Preliminary rendering of Vivacite’s Lac Megantic development. Photo courtesy of Microclimat Architecture
What if the future of shared-equity homeownership was not dependent on government subsidies? At Vivacité-Société immobilière solidaire, a Quebec-based nonprofit organization, we designed a shared-equity program based on a social economy model that leverages impact investors to ensure perpetual affordability, scale up our impact, and rise up to the challenge of the neoliberal city.
Over the past few decades, housing has been gradually commodified and turned into a real estate “market.” Cities are integrated into fast and elusive financial circuits, turning houses into liquid assets. The current housing crisis—visible through eviction, displacement, gentrification, and unsustainable levels of debt—calls for a renewal of affordable housing practices. As we keep proven methods like cooperatives, neighborhood-based community land trusts, and social housing, large-scale strategies must be developed as complementary tools in order to secure housing gains within the current paradigm of the neoliberal city.
We believe in thinking like activists and hijacking the tools used by traditional developers to the benefit of creating affordable and inclusive communities. We need fast-developing portfolios, we need to do large-scale land grabs, and we need to make margins on our projects and divert them all back into our communities.
Shared-Equity in the Canadian and Quebecois Context
Vivacité’s program design is a response to Canadian and Quebecois realities. Between 2000 and 2015, the average home price increased almost three times more rapidly than household income in Canada. In 2013, a large-scale survey found that 70 percent of young Quebecois households said that a downpayment was their main barrier in accessing homeownership, pointing toward a growing intergenerational inequity. Concurrently, most, if not all, existing homeownership programs in Canada do not generate perpetual affordability and can even increase household debt and accelerate speculation. In this context, the mainstreaming of shared-equity approaches is long overdue in Canada.
That being said, with an ever-shrinking pot of government subsidies, we believe subsidy should be prioritized for households with urgent housing needs. Independent from public subsidy, our model meets the housing need of the lower-middle class, while being respectful of limited public resources.
Perpetually Affordable Homes, Without Subsidies
Three crucial elements have to be gathered for a shared-equity program to work without subsidies.
No. 1—We adopted a portfolio model to act throughout the province of Quebec. Our initial cycle of development includes plans for the construction of 240 perpetually affordable units over five years, spread across Quebec in seven projects ranging from 27 to 40 units each. This approach enables us to balance the financial risk of different projects. We can build territorial solidarity among urban and rural areas and can invest in weaker markets because we have projects in stronger ones.
Our very first project, for example, is part of a major reconstruction process in Lac-Megantic, a rural community in Quebec that was struck by a devastating railway disaster in 2013. On top of the human tragedy and the collective trauma, a post-disaster real estate market is characterized by deep uncertainty, which only adds to the challenges the local community is already facing. Vivacité can partake in Lac-Megantic’s reconstruction because our portfolio will also have shared equity properties in downtown Montreal, a much more vigorous and predictable market. This allows us to have a larger scale impact instead of going through the lengthy process of securing funding, project after project.
No. 2—For our model to work free of subsidies, our organization acts like the real estate developer and we manage projects ourselves, from start to finish. This enables us to internalize our operations within the project costs and to generate a profit margin. This margin is the difference between the project overall costs and its recognized market value, and it is completely invested into the property and recognized as a part of the future owners down payment by their financial institution.
The full collaboration of a partnering financial institution is absolutely key here, and we greatly benefited from the early support of the Caisse d’économie solidaire, a Quebec credit union which serves the social economy sector. The shortfall after the margin to attain a 20 percent downpayment is covered by private impact investors. On average, each downpayment is 75 percent funded by Vivacité self-financing strategies and 25 percent funded by external capital. A transaction fee of $1,000 is required from the buyers, but the full 20 percent downpayment is invested by Vivacité.
No. 3—The third essential component of a social economy shared-equity model is the collaboration of impact investors willing to invest slow capital. For the development of our first portfolio, our financial planning forecasts a need of $5 million Canadian in private equity to partly cover the downpayments and stabilize the cash-flow during the construction phase. Vivacité retains 75 percent share of the market appreciation at the time of resale and the homeowner keeps 25 percent of market appreciation. Vivacité uses part of its share to reinvest in the property so that the next owner can still benefit from (at least) a 20 percent downpayment and to repay initial investments. While ensuring perpetual affordability, we can still generate a 6 percent internal rate of return over a 15-year period and remunerate our impact investors.
To initiate a second cycle of development, we can either wait to repay completely the initial investors or leverage new investments; our needs in external capital decrease from cycle to cycle, eventually reaching none.
It is worth mentioning that we design each project so that the average unit price should be affordable for a household earning the median income of its area. Projects in areas with lower-median incomes will need more external capital and projects in relatively wealthier areas will require less. Our portfolio structure makes room for at least one project presenting a very fine or non-existent margin (due to very low-market values, low-average income, or both). In a way, the projects cross subsidize each other, ensuring the risk balance of the portfolio.
This brings to light two important limits of our model: we can’t afford to produce affordable housing only in devitalized areas and we can’t address the need of only lower middle-class households. We are aware that, in a very expensive market like Toronto or Vancouver, a 20 percent downpayment might not be enough to generate significant affordability. Our tool cannot meet all housing needs, which is why we strongly believe in working collectively, as a sector, to develop innovative and solidarity-based alternatives along the housing continuum, from emergency shelter to homeownership.
Adopting a portfolio approach, taking on the developer role, and building collaborations with impact investors to make shared-equity homeownership work without subsidies is, in fact, a pretty straightforward approach. (So straightforward, it took us six years of hard work and trials and error to figure it out.) We are now in the process of concluding investment partnerships and are eager to share the lessons we’ve learned along the way as activist developers.
Steal this idea. The neoliberal city knows no bounds and we collectively need to always be delivering perpetually affordable housing, even during darker times of public leadership.
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2 thoughts on “Shared-Equity Homeownership With No Public Subsidy”
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This is an excellent idea!
In terms of the financial structure, who owns the mortgage, the buyer or Vivacité?
If the buyer can’t make mortgage payments during a period of time, would Vivacité make the payments or would the house be sold to a new buyer?
Thanks for your comment! The buyer owns the mortgage and Vivacité has a second rank mortgage. In case of default of payments, the house would effectively be sold to a new buyer (under the same conditions). Some older CLT’s in the US have the financial capacity to help the owners during difficult times. It’s definitely something we would want to do at some point in our existence. But, unfortunately, it’s a financial risk we can’t take in the early years.