SVX is launching a series of impact investing case studies to share models and lessons learned from our work to develop strategies and raise capital through our advisory services and investment platform. This learning series is focused on organizations, enterprises, and funds seeking debt and/or equity financing to start or scale their impact. This series is supported by the Government of Canada through our work as a designated national service provider for the Investment Readiness Program (IRP).
In Brief
In 2019, House of Friendship successfully raised $1.2 million in investment capital from community-based investors across Waterloo Region, Ontario to expand an addiction treatment facility for the region. The advisory work on the impact investing strategy was funded by the Kitchener-Waterloo Community Foundation as a pilot initiative to demonstrate the potential for impact investing as a tool to mobilize community capital, diversify and grow potential capital sources, and to scale the impact of an organization. A core team worked on the House of Friendship bond led by SVX, in collaboration with the MaRS Centre for Impact Investing and Miller Thomson LLP.
This case study will provide background on the organization, capital need, process, lessons learned, and results of their impact investing strategy.
Organization: House of Friendship
House of Friendship is a Canadian charity founded in 1939 as a mission in downtown Kitchener in response to the need for food and shelter in the aftermath of the Great Depression.
Over the following decades and into the 21st century, the organization expanded its services to now providing addiction treatment, food, emergency shelter and supportive housing, and vital community supports for those living on low income across Waterloo Region. With 200 staff members, 1,000 volunteers annually, and a large group of donors, House of Friendship now serves over 42,000 men, women, and children per year. It is an anchor institution in the community, recognized at a regional, provincial and national level as an outstanding social service agency.
Capital Need: The Close to Home Addiction Treatment Project
“The opioid crisis is growing in Canada, driven by both illegal and prescription opioid use…This crisis is having a devastating impact on the health and lives of Canadians, their families and communities across the country. In 2016 alone, there were 2,861 opioid related deaths and 16 opioid-related hospitalizations each day.” [1]
For over 40 years, House of Friendship provided addiction treatment services at their 174 King Street North facility, a 130-year old farm house that was unable to provide an environment conducive to privacy and healing.
In 2016, the visible and rising impact of the opioid crisis catalyzed the Close to Home Addiction Treatment Project. Through this initiative, the organization planned to grow their addiction treatment service offerings and purchase a property at 562 Concession Rd. in Cambridge, Ontario to provide an expanded suite of treatment with more dignity, increased access, and programming to meet future needs. By 2018, it was clear that the opioid crisis was continuing to accelerate.
Although House of Friendship had already raised $2M in philanthropic capital to renovate and re-purpose the property, the organization decided to expand the planned treatment facility. New building plans were designed to include a second floor, where its facility space would grow from 3,000 to 19,500 square feet indoors, and from 0.2 acres to 1.2 acres outdoors. The total new project cost would be $4.5 million, including the purchase of the property, construction costs, and furnishings, reserve and capital campaign costs.
In order to complete the expanded facility, an additional $1 million in capital needed to be raised to realize the Close to Home Addiction Treatment Project’s vision. To unlock this capital, House of Friendship sought expertise from the MaRS Centre for Impact Investing and SVX (formerly MaRS VX) to navigate the steps and resources required in structuring an investment offering, choosing a bond offering as its vehicle.
House of Friendship initially considered a traditional bank loan to finance the expansion. However, the team was interested in exploring a community-based financing model and contributing their learnings to other organizations.
Tool: A community-based bond offering
House of Friendship used a community-based bond offering approach for accredited investors modelled on the community housing bond offered by YWCA Elm Centre in Toronto in 2011 and retail community bond offerings by the Centre for Social Innovation, Innovation Works, and SolarShare.
A community bond is a debt instrument that raises investment dollars from community members who have an interest in achieving financial returns and creating positive impact in their community. In effect, it is a loan or promissory note with a commitment by the issuer (organization raising funds) to pay back interest and principal to the investor over a set period of time. Community bonds can take various shapes and forms, differing in total size, investor base, rate of return, and security. They are typically focused on retail investors (eg. the general public), but they have been modified to target accredited investors, including high net worth individuals (HNWIs) and foundations.
