Social Finance & Social Housing

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Presentation on social finance and social housing including background on MaRS, the Centre for Impact Investing, motivations, case studies, public policy implications, and areas of interest for housing providers. As presented at CHRA Pre-Congress in May 2012.

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1. Finding Money, Renewing Mission:Social Finance & Affordable Housing CHRA PRE-CONGRESS 2012 St. Johns, Newfoundland May 1st, 2012 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 USMaRS Centre for Impact Investing (CII)builds upon the foundational work of MaRS and Social InnovationGeneration (SiG), including the landmark report of the Canadian TaskForce on Social Financenational hub focused on increasing the awareness andeffectiveness of social finance to catalyze new capital, talent, andinitiatives dedicated to tackling social and environmental problemsin Canadaa global connector for Canada into the emerging field of impactinvesting 5. Pillar Description Strategic Initiatives Pg 6 6. SOCIAL FINANCE OVERVIEW 7. SOCIAL FINANCE OVERVIEWSocial finance is an investmentProfitsapproach which aims to solvesocial or environmental challengeswhile generating financial return.This includes investments thatrange from producing a return ofprincipal capital to offeringmarket-rate or even market-beating financial returns. PlanetPeopleSynonyms: Impact investing, community investing,and mission-related investing for foundations. 8. SOCIAL FINANCE OVERVIEW1. Entrenched social and environmental problemsChallenge: Strengthen from persistent poverty to climate change. an emerging2. Government revenues constrained due tomarketplace by mobilizing capital and modest economic growth and budget pressuresestablishing (deficit and rising core costs like health care).institutions and3. Growing number of charities, non-profits, co- regulations that will ops and for-profit companies building business more efficiently models and turning to investors for financing toconnect people and launch and scale up innovative new programs,their innovative ideas become sustainable, and stimulate economic to the private capitalthey need to tackle growth. complex societal4. As a result, new investment opportunities problems, create jobs emerging offering investors positive financialand strengthen returns and social and environmental impacts.communities.5. Growing base of interest and pool of talent from youth and mainstream finance leaders. 9. 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) 10. Example:Planet Bean CoffeeFair trade organic coffee co-operativeInvestment Type: Debt via loansPurpose: Infrastructureimprovements (new roaster) andretail expansion (new location)Terms: Five (years) at 8%Deal Size: $75,000 (part of$250,000 expansion from debt andequity [co-op shares])Investors: Retail and institutionalImpact: Revenue growth ($500k-$1.7M), new worker co-opmembers, positive local and globalimpact. 11. Example:Centre for Social Innovation (CSI)Multi-purpose co-working spacefor nonprofitsInvestment type: Debt viacommunity bond*Purpose: acquisition and re-development of new facility.Terms: Variable over three seriesfrom 5-15 years (prime + 1.75%,prime + 2.25%, & fixed 4.0%)Deal Size: $2.0 million**Investors: Retail & institutionalImpact: Facility to catalyze socialchange* Similar models implemented by Skydragon WorkerCo-operative and TRECs Solar Share initiative.** Investment was secured by City of Toronto 12. Example:Access Community Capital FundA not-for-profit fund located inToronto providing $5,000microloans to buddingentrepreneurs that are otherwiseexcluded from mainstreamfinancial markets.Investment Type: Debt viapromissory notePurpose: Financing for loan fundTerms: 0-2% with variable termsDeal Size: VariableImpact: Poverty reduction,employment creation 13. Energy efficiency Prime + 2%Poverty reduction Social housing unitsImpact+Return8%Carbon reduction Jobs for marginalized 1% p.a. over three yearspopulations 14. HOUSING SECTOR DRIVERS 15. HOUSING SECTOR DRIVERSThere are a number of factors that drive potential interest in socialfinance (new capital seeking impact) for housing providers:Housing demand: There is significant demand for affordable housingin Ontario, with 152,000 Ontarians on the waiting list and hundreds ofthousands struggling with poverty. Thirteen (13) per cent of Canadiansare in core housing need.Stock maintenance and improvement: There is tremendous need forstock maintenance and improvement, given the significant levels ofdeferred maintenance, and opportunities for energy efficiencyretrofits.Demonstrated financing needs: There have been a number ofidentified financing needs amongst individual housing providers,including mortgage financing, project bridge financing, and matchedfinancing. 16. HOUSING SECTOR DRIVERS It is not just a money problem. 17. CASE STUDIES 18. 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 19. Case Study:New York City Acquisition Fund 20. CASE STUDIES Motivation: formed in 2006 to address the shortage of affordablehousing in New York City Goal: support the development of 30,000 low income housing unitsin New York City Target ventures: for-profit and non-profit affordable housingdevelopers 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 21. CASE STUDIES Partners/Investors: Collaboration with the City of New York, majorfoundations (ie. Ford Foundation, Rockefeller Foundation), andprivate investment groups (ie. JP Morgan Chase Bank) Layered: Bank consortium provides senior debt as lending capitalwhile other investors provides guarantees in the form of low-interest subordinated loans 22. 