Toward a Non-Market Real Estate Strategy in Calgary

1. Toward a Non-Market Real Estate Strategy in Calgary Steve Pomeroy Focus Consulting Inc. Workshop Presentation March 9th, 2016 Steve Pomeroy Focus Consulting Inc.., Carleton University

2. Outline • Why a non-market real estate strategy? • State of the non-market housing “system” - challenges and opportunities • Break-out discussion #1 – review and validation • Lessons from abroad – insight and inspiration • Breakout discussion# 2 – Exploration and transfer of ideas • Conclusions and next steps in scoping the potential in Calgary Steve Pomeroy Focus Consulting Inc.

3. Why a Non-Market Strategy Calgary’s Plan to End Homelessness • Develop a non-market housing real estate strategy to address Calgary’s affordable housing gap • Enhance coordination in the non-market sector by developing a locally-driven, comprehensive real estate strategy to leverage existing assets • Explore innovative financing models and efficiencies of scale to maximize the impact of the non-market housing sector on ending homelessness • Purpose of this workshop is to scope out how to do this. Steve Pomeroy Focus Consulting Inc.

4. Why a Non-Market Strategy Other reasons: • Funding for social/affordable housing is minimal • Sector needs to create new sources of funding/capital • Potentially existing assets can be part of a more sustainable system • Expiring federal operating agreements creates both some challenges but also some opportunities Steve Pomeroy Focus Consulting Inc.

5. Traditional subsidy approach is not sustainable • Two fundamental problems: • A flawed funding mechanism, with perverse subsidy and rent system that: • Fragmented ownership – many small providers/small portfolios • Low rents good for affordability… BUT • Traditional model is a social assistance program, not an asset program • Does not promote/encourage sound asset management and asset optimization Steve Pomeroy Focus Consulting Inc.

6. Rent revenues very low Steve Pomeroy Focus Consulting Inc.

7. Assets or Liabilities • An RGI subsidy model is de facto income assistance • Low rents, plus high ratio RGI means minimal rental income • Without subsidy projects have negative income (NOI) and thus negative value = liabilities • There IS NO Value to lever! Steve Pomeroy Focus Consulting Inc.

8. Analysis required- re Viability • To develop a real estate strategy need to examine and understand current and projected financial status, by project • This requires subsidy (to help low income target population) but can be designed in a more sustainable way – and can stretch limited subsidy further. Steve Pomeroy Focus Consulting Inc.

9. EOA- Two types of concern • Without subsidy and with no mortgage, does project collect sufficient rent to be viable (cover operating costs)? • Does project have sufficient capital reserves or capacity to refinance to maintain building in sound condition? Steve Pomeroy Focus Consulting Inc.

10. Project Potential Outcomes (at Expiry) Steve Pomeroy Focus Consulting Inc.

11. Anticipated Projects “at Risk” • Public Housing (Provincial owned now operated by Calgary Housing Co.) • Family vs. seniors buildings • Urban Native • Some independent Non-Profit • Generally properties that are targeted with large proportion of RGI units(i.e. >65%) Steve Pomeroy Focus Consulting Inc.

12. Research Findings National Sample Steve Pomeroy Focus Consulting Inc.

13. 2nd issue = Fragmented ownership – many small providers • Many small providers* • Many small properties • Limited capacity and expertise *Dominant single provider Calgary Housing Co (7,500 of 11,750 units) Steve Pomeroy Focus Consulting Inc.

14. Recap of Two critical issues • RGI subsidy model (especially deep subsidy) counter productive to sound asset management and sustainability • Fragmented and small ownership & limited expertise and capacity to effectively lever properties (assets?) • Do participants agree with this assessment? Steve Pomeroy Focus Consulting Inc.

15. Breakout discussion #1 Do you agree/disagree? • Flawed subsidy model • Providers lack necessary expertise and capacity for sound asset renewal and expansion • Your portfolio will be more/less viable when federal agreements/subsidy end Steve Pomeroy Focus Consulting Inc.

16. The Challenge • Is it possible through a reformed approach to generate better outcomes? • i.e. to create value and potential leverage and to use assets to expand options and opportunities around affordable supply? What can we learn from experience and evidence from other jurisdictions? Steve Pomeroy Focus Consulting Inc.

17. The international experience • Netherlands – Bruttering out • UK social/affordable rent and asset leverage • San Diego Public Housing Leverage • South Africa – Creating sustainable sector • Western Australia – develop to reinvest And Some Canadian examples: • New Brunswick Housing Alternatives – co-op consolidation • BC Housing – transfer of provincial assets to community NPs Steve Pomeroy Focus Consulting Inc.

