></ul><ul><ul><li>$120 B annual expenditures </li></ul></ul><ul><ul><li>Less than 10% of income is donation capital </li></ul></ul><ul><li>Growing social and environmental pressures met with government and market failures </li></ul><ul><ul><li>Government: Insufficient and inflexible programs/services/funding </li></ul></ul><ul><ul><li>Market: Trust issues, see no potential for profit, respond to consumer demand </li></ul></ul><ul><li>Growing market opportunity for financial sector </li></ul><ul><ul><li>Citizens increasingly aware of societal issues </li></ul></ul><ul><ul><li>Increasing interest in: ethical investment; ethical consumerism (fair trade); local solutions; mission based entrepreneurs and ventures </li></ul></ul>Canadian non-profit income sources
    10. 10. Canada: A framework ready for renewal <ul><li>Limiting regulatory framework ready to catch-up </li></ul><ul><ul><li>Income Tax Act and charity law significantly restrict flow of capital </li></ul></ul><ul><li>International examples from US and UK provide relevant reference models: </li></ul><ul><ul><li>US </li></ul></ul><ul><ul><ul><li>IRS allowance of charitable investment in non-charities </li></ul></ul></ul><ul><ul><ul><li>Community Reinvestment Act </li></ul></ul></ul><ul><ul><ul><li>New Markets Tax Credits </li></ul></ul></ul><ul><ul><li>UK </li></ul></ul><ul><ul><ul><li>Community Interest Company designation </li></ul></ul></ul><ul><ul><ul><ul><li>Already over 800 registered CIC’s </li></ul></ul></ul></ul><ul><li>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. </li></ul><ul><li>Other survey results: </li></ul><ul><li>43% of CICs said that the most important factor in their decision was to prove their social purpose. </li></ul><ul><li>37% of CICs felt that the biggest barrier facing their company was access to finance </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>11% said it had given them, their directors and staff a clearer focus on their combined business and social aims. </li></ul><ul><li>Average turnover of CICs surveyed is £144,000. </li></ul><ul><li>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. </li></ul><ul><li>Source: </li></ul>
    11. 11. Canada: Potential leverage points <ul><li>Policy? </li></ul><ul><ul><li>Corporate structure </li></ul></ul><ul><ul><ul><li>i.e. CIC (UK) </li></ul></ul></ul><ul><ul><li>Tax </li></ul></ul><ul><ul><ul><li>i.e. New Markets Incentive (US) </li></ul></ul></ul><ul><li>Products? </li></ul><ul><ul><li>Social venture capital </li></ul></ul><ul><ul><li>Specialized investment products </li></ul></ul><ul><ul><li>Issues with substantial assets </li></ul></ul><ul><ul><ul><li>Affordable Housing </li></ul></ul></ul><ul><ul><ul><li>Community Energy and Efficiency </li></ul></ul></ul><ul><li>New capital pathways </li></ul>???
