Social Impact Financing for Housing Roundtable at the Hoover Institution, Stanford University
This fall, a diverse set of leaders in the affordable housing sector convened at the Hoover Institution of Stanford University for a half-day roundtable discussion on innovative approaches to housing finance, particularly those that do not depend on Low Income Housing Tax Credits (LIHTC) as a subsidy. Roundtable attendees included housing and finance experts who drew upon their own work and perspectives to contribute new ideas for housing finance, public policy, and operational models. A list of attendees is included on the final page.
The roundtable discussion sought to explore promising practices emerging in the affordable housing ecosystem of funders, developers, and nonprofits, and to discuss what changes to the current set of financing conditions are needed to facilitate more affordable housing construction.
Background
Created in 1986, the LIHTC program is by far the United States’ biggest subsidy source for new development of affordable housing. According to Urban Institute, LIHTC has supported the construction or rehabilitation of nearly 3 million units since inception and accounts for approximately 25 percent of all new multifamily construction.
LIHTC has its advantages: the 4 or 9 percent tax credit provided to investors enables the financing for low-income housing projects to pencil out.
But LIHTC deals also have limitations. LIHTC projects take a long time from design to completion due to the LIHTC allocation process. Their complex capital stack, including filling financing gaps with other sources of subsidy and/or tax-exempt bonds, adds additional time and uncertainty to the construction process. And, the legal and financial expertise required to execute LIHTC projects add considerable costs and time to project budgets.
As a result, LIHTC projects cost more than constructing new multifamily housing with similar unit sizes and amenities. These costs have made media headlines, as the cost of producing low-income housing can reach $1 million per unit in expensive California markets. Still, developers continue to use LIHTC to fund their housing because there are few other financing options.
Given the current affordable housing crisis, where the need for new housing is urgent and cost-per-unit must remain low if providing housing at scale, the industry’s primary reliance on LIHTC to fund affordable housing is increasingly problematic.
Roundtable Overview
The roundtable format provided an opportunity to bring together a diverse array of perspectives with the goal of identifying common themes, sharing promising approaches, and highlighting gaps that required further attention. Below is a summary of the discussion and key takeaways, organized by topic.
New Financing and Operational Models
To address the challenge of building affordable housing without depending on LIHTC, funders and developers are creating new financing and operational models that address key challenges in the construction and/or operation cycle.
Purchasing existing buildings reduces the time and cost of projects
Rather than construct new affordable housing, developers such as BDP Impact are purchasing existing buildings and converting them to permanently affordable housing.
These projects can produce housing more quickly and affordably than new construction.Rather than use LIHTC at the outset for new construction, BDP Impact’s model acquires the properties using social impact equity and market-rate debt. This allows them to transact quickly and effectively compete with private equity for suitable multifamily properties. BDP then uses LIHTC to refinance the project after 7-10 years, which ensures long-term affordability.
Replacing tax credits with concessionary capital lowers the cost per unit of housing
San Francisco Housing Accelerator Fund (SFHAF) in partnership with the Sobrato Family Foundation has developed a model that will use $50 million of low-cost capital to provide first-mortgage and soft-pay mezzanine financing to allow projects to move forward without using competitive state tax credits. Investors in the fund will remain invested at 22 years for a concessionary return. Capital will be injected into projects during construction, which helps to reduce the overall project cost.
Kaiser Permanente has been a leader in providing this type of financing. Kaiser has invested in a variety of impact funds and projects, including recent investments in Community Solutions’ national housing fund to end homelessness (managed by BDP) and SDS Capital Group’s Los Angeles-based housing fund. In both cases, Kaiser’s capital has come in at a below-market rate to allow project sponsors to achieve affordable outcomes without tax credits.
Social impact investment funds can help to reduce construction costs and can be revolved to support multiple projects
Another way that social impact funding can help to solve the housing gap is by allowing developers upfront access to the cash required to fund modular and other cost-saving construction approaches. A $50 million investment from Charles and Helen Schwab in SFHAF and their partner, Tipping Point, provided the funding for a 146-unit modular construction project developed by Mercy Housing in San Francisco in 2021.
In addition to allowing for the use of modular construction (which is difficult to finance using traditional sources of debt), the SFHAF/Tipping Point approach employed a creative structure to allow the funds to be recycled and subsequently provide funding for an additional set of units.
Well-structured governmental guarantees open an opportunity for creative impact bridge financing
The Mercy project, funded by SFHAF/Tipping Point, included a master leasing obligation from the City of San Francisco, which is financeable using traditional debt once the project is delivered. The construction risk to get to the payment guarantee, however, remained a challenge. SFHAF/Tipping Point capital addressed that challenge by providing the cash up front to allow the project to be built and delivered under the master lease. At that point the SFHAF/Tipping Point money was replaced with traditional debt and recycled to serve a similar bridge-funding role for other projects.