18. Netherlands – Bruttering out • Largest share of social housing in the EU: 32% of the total housing stock, and some 75% of the rental stock in the country • Bruttering (or ‘balancing-out’) agreement in 1993 made providers independent of public subsidy • Traded off subsidy for debt write-off and independence • Landlord to a broad range of incomes – not targeted exclusively to low income • National housing allowance program to address affordability • Finance against debt free assets - Revolving Fund Model to sustain new development with no subsidy Steve Pomeroy Focus Consulting Inc.

19. Netherlands – funding new social housing • Three-level security structure: • Central Fund of Social Housing (CFV): sector owned for self regulation and financial support where needed • Guarantee Fund for Social Housing (WSW), a sector based mutual fund to which all members contribute • Provides security and credit enhancement to faciltate competitive financing in private finance market • Overall regulatory role of state (re catastrophic risk) • Together with housing allowances, established self sustaining system, and sound asset management. Steve Pomeroy Focus Consulting Inc.

20. UK Asset leverage • Significant social stock with local authority (municipal) and housing associations accounting for almost 20% total stock and 55% rental stock • Ongoing process of transferring asset ownership and management of local authority “Council” housing to Housing Associations in order to access private finance to lever assets • Different (more favorable) rent regime in HA vs. LA rents • Most new construction via private non-profit HA’s (blended grant and finance model) Steve Pomeroy Focus Consulting Inc.

21. UK new development • Capital grant blended with private finance, backed by a housing allowance (Housing Benefit to separately address affordability) = effectively a rent revenue guarantee. • Social rents (50-60% market) & “affordable rents (up to 80% market) – generate project operating surplus. • Surpluses held in reserves and must be reinvested into new development – recent policy to transition social rents to affordable. • Separation of affordability (Housing Benefit) from rents and assets to create sound financial capacity for reinvestment Steve Pomeroy Focus Consulting Inc.

22. San Diego – Public Housing Conversion • Traditional US public housing has quite low subsidy and is constrained re funds to do capital replacement etc. • As in Canada rents also RGI based and very low • SDHC has a younger and small public housing portfolio and a lot of small scattered properties (50% < 5 units) so expensive portfolio to manage. • Total 1,366 homes in 137 properties • By converting to a different subsidy program (more generous), they could first create value and secondly leverage newfound equity • Found a “win-win” Steve Pomeroy Focus Consulting Inc.

23. San Diego – Public Housing Conversion • Model involved transfer of debt free properties assets from HUD to SDHC) • Shift to more generous and flexible subsidy program (sec 8) which is essentially a portable housing allowance. • Tenants protected, but have choice (50% stayed) • When vacated re-tenant but at higher rent (40th%tile) • Levered $95Million in long term financing • Used $95 Million to fund a range of deals – some acquisition with rehab, some new, some land for use in P3 tax credit affordable housing. • First $30 million created 430 new homes (incl 130 units SRO type for homeless); further 270 units/$54million = 700 units Steve Pomeroy Focus Consulting Inc.

24. South Africa – creating a sustainable Social Housing sector • Very young social housing sector (since 1994 post apartheid) 30,000 units (country pop = 53million) • Strategic sector used in transitioning urban restructuring zones. Serves low-moderate wage employed (must have income to be eligible) • Aspirations to grow sector to 200,000 homes by 2020 • Approach includes allocation of grant funding (national and state) to accredited Social Housing Institutions (SHIs) with expertise and capacity. Targeting 40 SHI’s @ 5,000 units each • Experience to date – SHI’s developing intermediate market rentals outside program • Program/funding reform underway Steve Pomeroy Focus Consulting Inc.

25. Western Australia • Like Canada – Australia a federation with joint housing jurisdiction at national (commonwealth) and state level. WA has a total population of 2.6 M (1.8M in Perth) • Overall tenure mix like Canada: • 69% H/O; 25% private rental; 5% social/public • WA Housing Authority owns/manages 36,000 public housing homes – also now largest land developer in WA • 2010 Affordable Housing Strategy Target 20,000 homes by 2020 • Strategy to grow community housing providers (CHP) Steve Pomeroy Focus Consulting Inc.

