Beat the REITs Webinar

Written by Kyla Tanner

July 6, 2020

The Canadian Network of Community Land Trusts hosted a webinar entitled Beat the REITs at the beginning of June (you can watch it on YouTube here). Six speakers from across the country presented on the topic of financialization of housing leading to an affordable housing shortage with a focus on innovative ways that the community sector – non-profits, co-ops and land trusts – can combat this problem. A common strategy is to acquire housing from the private market to provide sustainable, affordable rents to households. This blog post will briefly summarize the key messages from the webinar.

REITs Have Turned Homes into Investment Products

Real estate investment trusts, known by the shorthand REITS, bring together investors to own and profit from real estate. While these investors own malls, office buildings, long-term care facilities, the webinar focused specifically the ownership of homes and the conversion into an investment product. The issue is that homes are being financialized. They are no longer just somewhere to live, but something to invest in as part of a portfolio to drive returns on investment.

REITs first came on the scene in Canada in 1977. At first, they appeared to be a forward-thinking solution to fix-up housing that needed repairs, professionalize housing management, and benefit from economies of scale. While this did occur, the business model fundamentally changed the nature of rental housing. The customer is not the tenant in this business model, the customer is the investor. The business isn’t to provide housing, the business is making money from the tenants. To do this, rents are raised as high as the market can bear and if tenants can’t afford this price, the landlords find new tenants who can. When rents can’t be raised anymore, the building is sold.

Today, 9 of the 10 largest landlords in Canada are REITs or other financialized players. REITs thrive in a housing crisis and where government is absent. Martine August’s research points out that provinces with rent control regulations (BC and Quebec) have fewer REITS compared to those without controls. While Ontario has rent control, it is only in place until the unit turns over, then the rent can be raised substantially. This has led to tenants being pushed out of their homes so that the REIT can touch-up the unit and post it for twice the rent.

How can we stop the loss of existing affordable units? Acquisition of the units by non-profits, co-ops and land trusts before the REITs. However, this is much easier said than done. Key messages heard from the panelists are:

  • In Canada, affordable units are being lost at an alarming rate, much faster than new ones are being built.
  • Property owners selling buildings with affordable rents want to sell quickly and for the highest price. Often, community organizations do not have the cash resources to acquire the properties fast enough, resulting in the loss of sales.
  • Acquisition programs outlined in the webinar stemmed from community initiatives, not government initiatives.
  • The federal government does not an acquisition funding program.
  • Community organizations need to scale up and build capacity to counter the loss of affordable units.

The following sections outline the acquisition strategies in Quebec and British Columbia, and from non-profit organizations and community land trusts.

Quebec Acquisition Strategy

The Community Housing Transformation Centre (CHTC) noted research from Steve Pomeroy that found from 2011 to 2016 approximately 322,600 affordable units disappeared in Canada while only 20,000 new affordable homes were built. Development cannot close this gap due to timeliness and cost. Instead, acquisition could be a more appropriate strategy. We can’t build affordable housing at the rate we’re losing it, but maybe organizations can acquire the buildings and keep rent at affordable rates.

Société locative d’investissement et de développement social (SOLIDES) in Châteauguay, Québec is a non-profit housing organization whose mission is to purchase existing buildings where low- and moderate-income households current reside to protect tenants from the market and avoid gentrification. SOLIDES own more than 40 buildings on 18 sites with 546 units.

SOLIDES has been able to purchase buildings through a few different models of development and financing. For its first two projects, it purchased financing at 100% of the cost because the municipality provided a guarantee. This didn’t cost the city anything. However, SOLIDES is paying the market price for this model, which is a large debt. Today, it uses equity from its original projects (some of which were new development through the AccèsLogis Québec program) with bank financing to purchase buildings.

SOLIDES has been scaling up in this way continuously. It purchases about 3-4 buildings per year, representing at least 5% of their total stock. It is the largest landlord in Châteauguay. As a private non-profit, it is able to be flexible and use bank financing to purchase buildings quickly. The support from municipal programs provides stability.

CHTC outlined three types of acquisition funds that are available in Quebec outside of government programs:

  1. Transitional Acquisition
    • Short-term, 1st rank loan. It acts as bridge funding provided to secure the sale. It can be for up to 95% of the price of the project for up to 24 months. This has been used for nearly 20 years and 3,000 units have been created.
  2. Support Market Acquisition and Operation
    • Long-term, 2nd rank loan. The municipality will guarantee a loan to act as the down deposit for a mortgage. The loan can be up to 45% of the project cost to be paid back over 15 years. This has been used for nearly 20 years and 1,500 units have been created.
  3. Complete Market Acquisition and Operation
    • 100% financing via two loans: both a long-term 2nd rank mortgage used as a down deposit (25% of the price) and a 1st rank mortgage (15 years amortization over 40 years) (75% of the price). This is a new program that has not begun yet.

