PD&R Quarterly Update: How Local Governments Innovate to Meet Community Housing Needs

PD&R Quarterly Update: How Local Governments Innovate to Meet Community Housing Needs

At PD&R's recent Quarterly Update event, held March 21, 2024, panelists discussed examples of state and local strategies that can increase the supply of affordable housing.

In the midst of a worsening affordable housing crisis throughout the United States, local governments are pursuing innovative strategies to increase their affordable housing supply. On March 21, 2024, HUD’s Office of Policy Development and Research (PD&R) hosted a PD&R Quarterly Update on these local initiatives. Brian McCabe, PD&R’s deputy assistant secretary for policy development, opened the event and summarized recent HUD initiatives, including President Biden’s proposed $20 billion innovation fund for housing expansion. Lauren Lowery, director of housing and community development at the National League of Cities, provided keynote remarks followed by two panel discussions on state and local policies and proposals to increase the supply of affordable housing. The first panel explored Montgomery County, Maryland’s affordable housing initiatives and featured Chelsea Andrews, president and executive director of the Housing Opportunities Commission of Montgomery County; Zachary Marks, senior vice president of real estate at the Housing Opportunities Commission of Montgomery County; Hans Riemer, former president and at-large member of the Montgomery County Council; and Paul Williams, founder and executive director of the Center for Public Enterprise. The second panel highlighted several other innovative local and state housing production models and included Matt Bedsole, director of the Atlanta Housing Innovation Lab; Alex Lee, assemblymember for California’s 24th Assembly District; and Stefan Pryor, Rhode Island’s secretary of housing. Richard J. Monocchio, principal deputy assistant secretary of HUD’s Office of Public and Indian Housing, moderated the first panel, and McCabe moderated the second panel.

Montgomery County's Housing Production Fund

Montgomery County's Housing Opportunities Commission (HOC) combines the functions of a public housing agency, housing finance agency, and a public developer, an unusual consolidation that Andrews called a "unicorn" among public housing agencies. HOC oversees the county's housing voucher program, issues bonds, administers a resident services program, and acts as the county's largest affordable housing developer. In 2021, HOC launched the Housing Production Fund (HPF), a revolving loan fund that provides low-cost construction financing to develop self-sustaining housing projects. This fund awards 5-year construction loans for mixed-income projects that HOC develops with private partners. Once developers repay their loans to the fund, the 5 percent interest collected is returned to the county. Each rotation of $100 million in loans supports approximately 1,500 new units, 20 percent of which are reserved for families earning up to 50 percent of the area median income (AMI), 10 percent of which are reserved for families earning up to 65 percent of AMI, and 70 percent of which are rented at market rate. HOC retains an ownership stake in HPF-funded projects, ensuring permanent affordability. HOC's goal is to use this fund to produce 6,000 new homes over 20 years, 1,800 of which will be permanently affordable. Thirteen projects consisting of nearly 3,300 units are already in development.

Although the HPF loan covers only a portion of the total construction financing, the panelists explained that the loan allows developers to leverage other public and private funding. "What we demonstrated was [that] a revolving fund could… produce a whole lot of housing for a very limited amount of actual appropriation on the county's behalf," Marks said. Marks explained that the annual net cost to the county for the $100 million fund is approximately $2.7 million, which amounts to a small percentage of the county's total budget. Ultimately, approximately $54 million in taxpayer funds will enable roughly $2 billion in investment.

The panelists highlighted several advantages of this social housing model over other models for financing affordable housing. For example, these projects will have a longer affordability period than do most low-income housing tax credit (LIHTC) projects as well as a higher set-aside portion than most private developments that are subject to inclusionary zoning requirements. At the same time, these HPF-supported developments will be competitive with new nonsubsidized developments in the area, which Riemer suggests is essential "because it allows us to finance buildings that might be in communities where there could be resistance [and] bring in private investment where there isn't enough." Riemer and Andrews noted that a number of these affordable housing units will be in areas with higher opportunity levels than the areas where many existing subsidized units are located. These developments, coupled with HOC's resident support services, can provide a better quality of life for low- and moderate-income households.

Williams asserted that the low-cost public financing option supports more housing for residents at all income levels. Even after the county enacted zoning reforms that allow the construction of additional multifamily residences, many developers have struggled to launch market-rate developments projects because of the difficulty of obtaining financing, particularly at affordable interest rates. "Tools like this give housing finance agencies or housing authorities the ability to do those deals and say, 'I have a different source of capital that's cheaper than what we're going to find on the market,'" Williams explained. The panelists suggested that this model is replicable in other communities that have the political will, existing partnerships, and a partner or affiliate that can issue bonds.

Other State and Local Production Models

The speakers on the second panel highlighted housing initiatives similar to those of Montgomery County. Bedsole discussed the Atlanta Urban Development Corporation (AUDC), the new city-affiliated nonprofit tasked with developing mixed-income housing on publicly owned land. Although using public land for affordable housing had long been part of the city's plan, Bedsole said the city did not execute the strategy. "We didn't really have an entity that could look at all the public land [available] not just in our housing authority, not just in our city, but [also] in our schools and our transit agencies," Bedsole explained. Although AUDC is only 8 months old, several projects are already in the planning stages. One project is a tower being constructed above an existing fire station in Midtown, an area that has not had any affordable housing projects built in decades. In addition, AUDC is redeveloping Thomasville Heights, a 36-acre former public housing site.

Rhode Island established its housing department to respond to the state's housing challenges, including having the nation's lowest housing production rate. "We wanted to make sure that we were not just financing projects but [also] reaching into the market in a way that's nimble and helps to unleash activity [by] working with developers, nonprofits, [and] for-profits," explained Pryor, who leads the new department. Pryor said that the state's housing finance agency is creating a subsidiary that will be a "proactive development agency" that provides financial and technical support to developers. This subsidiary will be complemented by a new state equivalent to the federal LIHTC program with a 5-year authorization for $30 million annually. In addition, the governor has proposed a $100 million bond dedicated to housing, the state's largest such general obligation bond to date. According to Pryor, Rhode Island is also exploring the possibility of a statewide revolving loan fund similar to Montgomery County's HPF. Meanwhile, policymakers have begun addressing regulatory barriers to developing higher-density housing, such as by streamlining the local zoning approval process for new housing.

Echoing some of the other panelists, Lee said that he thinks public production is key to addressing California's affordable housing crisis. "We're trying to create a statewide public developer, something that takes a lot of cues and inspirations from [what] Montgomery County and HOC [are doing], but we're trying to do this at scale using our state resources and financing, state development expertise, [and] land aspects," Lee explained. He mentioned that the state has already identified approximately 90 publicly owned sites where it can develop affordable housing. The state could either develop the housing directly or contract with a third party to develop the land. In California, governments can provide a ground lease to another public or private entity for virtually no cost, giving the lessees a potentially significant financing advantage. Lee also said that the state is taking steps to encourage local governments to engage in public development, including a proposal to help school districts build housing for educators on district-owned land. Lee believes, however, that ultimately, the state needs a publicly affiliated developer with statewide jurisdiction to provide the affordable housing the market is not constructing.

Moving Forward

The speakers highlighted recently enacted and proposed initiatives to produce more affordable housing, emphasizing public development strategies. However, as Lowery said in her opening remarks, "local governments often do not start from the same place where resources, tools, funding or partnerships are readily available. Before we can innovate, we must understand the obstacles and barriers that local governments face." The panelists are optimistic, however, that with the right tools, local governments can alleviate their housing shortage.