One of the main drivers of the nation’s housing affordability crisis is financing. Rising interest rates, construction costs, insurance premiums, tariffs, and other expenses have made it increasingly difficult to cover the cost of building new housing. A project can be zoned, permitted, and ready to build but will fail to move forward if the financing does not pencil out. This is a particular challenge for communities looking to develop affordable housing, given its thin revenue margins and heavy reliance on governmental subsidies.
In response, some states and localities have advanced mixed-income housing through policies and programs to help stretch scarce public resources while also increasing overall housing supply. Mixed-income projects make housing development more affordable by combining market-rate units and income-restricted units, thereby reducing the amount of subsidy required for each affordable unit.
But even mixed-income development has become harder to finance in recent years.
At a recent Urban Institute event, leaders from Massachusetts, Colorado, and Chattanooga, Tennessee shared how their communities are experimenting with new ways of using public capital to support mixed-income housing development. These experts emphasized that mixed-income development isn’t a replacement for the Low-Income Housing Tax Credit Program and other federal, state, local, and nonprofit programs that support deeply affordable housing for families with the lowest incomes. Rather, it’s a complementary tool communities can use to meet their housing needs.
Though the challenges in local markets vary, each program uses public capital to lower the cost of mixed-income development, attract private capital rather than simply subsidizing new housing, and serve as the patient investor that can help developments remain financially feasible. By investing public dollars rather than simply providing one-time subsidies, these programs can generate returns that can be recycled to support future housing development.
How Massachusetts gets stalled projects moving
Massachusetts’s housing finance agency, MassHousing, found that some mixed-income projects in the state that obtained permits were not getting built.
A lot of mixed-income deals were permitted, got through the Chapter 40B process [a state law that allows affordable and qualifying mixed-income projects to bypass local permitting processes], but weren’t actually moving into construction because they couldn’t get their financing together.
Interest rates had risen substantially between the housing development’s inception and construction, stalling the projects. MassHousing wanted to maintain private-sector investment and inject the minimum amount of public money necessary to make projects viable so they could support as many developments as possible.
To address this gap, MassHousing created the BILD program, which combines two types of financing: (1) public equity at a below-market interest rate through its Momentum Equity Fund and (2) subordinate debt. Rather than fully financing projects itself, MassHousing uses these investments to fill gaps in the capital stack and leverage additional private equity and debt. Together, these tools can reduce a project’s reliance on private equity—which is more expensive—and make it easier to obtain construction financing.
Notably, BILD’s public capital is structured as an investment: MassHousing receives annual dividend payments from the project, and at the end of the investment term, the project repays MassHousing’s initial investment. MassHousing can then recycle those returns and repaid principal into future projects, allowing the same public funds to support multiple developments.
How Colorado uses public investment to build tenant wealth
In Colorado, state housing officials are using a similar investment vehicle—below-market public equity—to solve a different problem.
Low-income housing tax credits, the primary source of funding for affordable housing, are oversubscribed, leaving limited resources to meet affordable housing needs and significant financing gaps for households with middle incomes. In 2022, Colorado voters passed Proposition 123, which dedicates state income-tax revenue to housing while conditioning access to much of that funding on local governments committing to increase their affordable housing stock.
Like MassHousing, part of Proposition 123’s State Affordable Housing Fund provides below-market equity in mixed-income developments without taking an ownership stake. This allows developers to retain ownership and control while enabling the state to earn a return on its investment without becoming a co-owner of the property. Developers can also pair the equity investment with concessionary debt available through the fund to further reduce financing costs.
Colorado also created a Tenant Equity Vehicle to help families build their assets and eventually move toward homeownership. All interest payments from the state’s concessionary debt product and returns above the principal from its equity investment feed into the program. Tenants earn cash back for paying their rent on time and share in the property’s value as it grows.
How Chattanooga, Tennessee, leverages public ownership to preserve affordability
Invest Chattanooga is a nonprofit housing investment fund created by the City of Chattanooga and the Chattanooga Housing Authority and is seeded with $20 million in city capital. It provides a combination of below-market subordinate debt that is repaid at refinancing and recycled into new projects and common equity to address the city’s biggest housing development challenge: capital.
We don’t have a cost issue. We don’t really have…an entitlements or zoning issue, as much as we have a capital issue.
Unlike the programs in Massachusetts and Colorado, Invest Chattanooga takes an indefinite controlling ownership stake in the developments it supports. Because Invest Chattanooga doesn’t have to sell its stake after a predetermined holding period, it maintains an ongoing role in the property and can preserve the affordability of at least 30 percent of its units long term. This differs from conventional private equity, which typically seeks to exit an investment after five to seven years. In comparison, Colorado’s public equity program has defined investment terms of up to 30 years, and Massachusetts must remain invested for the full term of a project’s senior loan.
Source: “Tackling Housing Supply and Affordability Challenges Through Mixed-Income Housing Finance Innovations,” Urban Institute, July 27, 2026, https://www.urban.org/events/tackling-housing-supply-and-affordability-challenges-through-mixed-income-housing-finance.
Using public financing innovations to address local housing market challenges
Despite the different local challenges they seek to address, all three programs provide something the private market often cannot: patient capital. Whereas conventional private equity typically seeks to exit an investment within five to seven years, Massachusetts, Colorado, and Chattanooga can take a longer view, using public investments to support long-term housing affordability.
These approaches could help other states and localities stretch public resources further. Rather than providing a one-time subsidy, governments can structure investments to generate returns that can be recycled into future housing.
The idea…is to create really flexible capital and to really understand your state’s data and needs.
Still, financing innovation can’t overcome every barrier to housing production. Just as zoning and permitting reforms may not translate into new housing when projects cannot secure viable financing, new financing tools can go only so far where regulatory barriers constrain development. Addressing the nation’s housing affordability crisis will require progress on both fronts, along with greater federal support for housing across the affordability spectrum.
