Pay for Success: building on 25 years of experience with the Low Income Housing Tax Credit

Terri Ludwig

Community Development Innovation Review, 2013, issue 01, 109-113

Abstract: Pay for Success (PFS) has been touted as the hot new innovation in social investing. Over the past year, investors and governments across the country have committed millions of dollars to exciting new tools like social impact bonds (SIBs), which deliver a financial return only when specific social goals are met. But this approach is not new. Indeed, socially driven investors have used the PFS model for more than a quarter century. Consider the Low Income Housing Tax Credit (LIHTC), the primary tool for financing affordable housing development in the United States since the mid-1980s. Under this program?which deployed more than $8 billion in private capital last year alone?private investors front the money for a developer to construct rental housing that is affordable to low-income families, defined as those making less than 60 percent of the area?s median household income. In exchange, the investor is given a tax credit from the federal government, redeemable only when construction is completed and the low-income family moves into their new home. The rent must stay affordable for a 15-year window, throughout which the government can recapture the tax credit in the event of noncompliance. In other words, the federal government only pays if the program is successful?in this case if an affordable home is actually built and inhabited by a low-income family at affordable rents for at least 15 years. If that goal is not met, private investors, not taxpayers, are on the hook.

Date: 2013
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