Tax-free impact investment vehicle supports housing affordability for BC tradespeople, teachers, firefighters
VICTORIA, B.C. (Nov. 6, 2019) – Essential workers in B.C. struggling to afford a home in the community where they work may soon have access to a new first-time homebuyer mortgage financing solution. A mortgage investment corporation (MIC) launched by the non-profit BC Construction Association (BCCA) aims to make securing a mortgage easier for B.C.’s skilled tradespeople, medical care providers, educators, and emergency responders, while at the same time provide the growing impact investment market with a tax-free vehicle that supports housing affordability.
Despite their in-demand skills, steady employment and higher than average wages, thousands of essential workers in B.C. cannot afford to own a family home near their workplace. Often, they must either commute long distances to work, live in unreliable rental housing, or move elsewhere. This can leave employers with reduced access to skilled labour, create instability in families, and deprive communities of vital professional services.
Lisa Stevens (Chief Strategy Officer, BCCA) and Peter Elkins (Co-founder of Capital Investment Network) had previously looked to a MIC as a possible solution for the southern Gulf Islands, whose communities have trouble finding service providers who can afford to live there. When Stevens joined the BC Construction Association, a non-profit serving a booming multi-billion-dollar sector where the availability of skilled labour is the No. 1 challenge, she saw the need for affordable housing was equally pressing, but on a much larger scale.
Stevens and Elkins set course to prove the potential of the Impact MIC to address first-time homebuyer mortgage qualification challenges faced by tradespeople across B.C. Unlike banks and credit unions, MICs are not subject to the federal mortgage stress tests which thousands of B.C. workers struggle to meet. Additionally, shares in MICs are eligible for government deferred and tax-sheltered savings plans such as RRSPs, RESPs, RRIFs, TFSAs and RDSPs. While MICs typically generate revenue by attracting higher-risk customers willing to purchase higher-rate mortgages, this MIC sought to be an impact-investment that would thrive by offering tradespeople and other gainfully employed essential workers the competitive-rate mortgages they couldn’t get from a bank or credit union.
“Our goal is to create a social impact investment vehicle that offers value for investors while also helping tradespeople and other professionals to establish roots in B.C. communities,” said Stevens. “Guiding our approach is the belief that these highly skilled and hard-working earners should be able to afford housing, and organizations that employ and represent them are willing to invest in a financial vehicle that helps them succeed.”
Elkins knew that creating a MIC that would attract impact investors and others beyond the construction sector would require a rethinking of the typical MIC business model, along with extensive research into the structure, financing, regulation, management and marketing of MICs in Canada and similar investment vehicles abroad. To help address this complex challenge the BCCA team partnered with the Gustavson School of Business at UVic to create a capstone project for the school’s 2019 MBA program. As an applied project that involved exploring multiple disciplines and courses – such as strategy, management, law, collaboration, finance and HR – to address a real-world problem, the project fit in well with Gustavson’s mission to champion research that makes a difference and transforms lives.
Over the course of five months, faculty professors and 23 students devoted thousands of hours to conducting a gap analysis, financial research and surveys with MICs, potential investors, HNWIs, financial advisors, Foundations, tradespeople and constructions companies. That work became the foundation of the business case for the Impact MIC, Canada’s first impact-investment mortgage fund.
Whereas MICs typically offer higher mortgage interest rates, shorter terms for fixed rates and lower loan to (home) value ratios compared to banks, as a fund dedicated to helping essential workers, the Impact MIC will offer more favourable terms by roughly matching bank mortgage interest rates and term lengths for fixed rates, while also offering longer amortization periods (25-40 years) and a higher loan-to-value ratio (up to 90%).
Elkins expects competitive shareholder dividends, along with the Impact MIC’s tax-deferred/sheltered benefits and the important community benefit, will attract $500 million in capital over the next 10 years from the growing number of banks, pension funds, wealth managers, family offices, contractors, developers and individual investors for whom impact investing is a growing priority.
“The BCCA Board has approved funding to move the Impact MIC forward” confirms Chris Atchison, President, BCCA. “We’re proud to pioneer an affordable housing solution with the potential to improve the quality of life for thousands of skilled tradespeople and other essential workers across the province, benefitting every B.C. community.”
