Money Matters (on equity and debt and what that means for our co-op).

Image from Cooperators First

If only it were a simple thing. Housing the people of Canada should be simpler, but it is not. Housing isn’t just about providing safe shelter and a place to call home for Canadians. It has become not just an investment for families to build equity but a major business of international finance speculators, house flippers and others who are focused not at all on housing people but on maximizing profits. Throw in the challenges of competing visions around planning and zoning and the challenges of protecting land for food and the climate while building housing and things get even more complex.

Not a simple thing, housing.

With the goals of GREAT to build community supported, community run eco affordable and attainable housing, the structure of the project also may get increasingly complicated. We want and need to be able to raise money and access funding from the widest range of sources as we can.

Unfortunately acquiring financial support (such as grants or loans) for affordable housing sometimes requires the organization to be for-profit and sometimes a non-profit. Sometimes there are tax advantages to being a co-operative, but some other things are more restricted if you are a co-operative.

So at GREAT we are exploring how to best meet our goals through our project organization.

From the start we knew we wanted to create a new co-operative (read more about that here). The GREAT Housing co-operative will be a community development co-operative that allows it to sell shares (equity investments) and/or to raise funds through debt (such as community bonds or member loans).

When it comes to equity Co-operatives generally have two types of shares: Membership shares and investment shares. As the folks at Co-op Creator put it, “Simply put, share capital is the money a business raises in exchange for ownership in the company. For co-ops, this usually refers to the money an individual pays to become a member.” However some co-operatives issue investment shares. Again from Co-op Creator: “These shares are used to raise money and they do not give their purchasers the same rights as membership shares. Investment shares are usually worth more than membership shares (e.g. $1000), but they come with financial perks, rather than ownership and control.”

Some co-operatives raise funds through debt, such as through membership loans or “community bonds”. Cooperatives First has a 3 minute explanation on debt vs equity financing:

A key issue for the GREAT project is that if it were to raise most of its money through debt (such as community bonds) then it would be much more challenging to get support from organizations like the Canada Mortgage and Housing Corporation (CMHC) or from banks and credit unions. Any company, particularly a new one, that has more debt (community bonds for example) than equity is seen as a higher risk investment. As the Co-operative’s First folks say in the above video, “the more debt a cooperative takes on the riskier an investment it becomes.”

In short, shares are equity and community bonds are debt.

So at GREAT we think it is clear we need to finance largely through shares, especially at first as we build up equity.

As with all co-operatives in Ontario GREAT will operate as nearly as possible at cost and of course will abide by the International Co-operative Principles including principle #7 “ Concern for Community” where “Co-operatives work for the sustainable development of their communities through policies approved by their members”.

GREAT is not being created to maximize profit for its investors but to address our mission to create permanently affordable housing in Ontario that is community owned and environmentally resilient. The Co-operative will be targeting social investors who are willing to accept a lower financial return and increased risks, in exchange for the possibility of non-financial social returns, such as the affordability of rents in buildings that provide a model of better eco sustainability and stronger climate resilience.

However a Co-operative that issues shares is, for tax purposes, considered a for-profit organization. This changes nothing about our mission based approach to eco-affordable housing. Furthermore, it also means GREAT can issue shares and bonds. A non-profit can only issue debt financing.

The designation of being “for profit” does have an impact on what supports are available for our work. For example, some affordable housing granting and finance programs are only available to nonprofits. For this, and other reasons, we are exploring having the GREAT Housing Co-operative incorporate a subsidiary non-profit that would work transparently in support of eco-affordable permanent housing.