Preserving Affordable Units in Higher Cost Markets

June 28, 2019

Neighborhoods can profoundly impact an individual's health1, quality of life2, and prospects for upward economic mobility3. Generally speaking, access to economic opportunity is not evenly distributed4, thus making opportunity-rich neighborhoods often prohibitively expensive for low- and moderate-income (LMI) households. Programs that aim to protect access to affordable housing in high opportunity places can therefore be an important tool for improving the lives of LMI people.5 A recently launched low-cost debt fund managed by the Community Investment Corporation (CIC) is one such program.

Chicago, like much of the nation6, is experiencing significant housing affordability challenges. As rents soar in many Chicago-area neighborhoods, access to quality jobs, vibrant retail districts, and good schools, creating and preserving affordability has become more challenging. New research from the DePaul Institute for Housing Studies7 and the National Low Income Housing Coalition8 affirms that some neighborhoods have lost naturally occurring affordable housing at an alarming rate.

Funds for the construction of new affordable rental housing are limited, and competition for capital subsidy is intense. Land costs are high in markets with high demand, strong schools, vital amenities, and jobs, and efforts to construct affordable housing routinely face opposition from existing residents. As a result of these and other barriers, there is a significant shortfall of affordable housing for LMI families, especially in these higher-cost markets.

A new tool for incentivizing affordable development

Given the high costs of new construction, acquiring and preserving existing rental units is often a more cost effective approach for creating affordable housing in higher-cost markets. However, private owners need an incentive to commit to long-term affordability, and mission-driven developers need high-speed financing to supplement traditional bank debt and compete for properties.

CIC's new $36.5 million mezzanine debt fund9 (“the fund” or “OIF”) fills this important gap. The fund provides mezzanine debt at below-market interest rates to developers who purchase or refinance existing, stable rental buildings in higher-cost markets. Interest rates on market rate mezzanine debt range from 12.5 percent to 20 percent; the fund charges around 7.5 percent. The loan structure means that the funds will be repaid, and available to use again in the future.

The new fund can cover up to half of an owner’s equity requirement, or up to 90 percent loan-to-value, whichever is less. For instance, an owner might borrow 80 percent of a building’s value with a first mortgage. Of the remaining 20 percent equity requirement, the Fund would cover 10 percent, and another 10 percent would come from the developer.

In exchange for the low-cost mezzanine debt, participating owners must keep at least 20 percent of units affordable to households at 50 percent AMI for at least 15 years ($42,300 for a family of four in the Chicago Metropolitan Area). Owners may choose to use Housing Choice Vouchers, Project-Based Vouchers, or other types of rental subsidy to meet their affordability requirement. This means that in high-cost markets, owners can maintain consistent cash flow even while renting to very low-income households.

In the fund’s three year origination period, CIC expects to generate 300 affordable units in strong and strengthening markets, and 1,500 mixed income units overall.

Results highlight the efficiency of this model

Since the fund closed in November 2018, CIC has financed 11 projects totaling $2.23 million in OIF financing, generating 248 total units of mixed income housing. Of these, 55 are affordable to households with incomes at or below 50 percent of AMI.

This approach is highly efficient in terms of per-unit funding and transaction speed. Compared to the roughly $300,00010 cost of building a new affordable unit with grant funds, the fund has financed less than $40,000 per affordable unit with loan funds, and created long-term affordability in some of Chicago's most expensive neighborhoods and suburbs.

For example, a family business wanted to expand their rental portfolio in Evanston, IL, one of Chicago's strongest suburban markets. Once they selected a property, the owners learned that a recent ordinance change required that 10 percent of the units be available to low- or-moderate-income households. The attractive terms of the OIF incentivized them to double the required number of affordable units from 10 percent to 20 percent, not only meeting the requirements of the ordinance but also making the 18-unit property profitable. New construction or preservation deals that draw on capital subsidy can sometimes take years to complete; these clients closed in less than 90 days. As a result, the Evanston community gained four high-quality units guaranteed to be affordable to low-income tenants for at least 15 years.

Investors and funders

The $36.5 million fund includes $21 million in private investments from several large banks with significant presence in Chicago as well as $5 million from Benefit Chicago11; and $10.5 million in government investments from the city of Chicago, Illinois Housing Development Authority12, and the U.S. Department of Treasury Capital Magnet Fund 13. Early support from a large bank foundation also helped develop the program.


As rents skyrocket in city and suburban neighborhoods alike, many in the community development field have made a renewed push for policies and programs that promote equitable access to quality, affordable rental housing. CIC’s mezzanine debt fund is an example of an innovative approach to not only creating, but also preserving affordable housing as a community asset.

The Federal Reserve Bank of Chicago’s Community Development and Policy Studies Division (CDPS) blog routinely features emerging and innovative products, programming, and services developed by regional stakeholders that address the needs of Seventh District residents, in particular those living in low- or moderate-income communities. While not to be construed as an endorsement, these blogs may serve as examples of innovative and flexible lending practices that may qualify for credit under the Community Reinvestment Act. (Financial institutions subject to compliance with the Community Reinvestment Act are encouraged to consult with their primary regulator on how this product meets area credit needs.)

Taz George is a senior research analyst in the Community Development and Policy Studies division of the Federal Reserve Bank of Chicago.

Jason Keller is an economic development director in the Community Development and Policy Studies division of the Federal Reserve Bank of Chicago.

Stacie Young is the director of The Preservation Compact at the Community Investment Corporation, a certified community development financial institution (CDFI) serving Chicago’s metropolitan area by acquiring, rehabilitating, and preserving affordable rental housing. For more information, see and

1 Capps, K., 2019, “Childhood Asthma: A Lingering Effect of Redlining,” CityLab, blog, May 23, available at

2 Ludwig J., G. Duncan, L. Gennetian, L. Katz, R. Kessler, J. Kling, and L. Sanbonmatsu, 2013, “Long-Term Neighborhood Effects on Low-Income Families: Evidence from Moving to Opportunity,” National Bureau of Economic Research, working paper, No. 18772, February, available at

3 Leonhardt, D., A. Cox, C. Cain Miller, 2015, “An Atlas of Upward Mobility Shows Paths Out of Poverty,” The New York Times, May 4, available at

4 Economic Innovation Group, 2018, “From Great Recession to Great Reshuffling: Charting a Decade of Change across American Communities,” October, available at­.

5 While the program described in this post primarily focuses on affordability in high-cost areas, it is also vital to promote access to opportunity in LMI neighborhoods and areas that have experienced divestment by addressing access to quality education, housing, labor market opportunities, and other amenities. Promoting affordable housing in higher-cost areas and promoting growth of opportunity in LMI areas are both valid and important community development strategies.

6 National Low Income Housing Coalition, “The Gap: A Shortage of Affordable Rental Homes,” report, available at

7 Institute for Housing Studies at DePaul University, 2019, “2019 State of Rental Housing in Cook County, April 23, available at

8 National Low Income Housing Coalition, “The Gap: A Shortage of Affordable Rental Homes,” report, available at

9 See for more information.

10 See for more information on cost of affordable housing construction.

11 Benefit Chicago is mobilizing $100 million in impact investments to finance the growth of impact enterprises through the Chicago region to build wealth, create jobs, and enhance job readiness. See for more information.

12 IHDA’s mission is to finance the creation and preservation of affordable housing in Illinois. See for more information.

13 CDFI Fund Capital Magnet Fund is available at

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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