The document discusses social finance for social housing in Ontario. It provides an overview of social finance, describing it as an investment approach that aims to solve social or environmental challenges while generating financial returns. Examples of social finance deals in affordable housing, clean technology, and microfinance are presented. Key drivers in the housing sector that could attract social finance are identified as high housing demand, need for housing maintenance and improvements, and demonstrated financing needs.

1. SOCIAL FINANCE FOR SOCIAL HOUSING IN ONTARIO ONPHA Annual Conference Niagara Falls, Ontario October 28 th , 2011

2. PRESENTATION SUMMARY ABOUT US SOCIAL FINANCE OVERVIEW AFFORDABLE HOUSING SECTOR DRIVERS CASE STUDIES PUBLIC POLICY IMPLICATIONS AREAS OF INTEREST DISCUSSION

3. ABOUT US

4. ABOUT US MaRS is a large scale, mission based, innovation centre focused on supporting science, technology, and social entrepreneurs moving important ideas to implementation and building strong businesses. We focus on providing advisory services and access to capital.

5. ABOUT US MaRS Centre for Impact Investing (CII) builds upon the foundational work of MaRS and Social Innovation Generation (SiG), including the landmark report of the Canadian Task Force on Social Finance national hub focused on increasing the awareness and effectiveness of social finance to catalyze new capital, talent, and initiatives dedicated to tackling social and environmental problems in Canada a global connector for Canada into the emerging field of impact investing delivering programs and initiatives focused on research and policy, market and product development, and education and engagement initiatives to build our collective ability to mobilize private capital towards public good.

6. SOCIAL FINANCE OVERVIEW

7. SOCIAL FINANCE OVERVIEW Social finance is an investment approach which aims to solve social or environmental challenges while generating financial return. This includes investments that range from producing a return of principal capital to offering market-rate or even market-beating financial returns. Profits Planet People Synonyms: Impact investing, community investing, and mission-related investing for foundations.

8. SOCIAL FINANCE OVERVIEW Entrenched social and environmental problems from persistent poverty to climate change. Government revenues constrained due to modest economic growth and budget pressures (deficit and rising core costs like health care). Growing number of charities, non-profits, co-ops and for-profit companies building business models and turning to investors for financing to launch and scale up innovative new programs, become sustainable, and stimulate economic growth. As a result, new investment opportunities emerging offering investors positive financial returns and social and environmental impacts. Growing base of interest and pool of talent from youth and mainstream finance leaders. Challenge : Strengthen an emerging marketplace by mobilizing capital and establishing institutions and regulations that will more efficiently connect people and their innovative ideas to the private capital they need to tackle complex societal problems , create jobs and strengthen communities .

9. SOCIAL FINANCE OVERVIEW Social Finance Marketplace Current market size in Canada estimated at ~$2 billion, projected to grow to $30 billion over next ten years Global impact investing marketplace is estimated at $50 billion, projected to grow to $400 billion over next ten years Funds: Over $250 million in funds (and foundation investments) with proven track record; 30 funds operating or in development Deals: There is measurable (private) impact deal activity in Ontario mostly focused on debt instruments. In total, there are over 200 “living” deals in place across the country. Key sectors: Clean technology, sustainable agriculture, microfinance and affordable housing Strong interest amongst governments and institutional investors , particularly foundations, HNWIs, and wealth managers (Recent investor survey: 70% interested in public housing bonds)

10. Example: Planet Bean Coffee Fair trade organic coffee co-operative Investment Type: Debt via loans Purpose: Infrastructure improvements (new roaster) and retail expansion (new location) Terms: Five (years) at 8% Deal Size: $75,000 (part of $250,000 expansion from debt and equity [co-op shares]) Investors: Retail and institutional Impact: Revenue growth ($500k-$1.7M), new worker co-op members, positive local and global impact.

