By Stefano Rumi

The University of Virginia Pay for Success Lab (PFS Lab) is proud to announce its partnership with the National Housing Project Foundation (NHPF) to conduct a feasibility study on the use of Pay for Success (PFS) in the construction and maintenance of affordable housing. This initiative, titled “Our Neighborhood Project”, will culminate in a research report outlining the state of affordable housing in the United States and a call to action to use alternative modes of financing to make more neighborhoods affordable to individuals from all socioeconomic backgrounds. The report will serve as a benchmark of success for state and local governments, philanthropic institutions, and others interested in pursuing affordable housing financing.

Through PFS, local or state governments pay for the outcomes of evidence-based programs. A separate entity, such as a philanthropic investor, provides the upfront capital that the government repays if the program meets its intended outcomes. The model is especially attractive to governments looking to finance tangible results, without over-commitment of taxpayer money to projects.

This partnership with the NHPF comes at a crucial time when affordable housing is becoming an increasingly large issue in urban areas. An Urban Institute study recently demonstrated that there simply is not enough affordable housing in the United States, with an average of only 29 adequate, affordable rental units available per 100 low-income families. The economic effects of housing insecurity are tangible, with millions of families paying more than 70% of their monthly income to rent and mortgages.[1]

Why is this happening? There is an unfortunate gap in the housing market that simply makes affordable housing unaffordable. Without government assistance in financing development and maintenance of affordable housing units, either government-owned or privately managed, developers simply cannot afford to charge feasible rents and continue to provide quality service and management.

Currently, the U.S. Department of Housing and Urban Development relies on using tax credits to incentivize private developers to build affordable housing units, a step away from “Section 8” housing development that was government-constructed and operated, and largely proven to be unideal. However, tax credits fail to promote mixed-income neighborhoods, with the majority of developers choosing to construct affordable housing in predominantly poor, inner-city neighborhoods. Why is this the case? The consensus is not clear.[2] With increased pressure from neighborhoods to keep affordable housing out, and basic economic principles making affordable housing construction feasible only on low-value land (which happens to be largely in poor, inner-city neighborhoods), huge concerns remain on how to properly finance and promote mixed-income neighborhoods that do not isolate families along socioeconomic lines.   

The PFS Lab and NHPF are optimistic that the PFS private-public partnership model used is a solution to finance affordable housing construction and maintenance. PFS balances government involvement with private development; reimbursement of successful PFS project costs by governments incentivize developers to construct quality housing in diverse neighborhoods, without having to cut costs. The tangible effects of affordable housing on areas such as economic opportunity, health, education, and recidivism rates contributes positively to communities and, in the long run, saves taxpayers millions of dollars by solving social issues where they begin: at the home.[3]

The PFS Lab plans to release NHPF’s “Our Neighborhood” report in August 2017 and will make it available online.

[1] The Urban Institute. (n.d.). The cost of affordable housing: does it pencil out? Retrieved March 15, 2017, from http://apps.urban.org/features/cost-of-affordable-housing/

[2] De Souza Briggs, A., & Wilson, W. J. (2005). The geography of opportunity: race and housing choice in metropolitan America. Washington, DC: Brookings Institution Press.

[3] Burns, R. F., & Vaccaro, T. G. (2015). Unaffordable housing: A root cause of social inequality. Affordable Housing Finance. Retrieved from http://www.handhousing.org/wp-content/uploads/NHP_WhitePaper_Pages.pdf