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Community Development Investments (February 2012)
Corporation for Supportive Housing: Helping the Homeless Live With Dignity
Deborah DeSantis, Executive Director, and Brigitt Jandreau-Smith, Chief Lending Officer, Corporation for Supportive Housing (CSH)
CSHThe Horizon Apartments, with a trompe l’oeil facade, offer 20 units of permanent supportive housing for the homeless and mentally challenged in the Venice neighborhood of Los Angeles, Calif.
CSHThe rooftop deck of the Horizon Apartments in Venice, California, provides tenants a view of famous Venice Beach.
"There’s no place like home," Dorothy told Toto in the 1939 film The Wizard of Oz. But not everyone is fortunate enough to have a place to call home. Some sleep in vehicles; others on relatives’ couches; still others on park benches, entryway stoops, and heating grates. Nationally, more than half a million people in the United States are homeless on any given night, and at least 1.6 million people are homeless at some point every year. Nearly 17 percent of homeless individuals who are homeless on any single night are, by federal definition, chronically homeless because they have experienced long-term or repeated episodes of homelessness.
The Corporation for Supportive Housing (CSH), founded in 1991, is a community development financial institution (CDFI). Headquartered in New York, CSH has offices in 11 states and Washington, D.C. We help communities seeking to prevent and end homelessness by helping them develop permanent supportive housing (PSH). We give each tenant individualized attention. We tackle homelessness by bringing together people, skills, and resources, and providing high-quality advice and development expertise, in a collaborative search for solutions. We make loans and grants to sponsors of supportive housing; we work to strengthen the supportive housing industry; and we help reform public policy, making it easier for communities and developers to create and operate quality supportive housing.
Our mission is to create opportunities for formerly homeless tenants to live with dignity in accordance with their own interests, and we work hard to open the doors of supportive housing to people who face the greatest challenges.
What Is Supportive Housing?
Supportive housing is essentially affordable housing that provides access to health and social services, such as mental health and addiction therapy, medical care, case management, and employment services.
Supportive housing is proving to be a successful solution to homelessness because it addresses the issues that most often cause people to become homeless. Nationally, 110,000 people are, by federal definition, chronically homeless, due in part to untreated severe mental illness (60 percent), addiction (80 percent), and other chronic health issues. Many more are at risk of becoming homeless because they face these same challenges.
Together, supportive housing’s combination of place and services is addressing the needs of this fragile population.
CSH’s Track Record
For 20 years, CSH has led the national supportive housing movement. CSH provides critical capital to developers to jump-start projects that might otherwise fail early in the project development process. We have been successful because, with more than two decades of experience, we understand housing markets and are willing to take calculated risks.
CSH recognizes the importance of lending as a tool to create supportive housing. We offer low, simple-interest loans and low origination fees. Since 1991, CSH has committed more than $310 million in loans and grants to supportive housing projects and created nearly 50,000 new housing units. Today, our lending resources total more than $50 million, up sharply from $14.7 million in 2004. In addition, we provide significant additional capital to developers through special external loan funds.
Table 1 lists the five acquisition loan funds that CSH has either created or helped to create. Through these loan funds, CSH has access to additional capital to make loans to developers to create supportive housing. Four of the funds target California; the fifth fund targets New York. CSH is either an owner or originator of each of the five funds. CSH provides technical assistance to all five funds. Although the interest rates and fees vary by fund, each fund offers low interest rates and fees designed to contain project costs. Through these loan funds, CSH has access to additional capital to make loans to developers to create supportive housing. Basic information on each loan fund is shown, including total capitalization, geographic focus, loan terms, and loans made to date.
Table 1: CSH’s Role in Permanent Supportive Housing: Five Acquisition Loan Funds
What Financing Is Needed?
Funding supportive housing is complex but doable. With the right mix of training and support, sponsors of this much-needed housing can access appropriate funding packages, achieve financial sustainability, and even provide returns for investors.
Supportive housing projects often have several funding sources and require significant subsidies to cover the cost of services, which includes:
National research commissioned by CSH identified the key funding sources for supportive housing projects. The largest source of capital is the Low-Income Housing Tax Credit (LIHTC) program, used in 54 percent of projects and making up 32 percent of all capital used for these projects. Housing Finance Agencies (15 percent), redevelopment agencies (9 percent), and commercial banks (7 percent) are the next most-used sources.
The remainder of capital typically comes from a variety of U.S. Department of Housing and Urban Development (HUD) funding: McKinney-Vento programs (3 percent); the HOME Program (3.8 percent); and Community Development Block Grant funds (4.2 percent). State and local housing trust funds provide other funding.
Operating subsidies for supportive housing are primarily provided by HUD’s housing voucher programs, such as the Shelter Plus Care (S+C) Program and the Supportive Housing Program (SHP). HUD programs also cover the ongoing costs of providing support services to tenants through S+C, SHP, and Housing Opportunities for Persons with AIDS. Support services are funded by other federal and state programs.
Positioning Projects for Long-Term Sustainability
Planning is the key to long-term sustainability in supportive housing. CSH works with supportive housing sponsors to build strategic and informed plans for creating high-quality units. We provide a suite of products, services, grants, and training designed to give local service providers and housing developers an understanding of supportive housing financing, program models, and best practices. In addition, we provide one-on-one assistance to help sponsors with a range of project-specific work. This kind of assistance has helped establish a supportive housing industry that offers long-term sustainability. CSH works with sponsors in:
Investment Opportunities and Innovation
Traditionally, banks have invested in supportive housing projects and received solid returns by providing loans to CDFI funds that support below-market-rate lending for predevelopment and acquisition costs. Banks also lend directly to supportive housing developers to cover construction costs. Many of these investments and loans qualify for Community Reinvestment Act consideration.
