What is impact investing?

By David F. Schon

Affordable housing and community development project sponsors are looking at impact investors as a potential new source of capital. Whether philanthropic, private equity, or family office, impact investors seek to generate environmental or social benefits alongside financial returns.

Impact investments deliver social impact and financial returns without needing the low-income housing tax credits (LIHTC) that differ from the requirements of traditional market-rate capital sources. People who build affordable housing and community facilities are keenly interested in impact investing because federal, state, and local programs, while deeply useful, are too small to meet the nation’s need for affordable housing.

Much has been done to increase the supply of affordable housing in the United States through federal programs, including LIHTC and HUD-subsidy programs over the last 30 years. However, the United States remains in an affordable housing crisis, with half of renters spending more than 30% of their income on rent, per a Harvard study in 2016. The National Low Income Housing Coalition found that a renter working 40 hours a week, earning minimum wage, can afford a two-bedroom apartment in exactly zero counties nationwide.

There are volume caps for 4% LIHTC deals in different states, including New York, as well as the competitive soft funds intended to fill the gap, leaving the harder deals with a gap in financial feasibility. In New York City, 9% LIHTC is the only way to make a LIHTC deal preserving existing affordable housing, a significant chunk of which is HUD-assisted and nearing 50 years old. Market-rate purchasers with cash offers win out over affordable housing developers accustomed to a different real estate framework. Small and minority or women-owned affordable housing developers and consultants are also further closed out of an already tight market.

Faced with this scenario, organizations have started developing affordable housing using new pools of capital that are increasingly looking for social impact in addition to financial return. More seasoned organizations have set up affiliated divisions that raise capital from impact and market-rate investors for their development arms. More boutique placements are also emerging as private equity fund managers are being asked by investors about impact-investing opportunities. Opportunity Zone investments in housing are currently being pushed by trade associations that advocate for affordable housing. State and local governmental entities are developing programs with impact investors to facilitate housing and community development financings that are often left out of the market altogether—like small building and tenant-sponsored purchases, potential subordinate soft loans, and emerging developer capital programs.

There is a new opportunity for increased access to capital for organizations at all levels, more creative housing finance transactions, and more housing and community development projects getting done. Impact investing in housing and community development has the potential to address the nation’s tremendous unmet needs for years to come. Nixon Peabody is leveraging its expertise in private equity, affordable housing, and community development to get more capital where it is needed.

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David F. Schon


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