Mixed-Income Public Development Model: A New Path for Local Housing Finance Agency Innovation
Introduction
The national housing crisis in the United States has reached a scope and severity that traditional affordable housing solutions can no longer address on their own. For decades, the affordable housing market has relied heavily on the Low-Income Housing Tax Credit (LIHTC), federal vouchers, and tax-exempt Private Activity Bonds (PABs). While these tools have produced millions of homes, they are increasingly oversubscribed, underfunded, and ill-suited to today’s high-construction-cost and high-interest-rate environment. In response, a powerful new approach is emerging: the Mixed-Income Public Development Model, driven by innovation at the Local Housing Finance Agency level.
This model, detailed in a recent report by the Center for Public Enterprise and housing leaders from across the country, shifts away from purely private or public-private models toward majority public ownership of mixed-income housing. By leveraging tools like revolving loan funds, low-cost permanent financing through HUD’s Risk Share program, and mission-aligned mezzanine debt, local Housing Finance Agencies (HFAs) and Public Housing Authorities (PHAs) can produce thousands of new units without relying on scarce LIHTC allocations or vouchers. This summary explores how the model works, where it is already succeeding, and why it represents a critical innovation for state and local governments.
The Limits of the Traditional Affordable Housing Toolkit
To understand why the Mixed-Income Public Development Model is so necessary, one must first recognize the gaps in the existing system. LIHTC, while successful in creating roughly 3.85 million homes since 1986, is oversubscribed by nearly three times the available credits. Only one in four eligible households receives any form of federal rental assistance, including vouchers. Meanwhile, 31 states are at or near their annual cap on tax-exempt Private Activity Bonds, which are required for any project using the 4 percent LIHTC. This scarcity drives up costs and leaves many viable projects unfunded.
Furthermore, market-rate private equity investors often avoid mixed-income projects due to their complexity, including income verification requirements and longer timelines. In a high-interest-rate environment, construction loan-to-value ratios have dropped from two-thirds of project costs to as low as 50 percent, forcing developers to seek expensive private equity that demands double-digit returns. The result is a funding gap for publicly led, mixed-income developments a gap that the Mixed-Income Public Development Model is explicitly designed to fill.
What Is the Mixed-Income Public Development Model?
At its core, the Mixed-Income Public Development Model enables the production of housing that includes both market-rate and affordable units, with affordability achieved not through ongoing federal vouchers but through lower financing costs and property tax relief. Unlike traditional affordable housing, which often concentrates low-income households, this model intentionally creates economically integrated communities. Affordability comes from three key elements: a revolving loan fund for construction financing, low-cost permanent financing via HUD and Treasury programs, and mission-aligned mezzanine financing to bridge gaps between construction and permanent loans. Crucially, the model also requires majority public ownership and active asset management by the public sector.
This approach works best in strong rental markets where there is sufficient difference between market and affordable rents to allow cross-subsidization. That means it is most effective in high-opportunity areas, suburban Washington D.C. markets, or growing cities not in rural or deeply underinvested areas where private investment is absent. However, within those hot markets, the model is a potent tool to secure long-term affordability without consuming LIHTC or voucher resources.
Breaking Down the Financing Mechanisms
Revolving Loan Funds for Construction
In a typical market-rate deal, a developer secures a short-term construction loan from a bank covering 50 to 66 percent of costs, with the rest coming from private equity. In the Mixed-Income Public Development Model, a publicly capitalized revolving loan fund provides roughly 20 percent of construction costs, replacing expensive private equity. Because the fund is repaid when the project converts to permanent financing (usually after lease-up), the capital revolves and can be used again for new projects. This dramatically reduces the cost of capital and allows public agencies to stretch their dollars further.
Montgomery County’s Housing Opportunities Commission (HOC) provides the leading example. In 2021, the county authorized a $50 million taxable bond issuance to create a Housing Production Fund (HPF), later expanded to $100 million. HOC issues HPF loans to projects at 5 percent interest, which is far below private market rates. The fund provides about 20 percent of construction costs per project, and because it revolves roughly every five years, that $100 million fund is expected to catalyze $1 billion in total mixed-income development over a decade. The net annual cost to the county is only about $2.7 million.
Other cities have followed suit. Chicago created a $135 million revolving loan fund through its Residential Investment Corporation. Atlanta established a $38 million fund via the Atlanta Urban Development Corporation. Chattanooga allocated $20 million through its Invest Chattanooga program. Combined, these four jurisdictions have deployed $293 million in revolving loan funds, proving the model’s scalability.
Low-Cost Permanent Financing via Risk Share and FFB
Once a project is built and leased, the construction loan must be replaced with permanent financing. Here, the model leverages the Section 542(c) Risk Share program, under which the Federal Housing Administration (FHA) partners with qualified state HFAs to share mortgage risk. This federal credit enhancement lowers borrowing costs significantly. Even better, the Treasury’s Federal Financing Bank (FFB) can purchase these Risk Share loans directly, providing a low-cost, stable source of capital that does not rely on tax-exempt bonds.
Interest rates on FFB/Risk Share loans are typically set at the 10-year Treasury rate plus 100 basis points. Over the last eight years, that has ranged from 1.89 percent to 6.32 percent. Recent program changes have added an interest rate "collar," which locks in a rate range at project approval, protecting developers from spikes between construction and permanent financing. Notably, projects using FFB/Risk Share do not trigger federal prevailing wage requirements because the federal government is not assisting during construction—only during permanent financing. However, they must meet affordability requirements: either 20 percent of units at 50 percent of Area Median Income (AMI) or 40 percent of units at 60 percent AMI.