In addition to the traditional LIHTC investments, banks may invest in new supportive housing opportunities, such as cutting-edge, external loan funds and New Markets Tax Credits (NMTCs). External predevelopment and acquisition funds use initial government investments to leverage significant private capital. By subordinating the government’s lien position to the private capital, more housing can be created with the same amount of public grant resources. CSH, using this leverage strategy, capitalized the LA Supportive Housing Loan Fund on its balance sheet and is participating with other CDFIs in four such funds in New York City, Los Angeles, and the San Francisco Bay Area.
Industry Innovation: Acquisition Loan Funds
Typically, acquisition loan funds are independently capitalized limited liability corporations (LLC). An initial grant investment acts as a first loss, with public investors taking the primary and generally riskiest position, foundations taking the secondary loss position, and banks and other private investors taking the senior position, or the investment with the least risk. Typically, government agencies enlist multiple CDFIs to originate loans, with CDFIs marketing the loans, conducting due diligence, analyzing the projects and borrowers, structuring the loans, and providing technical assistance to ensure the quality of the applicants’ project plans. Because there is first loss built into the structure of the funds, CDFIs do not have to raise grant funds for loan loss reserve, eliminating a major challenge to funding supportive and affordable housing projects on a large scale.
In partnership with the Los Angeles Housing Department, CSH created the Los Angeles Supportive Housing Loan Fund, a stand-alone fund that exclusively targets supportive housing creation. CSH owns this fund, which uses a capitalization structure that is similar to an LLC, although it is not an LLC. The housing department provides top loss for the fund, which has allowed CSH to attract $25 million in private investment. CSH has enjoyed great success through the Supportive Housing Loan Fund in scaling supportive housing development in Los Angeles. To learn about this project, see the sidebar about Horizon Apartments,“Case Study: Venice Community Housing.”
These acquisition funds streamline the supportive housing funding process by tying predevelopment and acquisition loans directly to public sources of long-term financing. Given their first-loss positions, the public agencies have a vested interest in the success of the funds. By prioritizing these projects for long-term financing to mitigate risk, public funding for projects is more predictable, resulting in more local production.
Role in Supportive Housing Production
CSH sees tremendous opportunity for acquisition loan funds to attract unprecedented private investments in supportive housing projects. Other than Los Angeles’s Supportive Housing Loan Fund, no other existing LLC funds specifically target supportive housing. In fact, several funds are structured in ways that limit their use in supportive housing projects (for example, loan-to-value (LTV) ratios capped at 100 percent). If these funds are restructured to encourage supportive housing development, they could help governments achieve long-term supportive housing production goals and in ending homelessness nationally.
New Markets Tax Credits as New Funding Source
Supportive housing developers are also beginning to look at the New Markets Tax Credits (NMTC) program as another way to attract greater levels of debt and equity financing from banks. CSH received its first NMTC allocation in 2011. CSH expects to close at least one of its three investments in supportive housing projects by year’s end. CSH will sell its NMTCs to banks and other investors in exchange for equity and debt investments in the supportive housing projects. To date, supportive housing developers have used this program on a limited basis for very large, multi-use developments. CSH is exploring how NMTCs might fund program space for support services within housing projects, an innovation that would enable this financing to be used on a larger scale for these projects. With a seven-year compliance period, the NMTC program represents an opportunity to attract longer-term bank financing to supportive housing projects.
Risk Factors and Mitigation
As with any housing development project, supportive housing projects carry risks. Indeed, these projects may be incorrectly perceived as riskier than traditional affordable housing projects. The truth, however, is that supportive housing projects have proven to be solid investments.
CSH, in conjunction with Enterprise Community Partners, conducted the 2011 study “Permanent Supportive Housing: An Operating Cost Analysis.” The study concluded that permanent supportive housing is beneficial to communities as well as to homeless individuals. The low-income housing tax credit investments analyzed in the study generally had somewhat lower revenues and higher operating expenses when compared with LIHTC affordable housing investments without support services. The primary reason that the projects had stronger cash flow was that they had significantly lower debt service obligations. These reduced obligations offset the lower revenues and higher operating expenses. In addition, a strong service partnership was critical to maximizing housing stability. Stable tenancy leads to increased rental income and reduced repair and maintenance expenses.
Generally, supportive housing projects require higher LTV ratios (for example, 120 percent on average) than other affordable housing projects (80 percent to 100 percent LTV), because supportive housing sponsors often have limited collateral. Based on CSH’s very low default rate of less than 1 percent since 1992, we have not found the higher LTV to result in riskier loans.
When it comes to mitigating risk, CSH has pioneered a successful model. We develop long-standing relationships with prospective borrowers to help them plan supportive housing projects that are well-positioned with long-term financing from government and other sources. CSH provides extensive training and technical assistance to review project plans, and offers grants to build organizational capacity. CSH also maintains close ties with government funders in many parts of the country and has experience in helping prospective borrowers qualify for government support.
In addition, CSH offers Project Initiation Loans (PIL), a unique loan product designed to fund early-stage predevelopment and planning work. Capped at $50,000, PILs support robust planning and due diligence, including site and feasibility assessments. The result: stronger projects that are better positioned to repay larger property acquisition and predevelopment loans using permanent financing sources.