County-backed loan fund unlocks thousands of affordable housing units

Key Takeaways

Montgomery County, Md. is using a $100 million revolving loan fund to develop more than 3,000 affordable housing units across the county. The Housing Production Fund uses county-backed municipal bonds to provide up-front, low-cost capital for construction, replacing the need for private equity investment.

The Housing Opportunities Commission of Montgomery County (HOC), which operates the fund, is unique in that it functions as a public housing authority, a housing finance agency and a developer, according to Chelsea Andrews, HOC’s executive director. Its multifaceted structure is what has enabled the county to continue developing affordable units, regardless of the market, she noted.

“Our Housing Production Fund has been a tremendous tool that has helped us to advance development at times where it’s definitely becoming more and more difficult, especially with financing,” Andrews said. “… It allows us to continue to develop and to try to keep at pace with what the demands and the needs are.”

Montgomery County initially dedicated $50 million to the Housing Production Fund in 2021, and doubled its investment to $100 million the following year. 

“Developing a pipeline of over 3,000 units that we would not have otherwise been able to finance and move forward with is critical and significant for our county,” Andrews said. “So, it has definitely been a game changer in so many ways.”

Developers traditionally prioritize private equity during the construction phase because private equity firms can provide the necessary substantial upfront investment for materials, labor, equipment and technology. Replacing high-cost private equity, which typically demands a 15% to 20% return, with public capital that only requires a 5% or lower return, saves millions of dollars during the construction phase. 

The Housing Production Fund model has “without a doubt” increased developers’ interest in participating in these projects, according to Andrews.

“Of course, it was extremely enticing for any of our potential partners, so there was a lot of interest in how different developers can work with us,” Andrews said. “It allowed for an opportunity for guaranteed low-cost financing, which is the make or break at the beginning of any transaction.”

After a project is built, the loan is repaid and available to fund new construction. The $100 million Housing Production Fund can catalyze up to $1 billion of mixed-income development capital over a 10-year period, according to the National Housing Crisis Task Force.

The Laureate, the Housing Production Fund’s first project, opened in 2023, and two more developments are currently underway. At least 30% of units in projects the fund finances must be income-restricted, with 20% of units affordable at or below 50% Area Median Income (AMI) and 10% at or below Moderately Priced Dwelling Unit income limits of 65%-70% AMI.

The Laureate — a 268-unit mixed-income, mixed-use apartment building — is not your average public housing development. Its amenities include a courtyard pool, a yoga studio and a designated space for residents to wash their pets that’s been dubbed a “pet spa.” 

“We’re positioning these properties as market rate properties that also have affordable [units] in them,” Andrews said. “So, they’re competing with the market rate, they have the same type of amenities … and the finishings are the same across every single unit.

“I believe it’s because of the attention to detail and our commitment to deliver high-end, highly ‘amenitized’ developments that ultimately increase the market value for our neighbors that results in not having that negative stigma [that comes with affordable housing].”

Maryland recently created a state-level housing innovation fund to encourage jurisdictions to find creative approaches to financing affordable housing development. In Montgomery County, there’s more demand for this type of development beyond what the $100 million can provide, so HOC is exploring opportunities for additional funding for the Housing Production Fund to meet that, Andrews noted.

“Even now, there are still projects that we’re not able to advance because we would need more funding to do it,” she said. “… This is something that has caught fire, so we’re looking at all avenues from federal, state and local in terms of how to create models that have guaranteed low-cost lending options, but that ultimately revolve and potentially are structured in a way that offsets the cost to actually provide that option to HOC and/or other entities.”

Paul E. Williams, founder and executive director of the Center for Public Enterprise and Yakov Feygin, the think tank’s director of energy, wrote a report in 2024 on how, if expanded nationally, the revolving loan fund model could lead to smoother and more stable housing production and build millions of homes.

“A national construction fund would provide enough lower-cost construction financing to allow multi-family developers to clear upfront equity investment hurdles and continue developing projects in higher interest rate environments,” the report reads. “Thousands of permitted, ready-to-build units that are stuck in limbo would finally enter construction, ensuring that housing supply becomes available as the economy picks up steam and preventing housing costs from continuing to spiral upward.”