Crucially, because FFB/Risk Share does not consume a state’s limited volume cap for Private Activity Bonds, it leaves those scarce resources available for 100 percent LIHTC projects that serve the deepest needs. This is a game-changer for states that are oversubscribed on PABs.
Mission-Aligned Mezzanine Financing
In some cases, the permanent loan is not large enough to fully pay off the construction loan. That is where mezzanine financing comes in. The model relies on mission-aligned capital often from Community Development Financial Institutions (CDFIs), philanthropic organizations, or regional banks, to cover the remaining gap. Montgomery County’s HOC underwrites conservatively, assuming a 10-year mezzanine loan at 10 percent interest as a worst-case scenario. In practice, HOC typically secures better terms because it offers investors a moderate return backed by real estate in high-opportunity areas with paying tenants.
For communities seeking to replicate the model, local philanthropy is a natural partner. There is strong alignment between public mixed-income housing projects and foundations that want measurable, local impact. If mezzanine financing is not available at reasonable cost, jurisdictions can simply leave the low-cost construction loan in place longer, which slows the fund’s revolution but still produces valuable housing.
The Importance of Majority Public Ownership and Asset Management
What truly distinguishes this model from past public-private partnerships is majority public ownership. In Montgomery County, the Housing Opportunities Commission takes a majority interest in each property, typically through a joint venture LLC with a private development partner. This structure leaves control of affordability in public hands. HOC voluntarily rent-stabilizes all market-rate units (tying increases to the rental Consumer Price Index) and maximizes the number of income-restricted units against cash flow requirements.
Public ownership also allows the community to retain value over time. When a property is refinanced in 10 years, any reduction in debt service costs can be used to add more affordable units. A private, for-profit entity with fiduciary duties to maximize profit would be unlikely to make such a choice. Moreover, public ownership insulates the parent agency from liability through individual LLCs, and it has not deterred private developers HOC reports being inundated with partnership requests.
Asset management is equally critical. PHAs moving into mixed-income development may need to shift from centralized accounting to project-based methods common in the private sector. Getting this right requires thoughtful implementation that goes beyond financial performance to include resident services and community building.
Where the Model Is Already Working
Beyond Montgomery County, several other jurisdictions are actively implementing the Mixed-Income Public Development Model. In Chicago, the Residential Investment Corporation (a 501(c)3) operates a $135 million revolving loan fund targeting 30 percent of units at 60 percent average AMI. In Atlanta, the Atlanta Urban Development Corporation, housed within the Atlanta Housing Authority, runs a $38 million fund aiming for 20 percent of units at 50 percent AMI and 10 percent at 80 percent AMI. Chattanooga’s Invest Chattanooga, also under the housing authority, has a $20 million fund targeting 30 percent of units at 50 to 80 percent AMI.
Each jurisdiction is building its development pipeline differently some by reviving stalled private projects, others by developing public land, and still others by creating off-ramps for LIHTC projects that did not receive an allocation in a given year.
A complementary approach comes from Los Angeles. The Housing Authority of the City of Los Angeles (HACLA) has focused on an acquisition model, purchasing existing market-rate properties and converting them to affordable housing with long-term income and rent limits. Since 2020, HACLA has acquired over 2,000 units. It recently created an Acquisition Equity Fund combining mortgage revenue bonds, philanthropic funds, and government grants. This shows the model’s flexibility: it works for both new construction and preservation.
Expected Impacts and Scalability
The expected impacts are substantial. Montgomery County’s $100 million fund is projected to achieve 10-to-1 leverage over 10 years, catalyzing $1 billion in development and producing 5,000 to 6,000 units. If the top 50 U.S. metros created similar per-capita production funds, approximately $20 billion in public investment could catalyze $200 billion in mixed-income development over a decade.
Importantly, this model does not compete with existing affordable housing production. It supplements it. Projects that fail to win LIHTC awards can be reworked as mixed-income deals. Vouchers remain available for the deepest-need households. The mixed-income model simply ensures that production does not stop when those resources run out.
Implementing the Model: Six Stages for Local HFAs and PHAs
For a local Housing Finance Agency or Public Housing Authority looking to launch this model, the report outlines six practical stages. First, market testing involves creating a high-level financial model with local rental rates, construction costs, and potential subsidies. Second, pipeline development identifies stalled projects, publicly owned parcels, or prior applicants that fit the model. Third, institutional framework and governance design decides where the program should be housed and how deal flow will work.
Fourth, financial structure design explores revolving loan fund sources, senior debt options like Risk Share/FFB, and mezzanine debt from CDFIs or philanthropy. Fifth, project-level financial modeling creates pro-formas and term sheets for specific pilot projects. Sixth, capacity development ensures the agency has underwriters, project managers, and access to technical assistance. The nonprofit Center for Public Enterprise and Local Initiatives Support Coalition (LISC) both provide direct technical assistance to localities moving through these stages.
Conclusion: A Public-Led Path Forward
The Mixed-Income Public Development Model represents a fundamental innovation in how local Housing Finance Agencies and Public Housing Authorities can respond to the housing crisis. By combining revolving loan funds, FFB/Risk Share permanent financing, mission-aligned mezzanine debt, majority public ownership, and professional asset management, these agencies can produce thousands of mixed-income homes without relying on oversubscribed LIHTC or vouchers. The model is already proven in Montgomery County, Chicago, Atlanta, Chattanooga, and Los Angeles. For any state or local government with a strong rental market and a desire to scale affordable housing, this tool is ready to deploy. The only missing ingredient is the political will to put public capital to work in a smarter, more sustainable way.
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