Coop Housing Int'l | Financing Cooperative Housing

Financing Cooperative Housing

La Balma Housing Cooperative, Barcelona

Introduction

The financing of cooperative housing or any community housing has become more and more of a challenge over recent decades. The reasons for this relate both to housing market economics and how willing governments are to support coop housing development as a matter of public policy. The outcome is that it has become more and more difficult to develop coop housing that members can afford to live in.

As a result, coop developers have looked for alternative financing options that help make their coops more affordable. They have achieved much success, helped by lenders who support their mission, including finance cooperatives and by community-led organizations that are able to raise financing, and supportive governments in many cases.

Environmental Scan

Suitable land for housing development is becoming scarcer and scarcer in urban settings. This is resulting in upward pressure on land prices. As well land price is becoming more important than the value of land for non-profit community purposes. The outcome for coop and other community housing development is not a favourable one in a competitive market.

Competing actors for land acquisition

Market developers can outbid community developers because

they can sell or rent housing at a full market return
they have access to deep pools of investment capital.

The market is therefore out of equilibrium: financially unequal players are competing for the same assets.

Construction costs

The cost of materials and labour are growing faster than inflation
There are stricter building codes and sustainability standards (so more costly)

This all adds up to an affordability crisis in the housing market, both for new buyers and renters. This crisis is growing. New supply alone will not address these problems. Other policy solutions and lending practices are needed.

The Coop Response

Coop housing organizations and policymakers are responding to these challenges in different ways, as financing affordable housing development using only conventional financing is becoming difficult or impossible.

As a result, the challenges of unaffordable financing are giving rise to creative financing solutions.

What kind of financing are housing cooperatives using?

Financing for affordable coop development involves the raising of capital funds which must be repaid over time on terms that support affordability goals. Coops in different parts of the world are using a spectrum of financing solutions to achieve this purpose.

The Financing Spectrum

For housing coops financing can come through:

Debt financing: conventional bank loan
Public (government) lending.
Social purpose lending:
Patient capital: Patient capital is money a small or medium-sized private business raises. Its name refers to its lenient repayment terms.
Multiple lenders
Development grants/subsidies
Member equity investments (shares)
Voluntary member contributions
Collective financing
Corporate bond market
Community bonds/shares (Community shares are an effective and democratic way for communities to secure the assets they need. They are designed so that members of a community can put their money to work to purchase any income-generating asset that is needed by the community.)
Blended financing
Shared equity models
Crowdfunding
Microfinancing
Revolving loan fund
Indirect financing support

Who are the actors?

Coop members
Coops and secondary coops
Lenders, conventional, institutional, social purpose
Community, peer-to-peer investors
Donors
Levels of government
Any or all of these in combination

Palo Alto Housing Cooperative, Mexico City

Sources of Financing

The best financing solutions will often be a combination of different sources. This also creates complex financing models that require expert understanding and implementation.

Debt financing – standard mortgage lending from banks, credit unions, and other financial institutions

predictable and low underwriting risk, fixed terms, and market interest rates
interest rates may be lowered if there is a mortgage guarantee (typically a government guarantee)
on its own, often not an affordable option for community housing development

Public lending – direct lending to housing coops and their developers by a government financial institution, department, or agency

will typically involve a non-market rate of return
the purpose is to achieve housing / social policy aims

Social purpose lending – unsecured finance with fewer restrictions than bank finance that connects potential investors with social enterprises to address social problems by funding preventative interventions

must be able to pay some return to investors
investors may be willing to accept a below-market return to support coop housing development
instruments may include social purpose bonds (e.g., sustainability bonds)
investors may include pension funds and other actors seeking opportunities for impact investing (investing for positive social results)
overlaps with debt financing (e.g., pension fund lending)

Peer-to-peer lending (coop to coop) – a form of social purpose lending

through loan stock or community share coops
involves a direct investment by one coop in another
can involve share issuance, operational oversight role

Patient capital – longer time horizon for a return on capital provided by social purpose lenders

the intention is to maximize social impact over a return to investors
permits deferral of loan repayment until refinancing becomes more affordable

Multiple lenders – two or more sources of financing that complement each other;

may involve a combination of conventional, social purpose and government lending

Development grants and subsidies – can come from government or philanthropic sources, or a combination of the two

may be in the form of direct assistance or grant-of-use land contributions from various levels of government

