As the national housing crisis grows in scope and severity, traditional affordable housing solutions are proving insufficient. The affordable housing market has grown reliant on the Low- Income Housing Tax Credit (LIHTC) and federal vouchers, along with the ecosystems that have developed around them. However, these resources do not stretch as far in the context of rising construction costs and rents and increasing uncertainty regarding federal support and the macroeconomy.
To meet the crisis head-on, states and localities are deploying a new toolset. Housing Finance Authorities (HFA), state or local government, or quasi- overnmental agencies focused on providing financing for affordable housing possess capabilities beyond the traditional toolkit of LIHTC and associated tax-exempt bonds. Certain creative state and local agencies have begun leveraging additional mechanisms to drive a Mixed-Income Public Development Model, filling gaps left by traditional programs and resources. State and local governments can deploy revolving loan funds, low-cost permanent financing, and in some cases property tax relief to enable public-led development of affordable and mixed-income housing.
The Challenge This Tool Solves
The affordable housing development ecosystem is largely built on powerful, but currently insufficient federally authorized and funded tools including LIHTC, associated tax-exempt Private Activity Bonds (PABs), and vouchers. LIHTC is often oversubscribed by nearly three times, while only one in four eligible households receives federal assistance (including vouchers).
Beyond shortfalls in existing programs targeting lowest-income residents, challenges hinder
efficient affordable and mixed-income housing development. Market-rate private equity investors face high capital costs and typically avoid the complication of mixed-income projects, often lacking the capacity to properly manage the requirements accompanying affordable units, such as income verification. The development market also faces challenges across income levels in the current high-construction cost and high-interest rate environment. These factors combine to create a funding gap for mixed-income, public-led developments. Mixed-Income Public Development can create the conditions to fill this gap.
Types of Communities That Could Use This Tool
Affordability in the mixed-income development model comes from savings in financing costs and reduced operating costs through property tax relief. The model also relies on sufficient difference between market and affordable rents to permit a level of cross-subsidization. As such, this approach works best in areas with strong rental markets, and less effectively in rural or underinvested areas where private investment is not occurring. Generally, where private
development successfully pencils, this model should operate successfully by bringing in public financing tools and in some cases property tax relief to reduce costs. In hot markets where rents are rising rapidly, this model can be a potent tool to secure affordability in high-opportunity areas.
This paper focuses largely on the success of the Montgomery County Housing Opportunities Commission (Montgomery County is a region in Maryland and suburban Washington DC). The entity (HOC) was established in 1974 and acts as the County’s designated Public Housing Authority and Housing Finance Agency. More recently, the commission collaborated with Montgomery County Government to create the $100 million Housing Production Fund (HPF). We also highlight efforts in Chicago, Atlanta, and Chattanooga, demonstrating the breadth of community types that can benefit from the model.
Large jurisdictions with robust housing demand and well-staffed public agencies may want to begin by establishing revolving loans to achieve maximum benefit and scale from this model. However, many jurisdictions have existing housing trust funds or other low-cost loan or grant mechanisms often used to provide gap funding for LIHTC projects. Public Housing Authorities (PHAs), HFAs, or municipal housing departments could identify specific high-value development projects, develop partnerships with private developers, and use those existing authorities to issue low-cost construction loans. These projects could be based on government-owned land primed for redevelopment, with developers chosen through RFP, or could be done in partnership with private developers on stalled projects. A public entity could partner with the private developer, create a new publicly owned holding company to receive the loan, and proceed. This approach resembles “80/20” developments commonly undertaken with FHA Risk Share by private developers in New York City, but with the added benefits of public ownership. This allows municipalities to begin producing housing while figuring out the legal, financial, and political issues surrounding capitalizing a larger revolving loan fund or potentially creating a new public entity.
The involvement of the HFA that is part of the HUD-HFA Risk Share program can enhance the tool’s impact for communities with a participating HFA. The Federal Housing Administration (FHA) partners with the HFA to enhance HFA credit, lowering the cost of capital. The Federal Financing Bank (FFB) can also step in and purchase Risk Share loans, further reducing the cost of capital. These Risk Share loans can be taxable or tax-exempt and represent an opportunity to recycle Volume Cap that cannot be used to generate new 4% tax credits but can provide tax-exemption for a Risk Share loan.
Expected Impacts of This Tool
HOC’s $100 million fund is expected to have approximately 10-to-1 leverage over 10 years (more details in Case Studies section below), catalyzing $1 billion of mixed-income development capital. If the top 50 metros were generated production funds of similar per-capita scale, these funds of approximately $20 billion could catalyze $200 billion of mixed-income development over 10 years.