[1000 Words; 10 Minute Read] This post looks at what “Weighted-Blended” Finance Mechanisms are the most appropriate framing to consider the financing of affordable housing in the development process. We see that a “tiered” level finance generating structure is important in order to begin to start claiming the strength of weight with which mechanisms have the greatest power. San Francisco and the Bay Area case study is used to draw lessons for individual city nuances with respect to their use of financial mechanisms in affordable housing development. The City of San Francisco and the Bay Area was chosen as a case study as the area has been trying to overcome the challenges of high volume of affordable housing development in difficult market circumstances. Furthermore, the City of San Francisco and the Bay Area region has managed to lever in innovative finance approaches to tackle affordable housing where there is a property boom for some cities; whilst some other city administrations continue to deal with a stagnant property market.
The mechanisms highlighted in the previous section only serve to demonstrate financial force that shape the market. Often it is the process of development by affordable housing providers that select and implement the appropriate mix or “blend” of finance mechanisms, and in various different degrees or “weights.” As such, it is worth highlighting here the process of affordable housing development, to demonstrate that the blend and weight of finance will be one of the developer’s choices; the other being ensuring that the development is realized beyond the financial choices. A concern of the overall affordable housing development process is making sure that all the typical planning issues are dealt with first (Type 1 – direct mechanism). Following this priority will be submitting an application for tax credits (Type 2 – fiscal mechanism), in addition to engaging with an architect and the city administrators to prepare a building permit (Type 1). A selection of financing partners would be next, with the first one as an equity investor – the institution that is actually going to buy the tax credits – the debt part of the finance is then sought. Often, local cities and counties will also put up and control targeted dollars in the project, attached to a number of program funds that are made available at the federal level and the state level (Type 2). Developers will then start to bring together other sources of financing – government loan financing, such as city bonds (Type 3 – monetary mechanism). Once this is in place and the equity is confirmed, then the affordable housing developer (or partnership) can obtain an interim construction loan and start to lever in the permanent debt from mainstream financial sources such as high street banks (Type 3).
During the development process, different mechanisms will be blended in the finance mix. Further, the weighting of importance for each mechanism is also of interest to the affordable housing developer. To put some weighting into this blend that occurs during the process over time, affordable housing development finance operates over several “tiered” finance generating levels. Here it is put forward to consider the financing of affordable housing development as a three-tier finance generating system (see Table 1). At the first tier, federal–state–regional finance is generated, and devolved to the city and subcity scale via government programs. A significant weight provided in this tier is by the LIHTC system, developed by the CRA, which encourages commercial lending in the affordable housing sector. Other first-tier finance generating levels are those such as the IFDs that operate as value capture instruments, albeit less focused on blight, as was the now disbanded (in California) TIF districts. Non-value capture bonds also contribute to this first tier, with mechanisms such as the CFDs that are bonded to finance to pay for public needs (not specifically housing) then paid back via taxation. At tier 1 federal–state–region finance generating level, state-led regional PDA grants also have been selected to encourage TOD affordable housing located at key transport hubs.
Second-tier finance generating levels are those highly powered within city and county jurisdictions for affordable housing development. City financing from tax extraction is via instruments such as special property taxes (e.g. Prop 13), and affordable housing incentivized finance via inclusionary housing fees and levies, plus inclusionary zones that encourage cross-subsidization of finance for affordable units. Exaction in this second city tier includes the use of impact fees on developers that contribute to public costs occurring due to development, or from a community agreement that will pay on the benefit principle, a CBA. At this city extraction and exaction second tier, funds can be pooled by the city administration, such as in the form of HTF in the example of affordable housing development.
Table 1: Affordable housing finance “weighted tier” mechanism power and associated key concepts and policy
The third tier of finance generating for affordable housing development involves philanthropic, voluntary, private, and charity donations. Donations are not necessarily from government shaping type mechanisms (direct, fiscal, or monetary types) but will in turn provide less than market rate, and thus affordable housing developments. These could be philanthropic and as private syndicates or private payments. Donations in this way may in some instances provide a way that no individual affordable (or more specifically not-for-profit) housing developer could finance. More philanthropic contributions come from several charitable trusts that often provide gap financing and seed-corn money for mission-based projects to be realized.
The emphasis in this post was to explore more government shaping affordable housing development finance mechanisms, but with the continued rollback of state funding, available alternative donation-based “tiers” could be ever more weighted to drive affordable house development. Especially given the rise of crowdsourcing and the potential of crowdfunding mission-based projects such as affordable housing developments. That is not to say that the most significant weight of affordable housing development finance generation, by tier-one federal–state–regional power, is not to be dismissed, particularly by those that wish to see a fair housing allocation system, based on the greater public good and not just unfettered market forces and charity alone.
The weight of the blend in financing affordable housing development can also be considered in relation to the “tiered” finance generating level. The strongest weighted tier for mechanism power is the federal–state–regional tier that devolves many significant programs and acts that enable the affordable housing development sector to exist. Second, the county–city–neighborhood second tier is argued as providing power to generate finance, with some autonomous powers for city and county to exact, extract, and bond, although largely controlled by the federal–state–regional tier. The third tier of finance generation is that from philanthropic, voluntary, private, and charity donations; these donations arguably generate a weaker weight of mechanism power, although paradoxically without such contributions at site level many developments may not be kick-started.
Just as with the many sources of finance, partnering to provide affordable housing development (such as private equity or debt finance) may have the most influence. Influences by the sources of finance, rather than the mechanism of finances, are for further study – especially as the willingness for different sources of finance to be forthcoming could depend on many heterogeneous reasons, such as institutional power or the specific site location of the affordable housing development.
A full and formatted version of the post can be cited as: Squires, G. (2018). ‘Mechanisms for Financing Affordable Housing Development’ in Squires, G., Heurkens, E., Peiser, R., (2018). Companion to Real Estate Development. Routledge.