    12. 12. AH: Barriers to Affordable Development <ul><li>Potential non-profit partners lack required skills/experience in development and ongoing management of housing projects </li></ul><ul><li>Increasing development and raw material costs </li></ul><ul><li>Limited equity funding </li></ul><ul><li>Potential low income homeowners </li></ul><ul><ul><li>lack down-payment </li></ul></ul><ul><ul><li>require education and counselling on home buying </li></ul></ul><ul><li>Risk profile does not fit most lending requirements </li></ul><ul><li>Lack of standardization of legal contracts with current funding sources delays development process and is a further deterrent to seeking debt financing </li></ul>
    13. 13. AH: Sources of Public/Government Funding <ul><li>Federal Government </li></ul><ul><ul><li>provide funding that is primarily administered by municipalities </li></ul></ul><ul><ul><li>announced $680M for AHP to be administered at provincial level in 2001 </li></ul></ul><ul><ul><li>AHP committed federal government to provide $301M to Ontario over 5 years to develop at least 15,000 affordable housing units </li></ul></ul><ul><ul><li>CMHC, federal crown corporation which provides mortgage insurance for home owners is in cooperation </li></ul></ul><ul><li>  Provincial Government </li></ul><ul><ul><li>provide funding of programs that partially rebate PST for rental housing and Land Transfer tax for first time homebuyers </li></ul></ul><ul><ul><li>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 </li></ul></ul>
    14. 14. AH: Land use planning related mechanisms <ul><li>Inclusionary zoning </li></ul><ul><ul><li>requires that a development project includes a special component desired by municipality (affordable housing) </li></ul></ul><ul><ul><li>typically multiple-unit residential projects, of which the inclusionary units must be sold at affordable prices </li></ul></ul><ul><ul><li>City of Vancouver, 20% social housing </li></ul></ul><ul><ul><li>inexpensive municipal mechanism </li></ul></ul><ul><li>  Linkage Programs </li></ul><ul><ul><li>commercial developers are required to pay into a municipal fund dedicated to building affordable housing </li></ul></ul><ul><ul><li>also gives option to build affordable houses </li></ul></ul><ul><ul><li>very prominent in Western Canadian municipalities </li></ul></ul><ul><ul><li>most useful in municipalities with high level of commercial development </li></ul></ul><ul><li>  Density bonusing </li></ul><ul><ul><li>allows developers to add more floor area/additional density in exchange for provision of certain facilities benefiting the community </li></ul></ul><ul><ul><li>currently widely used in municipalities across Canada </li></ul></ul><ul><li>  Housing Trust funds </li></ul><ul><ul><li>currently 170 housing trust funds in US </li></ul></ul>
    15. 15. AH: Financial Innovations in the US (1) <ul><li>Low Income Housing Tax Credit (LIHTC) </li></ul><ul><ul><li>all states receive annual allocation of tax credits to award to affordable housing developers </li></ul></ul><ul><ul><li>federal government provides state and local LIHTC allocating agencies nearly $5 billion in annual budget authority to issue tax credits for affordable housing </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><li>GO Zone Tax Credits </li></ul><ul><ul><li>for the areas hit by the Hurricane Katrina and offer accelerated depreciation resulting in earlier tax benefits to investors at a premium </li></ul></ul><ul><ul><li>this has generated a huge equity investment in the area due to the greater pool of tax credits available </li></ul></ul><ul><li>Tax credit equity is a very popular investment alternative, attracting huge private equity groups and corporate interest </li></ul>
    16. 16. AH: Financial Innovations in the US (2) <ul><li>Home Ownership Zones </li></ul><ul><ul><li>designed to test the idea that cities can transform blighted areas into sustainable communities through the creation of mixed income single family homes </li></ul></ul><ul><ul><li>provides seed money for revitalization efforts </li></ul></ul><ul><li> HOME </li></ul><ul><ul><li>provides state and local government funding for housing programs </li></ul></ul><ul><li> SHOP </li></ul><ul><ul><li>provides funds for non-profit orgs to purchase home sites </li></ul></ul>
    17. 17. AH: Other Examples <ul><li>The Columbus Foundation used $2 million to seed an $18 million low-cost housing fund to build 1,600 new units of affordable housing. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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 </li></ul>
