Finding Money, Renewing Mission: Social Finance & Affordable Housing

CHRA PRE-CONGRESS 2012 St. Johns, Newfoundland

May 1st, 2012

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

ABOUT US

ABOUT USMaRS 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 Financenational 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

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Pillar Description Strategic Initiatives

SOCIAL FINANCE OVERVIEW

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.

SOCIAL FINANCE OVERVIEW1. Entrenched social and environmental problems

from persistent poverty to climate change.2. Government revenues constrained due to

modest economic growth and budget pressures (deficit and rising core costs like health care).

3. 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.

4. As a result, new investment opportunities emerging offering investors positive financial returns and social and environmental impacts.

5. 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.

SOCIAL FINANCE OVERVIEWSocial 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 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)

Example: Planet Bean Coffee Fair trade organic coffee co-operativeInvestment Type: Debt via loansPurpose: 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 institutionalImpact: Revenue growth ($500k-$1.7M), new worker co-op members, positive local and global impact.

Example:Centre for Social Innovation (CSI) Multi-purpose co-working space for nonprofitsInvestment 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 & institutionalImpact: 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

Example: Access Community Capital FundA 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 notePurpose: Financing for loan fundTerms: 0-2% with variable termsDeal Size: VariableImpact: Poverty reduction, employment creation

Impact + Return

Poverty reduction

Carbon reduction

Jobs for marginalized populations

Social housing units

Energy efficiency

1% p.a. over three years

Prime + 2%

8%

HOUSING SECTOR DRIVERS

HOUSING SECTOR DRIVERSThere 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. Thirteen (13) per cent of Canadians are in core housing need.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.

HOUSING SECTOR DRIVERS

It is not just a money problem.

CASE STUDIES

CASE STUDIES1. SECTOR FUND: NYC ACQUISITION FUND2. GOVERNMENT SUPPORTED BONDS: US AFFORDABLE

HOUSING BONDS3. LARGE-SCALE DEAL: TCHC BOND ISSUE4. SMALL-SCALE DEAL: COMMUNITY BOND PILOT

Case Study:New York City Acquisition Fund

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

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

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

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

CASE STUDIESUS 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.

CASE STUDIESExample: 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

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)

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%)

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

CASE STUDIESTCHC 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

CASE STUDIESTABLE: ANATOMY OF THE TCHC DEAL

Major partners: Fasken Martineau, Ogilvie Renault, Major Fis, Morrison Park Advisors

CASE STUDIESTCHC 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.

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.

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

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.

CASE STUDIESYWCA Community Housing Bond 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

Model: CSI Community Bond

CASE STUDIESMotivations

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.

CASE STUDIESEarly 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%).

PUBLIC POLICY IMPLICATIONS

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)

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.

AREAS OF INTEREST

AREAS OF INTERESTThere are a number of initiatives MaRS is engaged in that could be of interest to affordable housing providers: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 in Ontario.

DISCUSSION & QUESTIONS

Thank You

http://impactinvesting.marsdd.com

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