The US needs more affordable housing. But high interest rates and high housing development costs have made it difficult for states and localities to finance new units. Even with the recent expansion of the low-income housing tax credit, there are still not enough dollars to serve all communities in need (PDF).
In wake of these challenges, states and localities are testing new models to finance and subsidize new mixed-income housing. Combining below-market-rate and market-rate units, mixed-income housing projects generally require fewer subsidies and are more likely to be located in higher-opportunity neighborhoods.
Here, we explore how 16 states and localities are testing new ways to finance mixed-income housing projects. We find that these programs use a creative mix of financing strategies to make development financially feasible. We also outline key considerations for states and localities when developing these programs based on our recent analysis of Massachusetts’s Bringing Innovation to Lending and Development (BILD) program, led by MassHousing.
These new mixed-income financing tools could help states and localities expand the overall housing supply and better serve households facing the greatest affordability challenges.
New financing programs to support mixed-income housing construction have emerged in recent years
Across the 16 mixed-income financing programs we identified, 7 have disbursed money to projects and 6 have been funded but have not yet made disbursements. One program has been authorized by the state but has not yet been guaranteed funds, and 2 have been introduced by policymakers but not formally authorized by the state.
Mixed-income housing programs generally use one or more of the following financing tools:
- Providing subordinate or mezzanine financing that fills the gap in low-cost debt or equity financing to make projects feasible
- Funding housing construction to address a lack of capital to pay for construction
- Mobilizing private capital by leveraging public funds to de-risk projects and encourage private lenders and investors to provide financing
- Using revolving loan funds, which recycle funds for sustained programmatic support for many projects in perpetuity
Most of the programs we examined are revolving loan funds offering below-market subordinate debt for mixed-income housing construction, helping approved projects get shovels in the ground by lowering the cost of financing.
But several new programs—such as in Massachusetts, Colorado, Chicago, and Montgomery County, Maryland—are taking equity positions in mixed-income projects at a concessionary rate for both construction and postconstruction, offering developers cheaper capital for a longer term compared with market options. Each of these programs is executed in partnership with private lenders or equity investors.
Source: Urban Institute review of state and local mixed-income housing finance programs.
Note: The authors worked with generative AI to produce this landscape scan. Please see the Urban Institute’s generative AI policy.
Through these mechanisms, states and localities are making the math work for developers and pushing forward housing projects that deliver both affordable and market-rate units to the market.
Recommendations for states and localities designing and implementing mixed-income financing programs
In a new brief, we examine MassHousing’s BILD program, which supports new multifamily, mixed-income housing projects by making public equity investments and offering permanent, low-cost debt to developers who, in turn, must restrict at least 20 percent of new units as affordable to residents earning up to 80 percent of the area median income.
Based on the brief and this landscape analysis, we offer recommendations for states and localities developing similar mixed-income financing programs:
- Ensure financing is paired with zoning and permitting rules that help mixed-income projects get built. Offering affordable financing for mixed-income housing is effective only if there is a pipeline of projects that need it.
In Massachusetts, both the policy and regulatory environments provide strong incentives for mixed-income projects. The state’s Chapter 40B program fast-tracks approvals for mixed-income and affordable projects in localities that have not met their affordable housing obligations. Simultaneously, since 2000, many localities have adopted inclusionary zoning policies that mandate mixed-income development.
Similarly, housing production target programs, like Oregon’s Housing Needs Analysis and Connecticut’s 8-30g program, and affordability incentive programs, like California’s State Density Bonus Law and Montgomery County, Maryland’s mandatory inclusionary zoning program, create helpful conditions for mixed-income financing programs. - Partner with housing finance experts to develop effective financing programs. MassHousing’s housing finance experience was critical to creating and deploying BILD, a complex program that involves blending public and private capital, structuring subordinate debt and equity positions, negotiating terms with private lenders, and managing public risk.
This financing expertise may not always reside in a state’s housing finance agency. As shown in the table above, public-private intermediaries (e.g., Invest Chattanooga and Atlanta Urban Development Corporation) or states and localities themselves (e.g., Colorado and the City of Chicago) can also fill this role.
To balance public good with the incentives offered to developers, states and localities should conduct careful research to understand their local housing market’s dynamics, gaps in local financing, and developer needs before deploying funds to mixed-income projects. - Build in flexibility so programs can adapt as market conditions change. MassHousing created BILD because it observed that large, multifamily projects that obtained all necessary permits would often stall because of high interest rates and costly construction financing. MassHousing identified a way to unstick these projects by taking a first-loss equity position and pairing it with a low-cost permanent loan. That combination lowered the return a project needed to generate enough for construction to start, helping create affordable units that would otherwise not have been built.
Still, MassHousing continuously evaluates the evolving housing market using data analysis and discussions with developers and tweaks their program in response.
For example, though the program has so far focused on the more active housing development market in Greater Boston, MassHousing expects to expand BILD’s geographic footprint into lower development regions when macroeconomic conditions improve.
The momentum around mixed-income housing finance programs is a promising shift in states’ and localities’ approaches to affordable housing provision. With intentional deployment, places can effectively unlock critical capital to bring more housing supply on the market.
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