How can we break the cycle of housing inequity facing Chicago’s most vulnerable communities? To help answer that question, the latest in a series of ground-breaking financial innovation labs focused on making affordable housing an attractive proposition to both public and private finance, write city experts Stephen Engblom, Denise Casalino, Bill Abolt, and Garrett Harper.
As the third-largest U.S. city by population and GDP, Chicago is a key economic driver of the nation’s economy. However, while Chicago’s urban population has decreased, its most vulnerable residents remain in declining neighborhoods facing high crime and violence rates, and rapidly aging infrastructure needs to be upgraded. Without adequate housing provision, both the city’s ability to help its residents build a better life and its economic competitiveness are at risk.
Exploring this challenge and how best to catalyze the development of affordable housing in ‘complete’ and resilient communities across Chicago was the subject of a new Financial Innovations Lab® program convened by the Milken Institute, in collaboration with AECOM.
A difficult legacy
Despite a long history of innovative policy interventions and strategy, access to safe and high-quality housing is inequitable across the city, exacerbated by concentrated investment in hot neighborhood markets and a lack of investment in struggling neighborhoods.
Through Chicago’s resiliency efforts, it is clear that the legacy of past discriminatory practices and policies is still felt across the city today, causing disparities and disproportionately and negatively impacting the most vulnerable. Providing accessible housing is one of the most crucial ways in which the city can tackle this issue, building cohesive communities, growing economic opportunities, reducing crime, and increasing resilience.
Using innovation to deliver affordable housing in Chicago
In November 2018, as part of the second in a series of Financial Innovation Labs, the Milken Institute, in collaboration with AECOM, examined innovative approaches to deliver affordable housing in Chicago. This included discussing the necessary policy tools, funding and financing models to kick start increased development of affordable housing units as part of complete communities that meet the needs of all residents, support local economic development and provide essential facilities.
The Lab provided a unique opportunity for city officials, housing development stakeholders — both market and affordable providers — and experts from financial institutions to come together and discuss the big issues and barriers they face in this space and, crucially, identify areas in which they could work together to boost future housing development in Chicago.
No one size fits all
In general, participants, agreed there is no one-size-fits-all-solution to this issue, with Chicago’s diverse neighborhoods requiring more tailored approaches. Recognizing there are a limited number of equity financing sources currently being used to expand the number of affordable units, participants also highlighted that the greatest risk of complete community redevelopments is carried by earlier investors — given these projects are centered on the long-term physical, social and civic revitalization of neighborhoods. There was consensus that capital pools exist, but often lack the appropriate flexibility to offer gap or takeout financing.
Together, participants identified the following four innovative steps to help deliver the new housing needed, emphasizing the link to local economic development and job opportunities, transportation improvements, and other resilience measures to bring benefits to the community, developers and the city as a whole:
1/ Prioritize place-based policies and areas of focus
It is critical that any development strategy be neighborhood-specific, recognizing the breadth of challenges and opportunities that exist across Chicago. This will allow the city to prioritize efforts and provide targeted support that meets the needs of the individual neighborhoods using selection metrics and early community involvement.
2/ Resourcefully identify equity capital
The equity portion of the capital stack can be tackled by leveraging current policy tools and tax incentives, such as Opportunity Zone tax credits. This can occur through enhanced returns to investors on successful projects and the capital appreciation of assets that would be seen from market properties. This approach could be used in conjunction with other initiatives to catalyze affordable housing and complete community development. Possible new financing vehicles could better support Small and Medium-sized Enterprise (SME) developers to secure the last 20 percent financing through a central loss reserve pool that approved community development financing institutions (CDFIs) could leverage. Innovative partnerships between non-profit property owners and taxable investors could also monetize property depreciation values.
3/ De-risk and enhance early investment by critical providers
Current participants in the affordable housing market are a relatively small group and could be expanded to include local philanthropy and corporations. Through the creation of cross-business and industry partnerships, investments in complete community development can be de-risked via the creation of CDFIs or through the location of business anchors to stimulate local economic development and job creation.
4/ Identify creative pools of gap or takeout financing
Unfilled and growing financing gaps caused through delays handicap developers already struggling to complete the capital stack. Through the improvement of existing policies, such as the city’s Affordable Requirement Ordinance (ARO), and identification of short-term funding pools that match payments to existing projects, these gaps can be closed. Looking at opportunities to pool funds that meet the needs of investors seeking a return, those requiring an equity injection as a grant, and philanthropic investment could streamline affordable housing development.
Greater collaboration and coordination
Through the lab, participants advanced complex financing solutions to the challenge of affordable provision. But solutions will require increased partnerships and continued coordination across the board. Together, we hope to continue to work with the key stakeholders in the city, accelerating and bringing these transformational neighborhood projects to life.
Connecting the dots to address the gap
The Chicago Lab was the second in a four-part series of the Milken Institute’s signature Financial Innovations Lab program, hosted in collaboration with AECOM. The series examines ways to engage and accelerate new forms of capital that attract investors to the infrastructure space and explore innovative value capture mechanisms.
By bringing together interdisciplinary leaders from government, research bodies, financial institutes, and industry experts, we generate market-based solutions to overcome a city’s resiliency challenges. The series provides the opportunity to leverage a diverse pool of knowledge that can help expedite and identify new, innovative ways of funding impactful infrastructure projects.
Each Lab is designed to respond to this need by focusing on a single case study per city — a critical resilient urban infrastructure project or program that lacks a clear path to full funding. In addition to Chicago, and previously Los Angeles, the next lab discussions will explore recent infrastructure development and new investment vehicles in London and New York City. Following each lab, an executive summary that encapsulates the lab discussions and recommendations is produced.
Financial Innovations Lab is a registered trademark of the Milken Institute.