Pay for Success

4 min read

“Pay For Success” (PFS) Financing Structures have become one of the hot new tools in the emerging social impact investing field and increasingly a burgeoning opportunity for affordable housing owners and social service providers. PFS is a public-private arrangement to test or expand innovative programs or interventions where a government entity pays for the achievement of agreed-upon target outcomes. Social impact investors provide up-front funding for an evidence-based intervention and are paid back with “success payments” by government entities when the outcome targets are achieved and verified. This model facilitates interagency cooperation in which costs may be incurred by one agency or government program but the benefits are reaped by another. Like the LIHTC, the financial risk is incurred by the private sector and the savings are shared.

The PFS model, and its variants, like Social Impact Bonds, has been around for several years but just in the past few months there have been significant steps taken to bring PFS to the affordable housing community in the areas of permanent supportive housing and now, as of December 4, energy and water efficiency in the HUD-Assisted Portfolio. As our readers know, the capital side of affordable housing is relatively straightforward but funding services and/or addressing split incentive issues has been a tough nut to crack. As I describe below, PFS could be an exciting tool to supplement the traditional capital stack and allow affordable housing owners to provide more services and achieve deeper energy retrofits.

Permanent Supportive Housing
As a result of the Black Lives Matter movement and many high profile cases in the media, public attention is focused on the criminal justice system with increasing intensity. We in the community development field know all too well that the cycle of poverty is exacerbated by the challenges former felons face obtaining employment and accessing stable housing (affordable or otherwise). We already know that it is nearly impossible to get a job without a fixed address and how difficult it is to pass a resident screening if you don’t have employment (and near impossible when you layer on even a minor criminal conviction). It is little surprise there is such a high rate of prison recidivism given how limited the life options are. Indeed, in many communities it is essentially a crime to be homeless. This has a tragic cost in lives of the individuals and their families and also a hard cost to federal, state and local governments via the operation of jails and prisons.

Supportive housing offers a real second chance for individuals in need and today HUD has a NOFA on the street (applications due February 12) to provide PFS grants of up to $1.3 million per project to cover feasibility analysis, transaction structuring, outcome evaluation and success payments. The leverage these grants will raise will help stop the cycle of dependency and reduce the hard costs associated with recidivism and homelessness.

Energy Efficiency in the HUD-Assisted Portfolio
One of the major frustrations we experienced through our Preservation Through Energy Efficiency Initiative was the inability to effectively target efficiency opportunities in many HUD-Assisted Properties because of regulatory barriers and split-incentive issues. This is particularly frustrating given the age of many properties in the HUD-Assisted Portfolio and the sheer amount of money the federal government appropriates on utility expenditures (upwards of $7 billion annually). Through the tireless advocacy efforts of groups, like Stewards of Affordable Housing For the Future and Enterprise, the recently-passed Fixing America’s Surface Transportation (FAST) Act creates a new PFS pilot program that allows HUD to enter into contracts with outside entities and raise private investment capital in order to finance energy and water upgrades in HUD-assisted properties.

While the program is still under design, the demonstration will help improve up to 20,000 HUD-assisted apartments receiving project-based rental assistance (Section 8 PBRA), supportive housing for the elderly (Section 202) or supportive housing for persons with disabilities (Section 811). Over time, I think the data generated from this pilot will help improve our energy underwriting models in traditional debt markets, further increasing access to efficiency finance.

I am expecting these models will serve as templates for more PFS interventions in a wide range of areas, including resident service coordination, behavioral health care interventions and perhaps even a major rethinking of how we fund affordable assisted living. We’ll be following these programs closely in the coming months and exploring ways to take PFS to scale.

Stay tuned!