Going to community investors to acquire the needed capital provided House of Friendship with:
- An opportunity to access capital at better or similar terms than traditional lenders;
- An investment opportunity that was in line with charitable law and securities regulations, as a debt offering targeted to accredited investors facilitated by a registered financial services firm;
- Connections with new potential funders and supporters who may increase their profile in the community; and
- A complementary and new source of capital, allowing the organization to diversify its financing options and reducing its dependency on any one source.
The idea to raise capital from community investors was not new. Almost a decade ago, several members of Barnraisers Council, a group of private and public sector leaders with a vested interest in charting Waterloo Region’s future, began discussing the idea of piloting a community-based investment model in their own Waterloo community. Two Board members of Kitchener Waterloo Community Foundation (KWCF), an existing supporter and grant funder of House of Friendship, were part of Barnraisers Council. The conversations through Barnraisers Council sparked the impetus for KWCF to reach out to House of Friendship to gauge interest in piloting a community-based investment model. In 2018, KWCF Board members knew that House of Friendship needed to raise additional capital to operationalize their newly renovated facility for addiction treatment, and so began discussions about the possibility of House of Friendship piloting a community-based investment model in the Waterloo Region. From the perspective of KWCF’s Board members, House of Friendship was an ideal community-based organization to pilot a community-based investment model and serve as a pioneer. From the perspective of KWCF’s Board, partnering with House of Friendship on a pilot community-based investment project would continue demonstrating that KWCF serves as a pioneering leader of innovative projects in the Waterloo Region. Throughout the pilot project, Barnraisers Council provided an essential platform for discussion as well as its Waterloo Region network to help make the pilot a success.
Development Process
SVX approached the development of House of Friendship’s impact investing strategy in three phases:
1. Discovery: Feasibility Analysis
To begin, SVX outlined project objectives, ensured mission alignment between all key stakeholders, and discussed the pros and cons of various options to raise and structure the $1M bond. Critically, this phase involved the engagement and education of both staff and board members, supported by the guidance and insight of effective legal counsel to navigate both charity law and securities regulations.
The SVX team also conducted analysis on House of Friendship’s past and current financial statements to determine if it would be able take on $1 million in debt and repay its investors, and if so, through which revenue streams. SVX built a financial model (historical to 2025) to illustrate how taking on and repaying $1M of debt would affect House of Friendship’s cashflows, modelling out various rates, terms, and payback structures to illustrate how these variables would impact House of Friendships’ financials.
2. Design: Structuring the Bond
After an exploration of community bond structures and the costs and benefits of making the investment opportunity available to the general public (or RRSP/TFSA eligible), House of Friendship defined its target community investor base as accredited investors. This reduced reporting complexities and lowered legal and administrative fees.
Moreover, in order to reduce the risk of the investment, a secured community-based bond was selected as House of Friendship’s property could be held as collateral. There was a significant amount of review and discussion on whether or not to secure the bond against the property, which already had a first mortgage. Legal counsel was consulted to evaluate the cost and complexity of offering a secured bond. The cost of an unsecured vs. secured bond was estimated to be similar. But there were specific questions identified on whether House of Friendship could provide a secured offering:
- Does the organization have restrictions on providing a security on its assets (e.g. assess incorporation documents / letters patent and agreements that govern their operations and sources of funding)?
- If required, can the organization obtain consent for providing security to investors from the first mortgagee of the property?
Analyses indicated that House of Friendship could provide a secured bond offering, and that doing so would likely make target accredited investors more likely to invest.
A prototype (eg. draft terms) for the investment was created and tested with individuals and organizations connected to the community foundation and House of Friendship.
3. Deployment: Raising $1 million
In order to raise the capital required to bring the House of Friendship bond to life, their investment opportunity was onboarded to the SVX platform. SVX’s online platform allows investors to review and invest in a wide variety of impact ventures and funds. KWCF served as a lead investor in the bond, giving other co-investors the comfort of knowing that a reputable community foundation supported the project.
Lessons Learned
While a community bond can be an effective method of raising capital and scaling impact for some organizations like House of Friendship, it may not be right for all. Before embarking on the journey to designing a community bond, consider our lessons learned from this project.
