Rethinking the Rules of Housing Finance

This article is part of The Rooftop, a blog and multimedia series from New America’s Future of Land and Housing program. Featuring insights from experts across diverse fields, the series is a home for bold ideas to improve housing in the United States and globally.

The public conversation about the housing crisis often revolves around the challenges of NIMBYism, restrictive zoning, and permitting obstacles. Progress has been made through a record-breaking number of recent pro-housing policies across states to create the enabling public conditions for housing development. But without funding, many of these projects will not be realized. Financing challenges remain an underaddressed barrier to housing production, and closing these gaps is essential to turning policy progress into homes.

The first financing challenge is straightforward: public funding for low-income housing falls far short of housing production needs. For example, the nation’s largest affordable housing program, the Low Income Housing Tax Credit (LIHTC), is severely oversubscribed and only finances roughly 87,000 units annually against an estimated shortage of 7.1 million homes for low-income renters.

The second challenge is less quantifiable, but equally consequential: the affordable housing finance system is structured in ways that actively drive up development costs and make it harder to implement and scale the strategies that can lower costs or unlock new sites. As the “Five L’s of Building” (land, labor, lumber,  laws, and lending) continue to increase the price of development—per-unit affordable housing costs in San Francisco now routinely exceed $1 million—the following approaches can make more projects financially feasible and stretch limited funding across more homes. 

Across the country, mission-driven lenders are developing new products and structures to fill gaps in the traditional capital markets, from new underwriting models to blended finance structures to specialized predevelopment loan programs. Some approaches address the cost side of the equation: Innovative construction methods and development on underutilized land can meaningfully reduce development costs or create viable sites for housing. Others focus on streamlining financing structures themselves, reducing the time, cost, and complexity that come with layering multiple funding sources on a single project. This article draws on a few examples from California—a state with some of the country’s most acute housing shortages and highest development costs—to illustrate what it looks like when financing systems evolve to better meet housing goals.

Catalyzing Uptake of Innovative Construction Methods

Innovative construction methods, such as modular, panelized, and other offsite building methods, can reduce hard construction costs by 20 percent and cut build timelines by up to 50 percent. While other countries have scaled construction technology—a significant proportion of new housing is built with these techniques in countries like Sweden and Japan—the U.S. has been slow to adopt these approaches due to financing systems hurdles, leaving a proven cost-reduction strategy underutilized. 

The financing gap for innovative construction methods is partly a data problem. Lenders have decades of experience underwriting traditional site-built housing and understand its risk profile. These newer construction methods lack that track record in the U.S. market, leaving financial institutions with little basis to evaluate these projects, and making them more likely to decline or impose terms that undercut the cost savings benefits. One significant barrier for developers who want to use these building methods is obtaining a pre-development and construction loan. Standard loans release funds in stages as on-site work is completed, but projects with components built offsite require large upfront deposits to reserve a factory spot and purchase materials. Most lenders have no products designed for this cash flow structure, and therefore treat these housing projects as higher risk. Additionally, lenders often lack underwriting capacity for evaluating the factories themselves. 

Some individual projects have gotten around these hurdles using flexible funding sources: The Tahanan modular housing project in San Francisco was built 41 percent cheaper and faster than comparable site-built projects, but was only able to bypass lending barriers to utilizing modular because it was financed using philanthropic grant funding. The Housing Accelerator Fund’s Industrialized Construction Catalyst Fund (ICCF) has leveraged learnings from the Tahanan project to develop loan products that address these financing barriers and catalyze larger-scale uptake of these innovative construction methods for affordable housing. The $10 million pilot fund has closed loans for two projects and issued commitments to another two projects, supporting 430 units of new housing in its initial phase, with the goal of generating proof points that these construction methods can deliver affordable housing faster and cheaper with lower execution risks than currently assumed. 

Pairing Expertise with Capital to Build on Excess and Underutilized Land

Institutions across America are sitting on excess land that could house thousands of families, and advocacy efforts like the Yes in God’s Backyard (YIGBY) movement are pushing to unlock it. In California alone, K-12 school districts own over 75,000 developable acres, and faith-based organizations and nonprofit colleges hold over 141,000 acres statewide. Policy reforms have helped make housing on this land viable: California’s SB 4 legislation streamlines affordable housing development on land belonging to faith institutions and nonprofit colleges, while AB 2295 enables school districts to develop surplus land for educator and workforce housing.

Even with these policy improvements to unlock land, the housing cannot be built without capital. These excess land projects typically utilize ground leases, where the institution retains ownership of the land while a developer builds and operates housing on it, which adds complexity around title and loan terms. Many lenders are unfamiliar with this model or view ground lease projects as riskier, since the land can’t be pledged as collateral for loans. For projects on land owned by faith based organizations, congregations also typically can’t afford to take on predevelopment debt, and most of these landowners need technical assistance to navigate the financing and development process.

Several organizations are building the financing products and technical assistance programs these projects require. LISC Bay Area’s Public Lands: Unlocking Sites program offers unsecured predevelopment loans for publicly-owned sites where developers cannot hold the public land as collateral. The California School Board Association’s Loan Fund addresses the distinct financing constraints of school district land, and the United Church of Christ’s Church Building and Loan Fund is an emerging leader in supporting faith communities’ housing projects. 

Streamlining Capital Structures

Beyond the challenge of limited funding for affordable housing, the current structure is complex and fragmented, adding significant cost and time to every deal. Affordable projects in California typically require four to six separate public funding sources, each with its own requirements and compliance obligations, such that each additional funding source increases development timelines by four months and adds $20,460 in costs per unit.

Fund structures that consolidate multiple financing sources into a single lender can streamline processes and reduce financing costs. The Partnership for the Bay’s Future illustrates what’s possible for private funders: the $500M+ loan fund blended philanthropic capital with tech and bank funding to finance over 5,000 units, offering seven products under one lending umbrella and demonstrating the value of addressing housing financing at the regional level. On the public sector front, California’s governor is currently spearheading an effort to consolidate state financing programs into a “one-stop shop financing agency” to reduce fragmentation, uncertainty, and lending costs for developers.

The Bigger Picture

There are currently 40,000 affordable homes in the development pipeline in California that have been designed and permitted, but are awaiting funding to begin construction. More funding and public subsidies for affordable housing are essential, particularly for serving households on the lowest end of the income spectrum. But for the broader housing production challenge, the financing sector must also adapt financing practices, products, and capital allocation structures to be more responsive to new development models and reduce financing costs. Housing finance innovators like the fund managers spotlighted above are already doing this work, generating the proof points the broader market needs. The larger challenge is getting institutional public and private capital to follow in replicating, standardizing, and scaling these approaches until they are no longer the exception. 

Editor’s note: The views expressed in the articles on The Rooftop are those of the authors alone and do not necessarily reflect the opinions or policy positions of New America.