The Hidden Cost of Complexity: How Affordable Housing Finance Undermines Mission-Driven Development

• In Event: Dilemmas of Development: Challenges to Achieving Affordability Among Housing Suppliers and Local Governments

Abstract

Existing research points out that funding affordable housing has become increasingly complex, forcing developers to combine multiple funding sources—which each come with their own priorities, timelines, and requirements—into capital stacks that demand significant organizational resources to assemble and maintain. But the developers navigating this system are organizationally diverse, ranging from nationwide for-profits to community-based nonprofits, and research has also suggests that nonprofits may be less equipped to handle complexity, as they have less technical skill than their for-profit counterparts. If nonprofits face a disadvantage in a complex policy environment, this may also have implications for affordability, given research that shows that nonprofits are less likely than for-profits to convert affordable housing to market-rate after affordability covenants end. This paper asks: How do affordable housing developers across sector manage complexity in the funding process? What implications do their strategies have for low-income subsidized housing?Drawing primarily on 36 interviews with developers and 5 years of data from applications to California’s Low Income Housing Tax Credit program, I find that developers across sector arrive at similar levels of affordability in their projects, but through distinct pathways that may have implications for future affordability. For-profits optimize their projects within the rules of funding programs, whereas nonprofits struggle to conform their mission commitments to funding rules, which often do not align. Nonprofits attempt to manage this organizational strain by relying on consultants to manage complexity their staff cannot absorb, pursuing philanthropic and unconventional funding sources to fill gaps, and searching for creative overlaps between what funders want and their communities need. Both sectors stretch the boundaries of funding programs, but in different directions. For-profit developers move toward efficiency and profitability—pursuing the largest possible projects, maximizing rents to program limits, and advocating for middle-income developments where operating margins are more favorable. Nonprofit developers aim for more community impact—lower AMI targets, extra supportive services, and unique developments that serve specific community needs. While the funding system can accommodate both, it rewards the for-profit version more naturally, because efficiency and scale align with what scoring criteria measure. As funding grows more competitive and the misalignment between mission and funding priorities deepens, community-based nonprofits face pressure to adopt strategies that look increasingly like those of their for-profit counterparts. This suggests that while the financing system, on its face, incentivizes the participation of nonprofits, it erodes the qualities that make nonprofit developers valuable to housing policy.

Author

• Katherine Smock, University of California - Los Angeles
  Presenting Author