    18. 18. AH: Canadian Examples <ul><li>  Spence Neighbourhood Revitalization, Winnipeg </li></ul><ul><ul><li>Partners: RBC, CMHC, and community group </li></ul></ul><ul><ul><li>Goal: To share and lower risk of affordable housing financing </li></ul></ul><ul><ul><li>  RBC: </li></ul></ul><ul><ul><ul><li>supports development of materials for homebuyer education and counselling programs </li></ul></ul></ul><ul><ul><ul><li>supports investment and improvement of neighbourhood </li></ul></ul></ul><ul><ul><ul><li>ultimately improves underlying asset value, improves security on banks mortgage loans and help families to accrue assets and net worth </li></ul></ul></ul><ul><ul><li>  What does RBC get? </li></ul></ul><ul><ul><ul><li>potential to expand client base and build lasting relationships for future business generation resulting in a win-win situation </li></ul></ul></ul><ul><li>The HOME program in Edmonton </li></ul><ul><ul><li>Provides education and counselling, underwriting assistance and ongoing mentoring to help low- and moderate-income buyers become owners. </li></ul></ul><ul><ul><li>In addition, with the initial funding, HOME has created a downpayment pool </li></ul></ul>
    19. 19. AH: Potential Alternatives proposed by SHIP <ul><li>SHIP: Saskatoon Housing Initiatives Partnership </li></ul><ul><li>Investment fund </li></ul><ul><ul><li>helping affordable housing proponents access financing by marketing affordable housing to potential lenders and investors </li></ul></ul><ul><ul><li>identifying and trying to gain access to various funding sources </li></ul></ul><ul><li>Land Trust </li></ul><ul><ul><li>soliciting contributions of land, property or cash, which will then be held in trust and made available to developers of affordable housing </li></ul></ul><ul><ul><li>potentially provide incentives in the form of tax credits and charitable receipts </li></ul></ul><ul><ul><li>currently Tax Act provides larger write off for land donated to environmental trusts and conservation areas </li></ul></ul><ul><ul><li>potential for seeking amendment to Tax Act to provide comparable write-off to provide incentives to donors </li></ul></ul><ul><li>Community Investment Deposit </li></ul><ul><ul><li>GIC-type investment marketed as an ethical or socially responsible investment, paying a lower rate of interest regular GIC </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><li>Ethical investment GIC within an RRSP structure </li></ul><ul><ul><li>would provide a tax benefit to investors </li></ul></ul><ul><ul><li>marketing with a financial institution and investment dealer that already has distribution and sales infrastructure to market it </li></ul></ul>
    20. 20. AH: Potential Leverage Points from VHFMR <ul><li>VHFMR: Vancouver Homelessness Funding Model Report </li></ul><ul><li>Strategic Elements </li></ul><ul><ul><li>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; </li></ul></ul><ul><ul><li>Continued effort through bylaw and legislated changes to provide additional resources for the creation of non-market housing; </li></ul></ul><ul><ul><li>Bylaw enforcement to maintain standards throughout the system when adequate supportive housing resources are in place; </li></ul></ul><ul><ul><li>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; </li></ul></ul><ul><ul><li>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; </li></ul></ul><ul><ul><li>Upgrading support levels through increased government funding (via BC Housing and VCHA); and </li></ul></ul><ul><ul><li>“ Civility programs” provided by the City and non-profit organizations. </li></ul></ul>
    21. 21. AH: Proposed Vancouver Homelessness LP <ul><li>from Vancouver Homelessness Funding Model Report </li></ul>
    22. 22. Discussion <ul><li>Which barriers most limit your funding potential? </li></ul><ul><li>What’s most missing in your financial picture? </li></ul><ul><li>Which models most address your needs? </li></ul><ul><li>What other emerging notions, work, or solutions have you encountered? </li></ul><ul><li>What’s next? </li></ul>
    23. 23. CAUSEWAY a national collaboration Thank you! A national collaboration working on new pathways for financial investment in public benefit .
    24. 24. CAUSEWAY a national collaboration <ul><li>Strategies </li></ul><ul><ul><li>Learning and Knowledge Development </li></ul></ul><ul><ul><ul><li>Improve knowledge and awareness of Canada’s social finance opportunity </li></ul></ul></ul><ul><ul><li>Convening and Engaging </li></ul></ul><ul><ul><ul><li>Social finance pioneers, financial market masters, and policy developers </li></ul></ul></ul><ul><ul><li>Catalyze New Financial Pathways </li></ul></ul><ul><ul><ul><li>Product and policy development </li></ul></ul></ul><ul><ul><ul><li>Support capacity building for social capital users and providers </li></ul></ul></ul><ul><li>Key activities </li></ul><ul><ul><li>National forum being planned for October 2007 </li></ul></ul><ul><ul><li>Online platform coming summer 2007 </li></ul></ul><ul><ul><li>Product/Policy working groups emerging throughout 2007 </li></ul></ul><ul><li>Founders Circle currently being assembled </li></ul>
    25. 25. 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: