New Developments, Expanding Pay for Success
By Thom Amdur
4 min read
When you think of innovation in American business you probably think of Apple, Google and the myriad of tech “unicorns” (i.e. billion dollar startups) which dominate the business news. What do all of these companies have in common? Their business models are fundamentally all based on disruption.
The real estate industry is square in the crosshairs for disruption too. There are lots of examples already – Airbnb is shaking up the hospitality sector, RedFin is changing how we house hunt, and a quick Google search of crowdfunding and real estate, pulls results for more than 100 businesses seeking to disrupt how we raise capital to invest in traditional real estate.
Is the affordable housing sector ripe for disruption too? Probably. As I’ve written about in this column previously, I am excited about how technology, like 3D printing and pre-fabrication, may soon reinvent the way we construct buildings. Developers are experimenting with alternative designs, like micro-units and modern-day versions of co-housing (the dorm-like apartments built by WeLive), to address niche components of the affordable market. These are exciting developments, but ultimately, real estate and, especially, the affordable housing sector is driven as much by capital formation as it is by design. Hidden in plain site within the affordable housing finance capital model is the transformative “Pay For Success” (PFS) model that could disrupt not just real estate finance but also the social sector.
Stefano Rumi of the University of Virginia’s Pay for Success Lab recently published the excellent report “Pay For Success & Affordable Housing,”1 which explores how PFS works and how our industry can leverage it to transform the healthcare, education and other sectors of our economy. The report describes PFS as a “service contract through which governments purchase preventative social services from non-governmental service providers. Instead of up-front capitalization, service providers use an operating loan, acquired from third-party investors, which buffers governments from financial risk. In the event of success, the government pays out the contract and interests to the investor. In the event of failure, the government pays nothing.”
Does this sound familiar? It should: the LIHTC is the original PFS model and its 30-year track record of success has resulted in, on average, 100,000 units of affordable housing constructed or rehabbed annually. A recent report published by the accounting firm CohnReznick found that “through its 30-plus year history, the affordable housing built with housing tax credits has forged an impressive record of strong financial performance. The overwhelming majority of properties financed with housing tax credits are fully occupied, with strong net cashflows and foreclosure rates that are incredibly low.” The PFS model in financing the construction of affordable housing has created a win-win situation for the public, private and nonprofit sectors – a replicable model that has produced or preserved millions of quality affordable apartments for low-income Americans while providing developers and investors with reasonable returns. And of course, the federal government only pays its portion after the apartments are delivered and leased to qualified tenants.
This model has proven incredibly effective in producing units. Our next task is to take this financing model and apply it to other areas of social need. The affordable housing community actually has a leg-up on the competition. We already have a socially-motivated investor base that is used to the monetization structure of the model. As a highly regulated industry, we also have much of the reporting and compliance infrastructure in place required for the performance assessments that underlie a PFS contract. Most importantly, the affordable housing we develop is a natural platform to deliver high-impact, low-cost service to some of the nations’ most persistent and expensive social challenges.
Safe, quality, affordable housing is already one of the most successful and cost-effective interventions for those seeking to impact societal gains in healthcare, education, the reduction of prison recidivism and other areas. Our industry has shown through efforts, like HUD’s Family Self Sufficiency Program and Vermont’s Support and Services at Home (SASH) program, that bringing dedicated services to affordable housing can yield results far in excess to their costs. The affordable housing “platform” can leverage PFS models to address a number of areas. By creating new models to finance services in affordable housing, we can have a significant impact on a myriad of societal costs associated with chronic homelessness, reduce the costs associated with chronic but treatable healthcare issues, such as diabetes and hypertension, treat individuals with substance abuse challenges and reduce prison recidivism.
Now is the time to scale up these programs and the PFS model more generally. As Congress continues to debate tax reform, it is paramount that we expand successful PFS models, like the LIHTC, and create new space for it to be a disruptive force for good.