Mercy Housing employed a similar approach in the development of a Shelter-Plus-Care facility. With this project, the risk was the operating contract renewal by HUD, which came on a three-year cycle. In this case, the City of San Francisco signed an MOU agreeing to backstop the nonrenewal risk, which allowed Citibank to provide traditional debt financing.
Another example is The Granada, a former 214-unit hotel that Episcopal Community Services of San Francisco (ECS) purchased and converted into permanent supportive housing, with on-site wraparound supportive services. In 2020, ECS and the City and County of San Francisco (“CCSF”) jointly applied to the State of California for Project Homekey 1.0 funding, a creative financing opportunity from the State that aimed to expedite the creation of permanent supportive housing units. The Granada received a $47.6 Million Homekey grant for acquisition, construction, and operations. SFHAF issued a $64 million construction financing loan to renovate the property, and CCSF provided permanent financing to support its ongoing operations.
ECS also partnered with SFHAF and the City and County of San Francisco for the construction financing and permanent financing for the project, respectively. With the governmental sponsorship by CCSF and ECS’s long track record of successful housing development and 40 years of providing supportive services in the region, the strong sponsors partnership mitigated risks under the traditional real estate finance metrics, and provided the opportunity for private lenders such as SFHAF to invest in the project as the construction lender and bridge the creative financing need of the project.
SFHAF’s mission is to think differently about risk and identify innovative financing models that empower projects to move forward with greater costs and speed efficiency, but SFHAF’s capital is constrained in size and geographic reach. Creating new ways to measure and understand the true risk of a project in markets across the country would undoubtedly unlock more capital.
Corporate / foundation balance sheet guarantees are another important form of impact investment
While public-sector guarantees can help to pave the way to traditional private debt financing, impact investors can play a role in guaranteeing other project risks. In addition to impact investments in pooled fund vehicles or directly into projects, some funders are having impact by using their balance sheets to guarantee project risks, thereby allowing otherwise unfinanceable projects to move forward. The Community Investment Guarantee Pool (CIGP) is one prominent model that allows guarantors to combine resources and expertise by establishing a single, one-stop-shop for intermediary lenders in the climate, affordable housing, and small business sectors.
Achieving investment-grade credit rating helps affordable housing developers lower risk and enables greater investment
Nonprofits that get a credit rating are able to get bond funding at the enterprise level that provides tremendous flexibility. Several other large national housing developers have used a similar approach. SFHAF is working through the process of securing this type of financing to support their work; however, the current interest rate environment makes this strategy challenging.
Community-based support models can supplement traditional supportive services
At a time when funding for traditional supportive services is increasingly difficult to attain, communities such as Settled in Minnesota and Community First in Austin are demonstrating the power of “intentional neighbors” and community-based support models. Research by Dr. Gabrielle Clowdus has shown the positive impact of community support on housing stability and improved life outcomes for residents. Both Settled and Community First rely on the local faith community to identify members interested in living within sponsored supportive housing developments. These individuals do not provide specific case management or supportive services, but commit to being a supportive member of the community.
Additional Cost and Time Reduction Strategies
In addition to these financing innovations, roundtable participants explored solutions that could help to bring down the cost and time associated with housing production.
Vertical integration of housing construction beyond modular construction could help control project costs
The roundtable participants surfaced early work around combining efforts among the affordable housing developer community to collectively buy housing construction elements in bulk in order to secure greater control over the pricing of projects. The goal is to identify warehousing opportunities where key infrastructure, construction, and fit-out materials could be stored if they were to be purchased in bulk in order to attain cost savings.
Faith-based lands and school-owned lands offer inexpensive property
Chan-Zuckerberg Initiative (CZI) in partnership with the California School Board Association, UCLA and UC Berkeley mapped excess school district land (Report). They found that each school district had at least one site that could accommodate housing, and collectively the land mass would be the size of “five Manhattans.” CZI is now working with the school board to build its development capacity arm so that it can oversee the sites as a “master” and issue RFPs for development of multiple sites. With that scale, school districts can attract major developers and investors, such as Lendlease, which would not require LIHTC to create housing.
In California, SB 4, the Affordable Housing on Faith Lands Act, also known as “Yes in God’s Backyard,” passed in October 2023; the bill allows religious groups and nonprofit colleges to build affordable housing on their land by right, and may help to streamline entitlements for developing on faith-owned sites.