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 to95 per cent of the lesser of appraised value or purchase price whilethe 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 23. Example Recipient:Serviam Gardens (FordhamBedham Housing Corporation)243-unit green, affordablehousing development for low-and moderate-income seniorsPurpose: Acquisition andpredevelopment financing for 10unit complex rehabilitation and73 unit constructionDeal: $3.6 million loanTerm: 36 months 24. CASE STUDIESUS Affordable Housing Bonds Long history: concept of a public housing bond first emerged inNew York City in the 1930s Model: Basic structure often meets same characteristics as otherTax Exempt Municipal Bonds Issuers: cities, counties, special-purpose districts, and any othergovernmental entity below the state level Exemption: Interest income received by bondholders is exemptfrom federal and state income tax Other countries: China is now working to speed approval of thesetypes of bondsAside: Build America Bonds increasingly popular amongst housing authorities: issuers canchoose whether they offer a tax credit for the buyer or a direct payment from the federalgovernment equal to 35% of the interest costs. 25. 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 26. CASE STUDIES HUD Contribution: The agreement provides that the federalgovernment will loan the local authority a sufficient amount ofmoney to pay principle and interest to maturity. (ie. debt servicepayments) Security: The loans or bonds are obligations of the PHA. HUD doesnot guarantee or ensure these loans or bonds. Deal: In 2001, CHA became the first PHA to gain HUDs approval fora rated bond transaction. The deal was worth $291 million, with anAA Rating from S&P. Goal: Support its Plan for Transformation to replace over 18,000distressed units with 25,000 new or modernized units (Focus:Rehabilitate 9,400 units of seniors housing) 27. CASE STUDIES Challenge: Economic downturn of 2008 slowed construction plansfor CHA On the road to success: As of the end of FY2009, CHA hascompleted 17,812 public housing units or 71.25% of the Plan forTransformations overall unit delivery goal of 25,000 units.Timeline for achievement moved to 2015. Additional offerings: CHA also issued $25 million in Build AmericaBonds (10 year bond at 6.29%) 28. Case Study: TorontoCommunity HousingCorporation Bond:Regent Park Revitalization 29. CASE STUDIESTCHC Bond Issue Regent Park Development Initiative: six phases of developmentover 15 years for mixed housing, including 2,083 Rent Geared toIncome (RGI) units, 700 affordable rental units, 3,500 market rentalunits, 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. andprov. govts: $60 mil.] Motivation: flat, fixed revenues; aging buildings with significantcapital repair needs; poorly planned community in need ofrevitalization Nontraditional financing provided flexibility and scale 30. CASE STUDIESTABLE: ANATOMY OF THE TCHC DEALMajor partners: Fasken Martineau, Ogilvie Renault, Major Fis, Morrison Park Advisors 31. CASE STUDIESTCHC Bond Issue: Lessons Canadian capital markets are supportive. There was stronginterest and high level involvement in the deal from many majorcapital market players. Canadian banks were very supportive with major financialinstitutions involved in the deal. Asset security not important, Cityof Toronto funding agreement eliminated perceived risks. Process took time, money, and management attention. The dealtook three years from start to finish, with a significant amount ofenergy becoming familiar with the intricacies of Support of stakeholders was critical. Board of Directors keptinformed at every step of the way; despite arms lengthrelationship, City of Toronto ultimately had to sign off on thetransaction. 32. CASE STUDIESYWCA Community Housing Bond Purpose: Support partial financing oflarge scale affordable housing projectin Ontario (~300 units) Proposed Terms: 4% fixed over 10years Investment Type: Debt via promissorynote (unsecured) Deal Size: $1 million Investors: Accredited investors withfocus on foundations and high networth individuals Model: CSI Community Bond 33. 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. 34. 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%). 35. PUBLIC POLICY IMPLICATIONS 36. PUBLIC POLICY IMPLICATIONS Governments have more potential tools at their disposal tosupport 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) 37. PUBLIC POLICY IMPLICATIONS Governments across Canada are considering social finance. Fromthe Government of Ontario to the Government of Canada, socialfinance is becoming a part of mainstream government strategy. The housing sector should determine the potential opportunitiesand risks of the movement towards alternative financing. There isan identified need for the sector to engage in research and policydevelopment in this emerging area, for both government andindividual housing providers. 38. AREAS OF INTEREST 39. AREAS OF INTERESTThere are a number of initiatives MaRS is engaged in that could be ofinterest to affordable housing providers:Educational Resources: Educational tools, webinars and events forinterested investors, investees, and individuals interested in learningmore about social finance.Product Development: Initiating a practice for the development ofimpact investing instruments and best practice toolkits.Investment Platform: SVX, a platform to connect the supply anddemand for capital in the impact investing marketplace in Ontario. 40. DISCUSSION & QUESTIONS 41. Thank Youhttp://impactinvesting.marsdd.comaspence@marsdd.com

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