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Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License CAUSEWAY a national collaboration Social Finance Orientation Affordable Housing Track June 6, 2007 Prepared by: Michael Lewkowitz, start-up coordinator [email protected] -:- 416.607.5643

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Page 1: Causeway - Social Finance in Affordable Housing

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License

CAUSEWAY a national collaboration

Social Finance OrientationAffordable Housing Track

June 6, 2007

Prepared by: Michael Lewkowitz, start-up [email protected] -:- 416.607.5643

Page 2: Causeway - Social Finance in Affordable Housing

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License 2

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

Page 3: Causeway - Social Finance in Affordable Housing

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License 3

CAUSEWAY a national collaboration

A national collaborationworking on new pathways

for financial investmentin public benefit.

Page 4: Causeway - Social Finance in Affordable Housing

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License 4

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

Government Business

Charity & Non-profit

Hybrid Space

Venture philanthropy

Venture capital

Bank lending

Traditional grant making

CHA

RITA

BLE

CO

MM

ERCIA

L

HIGH INVOLVEMENT

LOW INVOLVEMENTAdapted from : Margaret Bolton , 2003

Page 5: Causeway - Social Finance in Affordable Housing

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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

Page 6: Causeway - Social Finance in Affordable Housing

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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.

Page 7: Causeway - Social Finance in Affordable Housing

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Orientation: A continuum of risk and return An increasingly broad range of mechanisms

that blend financial and social/environmental returns

GuaranteesCash Cash

Senior Loans Fixed IncomePublic EquityPrivate Equity

Subord. LoansEquityGrants

Ris

k

Return

Investment TypesBelow-Market Market -Rate

Adapted from : F. B. Heron Foundation

Expected loss % 100% 20-50% 10-20% 10-20% 1-8%

0

Often short periods

Low (except venture philanthropy)

n/a

None

No

-50%-c.10% No limit Variable up to 30% Fixed 5-18%

Repayment holidays Undefined Depends on success

5-7 yrs Depends on success Fixed term

Some (through partners) High (through board) High (through board) Low

Repayment IPO, sale, buyout Royalty, repayment or APO Repayment

None/subordinate Residual Subordinate First priority

No Through ownership Structured in loan agreement No

Return on investment

Term of investment

Involvement in business

Exit of investment

Liquidation rights

Voting rights

Grants Patient Capital Pure Equity Equity-like Loans

Adapted from: Bridges Community Ventures, UK

Venture philanthropy

Venture capital

Bank lending

Traditional grant making

CHA

RITA

BLE

CO

MM

ERCIA

L

HIGH INVOLVEMENT

LOW INVOLVEMENTAdapted from : Margaret Bolton , 2003

Page 8: Causeway - Social Finance in Affordable Housing

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License 8

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

High potential

social ventures

Fina

ncia

l

POTENTIAL RETURN

SocialAdapted from: Bridges Community Investment, UK

Low High

Hig

hLo

w

0

GuaranteesCash Cash

Senior Loans Fixed IncomePublic EquityPrivate Equity

Subord. LoansEquityGrants

Ris

k

Return

Investment TypesBelow-Market Market -Rate

Adapted from : F. B. Heron Foundation

Soc. P

urpos

e Bus

.

Social

Ente

rprise

Bus. A

rm of

Cha

rity

Charity

Soc. R

esp.

Busine

ss

Busine

ssSocial

CommercialAdapted from: John Kingston, Venturesome

Community Interest Companies

Page 9: Causeway - Social Finance in Affordable Housing

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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 ventures3%

5%

8%

35%

49%

CorporationsGifts

Individual Donations

Earned Income

Government

Canadian non-profit income sources

Page 10: Causeway - Social Finance in Affordable Housing

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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

Organizational Types

For Profit Not-for-Profit Charity

Wealth Maximization

Any Purpose Except Profit

Relieve PovertyAdvance Religion

Advance EducationCommunity BenefitAcceptable Purpose

Acceptable Purpose by Structure

Adapted from: W. L. Hunter

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

Page 11: Causeway - Social Finance in Affordable Housing

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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

Soc. P

urpos

e Bus

.

Social

Ente

rprise

Bus. A

rm of

Cha

rity

Charity

Soc. R

esp.

Busine

ss

Busine

ssSocial

CommercialAdapted from: John Kingston, Venturesome

Community Interest Companies

CO

ST

STAGESeed | Start -up | Survival | Growth | Maturity

VC/Equity Finance

LoansGrants

Specialized Investment Products

A dapted from : Derek Gent, V ancity

Start-up (100K)

Incubation (10K)

Growth (1M+)

Expansion (500K-1M)

No

earn

ed in

com

e

Ear

ned

inco

me

and

gran

tsP

ot. s

usta

inab

le

(75%

+ E

I)

Bre

akev

en (1

00%

EI)

Pro

fitab

le –

Sur

plus

no

t dis

tribu

ted

Pro

fit d

istri

butin

g –

soci

ally

driv

en

Pro

fit M

axim

izin

g

Bus. Angels

VC

Public MarketsFoundations

Retained earnings act as

equity

Adapted from: Bridges Community Ventures, UK | Whitni Thomas

???

