Non-profit housing org pilots $20 million loan guarantee pool

A Canadian non-profit housing organization is piloting a loan guarantee pool for its own affordable housing program, having secured an initial $20 million investment from four social-purpose investors. 

The loan guarantee pool mechanism would allow Nesting Ground to leverage the balance sheets of these four larger social-purpose organizations when applying for loans to finance affordable housing development, a process that typically requires significant collateral from guarantors. 

This added financial security through the guarantee pool props up their loan application, and by extension, allows them to continue developing affordable housing. 

On Sept. 9, Nesting Ground and for-profit development partner Windmill Development Group announced that Realize Capital, The Atmospheric Fund, Ottawa Climate Action Fund and Northpine Foundation had committed to the initial loan guarantee pool. 

A second round is now open, with Nesting Ground targeting an expansion to $50 million in loan guarantees. 

The non-profit’s pipeline currently includes 1,800 units across Toronto, Ottawa and Guelph. According to the organization, “every $1 invested in the Affordable Housing Guarantee Pool (AHGP) unlocks up to $10 in potential housing loans, grants and subsidies.” 

Crucial to the loan guarantee pool mechanism is that investors are not immediately giving up their capital, and are only acting as guarantors should the non-profit borrower default on their payments. 

Not only does the investment generate a return for the guarantor, but, according to Nesting Ground’s President Graeme Hussey, there have also been close to no examples of a Canadian non-profit defaulting on a loan.  

Nesting Ground, which partners with Canadian non-profits, co-operatives, faith-based groups, public sector service providers and others, operates as an independent organization, but was initiated through Windmill, added the latter’s CEO, Jeremy Reeds. 

“The deeper we got into trying to understand the problems in the non-profit affordable housing space, it became pretty apparent that there weren’t many non-profits [operating housing] at scale,” Reeds said. 

“The biggest constraints we found – unless it was a municipally-supported non-profit like Toronto Community Housing or Ottawa Community Housing – [wwerethat] most groups just didn’t have big enough balance sheets to compete at scale.

“So, the only way they could continue to grow, unfortunately, was very small, one-off projects, which, when it compounds with how long real-estate development takes, is hard to have a meaningful impact. As a result, a lot of the non-profit space has been fractured into a lot of small groups.”

With the federal government investing only so much in non-market housing, the non-profit sector often ends up competing with itself for that limited grant funding, Hussey added.  

On the other hand, the loan guarantee pool mechanism allows the government to view non-market housing development as an “investible” product, rather than an expense or a donation, he said. 

While the initial iteration of the AHGP is only applicable to properties in Nesting Ground’s portfolio, both Hussey and Reeds envision eventually scaling the program up and out to other non-market housing providers. Many of the impact investors that are part of or interested in the AHGP also raised the question of how the loan guarantee might extend out to other non-market housing organizations, Hussey said. 

“Most likely, in any situation, it would have to be a project organization that is somehow connected to Nesting Ground,” Hussey said. “Otherwise we’re going to have to go through a whole other layer of doing due diligence on projects that don’t involve us.”

Reeds told Future of Good in July that the organizations are trying to push toward a pool valued between $100 and $150 million, to expand to foundations and other entities “that have large balance sheets.” 

According to Hussey, impact investors are interested in the potential to support non-market housing developments, but find it challenging to “find tangible projects and ways to invest.” On the other side, “the non-market housing sector traditionally hasn’t used investors […]. They typically get government support.” 

Elsewhere, the proposed Impact Guarantee program would support small- and medium-sized social finance intermediaries through a risk-sharing mechanism similar to the AHGP, with the initiative’s team recommending that the federal government itself become a guarantor for the social finance sector.