26. Western Australia • Achieved 20,000 unit target in only 5 years, so increased target to 30,000 • Achieved through an aggressive pro-active development role • And with mixed income product, including intermediate market Steve Pomeroy Focus Consulting Inc. Element Units created % of all Income target Social rental (30% RGI) 5,400 27% Under $43,000 Affordable rental (80% Mtk Ave) 2,700 14% $43,000-$69,000 Shared ownership (priced below median) 1,900 10% $69,000-$104,000 Low deposit (priced below median) 10,000 50% Over $104,000

27. Western Australia • Strategic approach to create mixed income housing • Acting as a developer, often in public-private partnership • Take-back profit share “in kind” via some of units for own portfolio, or generate real estate developer surplus for re-investment • Pro-active development approach in collaboration with private sector, to fill gaps in “intermediate market” • Also “growing” community housing sector, with transfer of completed properties to community housing providers • Other States in Australia also transferring Public Housing to CHPs to grow the community sector. Steve Pomeroy Focus Consulting Inc.

28. Lessons in International examples • What makes them different and inspiring? • All separate asset from rental support • Use their asset base and corporate balance sheet to lever financing for expansion • Partner with gov’t, but lever their accumulated assets (i.e. not wholly dependent on govt $) • Entrepreneurial, creative, opportunistic and pro-active • Concept of “profit for purpose” vs. Not for profit Steve Pomeroy Focus Consulting Inc.

29. New Brunswick Housing Alternatives Inc.. • Co-op housing resource/technical assistance group - originally helped create and develop 9 separate coops (312 units) in St John, NB • Developed in 1980’s; so subsidy agreements expiring • Some have weak governance and in financial difficulty • Now exploring potential to merge the existing nine co-ops into one or two larger co-ops • Will achieve some economies of scale • Will enable them to leverage financing on a consolidated balance sheet • Then fund renewal and potentially some intensification and new units Steve Pomeroy Focus Consulting Inc.

30. BC Housing Asset Transfer • 8,600 provincial owned managed units • Province believes community sector better stewards; • Government role is not in management and operations its in funding and facilitating • Funding transfer to help build more mid size societies (1,000-2,000 units each) • May result in 6-8 mid mixed, with increase professionalism and capacity to take advantage of post EOA leverage opportunities Steve Pomeroy Focus Consulting Inc.

31. Insights and options • Create capacity to build equity for reinvestment (long term sustainability and increased self reliance) • With low rents, valuations are low or negative (but can rectify) • What’s necessary to optimize potential financial leverage? • Reform subsidy model, separate personal rental assistance from project based • Reform social assistance minimum rents • Need scale to be professional and investible • Explore consolidation of single project providers • Explore group structures, such as land trusts to hold assets • Scale and strong consolidated balance sheet enhance ability to borrow Steve Pomeroy Focus Consulting Inc.

32. Insights and options (cont’d) • Examine existing assets and opportunities to intensity/redevelop • Benefit of rising house prices • Your property values have increased (underlying land values) • Selection disposition of valuable assets to reinvest elsewhere? • Value of NP ownership in in preserving long term affordability • Break-even costs rise slower than market rent (Ekos/Ottawa) • At low end market rent achieve leverage but can also offer government some competitive advantage (e.g. cost of stacked rent supplements) Steve Pomeroy Focus Consulting Inc.

33. Role of Government(s) • Fundamentally housing affordability is an income issue • Income redistribution remains important • Provide subsidies to household to enable affordability without negative impacts on asset management = Province • Argument for some capital funding for retrofit (e.g. under CEAP) = federal role (new social infrastructure funds?) • Potential to maintain some capital grant to further enhance leverage (e.g. UK) but not dependent • EOA maturing mortgages creates federal direct financing room • Use to for low cost financing for renewal and expansion Steve Pomeroy Focus Consulting Inc.

34. A Bold New Social Sector • Don’t settle for just preserving what you have • Set the bar higher – dream and think big • Ensure properties are assets and use them • Create new opportunities for low income and vulnerable people to live and succeed • Become more self reliant and sustainable • Challenge yourselves and government • Together you CAN DO BETTER! Steve Pomeroy Focus Consulting Inc.

35. Breakout discussion #2 • Do you believe rent-revenue based models can translate to Calgary? • Are there under-utilized properties with redevelopment potential? • There is potential to lever existing assets • If there is potential, what are current barriers and roadblocks that need to be addressed? Steve Pomeroy Focus Consulting Inc.

36. Summary- next steps Draft brief on potential opportunities Undertake case studies examining 3-4 portfolios viability without subsidy, redevelopment/intensification potential and existing expertise(or lack of) Identify key policy challenges Workplan to develop a real estate asset strategy Reconvene March 31st Steve Pomeroy Focus Consulting Inc.

37. Thank you! Additional background reports available at www.focus-consult.com