Page 12: Causeway - Social Finance in Affordable Housing

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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

Page 13: Causeway - Social Finance in Affordable Housing

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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

Page 14: Causeway - Social Finance in Affordable Housing

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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

Page 15: Causeway - Social Finance in Affordable Housing

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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

Page 16: Causeway - Social Finance in Affordable Housing

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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

Page 17: Causeway - Social Finance in Affordable Housing

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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

Page 18: Causeway - Social Finance in Affordable Housing

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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

Page 19: Causeway - Social Finance in Affordable Housing

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AH: Potential Alternatives proposed by SHIPSHIP: 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

Page 20: Causeway - Social Finance in Affordable Housing

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AH: Potential Leverage Points from VHFMRVHFMR: 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.

Page 21: Causeway - Social Finance in Affordable Housing

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AH: Proposed Vancouver Homelessness LPfrom Vancouver Homelessness Funding Model Report

Page 22: Causeway - Social Finance in Affordable Housing

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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?

Page 23: Causeway - Social Finance in Affordable Housing

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CAUSEWAY a national collaboration

A national collaborationworking on new pathways

for financial investmentin public benefit.

Thank you!

Page 24: Causeway - Social Finance in Affordable Housing

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License 24

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

Page 25: Causeway - Social Finance in Affordable Housing

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License 25

CAUSEWAY a national collaboration

Michael LewkowitzStart-up Coordinator

Phone:(416) 607-5643(778) 329-0021

Email:[email protected]

Tim Draimin Chair, Steering Committee

Phone:(604) 647-6611 x244(416) 481-8652

Email:[email protected]

CONTACT

Volunteer ContributorRadha Subramania: [email protected]

Page 26: Causeway - Social Finance in Affordable Housing

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GOVERNANCE

SUPPORT

CAPITAL PATHWAYS WORKSHEET

SOURCES INTERMEDIARIES MECHANISMS RECIPIENTS USES

Page 27: Causeway - Social Finance in Affordable Housing

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3%

5%

8%

35%

49%

CorporationsGifts

Individual Donations

Earned Income

Government

Organizational Types

For Profit Not-for-Profit Charity

Wealth Maximization

Any Purpose Except Profit

Relieve PovertyAdvance Religion

Advance EducationCommunity BenefitAcceptable Purpose

Acceptable Purpose by Structure

Adapted from: W. L. Hunter

Soc. P

urpos

e Bus

.

Social

Enterp ri s

e

Bus. A

rm of

Cha

rity

Charity

Soc. R

esp.

Busine

ss

Busin

ess

Social

CommercialAdapted from : John Kingston , Venturesome

Community Interest Companies

CO

ST

STAGESeed | Start-up | Survival | Growth | Maturity

VC/Equity Finance

LoansGrants

Specialized Investment Products

Adapted from : Derek Gent, Vancity

GuaranteesCash Cash

Senior Loans Fixed IncomePublic EquityPrivate Equity

Subord. LoansEquityGrants

Ris

k

Return

Investment TypesBelow-Market Market -Rate

Adapted from : F. B. Heron Foundation

Venture philanthropy

Venture capital

Bank lending

Traditional grant making

CHA

RITA

BLE

CO

MM

ERCIA

L

HIGH INVOLVEMENT

LOW INVOLVEMENTAdapted from : Margaret Bolton , 2003

Start-up (100K)

Incubation (10K)

Growth (1M+)

Expansion (500K-1M)

No

earn

ed in

com

e

Earn

ed in

com

e an

d gr

ants

Pot

. sus

tain

able

(7

5%+

EI)

Brea

keve

n (1

00%

EI

)Pr

ofita

ble

– S

urpl

us

not d

istrib

uted

Pro

fit d

istri

butin

g –

soci

ally

driv

en

Prof

it M

axim

izin

g

Bus. Angels

VC

Public MarketsFoundations

Retained earnings act

as equityAdapted from : Bridges Community Ventures , UK | Whitni Thomas

High potential

social ventures

Fina

ncia

l

POTENTIAL RETURN

SocialAdapted from : Bridges Community Investment , UK

Low High

Hig

hLo

w

0

Expected loss % 100% 20-50% 10-20% 10-20% 1-8%

0

Often short periods

Low (except venture philanthropy )

n/a

None

No

-50%-c.10% No limit Variable up to 30% Fixed 5-18%

Repayment holidays Undefined Depends on success

5-7 yrs Depends on success Fixed term

Some (through partners ) High (through board ) High (through board ) Low

Repayment IPO, sale, buyout Royalty , repayment or APO Repayment

None/subordinate Residual Subordinate First priority

No Through ownership Structured in loan agreement No

Return on investment

Term of investment

Involvement in business

Exit of investment

Liquidation rights

Voting rights

Grants Patient Capital Pure Equity Equity -like Loans

Adapted from : Bridges Community Ventures , UK

Government Business

Charity & Non-profit

Hybrid Space

REFERENCE FRAMEWORKS

A

B

C

D

E

F

G

H

I

J

Government Business

Charity & Non-profit

Hybrid Space