Mayor Parker, Here’s How to Build More H.O.M.E.s

Mayor Parker and City Council spent much of this spring debating which spending programs would be eligible for funding from the $800 million in bond revenue for H.O.M.E., the Mayor’s signature policy to build and repair 30,000 homes in Philadelphia.

This fall, they’re working on a bond allocation bill that will decide which activities will receive funding in the first round, so City Hall is more or less rerunning the same debate again.

Sean Walsh at The Inquirer overviews the likely programs receiving initial funding, and the debate over them in City Council, which seems mostly focused on the “Area Median Income wars” Mayor Parker said she wanted to avoid. Some members are pushing for the bond spending to be earmarked for the lowest income cohort, rather than expanding eligibility in the other direction, as the Mayor proposed.

Totally lost in the discussion, however, is the all-important issue of how to spend the funds in a way that maximizes the number of new housing units constructed per dollar spent.

The forgotten supply imperative

In this house, we believe in the original Parker campaign pledge to literally build 30,000 new units of housing, and we were disappointed by the City Hall consensus to deemphasize this by spending only 27 percent of the H.O.M.E. bond revenue on activities that are useful for constructing new housing.

As Malcolm Burnley wrote in The Citizen, the H.O.M.E. proposal has become less ambitious over time on the “building new housing” metric, which at one point was offered as the main reason for doing all this. Everyone in official positions quoted in the piece makes sensible points about why a blended preservation-plus-new-supply agenda makes more sense for Philadelphia’s housing needs than a blunt construction goal, which nobody would dispute.

We’re on Team Blended Plan too, but even in the Mayor’s opening bid proposal, 73 percent of the spending was proposed for activities that aren’t even distantly useful to the goal of constructing more new housing units. And within the 27 percent for supply-focused activities, the focus was suboptimally skewed toward onetime program spending rather than self-replenishing programs like revolving loan funds, or more broadly usable incentives like a property tax abatement for improvements.

If City Hall does nothing else for housing supply in this funding package, they should fund the revolving loan fund for mixed-income housing that was authorized in the bond allocation bill.

Fund the Revolving Loan Fund

Complicating things, seven new programs were added to the eligible programs list last-minute in the spring, potentially upsetting the fragile agreement between Council and the Parker administration on the rough dollar amounts each program would eventually receive. In the deal struck between Mayor Parker and Council, Council has an official role in reviewing and approving bond spending decisions.

One of the new programs that Council put into the bond authorization bill at the last-minute was a revolving construction loan program for mixed-income housing. It is the single best thing Council could fund with the bond revenue in the new housing supply column. It’s so important that it’s even worth pulling funds from some of the other pro-supply line items like the Low-Income Housing Tax Credit gap financing grants or even the Accelerator Fund’s increase.

Here’s how it works: The City would seed the revolving fund with a onetime payment, and then the fund would issue low-interest construction financing for residential and mixed-use apartment building projects. In the places that already have such revolving funds, like Montgomery County, Maryland, Atlanta, Chattanooga, and most recently, Chicago, the loan fund typically provides construction capital for up to five years, and then gets paid back when a project is completed and refinanced. Rinse and repeat.

Private developers can earn a fee developing the buildings, but in a typical case, the finished project is purchased by the local Housing Authority to own and operate as a mixed-income property in perpetuity. The typical mix is 70 percent market-rate, 30 percent below-market, with a 50 to 80 percent Area Median Income band, sometimes going higher or lower.

In Philadelphia, this would all dovetail nicely with the Philadelphia Housing Authority’s current strategy of acquiring a lot of market-rate apartment buildings and operating them as mixed-income or Section 8 rentals. In some places with a revolving loan fund, it’s common for the Housing Authority to be the institutional home for the fund, putting the Housing Authority in the driver’s seat for deciding which construction projects to lend to, and eventually own. This is sometimes called public development, even though private development firms are still the project managers.

Even though it’s received little discussion or media attention so far, the revolving loan fund is the single-best thing Council could fund with the bond revenue in the new housing supply column.

A good early use case for the new fund would be to identify some large development projects that got their entitlements during the 2020-2021 abatement cliff bonanza, and see which ones have zoning permits but no construction permits yet. Some already-permitted projects in that category are imperiled because of the change in the interest rate environment and the increased cost of financing over the intervening years. Some of those projects could be financed, constructed, and sold to the Philadelphia Housing Authority.

