interest, property owners must raise rents, making it difficult to finance afford- able housing units to be offered at low prices. PFS financing allows developers to use interest-free philanthropic and investor money, which keeps rents low and facilitates more construction projects. In addition, many not-for-profit afford- able housing providers actively compete for land with for-profit developers who have many more financial resources and reserves available at their disposal. Oftentimes, not-for-profit developers spend too much time looking for ways to put together a viable capital stack, only to be quickly outbid by competitors who can build unaffordable housing hassle-free. The PFS model also allows for recycling of philanthropic money. Because investors and charitable organizations receive their initial investment back plus interest (upon successful completion of the project), they can continue to capi- talize development projects. This allows for extended coverage of philanthropic capital funds to invest in more affordable housing unit construction. In addi- tion, philanthropic money boosts federal support to help finance construction of affordable housing in “high opportunity areas.” These areas are proven to promote better life outcomes for their residents (as demonstrated through the Moving to Opportunity housing voucher program), but because land prices are often higher in desirable areas, developers cannot finance construction of afford- able housing units in such areas. PFS also provides a formal investment mechanism for impact investors to use capital to promote social benefits. Impact investors show a clear desire to capitalize projects that improve lives; without PFS contracts, impact investors may have a harder time getting involved in affordable housing construction. Because Pay for Success reimbursements provide interest at the end of a project, impact investors and even some traditional investors can turn a profit while pro- moting extensive social good. Current popular government financing mechanisms for affordable hous- ing construction, such as LIHTC, do not provide capital for the actual operation of affordable housing properties. The PFS system can help fund maintenance of newly-built affordable housing as well as accompanying services, leading to more successful affordable housing units that keep people housed and lower the local government’s social service costs. [See the Resident Services section below for a more extensive discussion.] PFS contracts protect from volatility in the LIHTC market. As recent mar- ket activity demonstrates, if the tax credit market tanks, construction becomes more difficult to finance. PFS also helps incorporate state and local money into affordable housing construction. Beyond federal LIHTC money, PFS provides a funding framework to apply non-allocated housing money that is currently unused by housing authorities in communities across the nation. Finally, PFS financing provides governments with tools to keep afford- able housing developers accountable. Because payment is made only after
Pay for Success & Affordable Housing | Stefano Rumi 37
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