successful completion of the project, affordable housing providers are incen- tivized to continue ensuring quality service throughout the duration of the project. Because PFS contract terms are negotiable, local governments have flex- ibility and bargaining power to ensure compliance with federal and local man- dates to “affirmatively further affordable housing,” even beyond the 15-year cutoff of LIHTC-financed units, keeping more affordable housing units on the market longer. Pay for Success and Pre-Acquisition Financing Another novel application of PFS contracts in promoting affordable housing construction is in funding pre-acquisition financing. Affordable housing provid- ers often incur costs during the pre-acquisition phase of either a construction or preservation project that comes directly out of its operating budget. Though these costs are comparatively little per property, their impact is significant. PFS financing can help smaller affordable housing providers and faith- based institutions be more competitive in the pre-acquisition phase. Local gov- ernments that are hesitant to capitalize full projects or do not have the funds to embark on large-scale construction projects can engage with many smaller PFS projects at a time and provide reimbursements only upon successful closing of an affordable housing deal. Such small-scale investments are very feasible, yet provide an essential source of funding to promote more development. Pay for Success and Property Acquisition/Rehabilitation/Preservation Many of the benefits of PFS financing for housing construction can be used to finance the preservation and rehabilitation of existing housing units for the affordable housing market. Because rehabilitation is often cheaper than new construction, governments are incentivized to preserve existing housing stock. However, because some units may be located in areas of low opportunity, in addi- tion to a general deficit of affordable housing units today, governments should finance both the preservation of existing units at up-to-date standards as well as the construction of new affordable housing units in communities. Acquisition and preservation projects will become especially important in the coming years as many LIHTC-financed properties reach their 15-year maturity, meaning that many developers may seek to convert affordable housing units into market-rate housing, resulting in dangerous reductions to the already low affordable housing stock of many communities. Pay for Success contracts can also boost the attractiveness of 4% LIHTC deals. Because 9% tax credits are finite and usually allocated to larger construc- tion deals, affordable housing providers must rely on 4% tax credits and bonds to finance preservation projects. In addition, 4% tax credit deals require more soft money to operate; resulting in a larger gap in financing that must be cov- ered through costly loans. Using Pay for Success contracts with 4% tax credits
38 Pay for Success & Affordable Housing | Stefano Rumi
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