Tonya Surman, Co-founder and Executive Director of the Centre for Social Innovation (CSI) in Toronto, is a dynamo. Dedicated to fostering innovation and positive social and environmental change through collaboration, Tonya has been practicing what she preaches for over 20 years. Her current venture, CSI, is an innovative collaboration space whose mission is to catalyze, connect and support new ideas that make positive change in the world¹. The mission’s latest manifestation is in the form of a unique social capital-raising tool, utilized towards the purchase of the organization’s second location – CSI Annex.

A 36,000 square foot building located near Bathurst and Bloor, CSI Annex will be the future home of nearly 300 organizations focused on creating a better world. Like its predecessor, CSI at 215 Spadina, CSI Annex is not only a shared workspace, but also an innovation hub, incubating social and environmental organizations and helping increase their capacity to affect positive change. But there is one key difference between the organization’s two locations. And that is in the creative deal structure that has allowed CSI to complete the purchase of its new building.

The Model

The CSI Annex property, at the time of purchase, was valued at approximately $4.2 million. With renovations and leaseholds, the projected value of the building was expected to be approximately $6.5 million. Generally, such a deal would be beyond the financial capacity of a small, fairly new, community-based nonprofit. While this was also true for CSI, the deal was certainly not beyond the perseverance and ingenuity of Tonya and the CSI Team. Guided by a do-it-yourself philosophy, and undeterred by the anticipated challenges, the team consulted with the City of Toronto, encouraging the City to utilize its guarantee provisions to provide a loan guarantee to CSI for the purchase of the building. The tremendous impact of CSI on Toronto’s economic development and culture was not unknown to the City, and the City obliged.

Armed with this guarantee, CSI was able to secure a competitive 5-year, $4.5 million mortgage from Alterna Credit Union at 4.50%. The mortgage itself is structured as a development loan, carrying interest only during the first year while the organization undertakes renovations. Once tenants start filling-up the space (there are currently leases for 100 members but there is still room for you), the loan will convert to a long-term mortgage with a blended payment, reducing the loan balance that is amortized over 25 years.

This was a huge step forward towards acquiring the building. But the mortgage provision covered 75% of the building’s full projected costs. There was still approximately $2 million to be raised in order to complete the acquisition of the property and conduct renovations. Enter community bonds. 

Like most debt securities, a community bond is a debt instrument in which the issuer of the bond (the borrower) promises to pay the holder of the bond (the lender) the principal amount borrowed, along with any interest payments accrued during the holding period of the bond. For risk-averse investors, it is as conservative and reliable a debt security as most high-quality debt investments. Unlike most debt securities, however, a community bond is issued by the community (nonprofit and community organizations), and for the benefit of the community. When backed by a physical asset, the bond can also be held in one’s RRSP and TFSA accounts. In addition, community bonds allow for lower investment minimums, making investing in the bonds more affordable for a larger number of people.

For Tonya and CSI, the community bond is first an expression of their core value of positive change and innovation through collaboration, and only then a financial instrument. “Community bonds are about democratizing social finance.  These instruments are how capitalism is supposed to work.  For the community, by the community,” says Tonya. With no financial assets to back the purchase of the new building, CSI sought to leverage the only (and without doubt its most important) asset, and that is its relationship with its community².

The CSI Community Bond

The bond offer consists of three series of bonds, backed by a mortgage charge on the property:

• Series A offers a floating rate of return at Bank Prime (currently at 2.25%) + 1.75%. Principal payments for Series A are intended to commence within the first four years of the project, with a maturity date and final payment due 10 years from inception;
• Series B also offers a floating rate of return, but at Bank Prime + 2.50% (75 basis points higher than Series A). Principal payments on Series B will be deferred until after the maturity date of Series A, following which principal repayment will commence with a final maturity date of 15 years from inception; and
• Series C offers a fixed rate of return at 4.00% and has a maturity date of 5 years from inception.  Series C accrues over the life of the investment.

All three series are subordinate to the conventional mortgage financing claim (applicable to Alterna Credit Union), but rank equal to one another. An important difference amongst the three series, aside from the rate of return and maturity, is the minimum amount required for investing into each of the series. Series A required a minimum investment of $50,000, Series B required $100,000, and Series C requires a minimum investment of $10,000. The lower investment minimum for Series C was established to make it a more affordable investment for a larger number of people.

CSI has already raised the desired $2 million through the above bonds. The organization sold out of Series A and B even before the closing of the deal in May 2010. Series C, however, is still available, but only to the community. And that is because Tonya wants the community to buy out the bank! CSI is a community asset, and Tonya would like to keep it as such.

The return on the bonds will be paid from rental income derived from the tenants, and the intention is for CSI to use a combination of operating surpluses, proceeds from the community bonds and access to capital campaign fundraising over a period of 15 years following acquisition to retire the principal of investor funds and become full owner of the property.

The Challenges

It was no simple matter to accomplish all of the above, of course. And for a no holds barred insight into the challenges faced, I went straight to the voice of the revolution, Tonya:

“Our goal was simple – to offer a 'buy-local' impact investment. I want to serve my community, not the bank.  But how do we break down the systems that are designed to ensure that the rich get richer? Our financial systems are designed to 'protect' for anything different. How does one innovate in this context?  Every step has been a risk! My amazing board and staff team have had to be willing to push the boundaries of banking compliance departments at every step. And we do it with the goal of transforming a system and offering practical tools to enrich our communities.”

“The challenge wasn't even the rules,” adds Tonya. “We knew that we could do what we did. It was convincing people to interpret the rules in a way that serves the betterment of our communities. And convincing compliance people to do something different. ”

This convincing involved the following:

• Clarifying the RRSP eligibility rule. Since mortgages are RRSP eligible, a community bond backed by a mortgage charge on the property could also be RRSP eligible.
• Finding partners that would administer the RRSP. This involved having to build relationships with the big banks to varying levels of success, and eventually finding a partner in Concentra Financial.
• Clarifying what is meant by ‘benevolent society’ in the Ontario Securities Act. And that is the nonprofit public benefit sector.

“Sometimes transforming a system is about real need, new solutions and compliance departments.  I guess that this is what social innovation looks like,” says Tonya.

Looking Ahead

Tonya and CSI are constantly challenging traditional models and systems in a quest for improved and innovative outcomes. Tonya wants to make it easy for other qualified nonprofits to issue community bonds. She wants to see nonprofit organizations have more control over their financial destiny. “I am a risk taker by nature, most nonprofits are not. I implore the sector to replicate the community bonds for their own infrastructure projects. Fundamentally, it is about embracing and leveraging our greatest assets – our community – to build resilient social mission groups able to build a healthy and vibrant Ontario,” Tonya elaborates.

Through her engagement in the Partnership Project and as the co-chair of the Ontario Nonprofit Network (ONN), Tonya is pushing for clarity within the laws to remove the ambiguity surrounding the issuance of community bonds. She is looking for champions within big financial institutions that will make it easier to clear community bonds as viable investment opportunities and make such bonds available to their clients within their RRSP offerings. And she is looking for nonprofits to embrace this new form of financing. In fact, CSI will be releasing a Do-it-Yourself Guide to Community Bonds in April to enable qualified nonprofits to utilize community bonds for their financing needs. “The first time is an invention and the second is the real innovation,” concludes Tonya.  

And last but not least, the impact (you ask?)

Visit CSI to see it all in action. 

Notes:
¹ CSI Investor’s Package, September 28, 2010.
² Tonya Surman, TedX Toronto Talks, September 30, 2010.

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