A private apartment development in Montgomery County, Maryland was stalled out. The plans were approved and the site was ready to go, but the developer couldn’t get the last of the funding needed to start construction.
“They couldn’t get equity to fill the gap and they were bleeding money,” Paul Williams told a packed room at the Governor’s Housing Conference in Virginia Beach Wednesday morning.
Typically, there are two main ways developers plug that funding gap.
First, there’s federal financial aid. Tax credits and tax-exempt bonds are meant to help build affordable housing, but those forms of funding are stretched increasingly thin.
Monique Johnson with Virginia Housing noted that a decade ago, there would be five applications for one type of tax credit funding. This year, there were nearly 60.
The other way is to get private equity to fund the balance. But developers say including affordable units won’t make them enough money for those investors.
Williams, the executive director of the Center for Public Enterprise, said officials in Montgomery County opted for a third way — and in doing so, developed a new funding model that has rapidly gained traction in cities around the country.
An arm of the county’s housing authority effectively bought into the project. Using a revolving loan fund originally allotted $50 million by the county government, as well as the ability to leverage other low-interest financing and tax relief, the agency filled the gap and then some, taking a majority ownership stake.
“Montgomery County had just capitalized their revolving loan fund and said ‘hey, I have this tool to actually solve exactly this problem,’” Williams said.
What was planned as a market-rate apartment complex became a mixed-income development with nearly 300 units — roughly a third of which are reserved for families with lower incomes. By including market-rate apartments, the project can sustain itself and eventually pay back the money from the loan fund to do it again on another project.
On the surface, the concept is similar to housing trust fund programs that have recently gained popularity. A government appropriates millions of dollars into a fund dedicated to promoting affordable housing.
But while most housing trust fund programs give out grants and incentives to private developers, the structure Williams helped develop in Montgomery County allows the government to own and control the properties once construction is done and loans are paid, guaranteeing affordability as long as the county wants. It also keeps replenishing the loan fund to let the county invest in future projects.
At its core, it’s a series of public-private partnerships — typically used to build things like sports arenas, but used here to develop affordable housing.
The program has been such a success in Montgomery County the government doubled its loan fund to $100 million. Williams said there are now 4,000 units in the construction pipeline in the county, half of which are from the county taking over stalled apartment developments.
But the same structure can be used in different ways, Williams explained.
In Atlanta, the city set up a similar agency — not to get stalled projects over the finish line, but to capitalize on underused city properties, like a city-owned parking lot and fire station smack in the middle of the most expensive part of town.
“They created an urban development corporation, and (its) first (public request) was ‘who wants to build me a 40-story multifamily residential tower on this property,” Williams said.
He said the city agency immediately got a dozen responses from developers of both market-rate and affordable housing — and because the city agency is handling the financing rather than just selling off the land, it can decide what the final project looks like and how much affordable housing is included.
And Williams says there are a lot more opportunities beyond Montgomery County’s pipeline of stalled private projects and Atlanta’s use of underutilized public land.
A big one that hasn’t been explored much is taking on some of those dozens of properties that applied for and didn’t get the federal low-income housing tax credits.
“Normally, what I tell you is ‘better luck next year,’ but what I can offer you now is ‘here's an off ramp, I can get you done right now as a mixed-income project,’” Williams said.
He noted that finding new ways to fund affordable housing development seems more important now than ever with the incoming administration of President-Elect Donald Trump.
“It is exceedingly unlikely that there will be a large federal expansion of low-income housing tax credits or tax exempt bonds for the next four years at least, he said. ”So yet another reason to start looking at these kinds of tools that can do some volume without those resources.”
