by Britany Stares

A near-universal challenge faced by nonprofits working on affordable or social housing solutions is raising or accessing sufficient capital to undertake such projects. Whether your organization is exploring a loan, a line of credit, bonds or other innovative means to raise funds, one strategy to consider is pursuing a third party guarantee. A guarantee is precisely what it sounds like: a pledge by a third party, such as a foundation, government or other source, to repay the cost of a loan or the payouts on a bond in the event that the original borrower is unable to do so.

There are many benefits to using guarantees in social impact projects. For nonprofits, having a guarantor can provide access to debt capital, such as a bank loan, that might otherwise be unavailable due to lack of lender confidence, or reduce the cost of borrowing through lower interest rates. Guarantees can also be an attractive option for governments, as they reduce reliance on direct public funding or lending. Government guarantee schemes for affordable or social housing in several countries have default rates at or near zero[1] (insert link). In high-need areas such as affordable housing supply, guarantees can accelerate development as well as help build investor confidence in the sector, opening the door to more capital over the long-run.

In Canada, guarantees appear to be an underutilized tool for social impact, particularly with regards to housing. While the federal government has a long history of providing loan guarantees in the form of mortgage insurance to social and affordable housing developers through the Canada Mortgage and Housing Corporation (CMHC), foundations and municipalities are largely only beginning to explore their potential role as guarantors. There is some evidence to suggest, however, that this is changing. Several municipalities in Western Canada are considering or already acting as guarantors for housing cooperatives, nonprofit housing developers and municipal housing corporations, without reports of defaults. In a well-known, albeit non-housing related example, the City of Toronto recently guaranteed a loan for the Centre for Social Innovation (CSI) to help the social enterprise purchase a new building. The guarantee was discharged successfully ahead of schedule, and was estimated to have saved CSI over $200,000 in interest per year (insert link)[2].

Embracing the full value of guarantees for affordable and social housing purposes requires raising awareness among prospective borrowers and guarantors alike about the risks and responsibilities involved. Some guarantors may require payment, and all would-be borrowers must be able to demonstrate how they will mitigate the risk to the guarantor. Many potential guarantors lack a clear framework and overarching strategy for accommodating guarantee requests. Finally, despite no direct costs to the guarantor (assuming no defaults occur!), guarantees are financial commitments and therefore affect the borrowing capacity and credit rating of guarantors, including municipalities.

In sum, third party guarantees can support a wide range of social outcomes, though their potential remains largely untapped. Addressing such problems as the affordable housing shortage will require every tool in the impact investing toolkit – and guarantees can be a useful way to leverage these.

[1] Lawson, J. (2013). The use of guarantees in affordable housing investment: a selective international review. AHURI Positioning Paper No. 156.