Partnerships with institutional investors or local rental owner collaboratives offer the potential for bulk unit access without development/acquisition risk
Invitation Homes and other major investors own inventories of thousands of properties across the country. The roundtable group considered whether nonprofits could manage these properties for a fee while keeping the rent affordable. While institutional investors are unlikely to be aligned with nonprofit affordable housing developers, homeownership collaboratives and community land trusts may offer a way to partner on scattered site housing. LROC (Local Rental Owner Collaborative) in Los Angeles is a pilot project featuring 50 small housing investors who control 300 units. Some 90 percent of the tenants are low- or extremely low-income and 90 percent of the owners are BIPOC. This partnership provides wealth retention opportunities for the owners, whose participation is incentivized with short-term rental relief grants combined with long-term financial consulting services, technology tools, and property management resources.
Public Policy Changes
Much affordable housing public policy is designed to support traditional LIHTC financing. Changes to housing finance policy offer an opportunity to meaningfully enhance the supply and impact of new housing units.
Universal housing vouchers could speed up and lower the cost of affordable housing development, reducing the need for LIHTC
The federal government helps low-income families, the elderly, and the disabled afford housing in the private market through a range of publicly backed vouchers. But because there are not enough of these vouchers to meet demand, new affordable housing developments cannot depend on housing vouchers as a source of rental income. Rental income is otherwise paid for by public subsidies, grants, project based vouchers, private rents or often a mix of the above sources. The lack of a guaranteed rental income source can add complexity and risk to the capital stack, which in turn adds cost to the legal bill for projects. Additionally, many of the funding sources for rent come with strings attached.
Advocacy for universal housing vouchers has primarily focused on the moral argument that we should ensure everyone access to housing. But there is potentially also a business case to be made for universal housing vouchers: through universal housing vouchers, the federal government would be essentially guaranteeing the rent for affordable housing development. This guarantee would “de-risk” projects, eliminate the need for private or public fundraising to subsidize tenants’ rent, and reduce the complexity of an affordable housing development’s capital stack. With guaranteed rental income, affordable housing developments might be able to close on their funding more quickly and without LIHTC as a component, again, meaningfully lowering cost and time for affordable housing delivery.
Reform around voucher and other subsidy support for different housing typologies could have a big impact
A number of the housing providers expressed frustration with the inability to use housing vouchers across a wider range of housing types. Community First’s properties that were previously mobile homes and now converted to permanent housing were deemed ineligible. Similarly, several organizations offer multiple bedroom units that can only accept a single voucher, where (even at a reduced payment) the unit could support two unrelated individuals who agreed to be roommates.
Medicaid could help defray some of the cost of affordable housing
Medicaid is increasingly seen as a way to help pay for affordable housing but could be doing much more given its demonstrated importance in driving healthcare cost reductions. Much of the focus in this area is around reimbursement for services, but in Arizona and Oregon, Medicaid is being used to pay rent directly. California has petitioned to allow for this as well. In other states it can now be used to cover some housing related expenses, such as a security deposit, moving expenses, and improvements, such as mold removal or air-conditioning installment. The biggest challenge in using Medicaid is billing. Most organizations do not have the expertise or infrastructure to effectively bill under Medicaid rules, and reimbursements are difficult to reliably project. In California nonprofit organizations focused on centralizing compliance and reimbursement for Medicaid may help to streamline the use of Medicaid to pay for housing.
Conclusion
The roundtable discussion surfaced an array of innovations in affordable housing finance that have the potential to meaningfully increase the supply and sustainability of affordable housing in communities of all shapes and sizes. While government subsidy will continue to be needed in order to house Americans across income levels, these alternative financing methods can help ensure affordable housing is produced as quickly and efficiently as possible. Representing the cutting edge of affordable housing development today, these ideas are worthy of wider uptake. Readers are welcome to share these insights with others in the field in the hopes of building a larger coalition of developers, funders, and service providers who are able to more cost effectively and quickly produce the affordable housing needed in the United States.
Roundtable Attendees
Jennifer Dolin- Jen Dolin Consulting (formerly of Mercy Housing)
Rebecca Foster- San Francisco Housing Accelerator Fund
Anu Natarajan- Meta
Gabrielle Clowdus- Settled
Larry Smith- Board Chair at Mobile Loaves and Fishes
Erin Gilbert- Schwab Foundation
Joanne Lee- Kaiser Permanente
Macy Leung- Episcopal Community Services
Ruby Bolaria Shifrin- Chan Zuckerberg Initiative
Joyce Truong- Avivar
Dave Foster- BDP Impact Real Estate
Special Thanks
This roundtable was made possible by the Hoover Institution at Stanford University through the Bochnowski Family Veteran Fellowship Program (VFP). The VFP is a nonresidential, year-long project-based program for 10 military veterans to accelerate solution-finding at a local, state, or national level. The VFP is building an effective and enduring group of successful veteran practitioners, motivated to confront real-world challenges with support from networks at the Hoover Institution and Stanford University.