Niche and Gap Funding

6 min read

Three Financing Tools That Can Preserve Affordability

A recent NH&RA presentation describes new and underutilized options for affordable home providers.

While the affordability of workforce housing is technically supposed to be “naturally-occurring”—meaning it filters down and becomes cheaper over time—that does not always happen. Strategies for preserving affordability were the focus of a recent National Housing & Rehabilitation Association webinar called ‘Niche Financing Tools: Faircloth to RAD, Fannie Mae’s Sponsor Initiated Affordability and Property Assessed Clean Energy.” According to a Fannie Mae analysis cited by Angela Kelcher, one of the presenters, as many as 500,000 workforce units in America could cease to be affordable given market conditions. The purpose of the webinar was to educate NH&RA members on all three financing mechanisms, through a panel of affordable housing industry experts.

NH&RA President and event moderator Thom Amdur opened by noting that the association tries to look for as many financing tools, especially new or underutilized ones, for affordable housing financing as possible. The first one he focused on was Faircloth-to-RAD.

As the Department of Housing and Urban Development’s website notes, “Faircloth refers to a limit on the number of public housing units a Public Housing Agency (PHA) can own, assist or operate. The Office of Recapitalization indicates that many PHAs operate fewer public housing units than their Faircloth limit, meaning that currently 220,000 units of public housing could be developed. The new Faircloth-to-RAD option is designed to establish a long-term, reliable rental subsidy contract to help PHAs and their development partners more readily finance the construction of new deeply affordable units.”

Tom Davis, the director of recapitalization at HUD’s multifamily housing division, and Dan Rosen, a real estate attorney with Klein Hornig, went into more detail as panelists at the seminar. They described the Faircloth limit, which was established by a 1998 rule that caps the total number of public housing units a PHA can support. The rule makes project underwriting difficult, which is problematic given that over the last two decades, Davis said, approximately 220,000 units have been removed from the nation’s public housing stock.

The conversion program allows PHAs to access Rental Assistance Demonstration (RAD) financing to help them make up for the lost units. RAD funds the conversion of standard public housing into privately-managed units that are underwritten via Section 8 vouchers. According to Davis, this protects moderate-income and naturally-occurring affordable housing. This is in concert with a federal investment of $213 billion into “new affordable housing resources,” including $55 billion in Low Income Housing Tax Credit allocations. The objective of such a conversion is to place an additional subsidy “on top of the mixed-finance structure” that aids with underwriting.

Davis added that recent guidance HUD issued about Faircloth-to-RAD will be helpful for financiers who are interested in such conversions. He said that HUD will soon develop a tool for determining the rent payoff from a hypothetical RAD conversion.

Kelcher, representing Fannie Mae on the panel, spoke to a second program designed to maintain deep housing affordability: Sponsor-Initiated Affordability (SIA) incentives. describes SIA as a program that, “Encourages Fannie Mae DUS® borrowers to set rent and income restrictions in conventional workforce housing in exchange for lower borrowing costs. SIA incentives will be available for borrowers that preserve or create a minimum of 20 percent of units for renters earning less than 80 percent of area median income (AMI)…with rents not exceeding 30 percent of AMI.”

Fannie Mae, said Kelcher, now does $43 billion in business for federally-subsidized projects, and 50 percent of Fannie-financed units are “mission-driven,” targeting those whose AMIs are 80 percent or below.

SIA will make it easier to help this demographic. It seeks to partner with organizations that want to finance or build deeply affordable housing, ranging from technology firms that invest in workforce housing, to ones that use Fannie’s social bonds for affordable rental housing.

Under Fannie’s voluntary restriction arrangement, rent for qualifying properties cannot exceed 30 percent of household income, which Kelcher says should appeal to “socially-minded” financiers. The program is structured around new units, as opposed to existing LIHTC properties.

The third program discussed was Property Assessed Clean Energy (PACE), with Sal Tarsia, managing partner at CastleGreen Finance, providing an overview. A poll of the audience found that few were familiar with this program.

While overseen by the Department of Energy, PACEs are state and local programs that, according to, “Allow a property owner to finance the up-front cost of energy or other eligible improvements on a property and then pay the costs back over time through a voluntary assessment.” The program, similar to special assessment districts by city governments, but for individual homeowners, helps fund water conservation, energy efficiency, disaster resilience and other improvements that lower a home’s long-term utility costs.

PACE programs typically last between 20 and 30 years, and Tarsia notes that over 200 lenders have been involved. Meanwhile, the overall presence of PACE has grown, with 37 states passing enabling legislation, including Massachusetts, Tennessee and Washington. The cities of Chicago and Philadelphia have recently launched PACE initiatives, and New York City has begun its program in concert with its Climate Mobilization Act.

“Three of the largest cities in the country have just come on board with PACE in the last month to two years. We’ve really only scratched the surface,” Tarsia said. “We’re converting a construction project, which is very often being financed with floating rate debt. We’re taking some of the risk out of the equation from an interest rate perspective.”

That is because, in addition to making homes more environmentally-friendly, PACE financing tends to replace debt or reduce gaps in equity financing. Tarsia observed that projects that had been hurt by COVID-related losses could use PACE funding to recoup lost liquidity during “lookback” periods in several states. In other words, while PACE isn’t a program that produces deeply affordable housing unto itself, it can add to the capital stack of such projects.

In conclusion, all three of the programs discussed during the NH&RA seminar provide opportunities for financiers who need to meet certain affordability goals for their projects. The key is taking these programs beyond the “niche,” and into mainstream awareness and adoption.

This article featured additional reporting from Market Urbanism Report content staffer Ethan Finlan.