If we get this right, a new revolving loan fund could become a feeder for PHA’s widely-celebrated acquisition strategy, creating a steady pipeline of new buildings for them to buy, and a new source of revenue to maintain their scattered site portfolio.

Trade-offs with alternative pro-supply spending

Some of these negotiations might have been less fraught if City Hall had put out a plan for about half the bond spending, and then filled in the rest of the details in collaboration with City Council and outside stakeholders.

With every dollar of the $800 million pledged to some program right from the jump, it’s fallen to people like us to be the bad guys and name some programs that should get less so others can have more. One spending area to reconsider: the $78 million pot of funds currently pledged to Low-Income Housing Tax Credit (LIHTC) gap financing grants.

LIHTC is the federal government’s largest affordable housing program, so we can’t afford not to play the game to some extent. But the potential for spending on this is also kind of limitless, and LIHTC projects typically end up costing hundreds of thousands of dollars more per unit than other affordable housing developments. We shouldn’t allow the LIHTC wild goose chase to distract us from more lucrative local opportunities when they come up, especially when we have the chance to invest a lot of borrowed money.

The bond budgeting debate may be zero-sum, but these financing tools would be complementary once in place. If revolving loan fund projects can better serve the 50 to 80 percent AMI needs, then housing officials can devote more LIHTC grants to projects with lower AMI bands.

There are some other good reasons to prefer the revolving loan fund option to LIHTC too, no matter your ideological starting point.

At the most basic level, it’s easy to see why a revolving fund is a higher-impact investment of bond funds than one-and-done grants for a couple dozen projects.

LIHTC gap financing grants are $3 million max per project. Every project team applies for, and usually receives, the maximum amount. The money gets spent, and then it’s gone. With $78 million to spend, only 26 buildings ever will likely be supported by this.

By contrast, a revolving loan fund makes loans, gets paid back, and then loans out more funds. If we’re going to use unsecured debt to make all these housing investments, shouldn’t we try to get a few permanent funding streams out of this? A self-replenishing loan fund is a really good use case for borrowed funds, while some of the other spending items elsewhere in the proposal — like the back-rent payments — don’t really pass that test.

Another big advantage of funding the new revolving loan fund over the LIHTC grants is the permanence issue. Affordability deed restrictions associated with LIHTC projects expire after 30 years, while loan fund-supported projects purchased by PHA would be permanently affordable.

For our friends on the left, more permanent public ownership of mixed-income housing by PHA seems like it would be a bigger win for that political worldview than this complicated neoliberal tax credit financing that doesn’t even get us permanently-affordable housing in the end. In Chicago this was all branded as a “Green Social Housing Fund”, but is less left coded in other locales.

Operating more mixed-income buildings, including more market-rate housing, would help diversify PHA’s portfolio of properties, bringing in more market-rate rental income and shoring up the agency’s finances — important to PHA’s capacity to be a good landlord to their residents by keeping up with maintenance and their other responsibilities. A more muscular PHA would be a win for progressive housing goals, and a win for a growing housing construction sector.

From a more cynical political standpoint, LIHTC projects also take a long time to complete. They often can take between six and ten years or sometimes longer from start to finish, and most of that time is spent coordinating different public and private funding streams.

Politics is partly about showing your work, and if members want to show voters some physical wins from the H.O.M.E. initiative before 2027, LIHTC timelines are not their friend. Some of these projects may not even be completed by the time some Council members leave office.

Revolving loan fund projects — free from all the federal requirements that come with LIHTC — are more of an adaptation of the market-rate housing business model than capital-A Affordable Housing business model. Supported projects can be built on the construction timeline of market-rate projects, so funding a revolving loan fund gets us more housing, faster.

Politically, there’s a good opportunity here for a strange bedfellows alliance between the Parker administration, progressives, organized labor, and local builders and contractors to create an important new player in Philadelphia’s affordable housing finance landscape that can build more mixed-income housing quickly while also strengthening the Philadelphia Housing Authority.

Mayor Parker, Here’s How to Build More H.O.M.E.s

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