“The Impact MIC is a business solution with potential application to other industry sectors,” added Elkins. “We look forward to exploring partnership with organizations that support highly-skilled essential workers, and to connecting with individuals and organizations interested in a competitive and tax-free or deferred return with the potential to create significant positive social impacts.”
BCCA is planning to make mortgages from the Impact MIC available as of April 2020. For more information, potential partners and investors are encouraged to contact Peter Elkins, Acting CEO of the Impact MIC, at email@example.com or visit https://www.bccassn.com/resources/mortgage-investment-corp/
ABOUT BRITISH COLUMBIA CONSTRUCTION ASSOCIATION
The British Columbia Construction Association (BCCA) works with four Regional Construction Associations (NRCA, SICA, VICA and VRCA) to serve more than 10,000 employers in the provinces industrial, commercial, institutional (ICI) construction industry. For more information about BCCA, please visit www.bccassn.com
MORTGAGE INVESTMENT CORPORATIONS
- A MIC is a company that pools the funds of investors. They are required to hold a minimum of half of their assets in residential mortgages, cash and insured deposits. The remaining assets can be mortgages on commercial or industrial properties, developments or other assets.
- MICs were legislated into existence in Canada in 1973 to increase the “flow of mortgage funds” and provide a channel for small investors to participate more directly in real estate finance markets through private lending.
- MICs typically provide shorter-term mortgages at higher rates to borrowers who have difficulty qualifying for loans from more stringently regulated financial institutions.
- Unlike banks and credit unions, MICs are not subject to federal mortgage lending rules and oversight, and MICs pay no corporate taxes when they distribute all their income as dividends to shareholders.
- Shares in MICs are eligible for government deferred and tax-sheltered plans such as registered retirement savings plans (RRSPs), registered education savings plans (RESPs), registered retirement income funds (RRIFs), tax free savings accounts (TFSAs), life investment funds, locked-in retirement accounts, individual pension plans, and registered disability savings plans (RDSPs).
- In Canada, CMHC-insured homes have a maximum amortization of 25 years, which, with a 20% or more down payment, can be extended to 30-35 years, if the lender agrees. MIC mortgages can have longer amortization periods (40 years or more). This approach is similar to Europe, where 50, 60 and 100-year amortization periods are available.
- MICs are overseen as investment vehicles via provincial securities legislation. (e.g. BC Securities Commission in B.C.). They may accept foreign investment funds, but all assets held must be Canadian.
- There are over 250-300 registered MICs within the Canadian market charging higher interest rates, between 4%-15%, and generating a return on investment between 4%-10%.
- MICs play a peripheral role in the residential mortgage market, accounting for under one per cent of total residential mortgages outstanding.
- (For more information, see CMHC Mortgage Investment Corporations – Update, December 2018)
- The Impact MIC will focus on providing mortgages at rates competitive to those offered by banks and credit unions (between 2.75% – 4%).
- The Impact MIC will focus 50% of its portfolio towards residential mortgages for essential workers associated with its partner associations. The remaining 50% will be focused on construction sector financing solutions such as loans for bridge financing and preconstruction, or to better manage prompt payment.
- By increasing amortization periods, the Impact MIC can make monthly mortgage payments either less than or equal to a customer’s rent payments, thereby reducing the probability of defaults.
- The Impact MIC is targeting a more than 6% return for investors on their TFSA, RESP, RRSP, and RDSP or cash investment.
- Financing for the Impact MIC will be through an equal combination of debt and equity. Funds will be obtained from banks, credit unions or government at roughly 2% per annum. Equity will be obtained from private investors such as construction companies, high-net-worth individuals, corporations, pension funds and wealth managers.
- The BCCA will be one of the principal shareholders of the Impact MIC.
- The Impact MIC will provide free services like financial coaching to help borrowers be careful about how they manage their finances.
- Loans to the MIC will be guaranteed by the owners of the MIC who hold voting shares.
- Impact investing in Canada has grown from $8.15 billion in 2015 to $14.75 billion in 2017, an 81 per cent increase over two years. (Source: 2018 Canadian Impact Investment Trends Report