To pay for affordable housing, some non-profits bypass banks and get loans from their neighbours
'Community bond' model gains traction as housing providers try to ramp up supply
The Ontario community of Haliburton County bustles in the summer months with cottagers who flock to the area's lakes to kick back by the water.
But for workers who keep the community afloat by waiting tables, stocking shelves and repairing roads, finding an affordable place to live, much less a second home, can be difficult.
"[People] think this is Eden, and it is, but it's also poor because of the basis of the economy," said Fay Martin, vice-president and founder of Places for People, a not-for-profit affordable housing provider in the area.
"We do have people sleeping in tents and in hunt camps and in RVs and in places where they ought not to be sleeping."
To help finance affordable housing projects, the organization has started to experiment with a new method of raising capital. Rather than borrow money from the bank, the idea is to borrow money from its neighbours by selling "community bonds."
Community bonds, like conventional bonds, are interest-bearing loans with fixed terms and rates of return, but they're issued by non-profits that direct the money toward particular projects.
Last year, Places for People sold $850,000 worth of bonds in three months, and it used the money to consolidate its debt. The organization, which bought an eight-plex earlier this year to add to the five properties it already owned and managed, isn't currently in the midst of a community bonds campaign.
It's among a growing number of non-profits testing the model, which advocates say has several advantages. For one thing, selling community bonds can allow non-profits to borrow money with better terms than they would be able to get from a bank.
Another advantage is that with the high cost of living — and with fewer Canadians donating to charity — asking supporters to buy a bond can be easier than asking them to make a cash donation.
"As someone who's under the age of 40 ... I don't have a lot of friends and peers that are making large charitable donations," said Ryan Collins-Swartz, a co-executive director with Toronto-based Tapestry Community Capital, which helps non-profits set up community bond campaigns.
"But with a little bit of money that we have saved up, we're looking to be allies to causes and social movements and things that we believe in."
11 more housing providers using model
The model isn't yet widespread in Canada, but it's gaining momentum. When Tapestry launched six years ago, Collins-Swartz said, he was aware of only about 10 instances where community bonds had been used.
But in the past year, "we've launched 10 different community bond campaigns and have a lot more coming up," he said.
The terms are often set somewhere between two and seven years, with a rate of return between 2.5 and five per cent interest, he said.
While community bonds have been used to finance everything from music venues to renewable energy projects, there's growing interest in using the model to pay for affordable housing.
Tapestry has twice been recognized by the Canada Mortgage and Housing Corporation's Housing Supply Challenge, which rewards new ideas to boost housing construction.
The organization announced this week it will work with 11 more housing providers from Victoria to Winnipeg to Barrie, Ont., that are planning to sell bonds to either preserve or create new housing.
Martin, with Places for People, said selling community bonds isn't just a way to raise capital; it's also a way to drum up community support. Buying a bond in support of a project gives people a feeling of ownership, she said.
"To me, there's no use developing housing if the community doesn't welcome that housing," Martin said.
"Even if banks and the government would want to give us all the money that we need, I would still make an argument that at least a piece of that funding stack needs to be community bonds because it creates community."
Kim Switzer, who lives in a Places for People rental duplex in Haliburton County with her three children, said her unit has been a "saving grace," and she's glad the organization is exploring all avenues to build more affordable housing.
"Hats off to them for finding a different way to be able to create some money flow [and] open up more doors for affordable housing because it is so needed up here," said Switzer, who works at a local restaurant.
Due diligence needed
Investors who want to buy community bonds need to do their homework, said portfolio manager Patti Dolan.
Unlike conventional bonds, community bonds aren't independently evaluated by credit rating agencies, so buyers need to make sure an organization's finances are solid before buying in, she said.
"You want to make sure that there's some source of cash flow that will be able to pay back in that period of time that you're lending the money," said Dolan, a senior investment adviser and portfolio manager with Wellington-Altus Financial, a wealth management firm in Calgary.
Organizations that want to issue community bonds also need to do their homework and seek legal advice before proceeding to ensure they understand securities law requirements, said Ilana Kelemen, a spokesperson for the Canadian Securities Administrators.
Collins-Swartz of Tapestry said organizations typically use the bonds to supplement money they get through grants or government funding that does not have to be paid back.
Different non-profits have different ways of generating revenue to repay the bonds, he said. For instance, a music venue might sell tickets; an affordable housing provider collects rent; a renewable energy co-op generates power and sells it back to the grid.
Every project Tapestry has supported in raising community bonds so far has successfully repaid investors and never missed an interest payment, Collins-Swartz said.
Dolan said community bonds can play a role in an investor's broader portfolio, as long as they enter the purchase with their eyes open.
"It's funding a project in your community that you're passionate about, you know, you really can't quantify that kind of value," she said.
Given the increasingly high rents and tight rental markets in cities across the country, Dolan said she expects to see community bonds used more frequently as organizations try to ramp up construction of affordable housing.
And while the model is no "silver bullet" for the housing crisis, Collins-Swartz said it's one of many solutions that can help make a difference.
"I do believe in acting with our investments, and moving our money around can have a big influence on the future that we want — and also the world that we have today."
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