When you imagine a three-legged stool, you know that each of the legs plays a crucial role in keeping the stool balanced. If one of the legs is missing, the stool can no longer stand.
In affordable housing development, the three-legged stool is used as a metaphor to describe the three essential components a housing project needs for success: capital, land, and capacity. (In any order.) Here is a graphic for reference:
Only once all of the components are present (or assumed to be present, such as an anticipated source of funding that has not yet come through) can a project team pencil out the feasibility of their project.
Let’s dive deeper into each of these components
Capital: Nothing gets built without money
Capital refers to the financial resources needed for a project and can come in various forms: funding, financing and equity.
Funding sources are considered grants or other non-repayable loans. These typically come from various levels of government through programs, but projects can also receive funding from philanthropic organizations.
Financing typically refers to loans, such as long-term loans, short-term “bridge” loans for cash flow, or construction loans. Determining the financing needed for a project is done through analyzing the operating budget. A strong operating budget means that the project can support a substantial mortgage.
Equity is any asset contributed by the owner of the project and is almost always required for project success. This can be in the form of cash reserves, fundraising, or money raised from a community bond, or other assets such as land. Leveraging pre-existing assets strengthens funding and financing opportunities, and overall improves project feasibility.
In housing development, each financial resource contributes to a project’s “capital stack.” Funding providers across Canada have tried to make it so that a project can find funding for different phases of development, meaning that their programs can be “stacked”.
Some examples of housing providers in Canada that offer funding and financing opportunities are:
- The Canada Mortgage and Housing Corporation (CMHC)
- The Federation of Canadian Municipalities (FCM)
- The Community Housing Transformation Centre (CHTC)
There are numerous programs beyond the ones offered by the above providers as well. Project teams can often look to provincial and municipal departments for current funding and financing opportunities. Again, it is crucial to look at equity contributions that can add to the financial support of the project.
Land: Nothing gets built with nowhere to put it
Land, of course, is the physical parcel of land where the project will be built or renovated. In housing development, the land is often referred to as the “subject property”.
Land is expensive. For nonprofit organizations, acquiring land for a project can be a huge barrier, and consultants or real estate agents are sometimes hired to locate and purchase land on their behalf. For smaller organizations, this is not always possible. (This is why having land as an asset can be so critical.) Private partnerships can help with land acquisition, and sometimes government entities can transfer land or create a land lease agreement with a housing developer to alleviate the burden.
If a project team has or acquires land, they then need to navigate the zoning regulations that determine the permitted uses on the land and what type of building can be constructed or renovated. Planning applications to a municipality, such as a zoning by-law amendment or a minor variance, can be costly and timely, depending on the location of the project (the province and municipality, and also their respective processes for land-use planning).
Capacity: Nothing gets built without a team to manage the capital, the land, and the rest of the project[HE1]
Having “capacity” means a project team and the client and/or housing provider can see the project through from conception to completion.
Capacity encompasses both internal knowledge within an organization and external support from consultants and experts. Building capacity involves pooling existing expertise and leveraging external resources to meet project deliverables and navigate any challenges that arise. External experts can include regulators, consultants, funders, support services, property managers, construction managers, and more. Often, the architect of the project team will assume the role of a “primary project consultant” and will hire sub-consultants to do specific work for a project, such as a structural engineer or landscape architect.
Here is an image that shows a standard (but not universal) make-up of a project team:
Often, clients and/or housing providers may lack the necessary internal expertise to fully execute an affordable housing project, despite their acute understanding of their target audience and local community context which is essential as a provider. In such cases, collaboration between clients and experts becomes essential to pinpoint weaknesses and facilitate the project’s progression.
How these components relate to project feasibility
The “three-legged stool of development” is not simply a conceptual tool, but a practical framework for ensuring project feasibility.
Adequate funding, appropriate land and a strong project team are vital components that must work in tandem. By recognizing and addressing the significance of each leg, organizations can lay a solid foundation for project viability. A holistic approach that considers all three elements will lead to more sound development projects.
As affordable housing development becomes ever-important, it is critical to refer to the three-legged stool when creating projects and policies to ensure that cities are building equitably and sustainably.