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COMMUNITY INVESTMENT FUND

This draft outlines the establishment of a Community Investment Fund (CIF) in Canada aimed at institutional investors. Recognizing the capital gap in the community investment sector, the CIF seeks to generate market returns while supporting community development. Funded by Western Diversification and managed by CCEDNet, the CIF will facilitate investments in affordable housing and community services, aimed at creating collateral social returns, such as job creation. Seeking feedback on a $20 million investment opportunity, the proposal emphasizes securing invested capital with a government guarantee.

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COMMUNITY INVESTMENT FUND

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  1. COMMUNITY INVESTMENT FUND CONSULTATION DRAFT JANUARY 2006

  2. CONTEXT AND BACKGROUND • Capital gap in the community investment sector • Experience in the U.S. demonstrates community investments can generate market returns for institutional investors • Initiative to establish community investment fund in Canada for institutional investors • Funded by Western Diversification and managed by the Canadian Community Economic Development Network (CCEDNet)

  3. COMMUNITY INVESTMENT DEFINED • Different definitions of community investment (CI) or community development finance • For the purpose of the Community Investment Fund, CI is defined as: market grade investments that generate collateral social returns such as jobs, affordable housing, community economic restructuring and community services

  4. RATIONALE • Community investing is an emerging asset class: as with private equity 15 years ago, CI creates new investment opportunities • Opportunity to take advantage of unique assets that exist in underserved markets, e.g. under-utilized skills, local community knowledge

  5. US ETI EXPERIENCE American pension funds involved in community development finance: • CalPERS • New York State Pension Funds • New York City Pension Funds • United Methodist Church General Board of Pensions and Health Benefits • The Church Pension Group (Episcopal Church of America) • AFL-CIO Housing Investment Trust

  6. ANALYSIS OF US ETI EXPERIENCE (4 case studies) • ETI policies from 5 – 20 years old • Purpose: To finance under-invested markets, e.g. affordable housing, community facilities, small business, international micro-finance • Primarily low-income housing • Allocation cap: .8% - 10% of fund assets; 2% common • Comparable returns to asset class • Work through intermediaries

  7. CANADIAN ETI EXPERIENCE Concert Properties • Over $800 M in assets • Established in 1989 • 100% of fund in ETI projects: • Commercial, industrial and residential real estate, including affordable rental housing • Mandate to employ unionized trades people on job sites

  8. CANADIAN ETI PRODUCT CMHC: Canada Mortgage Bonds (CMB) Program (June 2005) • Mortgage loan financing for social housing • Principal guaranteed by government • 3.55 - 5.527% coupon since inception • 46% of investors are pension and fund managers (mix of Canadian and international investors) • $54.45 billion in pool

  9. COMMUNITY INVESTMENT FUND PROPOSAL • Seeking feedback on $20 M Community Investment Opportunity

  10. CIF OBJECTIVES • Maintain security of invested capital • Provide return equivalent to GOC 5-year bond rate • Low investment risk through government guarantee of principal (TBD) • Support community economic growth and asset development

  11. FINANCIAL STRUCTURE • Returns/Asset Class: Equivalent to GOC 5-year bond rate • Risk: Principal guaranteed by government (TBD) • Liquidity: Available on a partial basis(prior to normal five-year term) through redemption of CI Fund's cashholdings (20% of Fund to be held in Treasury Bills)  • Governance: Oversight provided by intermediary (Vancity) and proposed Investment Committee (2/7 reps are investor appointments); both investor reps must be in agreement

  12. Investor A Investor B Investor C Investor D Intermediary: Vancity Credit Union Investment Committee Credit Unions (3) Loan Funds (3) CAPITAL FLOW

  13. LENDING CRITERIA • Project must be in Western Canada • Conventionally sound and viable investment • Strength of the borrower • Strength of the project • Loan projects must be community/FN; CED impact • Terms of no more than 5 years

  14. INVESTMENT STRATEGY Company characteristics • Small businesses that diversify and strengthen local economies • Community real estate including affordable housing, community facilities and construction financing, non-profit asset development • Businesses with less than $10 million in annual revenues and less than 100 employees

  15. INVESTMENT STRATEGY CONTINUED Deal Characteristics • Debt financing • $2 M maximum • Borrowers include individuals, partnerships, societies, co-operatives or corporations • Excluded: tobacco, pornography, franchises, multi-level marketing schemes, gambling casinos or bingo halls (to be aligned with government restrictions) • Reasonable security and equity components

  16. INTERMEDIARY Vancity Credit Union: • $10.5 billion in assets; largest community-based credit union in the world • Citizens Bank, wholly owned subsidiary, offers commercial loans; national license with offices in Vancouver, Calgary and Toronto • Proven track record in social economy • $18 M in regional development financing through Vancity Capital Corporation: last 5 years invested $35 M in over 100 investments; 10 syndicated loan transactions over past 2 years • Leading ethical fund managers; major wealth management division including full service brokerage • $300 M Victoria real estate project • Range of community development finance vehicles

  17. PARTNERSHIP OPERATING TERMS • Investment Committee: Reviews each investment on a deal by deal basis. Members: 7 members including 2 from partner funds, 1 from applicant partner fund, 2 from Vancity, 2 from investor group; Vancity chairs committee • Investment Approval: 4 out of 7 in agreement; both investor representatives in agreement

  18. PARTNERSHIP OPERATING TERMS CONTINUED • Transaction Size: Minimum transaction size of $50,000 with maximum of $2,000,000 • Returns: Partner will provide CIF pool a return equivalent to GOC 5-year bond rate. Partner is responsible for achieving blended rate of return (I.e. partner may price loans at whatever rates the market will bear with an obligation to generate GOC 5-year bond rate to the CIF pool.)

  19. LOAN DIVERSIFICATION Asset Target • Commercial and non-profit loans: 25 – 50% • Community real estate (including affordable housing): 50 – 75%

  20. GEOGRAPHIC DIVERSIFICATION Asset distribution will be population-driven. If no take-up, assets will be re-allocated to active provinces, with flexibility for financings that cross provincial boundaries.

  21. DEAL FLOW Targeted deal flow: $4 – 5 M per year in business financings

  22. RISK CONTROLS • Government guarantee of principal • Loans will be secured by an appropriate combination of mortgages, chattel mortgages, general security agreements, personal property security agreements, promissory notes and personal guarantees • Double diligence for larger transactions • Diversified investment pool

  23. PRINCIPAL TERMS Fund size $20 million Commitment Minimum $1 million Term 5 year minimum (for Investors) Management fee 1.25%

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