Dan Van Leeuwen, president and chief executive officer of the Calgary-based development company New Urban, has been well aware of the housing affordability issues faced by residents of his city. In 2011, census data indicated that more than 35,000 households (8.1 per cent) in Calgary were facing financial hardship by spending 30 per cent or more of before-tax household income on shelter. Mr. Van Leeuwen understood that it would be impossible for his company alone to help all those with housing needs, but he had an idea that could provide assistance through a new homeownership strategy.
The strategy involved looking at the continuum of housing needs – ranging from shelter to financial aid to social support – and targeting a specific segment of the population. This segment is made up of people who have a reliable income source, but neither the wealth nor equity required for a down payment to achieve homeownership. Mr. Van Leeuwen felt that equity-based financial supports in the form of down payments could be part of a plan that encourages homeownership at market rates while freeing up rental units and subsidies for those in greater need. But could he get buy-in from key partners to make his plan work?
The background
New Urban is a real estate development company in Calgary employing a combination of eight full-time, part-time and contract staff. Mr. Van Leeuwen founded the company in 2008 and has spearheaded the commercial, office, residential and hotel projects it has undertaken to revitalize inner-city neighbourhoods. New Urban's projects currently cover a total of 3.15 acres throughout Calgary with a value of $430-million.
Also in 2008, Mr. Van Leeuwen joined forces with Judy Hoad to create the INHOUSE Society, the not-for-profit arm of New Urban. INHOUSE is operated by a three-person complement under the direction of a six-member board. Ms. Hoad plays a vital role in her consultative capacity as president of the board to achieve the organization's mandate of forging strategic partnerships that foster innovative models of housing affordability.
The organization was created to promote the concept of housing affordability in a manner that better leverages the strengths of both the public and private sectors. It advocated for a departure from the traditional government response to housing pressures, under which policies are developed to mandate allocation of municipality-managed subsidized units as a percentage of proposed developments. As a variation to this approach, Mr. Van Leeuwen proposed that the developer's contribution should take a different form, in partnership with the municipality.
The solution
With the City of Calgary expressing an interest in exploring this new approach, the Shared Equity Lender Financing (SELF) model was conceived by INHOUSE. SELF is designed to enable low-to-moderate-income earners to build equity through homeownership by replacing the need for a purchaser's down payment with a deferral of the land value and the developer's equity in the project.
In this case, the deferred value would come from the City of Calgary providing municipally owned land while New Urban would take on land development and construction costs. This deferred value would constitute 35 per cent of the purchase cost of units, making the mortgage value to the consumer 65 per cent of the total value of the unit. A smaller loan-to-value mortgage is made possible in this manner.
For example, the purchase of a $250,000 housing unit with a conventional mortgage requires a down payment of 20 per cent or $50,000, an amount that many entry-level purchasers do not have available. With the SELF model, the lender accepts the deferred value (land and construction) as 35 per cent of the total purchase price, leaving 65 per cent as a loan-to-value mortgage, which is provided to the purchaser. In time, when an owner sells a unit, the same 35/65 split applies. Of the proceeds from sale, 35 per cent of the sale price is given to INHOUSE while the remaining 65 per cent goes to the unit owner to pay off the mortgage loan, leaving the rest as equity for the owner.
However, the SELF model is contingent upon an investment that can appreciate over time. For this reason, the eclectic Calgary community of Bridgeland was chosen for New Urban's first foray into housing affordability. The identified municipally owned site, now called McPherson Place, is situated adjacent to the Bridgeland LRT station, offering amenities such as convenient access to downtown, the river pathway system, and shops and restaurants within walking distance. Bridgeland is an attractive community that is expected to generate return on investment through appreciation of land and housing units.
Recognizing this opportunity, Mr. Van Leeuwen and Ms. Hoad put together the Bridge Attainable Housing Society (BAHS) to act as the not-for-profit organization that would negotiate the terms of the McPherson Place construction and unit sales through the SELF model. To start, BAHS acquired the land from the City of Calgary for $6.3-million. This was secured through a non-interest bearing 10-year debenture, with an 11 per cent interest clause in the event of default. BAHS then entered into formal partnership agreements with New Urban Consulting and McPherson Limited Partnership for the provision of project management, unit financing and construction loans.
The result
Construction began on McPherson Place as a 160-unit development in June, 2011, with units selling out in four months. Studio, one-bedroom and two-bedroom units in this six-storey building sold for an average attainable price of $172,000, and are complemented by 4,500 square feet of retail space at the base. The current market value of the project is $47-million, and 58 of the units have been sold to the Calgary Housing Company to hold as subsidized housing units.
At the same time, the goal of assisting first-time purchasers in building equity has been achieved, as evidenced by the sale of eight units over the past 18 months that averaged about $23,000 in equity for the owner. As these people move into full market units, the McPherson Place units are sold to buyers on their lengthy waiting list, advancing another opportunity to assist in equity-building.
The case of McPherson Place demonstrates that public and private sectors can unite to make best use of their skills and assets to provide a means for citizens to meet their basic need for housing.
Jyoti Gondek (@jyotigondek) is the director of the Westman Centre for Real Estate Studies at the Haskayne School of Business (@haskayneschool)
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