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COMMUNITY INVESTMENT FUND

COMMUNITY INVESTMENT FUND . CONSULTATION DRAFT JANUARY 2006. 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

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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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