11. Example: Centre for Social Innovation (CSI) Multi-purpose co-working space for nonprofits Investment type: Debt via community bond* Purpose: acquisition and re-development of new facility. Terms: Variable over three series from 5-15 years (prime + 1.75%, prime + 2.25%, & fixed 4.0%) Deal Size: $2.0 million** Investors: Retail & institutional Impact: Facility to catalyze social change * Similar models implemented by Skydragon Worker Co-operative and TREC’s Solar Share initiative. ** Investment was secured by City of Toronto

12. Example: Access Community Capital Fund A not-for-profit fund located in Toronto providing $5,000 microloans to budding entrepreneurs that are otherwise excluded from mainstream financial markets. Investment Type: Debt via promissory note Purpose: Financing for loan fund Terms: 0-2% with variable terms Deal Size: Variable Impact: Poverty reduction, employment creation

13. Impact + Return Poverty reduction Carbon reduction Jobs for marginalized populations Social housing units Energy efficiency 1% p.a. over three years Prime + 2% 8%

14. SOCIAL FINANCE OVERVIEW Example Intermediaries: Canadian Alternative Investment Cooperative (CAIC) Purpose: building alternative economic structures that are supportive of worker cooperatives, disadvantaged peoples, and the environment. Target ventures: non-profits or charitable organizations, affordable housing initiatives, worker cooperatives, and social enterprises. They target these focus areas through the provision of mortgages and loan financing. Fund size: $7 million Investment size and term: up to $50k loans & $500k mortgages Investors: 48 co-op members, including organizations across the country such as Montreal City Mission (Quebec), Catholic Health Association (Ontario) and Sisters of Service (Ontario). Financial return: mortgages (5 per cent) and loans (8-9 per cent)

15. HOUSING SECTOR DRIVERS

16. HOUSING SECTOR DRIVERS There are a number of factors that drive potential interest in social finance (new capital seeking impact) for housing providers: Housing Demand: There is significant demand for affordable housing in Ontario, with 152,000 Ontarians on the waiting list and hundreds of thousands struggling with poverty. Stock maintenance and improvement: There is tremendous need for stock maintenance and improvement, given the significant levels of deferred maintenance, and opportunities for energy efficiency retrofits. Demonstrated financing needs: There have been a number of identified financing needs amongst individual housing providers, including mortgage financing, project bridge financing, and matched financing.

17. HOUSING SECTOR DRIVERS It is not just a money problem.

18. CASE STUDIES

19. CASE STUDIES SECTOR FUND: NYC ACQUISITION FUND GOVERNMENT SUPPORTED BONDS: US AFFORDABLE HOUSING BONDS LARGE-SCALE DEAL: TCHC BOND ISSUE SMALL-SCALE DEAL: COMMUNITY BOND PILOT

20. Case Study: New York City Acquisition Fund

21. CASE STUDIES Motivation: formed in 2006 to address the shortage of affordable housing in New York City Goal: support the development of 30,000 low income housing units in New York City Target ventures: for-profit and non-profit affordable housing developers who refurbish existing units or build new housing Fund size: ~ $200 million Investment size and term: Up to $7.5 mil (new build) or $15 mil (acquisition); lending period of up to three years Interest rate: variable interest rate currently indexed to prime (minus 40 – 60 basis points) Impact: $151M invested and 4,384 units created or preserved

22. CASE STUDIES Partners/Investors: Collaboration with the City of New York, major foundations (ie. Ford Foundation, Rockefeller Foundation), and private investment groups (ie. JP Morgan Chase Bank) Layered: Bank consortium provides senior debt as lending capital while other investors provides guarantees in the form of low-interest subordinated loans

23. CASE STUDIES Contribution: Borrowers must contribute five (5) per cent of pre-development or acquisition costs as equity Max. loan value: for-profit developers are eligible for loans up to 95 per cent of the lesser of appraised value or purchase price while the number goes up to 130 per cent for non-profit developers Other fund models: JP Morgan Urban Renaissance Property Fund: $175 mil. fund with market returns targeting urban development and redevelopment of affordable using using "green" specs from solar heating to recycled building materials

24. Example Recipient: Serviam Gardens (Fordham Bedham Housing Corporation) 243-unit green, affordable housing development for low- and moderate-income seniors Purpose: Acquisition and predevelopment financing for 10 unit complex rehabilitation and 73 unit construction Deal: $3.6 million loan Term: 36 months

25. CASE STUDIES US Affordable Housing Bonds Long history: concept of a public housing bond first emerged in New York City in the 1930s Model: Basic structure often meets same characteristics as other Tax Exempt Municipal Bonds Issuers: cities, counties, special-purpose districts, and any other governmental entity below the state level Exemption: Interest income received by bondholders is exempt from federal and state income tax Other countries: China is now working to speed approval of these types of bonds Aside: Build America Bonds increasingly popular amongst housing authorities: issuers can choose whether they offer a tax credit for the buyer or a direct payment from the federal government equal to 35% of the interest costs.

