What Types of Projects and Activities Can Grantees Seek Out in the OZ?
Generally, there are two ways that grantees can take advantage of the investment opportunities that are presented by OZ capital:
- Most directly, grantees can secure OZ-generated capital in HOME and HTF projects and develop affordable housing in the OZ. By including OZ-generated capital in the capital stack, grantees can limit the amount of the HOME or HTF investment in the project.
- Indirectly, if appropriate housing development projects do not immediately exist, grantees may wish to work with other agencies, developers, and investors to support other investments in an OZ that might have benefits to residents of nearby HOME- or HTF-assisted housing.
Development of Affordable Housing in the OZ
Housing is a critical component of a community’s economic ecosystem. The development of quality affordable housing is often incorporated into local redevelopment strategies, to both eliminate blight and to stabilize neighborhoods by bringing in new residents and new economic life.
Potential affordable housing developments will cover a wide range of types, depending on the demographics and needs of the OZs in the jurisdiction, and the grantee’s community development needs. Some factors to consider:
- Project Size is a factor to consider. OZ investors may be most interested in large-scale rental projects, but this is not a requirement. Grantees can pursue small-scale rental projects if they can identify an OZ investor. Developers of projects with a small number of rental units may have opportunities with locally based OZ investors interested in direct investment (non-QOF) opportunities.
- HOME Funds are for affordable housing, as well as mixed-use, and mixed-income developments. HOME is a flexible source of funds. It can finance developments that are 100 percent affordable housing; or, when combined with other funding sources, HOME can help finance a wide range of rental and homeownership housing types, including mixed-income housing and mixed-use development. HOME funds can pay for the affordable units and a fair share of common costs; it can also pay a proportional share of some limited infrastructure development to support these ventures. OZ equity and other sources would be required to fund costs that are not HOME-eligible.
- HTF Funds are deeply targeted to VLI and ELI households. HTF project rents need to be extremely low to serve the neediest of residents. These projects generally require a deeper subsidy and additional operating subsidies to be sustainable. In some instances, HOME and/or HTF funds are insufficient and additional resources must be identified. These projects may be too challenging to underwrite in a way that secures a sufficient return on investment to attract an OZ investor. However, the additional equity of the right OZ investor, combined with HTF funds, will be sufficient to write down the up-front costs so there is less debt, a more sustainable project, and a sufficient return on investment to attract an investor.
- Workforce Housing may provide an investment opportunity for some companies and institutions in or near the OZ. Grantees may be able to collaborate with large employers or institutions (such as hospitals or universities) to generate opportunities for mixed workforce housing. Many large institutions and companies benefit from housing development that helps stabilize the neighborhoods near their campuses. In addition, these housing developments can provide a source of affordable housing for their lower-income employees. Corporations with a prominent presence in the community may have their own capital gains that they wish to invest in OZs for tax purposes. Combining HOME or HTF financing in workforce housing can be a way for grantees to tap the resources of certain institutional investors and ensure that some of the workforce housing is targeted to low-income, VLI, or ELI households. Limiting beneficiaries or preference to a particular segment of the low-income population can only be done, if described in the action plan. Therefore, grantees that pursue workforce housing must describe tenant preferences in their Consolidated Plan/Action Plan.
Coordinate with Other Agencies and Investors to Concentrate Investments in the OZ
Through thoughtful planning, grantees can coordinate with other agencies and potential investors to identify ways to mutually support each other, even if OZ investors do not directly invest in HOME- or HTF-funded projects. Some ideas include:
- Identify Economic Development Activity that Complements/Supports Existing HOME- or HTF-Assisted Housing and Its Residents. Grantees can seek out or encourage investors to capitalize economic development initiatives that will support the grantee’s nearby developments and its residents, such as grocery stores, other commercial services, or to invest in businesses in the OZ that might create jobs. Remember, while OZ equity is often invested in real estate, it is not required to be. Grantees and investors can identify other economic development initiatives in the OZs, such as working capital for new or existing businesses.
- Coordinate Infrastructure Improvements to Support Affordable Housing and OZ Investments. Jurisdictions can also target local capital improvement funds to upgrade existing infrastructure, to maximize the redevelopment impact in the OZ. Many successful redevelopment strategies begin with a significant and coordinated investment of public funds, which then spur additional private investments. Grantees can work within their jurisdictions to coordinate these investments and ensure they support the grantee’s affordable housing investments as well.