Revolving Loan Funds Offer Powerful, Consistent Gap Funding

For decades, the Low Income Housing Tax Credit (LIHTC) program has served as a primary financial mechanism for funding the creation of new affordable housing projects nationwide. However, LIHTC’s resources have begun to fall short of meeting America’s ever-increasing housing demand, resulting in an ongoing affordability and supply crisis.

“The fundamental constraint on total production in the affordable pipeline is the availability of the tax credits and bonds,” says Paul Williams, executive director of Center for Public Enterprise (CPE), a national policy research and advocacy nonprofit based in Brooklyn, New York.

Thus, policy experts, developers and officials at the local, state and national level have been left searching for alternative funding sources that can bolster the LIHTC program’s already sizeable impact. In recent years, Revolving Loan Funds (RLFs) have emerged as a promising strategy for securing gap financing for projects that otherwise would remain stalled due to depleted tax credit dollars.

Specifically, RLFs provide inexpensive construction financing — a typically higher-cost form of capital since the risks associated with the construction phase result in higher interest rates on loans.

Streamlining Capital

While there are many flavors of these revolving funds, they generally follow a similar tack: After being capitalized by a financial entity with a public interest (such as a state agency), an RLF will issue low-interest loans to projects that align with certain policy goals. The project will then utilize that capital to finance the construction phase. Once a project is placed in service, the borrower then quickly pays back the RLF using both revenue and longer-term debt coverage that is lower-cost than it would have been if secured during the construction period. Critically, this means that an RLF is replenished quickly and can be redeployed in the market (hence the term “revolving”).

In addition to providing lower cost of capital, RLFs are relatively consistent once they are deployed. Unlike gap financing measures with fluctuating sources of revenue (such as the National Housing Trust Fund), RLFs are structured such that they receive sufficient returns to sustain themselves after initial capitalization. This relative stability compared to other gap financing resources makes RLFs an especially promising strategy for generating significant overall increases in affordable and mixed income housing stock over the long term.

Williams argues that RLFs can empower Housing Finance Agencies (HFAs) in ways they may not currently realize are possible. “The state HFAs actually have a lot of ability to shape the market,” says Williams. “They allocate tax credits, which is their primary job. But they can actually drive affordability solutions and supply solutions, and that’s the outcome we’re moving toward with RLFs.”

This innovative funding source enters the fray at a time when heightened interest rates have made equity financing increasingly expensive. Cost of capital has become one of builders’ primary impediments to constructing new housing: According to a 2024 Urban Land Institute survey, 94 percent of commercial real estate developers view high interest rates and cost of capital as the most pressing cause for concern in the real estate industry (up from 69 percent in 2023). 

These financial factors have made deal closure and new unit production increasingly difficult for developers, and a nationwide backlog of hundreds of thousands of units in authorized but unstarted residential construction projects has accumulated as a result. Indeed, national building data from the U.S. Census Bureau shows that the average monthly number of authorized but unstarted residential housing units jumped nearly 55 percent from 2020 to 2025. The U.S. housing supply shortage, meanwhile, ballooned to nearly 4.7 million units in 2025, according to a report published this year by the U.S. Chamber of Commerce. This housing deficit has caused widespread financial impact beyond strains on renters and homebuyers, and has resulted in tens of billions of dollars in GDP loss in the years since 2008.

For developers whose projects have stalled, RLFs offer an opportunity to move ahead, Williams explains. By creating “a channel for production” that does not require any tax credits or bonds, RLFs provide an opportunity to replace financing capital sourced from private equity with lower-cost capital obtained through loans in a developer’s capital stack.

Scaling the RLF Model

Since 2021, CPE has been working with state lawmakers and HFAs to demonstrate how this process can work.

“We will go through the projects that applied to the Qualified Allocation Plan but didn’t get selected, model them out as mixed-income and middle-income deals without credits and use a RLF to add debt leverage to the deal, and then pick the deals that work,” Williams explains. “From the developers’ perspective, they’re thinking, ‘Do I want to wait in line for credits for the next round in two years? Or do I just do a mixed-income deal right now?’ And usually they pick mixed-income deal, right now.”    

The pitch has been working: In the past two years, at least five states have established RLFs dedicated to jump starting production and moving stalled deals into the construction phase, according to a recent CPE report. These new funding sources have already provided the capital to commence construction of thousands of units.

In August, the Michigan State Housing Development Authority (MSHDA) announced the establishment of the Michigan Housing Accelerator Fund, a $75 million RLF dedicated to boosting mixed-income multifamily housing production by providing low-cost financing capital to developers. Projects receiving funding must designate at least 20 percent of units as affordable to households at or below 50 percent Area Median Income (AMI) or 40 percent of units affordable to households at or below 60 percent AMI.

“Michigan’s tax credit programs remain among the most competitive in the country, with demand outpacing available resources by roughly ten to one,” said Tony Lentych, chief housing investment officer at MSHDA. “As we reviewed the queue of unfunded proposals within all of our rental development programs, it became clear that several projects were ready to move. That prompted us to explore ways to activate more of our pipeline without relying solely on oversubscribed resources.”

“One of our key policy objectives is to relieve pressure on the highly competitive 9 percent and 4 percent tax credit allocations,” Lentych continued. “If we can bring an additional project to fruition without tapping those limited resources, that represents a meaningful public policy win.”

Lentych said MSHDA also saw that an alternative deal structure, like one supported through RLF financing, was unlocking developer interest in a different way. “Some developers who might not have pursued a traditional standalone housing tax credit deal were far more open to participating in a mixed-income or market-rate component,” he explained. “When the credit percentage is lower but applied to a larger project, the total benefit can be comparable to a full 9 percent transaction, even if it isn’t structured as a standalone tax credit deal.”

MSHDA expects to bring its first RLF deal to the MSHDA Board for consideration in the next 60 to 90 days

Elsewhere, Utah provides an example of how RLFs can be deployed creatively to accomplish precise policy goals.

In 2024, state lawmakers established the Utah Homes Investment Program with a $300 million initial capitalization, aimed at building 35,000 new starter homes across the state.

Though the state has some of the highest rates of new home construction in the nation, local policymakers realized that the bulk of construction focused on homes serving only the wealthiest of Utah’s families. “Builders will generally tend to build more luxury homes, because their margins are greater,” says Steve Waldrip, senior advisor for housing strategy and innovation for Utah Governor Spencer Cox. “So we started to look at what we can do to incentivize the creation of starter homes.”

The program provides low-cost deposits to financial institutions, which in turn provide low-interest loans to developers for construction of projects with at least 60 percent of units for sale priced at $450,000 or less. 

In July 2024, officials in northern Utah’s Weber County approved a proposed project to build 275 new homes in an existing development, with financing capital sourced from the program.

Not only does the Weber County project highlight the potential impact of RLFs on unit production, it also underscores how the flexibility of RLFs allows officials and communities to tailor the terms of the loans according to local markets and community needs. According to Waldrip, based on community feedback, the Weber County project will require that homes be offered first to teachers, first responders, government employees, firefighters, police, veterans, and active duty military.

In addition to Utah and Michigan, RLFs have also taken root in New York, Massachusetts and Oregon. Further scaling the RLF model, Williams says, is a viable path to a significant increase in nationwide housing production. 

“The U.S. starts roughly 350,000 multifamily units a year, and we have been flat at that number for 30 years straight,” Williams explains. “If you look at some of these programs, they’re not huge, but on a three year revolving term, you could legitimately get some of these states to about 1,000 units a year of production on average. If every state had an RLF balanced to where the housing demand is, the U.S. goes from 350,000 to 400,000 annual starts. That’s a pretty significant jump.”