Member equity/shares – members purchase shares in the coop

can significantly reduce coop borrowing requirements depending on the amount of the purchase
members can save for their share purchases through the housing coop or coop lenders

Voluntary member contributions – members provide donations / unsecured loans to the coop

assists with liquidity

Collective financing – groups approach lenders together;

offers greater lender business opportunities
lending risk can be spread among multiple projects
land trusts with multiple projects are ideal candidates for collective financing

Corporate bond market – A corporate bond is debt issued by a larger organization for raising capital. An investor who buys a corporate bond is effectively lending money to the organization in return for a series of interest payments;

only available to large-scale providers (e.g., ABZ Sustainability Bond, Zürich); or to intermediary housing finance corporations (e.g., The Housing Finance Corporation, UK; Housing Investment Corporation, Canada)
long-term lending to providers financed by bond issues from the intermediary
uses conventional bond market actors to rate and issue the bonds

Community bonds – social-finance instruments that can be used by charities, non-profits, and cooperatives to finance socially and environmentally impactful projects;

beginning to find use in community housing development
issued on behalf of borrowers by a social-purpose intermediary to investors wishing to invest in an interest-bearing investment with a social-impact purpose
also known as participatory bonds but not to be confused with standard business participation bonds used for investing in commercial and industrial properties

Blended financing – the use of more than one type of lender to achieve greater debt service capacity

g., a blend of social purpose / patient capital lending with government or conventional lending
priority of lender security can be a challenge (see Lending Criteria page for a description of lender priority)

Shared equity models – coop or member has an equity partner, typically a level of government or the coop association itself

can fit with rent-to-own models
assists the member by reducing debt service obligations, the member can gradually acquire greater equity over time

Crowdfunding – the practice of funding a project by raising many small amounts of money from many people, via the internet.

Microfinancing – small short-term loans, typically to low-income families in the developing world

can be used for small-business development purposes or in the case of housing to support the development of a home, typically in stages.
Also known as microcredit.

Revolving loan fund – a pool of funds available for micro-financing purposes as a gap financing measure primarily used for development and expansion. It is a self-replenishing pool of money, utilizing interest and principal payments on old loans to issue new ones.

borrowers are given small, short-term loans to pay for the construction of a home
when the loan is repaid it goes back into the loan fund enabling further borrowing
borrowers can take out successive loans to enable expansion of the home, typically built one room at a time

Indirect financing support – mechanisms that make debt service more affordable

government financial support that assists with debt repayment
grant-of-use of government lands held in community land trusts, land-bank foundations with nominal leasing rates
mixed commercial/residential development (non-residential leasing revenue assists with debt service capacity)
mixed tenure rental/ownership, sale of ownership units reduce financing costs for rental component

Lending Criteria

Three criteria will typically apply to a loan application, particularly to a market lender application. All three criteria serve to protect lenders from default, or in the event of default, keep the lender whole. Social purpose (impact) lenders can be willing to waive one or more of the criteria, particularly when the amounts at stake for a lender are relatively modest.

Loan to value ratio (LTV) – the amount of the loan relative to the value of the property

a lender will want the loan to be less than the value by a certain percentage that may vary depending on a lender’s risk tolerance

Debt coverage ratio (DCR) – the ratio of the coop’s debt service (mortgage payment) amounts to a coop’s net operating income (NOI)

NOI is the net revenue of the coop after operating costs but before debt service and reserve contributions
a lender will want NOI to exceed debt service obligations by a certain percentage that may vary depending on a lender’s risk tolerance

Mortgage insurance and guarantees – can come from private or government mortgage insurers, government guarantees

can impact both LTV and DCR by allowing coop to borrow more as these ratios are subject to less risk

Lender priority – refers to the order in which lenders get repaid.

Where there are two or more loans secured on a property, priority refers to the order in which the lenders are entitled to be repaid if the property must be sold.
The first priority lender will be repaid before the next priority lender(s) receive anything
Priority is a concern where there are insufficient funds to repay all the lenders in full.
The lower a lender’s priority is the higher the loan interest rate is likely to be, to compensate for the lender’s additional repayment risk