1. Evaluate whether a bond is the right fit for the organization. Ask yourself key questions:
- Buy-in: Is there buy-in and engagement from the Board of Directors and senior management, including a long-term commitment to the capital raise process? Is there buy-in from the community?
- Financial fitness: Is the organization able to take on debt on their balance sheet? Does the organization have revenue streams or cash flow to pay investors during the investment term, and to pay them back at the end of the proposed investment period?
- Investor audience: Is there an investor that will be able to garner support from the community? What types of investors will be eligible to invest in the bond?
- Expertise: Do you have access to the necessary external impact investment and legal counsel? Do you have the necessary internal and financial resources to manage the capital raise process, including ongoing administration for investors (eg. interest payments and reporting)?
2. Consider the reputation of the bond issuing organization and the level of involvement from the organization’s partners.
House of Friendship received a remarkable response from investors in the Waterloo Region — in investment dollars and for the mission of the project. The charity’s positive reputation in the community and involvement from KWCF and the Barnraisers Group was essential to raising capital for the $1M bond. Prior to designing an investment structure, organizations should consider whether similar support can be garnered in their target community.
3. Clarify roles and responsibilities.
Projects to develop an impact investment offering often involve a host of various stakeholders, both internal and external to the organization. For example, when KWCF emerged as the lead investor for the project, they identified that understanding what ‘being a lead investor’ in each project was an essential part of the design process. Would it mean committing the largest dollar amount? Being the investor that catalyzed the investment offering? Permitting the use of their name to attract other investors? The answers to these questions may vary in each bond offering.
4. Lead with impact. But make sure your financial (and revenue) model is airtight.
Telling the story behind the $1 million community bond was essential to garnering community support. Although the offering was ultimately a return seeking investment opportunity, the demonstrable social and community-based impact enabled by the investment dollars was a fundamental to unlocking the interest and capital of investors. But impact is a necessary, but not wholly sufficient condition for success. The financial model for the organization and the bond offering were critical to ensuring investor comfort and confidence to place their capital.
5. Tailor the financing structure and terms to the organization’s needs, then match it to the interests of investors.
The impact investment model that an organization selects should be tailored to their specific needs and circumstances that has been tested with potential supporters . While House of Friendship’s pilot demonstrates a successful implementation of a bond offering for a real estate project financed by local accredited investors, a different organization with a different set of prospective investors may require different terms, rates, investment sizes, or even an entirely different financing tool altogether.
6. Consider blended financing strategies.
Investment capital alone did not open or operate the Close to Home Addiction facility. The project is made possible by a thoughtful blended financing strategy including philanthropy, government support, and lending capital from a variety of sources. It was the addition of lending capital that helped meet the immediate capital need for the expansion, but that capital is supported in the long-term by philanthropic and government sources.
7. Charities and nonprofits can mobilize supporters to become investors
Many organizations have longstanding donors and supporters who contribute financial donations and grants. They can be mobilized to use additional forms of capital to support the organization, and they are likely to be the first investors in these types of offerings.
Results
Over the course of 11 months, House of Friendship, SVX, and other community members structured and launched the Close to Home Addiction $1 million bond. Within two (2) months of opening the offering, it was oversubscribed at $1.2M. Today, the House of Friendship bond serves as a pioneering model for other community-based organizations to consider as they raise capital to start or scale their environmental and/or social impact.
Our Partners
Social Venture Connexion (SVX)is financial services firm and registered Exempt Market Dealer (EMD) that provides a platform to raise capital or make investments, designs private offerings, and manages place-based funds.
The MaRS Centre for Impact Investing creates and implements impact investment strategies and instruments for impact investors, government, and social service providers.
Kitchener Waterloo Community Foundation (KWCF) is a leading community-building organization in Waterloo Region that has granted more than $47M to local charities and non-profits. KWCF catalyzed the community-based bond, provided the upfront capital for the pilot, and acted as the lead investor for the offering.
Miller Thomson LLP is a full-service law firm built to provide the most comprehensive legal help for businesses of every size, entrepreneurs, and individuals. The firm provided legal counsel throughout the project.