26. CASE STUDIES Example: Chicago Housing Authority Federal support through the Capital Fund Financing Program (CFFP): to raise funds to accelerate major modernization projects. To date, 157 US housing authorities have received approval for bonds or loans totalling more than $3.7B, allowing them to use a portion of their annual capital funds for debt servicing. Purpose: Public housing authority (PHA) bond proceeds provide low-rent housing through new construction, rehabilitation of existing stock, purchases from private builders or developers, and leasing from private owners. Tax exemption: Interest on the bonds is exempt from federal income taxes and may also be exempt from state and local income taxes. Term: Investment term typically no longer than 20 years

27. CASE STUDIES HUD Contribution: The agreement provides that the federal government will loan the local authority a sufficient amount of money to pay principle and interest to maturity. (ie. debt service payments) Security: The loans or bonds are obligations of the PHA. HUD does not guarantee or ensure these loans or bonds. Deal: In 2001, CHA became the first PHA to gain HUDs approval for a rated bond transaction. The deal was worth $291 million, with an AA Rating from S&P. Goal: Support its Plan for Transformation to replace over 18,000 distressed units with 25,000 new or modernized units (Focus: Rehabilitate 9,400 units of seniors housing)

28. CASE STUDIES Challenge: Economic downturn of 2008 slowed construction plans for CHA On the road to success: As of the end of FY2009, CHA has completed 17,812 public housing units or 71.25% of the Plan for Transformation’s overall unit delivery goal of 25,000 units. Timeline for achievement moved to 2015. Additional offerings: CHA also issued $25 million in Build America Bonds (10 year bond at 6.29%)

29. Case Study: Toronto Community Housing Corporation Bond: Regent Park Revitalization

30. CASE STUDIES TCHC Bond Issue Regent Park Development Initiative: six phases of development over 15 years for mixed housing, including 2,083 Rent Geared to Income (RGI) units, 700 affordable rental units, 3,500 market rental units, and 250,000 sq ft. of commercial space Total cost: $1 billion [TCHC and the City of Toronto: $450 mil., Priv. interests and commercial service providers: $500 mil., Fed. and prov. govts: $60 mil.] Motivation: flat, fixed revenues; aging buildings with significant capital repair needs; poorly planned community in need of revitalization Nontraditional financing provided flexibility and scale

31. CASE STUDIES TABLE: ANATOMY OF THE TCHC DEAL Major partners: Fasken Martineau, Ogilvie Renault, Major Fis, Morrison Park Advisors

32. CASE STUDIES TCHC Bond Issue: Lessons Canadian capital markets are supportive. There was strong interest and high level involvement in the deal from many major capital market players. Getting a high credit rating was critical as it allowed investors to move into an unfamiliar sector, simplified the marketing task, and created a great deal of demand. Canadian banks were very supportive with major financial institutions involved in the deal. Asset security not important, City of Toronto funding agreement eliminated perceived risks

33. CASE STUDIES TCHC Bond Issue: Lessons Process took time, money, and management attention. The deal took three years from start to finish, with a significant amount of energy becoming familiar with the intricacies of Scale of the investment and story was extremely important. According to TCHC, it was much easier to borrow $250 million than $15 million, and these borrowing costs dropped to a level nearly the same as the City of Toronto. In addition, revitalization was seen as a major, simple story, attracting major players. Support of stakeholders was critical. Board of Directors kept informed at every step of the way; despite arm’s length relationship, City of Toronto ultimately had to sign off on the transaction .

