An innovative pay-for-performance pilot that helps bridge the connection between social services and affordable housing has launched with the funding of its first project.
Deborah Strong Housing in Ypsilanti, Mich., is the first of several projects to be funded under the Strong Families Fund.
Overall, the fund is expected to finance the construction or renovation of 600 to 700 affordable housing units in the next three years. The breakthrough is that it will also support on-site access to high-quality coordination of social services over the next decade.
Several banks and philanthropic partners, led by The Kresge Foundation, the Robert Wood Johnson Foundation, KeyBank, and Goldman Sachs, have committed more than $70 million to launch the fund, the largest pilot pay-for-performance project to finance services coordination and affordable housing.
"This fund is a great example of the bold, innovative approaches that philanthropy and the private sector can use to create positive change," said Kresge Foundation President and CEO Rip Rapson in a statement. "Bringing together so many strong partners allows us to marshal shared resources around a common agenda and achieve a greater impact than any of us can have by going it alone."
A new approach
The fund combines federal low-income housing tax credits (LIHTCs) for capital development with a pay-for-performance model to provide access to up to 10 years of incentive payments to housing developments.
In return, developments must provide on-site, social services coordination targeted to improving resident and property outcome measures in five areas including health and wellness, housing stability, and education. Multiple studies speak to the improved outcomes for families and children from high-quality affordable housing with well-defined links to services. Such settings, the research shows, also may ultimately lead to a reduction in other public-sector costs.
This is a change from traditional approaches to funding services coordination. In many cases, the work is often paid for by short-term grants or by excess cash flow at a development. The Strong Families Fund aims to provide developers with a stable and long-term source for this work when there is evidence that resident outcomes are improving.
To generate a funding source that will enable developers to consistently provide high-quality coordination, the Strong Families Fund will utilize one or more different levers. These include the partial release of operating and/or Sec. 8 transitions reserves, which would be replaced with a Kresge guarantee, and moderately discounted first mortgage debt and granted-funded outcome payments tied to improvements in five areas of measurement. These sources, plus an additional equity payment tied to outcomes from the LIHTC investor in year 10 is expected to provide developers with up to 10 years of funding to help coordinate social services.
Along with Kresge, the Robert Wood Johnson Foundation, KeyBank, and Goldman Sachs, partner organizations include The Community Development Trust (CDT), Great Lakes Capital Fund, the National Affordable Housing Trust (NAHT), Stewards of Affordable Housing for the Future, and the Corporation for Supportive Housing (CSH).
Ypsilanti Housing Commission and Chesapeake Community Advisors are behind Deborah Strong Housing. Named in the memory of a longtime local housing advocate, the project will involve the rehabilitation of 112 units of affordable family housing.
Russ Olwell, director of Eastern Michigan University’s Institute for the Study of Children, Families and Communities, which is providing social service support, calls the Strong Families Fund an opportunity to test both the intense service delivery and pay-for-performance models.
“[The Strong Families Fund] is based on the best evidence we have of what will make families stronger and keep people healthy,” Olwell said. “The fund’s structure gives us a timeframe beyond the typical grant-making timeline of one or two years to understand which approaches are the most effective.”
That family focus is a key for the Robert Wood Johnson Foundation and its work to build a "culture of health," said Nancy Barrand, senior adviser for program development at the foundation.
Robert Likes, KeyBank’s national manager of Community Development Lending and Investment (CDL), calls the project “an impressive initiative that has found an innovative way of incorporating private capital to create safe, decent, affordable housing. We're proud to be working with so many others to improve the daily lives of low- to moderate-income families, especially since lack of quality affordable housing is at an all-time high in this country."
Goldman Sachs, through its Urban Investment Group, has committed $30 million to the fund through a LIHTC equity investment in a limited partnership with NAHT to support the new construction or substantial rehabilitation of family housing projects throughout the United States.
“This initiative will develop an innovative, scalable 'pay for success' model in traditional affordable housing projects that will result in better outcomes for low-income families,” said Margaret Anadu, managing director at Goldman Sachs, who oversees the firm’s impact investing projects.
The Strong Families Fund is part of a growing trend in philanthropy to use grants plus other forms of investment capital in response to complex social problems. More than a dozen states are currently pursuing Social Impact Bonds—a funding mechanism to pay for social services where there is evidence that the intervention is effective in improving outcomes and results in savings for the public sector, according to the fund supporters.
Kresge has committed $7.25 million to this initiative, including $6 million in social investment commitments and a $1.25 million in grant funding from its human services team. The Robert Wood Johnson Foundation will provide $4.8 million in grant funding, a significant portion of which will fund the incentive outcome payments.
LIHTC equity is being provided by KeyBank and Goldman Sachs, and up to $20 million in debt for the developments will be invested from CDT, a major affordable housing lender. Great Lakes Capital Fund, based in Lansing, Mich., and the NAHT, based in Columbus, Ohio, are syndicating the equity for the investors.
CSH, which is actively engaged in a number of pay-for-performance initiatives around the country, is overseeing outcome measurement, evaluation, and strategies for advancing the Strong Families Fund model in other affordable housing developments. CSH has worked closely with Stewards of Affordable Housing for the Future in identifying the key social outcomes being measured by the fund.