British Columbia Acquisition

BC Non-Profit Housing Association (BCNPHA) acknowledged that British Columbia does not yet have an acquisition fund or strategy, unlike Quebec, but is working on a Made in BC Acquisition Strategy. BCNPHA research found that while the largest share of purpose-built rental is by private corporations in Vancouver and Victoria, there is a significant number of individual investors, often couples who own the building but don’t have children to pass the business onto. This poses an opportunity for acquisition when they are ready to sell.

To keep the rents at affordable rates, it would cost $120,000 per unit to purchase a building. BCNPHA modeled scenarios to see if eliminating the tax burden (municipal property tax, transfer tax, provincial corporate tax, and federal corporate tax) on the sale of the properties could make it affordable to purchase. It discovered that the equity gap was still $40,000 per unit, deeming it unaffordable.

Due to the considerable amount of time it would take to establish a tax credit, this has been abandoned for the strategy. Instead, BCNPHA is working with Co-operative Housing Federation of BC (CHFBC) on a strategy that has $500 million in grants to cover equity gaps, low cost financing with 50-year amortization, and coupling this with BC Housing’s existing rehabilitation and retrofit program. The strategy aims for community ownership of housing, flexibility, and acquisitions paired with rehabilitation.

Non-Profit Organization Acquisition

Non-profit housing organizations have historically been focused on new development, but Steve Pomeroy stated that there is a missed opportunity for acquisition. However, these non-profits do not have the cash reserves to purchase quickly (usually need to purchase within 24 hours), which often results in them losing sales. There is no opportunity for acquisition under the National Housing Strategy (NHS). CMHC’s programs don’t allow organizations to move fast enough to acquire properties when they come up for sale.

One pitch for an acquisition program from Pomeroy is the creation of a foundation that holds $5-10 million to give organizations the ability to purchase quickly. Over the following 12-18 months the organization can work with CMHC for funding through the Co-Investment Fund program, which can then repay the foundation. An entity would be required to act as an intermediary to the organizations purchasing the buildings. The intermediary could help ensure due diligence has been paid to purchase buildings, manage the acquisition process, secure financing, and manage the repatriation of funds from CMHC. This program is envisioned as a national fund with local delivery capacity that would allow acquisition to increase in scale.

Joy Connelly’s blog post outlines how Innstead Co-op bought over 50 houses using a non-profit Acquisitions Strategy beginning in 1976. While the organization has had great success, she notes that today “we will be pursuing far more complicated buildings and competing with buyers in a red-hot market”.

Community Land Trust Acquisition – Municipal Small Sites Acquisition Program

The Parkdale Neighbourhood Land Trust (PNLT) is a community governed land trust in the Parkdale neighbourhood of Toronto that has focused on the purchase of rooming houses (see this blog post to learn about rooming houses). A PNLT study in 2017 found that over 10 years, 28 rooming houses in Parkdale were lost through sale of the buildings, displacing 350 tenants. Another 59 rooming houses were at-risk, housing 808 tenants.

PNLT tried to purchase buildings as they came up for sale to place them under non-profit organization’s ownership and operation. However, it lacked the cash resources to acquire the properties quickly and without government support. PNLT was unsuccessful for eight attempted purchases.

So PNLT advocated for the City of Toronto create a pilot program for small sites acquisition. The City did so and when PNLT responded to the RFP it was able to successfully purchase a property with 15 units.

PNLT wants the pilot project to be scaled up. The Municipal Small Sites Acquisition program would provide funding (capital grants and forgivable loans) to non-profits and community land trusts. This would enable the purchase of at-risk private market rental housing to create permanently affordable rental housing. The program is meant for buildings that have 6-40 units.

Scaling Difficulties

Pomeroy stressed the need to consider scale of the non-profit and community land trusts. As previously mentioned, more than 300,000 affordable units were lost in 5 years. The programs being discussed are aiming to acquire 5,000 to 10,000 units, at the high end. While this seems ambitious compared to what they have been able to acquire previously, it is only a drop in the bucket compared to what is being lost. An “audacious” plan could be the purchase of REITs themselves. Acquiring a few REITs that have 10,000 units in their profile already could go a long way to securing more affordable units in the country.

Webinar Panelists

  • Thom Armstrong, Co-operative Housing Federation of BC and Community Land Trust Foundation of BC, Vancouver, BC
  • Joy Connelly, Circle Community Land Trust, Toronto
  • François Giguère, SOLIDES, Châteauguay, Québec
  • Stephen Corriveau, Community Housing Transformation Centre
  • Jill Atkey, BC Non-Profit Housing Association, Vancouver, BC
  • Steve Pomeroy, Carleton University & Focus Consulting, Ottawa, ON
  • Joshua Barndt, Parkdale Neighbourhood Land Trust, Toronto, ON
Kyla Tanner

Kyla Tanner

Student Intern

July 6, 2020