34. CASE STUDIES Community Bond Pilot Purpose: Support partial financing of large scale affordable housing project in Ontario (~300 units) Proposed Terms: 4% fixed over 10 years Investment Type: Debt via promissory note (unsecured) Deal Size: $1 million Investors: Accredited investors with focus on foundations and high net worth individuals (limited numbers) Model: CSI Community Bond

35. CASE STUDIES Motivations Cost Savings: The bond will reduce the annual cost of debt servicing and the total cost of financing by hundreds of thousands compared to current financing regime (Infrastructure Ontario). Demonstration of leadership: Opportunity for provider to show leadership in emerging social finance sector Platform & Development Opportunity: MaRS and SVX provide platform to develop product and identify investors Model Issue: Development process and materials can be used as template for other housing providers.

36. CASE STUDIES Early Lessons Small scale investments are possible: Despite lessons from TCHC deal, it is possible to structure smaller scale deals for affordable housing providers. Investor profile: At present, it is both costly and difficult to create an investment opportunity for the retail market. The ideal approach is to target a small number of accredited investors, particularly foundations and HNWIs. Deal Terms: A smaller scale deal requires a relatively short investment term (less than 15 years) with the capacity for investors to exit. Return: Given the sector profile and the current performance of the market, investors are willing to consider more modest returns (~2-5%).

37. PUBLIC POLICY IMPLICATIONS

38. PUBLIC POLICY IMPLICATIONS Governments have more potential tools at their disposal to support the financing of social housing. Governments can incentivize investment in affordable housing. (ie. Build America Bonds or tax exempt municipal bonds) Governments can play a role as guarantors to increase investment likelihood. (ie. TCHC/CSI Bond issue) Governments can re-allocate a portion of grant funds towards debt servicing to leverage larger pools of capital for acquisition or repair. (ie. Capital Fund Financing Program) Governments can provide financing to leverage other investors for larger capital pools. (ie. NYC Acquisition Fund)

39. PUBLIC POLICY IMPLICATIONS Governments across Canada are considering social finance. From the Government of Ontario to the Government of Canada, social finance is becoming a part of mainstream government strategy. The housing sector should determine the potential opportunities and risks of the movement towards alternative financing. There is an identified need for the sector to engage in research and policy development in this emerging area, for both government and individual housing providers.

40. AREAS OF INTEREST

41. AREAS OF INTEREST There are a number of initiatives MaRS is engaged in that could be of interest to affordable housing providers in Ontario: Educational Resources: Educational tools, webinars and events for interested investors, investees, and individuals interested in learning more about social finance. Product Development: Initiating a practice for the development of impact investing instruments and best practice toolkits. Investment Platform: SVX, a platform to connect the supply and demand for capital in the impact investing marketplace.

42. AREAS OF INTEREST What is the Social Venture Exchange? A local, impact-first market connecting social ventures, impact funds, and impact investors in order to catalyze new investment capital geared towards improved social and environmental outcomes. allows investors access high quality, screened investment opportunities reducing burden of due diligence provides ventures with low cost access to capital and increased financial expertise OUR PARTNERS

43. AREAS OF INTEREST Access point Private connection Due diligence and filtered information Standard and transparent listings requirements Nonprofit public service organization Impact measurement Investors: Supply of Capital Ventures: Demand for Capital

44. AREAS OF INTEREST Ventures & Funds : Nonprofits, co-ops, and social purpose businesses in target sectors (including housing) Investors: Accredited investors including foundations, HNWIs, fund managers, wealth managers Deal size: $25k to $10M Products: Debt (bonds, promissory notes, debentures, loans and loan guarantees) and Private equity (common/preferred/co-op shares, limited partnerships [for funds]) Additional activation: Convening of investor breakfasts and investor webinars

45. DISCUSSION

46. KEY QUESTIONS Need: Do you have a short-term capital need? Barriers: What are your current barriers to financing? Utility or Potential: Have you ever utilized or considered a social finance vehicle to support housing rehabilitation, acquisition or development? Opinion: What do you think about the potential for social finance to support the development of social housing in Ontario? Are the concepts and models discussed applicable to your organization? Challenges: What are challenges to this approach in Ontario? Interest: Are you interested in finding out more about this work?