This article is part of the Under the Lens series
Shelter in a Federal Storm: State and Local Housing Solutions for a Time of Federal Hostility
When first-time developer Will Hanrahan was working on what would eventually become The Railyard—a mixed-use project in Lexington, Kentucky, that includes two commercial spaces and 32 units of housing, 12 of which will be permanently affordable—one of his first moves was to apply for federal subsidies. The Railyard is the kind of modestly sized mixed-use development that can be difficult to finance, so Hanrahan was counting on federal money to close the gap. He’d applied for several federal grants connected to the U.S. Environmental Protection Agency’s (EPA) Greenhouse Gas Reduction Fund and felt fairly confident that he’d receive the funding. (The project is located in a Justice40-designated census tract, which made it eligible for targeted federal investment.)
Hanrahan had purchased the land and was ready to go. But in March 2025, he received an email from one of the local groups designated to distribute the funds he’d applied for, explaining that they and other awardees had been unable to access obligated funds from those programs for several weeks. They had even had to file a lawsuit against the EPA and Citibank, which was managing the grant program and holding the money, to unfreeze the funds.
“The message made clear that projects relying on this capital were being delayed or paused,” recalls Hanrahan.
Once it became clear that the money wasn’t coming through, Hanrahan was forced to pull several green components from the project, including solar panels that would have provided low-cost electricity to occupants. “I could not afford to let an uncertain federal timeline put the entire project at risk,” he says.
Experiences like Hanrahan’s are increasingly common across the U.S., as previously committed funds are frozen or withdrawn, and the Trump administration signals that it wants to slash longstanding federal affordable housing subsidies like the Section 8 rental assistance program.
“The truth is, local government right now is in a really fiscally constrained place between higher [interest] rates and reduced federal support,” says Patrick Spence, program manager for economic mobility at the National Association of Counties (NACo). “[There’s] essentially a big shift of responsibility away from the federal government to state and local [governments]. Secondarily, from 2020 to 2023, we had an unprecedented sugar high in federal cash going to state and local [governments] between the American Rescue Plan, the bipartisan infrastructure bill, and even [the CARES Act] at the end of first Trump administration. There was a lot of money—and it’s all gone.”
Although Congress recently approved a budget that increased HUD funding, this funding is not enough to keep up with inflation, and timing and eligibility criteria for funds remain chaotic. Many developers and housing advocates are unsettled, and states and localities are exploring ways to fund affordable housing with less reliance on federal assistance. In many cases, they’ve found that they have valuable untapped resources that can be unlocked with a little ingenuity.
Long-Term Public Equity Investments
The fundamental problem of building affordable housing—with or without federal money—is a math problem: Developers must borrow money to build housing, and those loans must be paid back with the cash flow (rents minus operating expenses) from that housing. Affordable housing can complicate this process since rents are capped. Federal funding generally comes in at the front end of the development process, in the form of grants or tax credits, which reduces the remaining amount of capital the developer needs to secure. This is the typical public-private partnership: the government chips in money upfront, and the private market takes it from there.
But the rest of the money can be costly, both literally and in terms of opportunity costs. High interest rates on bank loans mean that less housing can be built per borrowed dollar, and equity investors—partners who contribute money in exchange for a share of the eventual cash flow—sometimes demand back-end returns as high as 20 percent or 30 percent. Many of the ways local programs look to support affordable housing involve lowering the cost of projects or their financing.
In Tennessee, Invest Chattanooga, a publicly supported nonprofit housing investment group, is using the city’s $20 million Housing Production Fund to revamp an ossified, inefficient building process.
“This program puts that whole approach on its head,” says Hanneke van Deursen, the director of housing finance for the city of Chattanooga. “Instead of starting from a project that’s infeasible and adding money in until it’s feasible, we’re starting from a project that’s fully feasible—namely, a kind of institutional multifamily product [that’s] fully market rate. And we’re adding subsidies, adding cash cost savings, into that project and pushing down [to add in affordability].”
Initially, Invest Chattanooga assumed it would take a more conventional approach to affordable housing. “We first thought about doing [a] traditional revolving loan fund,” says van Deursen, “but we realized that that fell short of the mayor’s vision for the fund, which was an evergreen fund that would incentivize the private sector to come alongside the public sector [to] get novel housing projects built.”
After researching how local governments like those of Montgomery County, Maryland, and Atlanta are using affordable housing funds in novel ways, van Deursen and Invest Chattanooga CEO Matt Bedsole refocused on assuming the position in the capital stack that an equity investor would.
Van Deursen says Invest Chattanooga is, in many ways, like any other private equity investment group. “A developer has their project and their pitch together, and they’re looking for investors to make it happen. You can only fund so much of the project costs alone. You need people to come in with equity investment. And we are one such … group that they can pitch to. Our proposition is, ‘Hey, we’re willing to put money in at a below-market rate, but in exchange, we’re looking for you to hit this affordability.’ They’re really pitching us to try to get capital to make their deal happen. The advantage we bring to their project is we are not expecting that 15 percent internal rate of return that most private equity out there is looking for. That’s really hard to make happen in today’s markets.”
Invest Chattanooga provides funding in two ways, says van Deursen—as a share of the common equity and as a mezzanine construction loan that is transitioned into impact capital after a project is built. The common equity position enables permanent affordability because Invest Chattanooga maintains governance rights throughout the project’s duration.
It’s an elegant solution with manifold benefits. By quickly injecting money into construction, it catalyzes development at one of the major points of friction. By replacing the most expensive money (that provided by equity investors who demand high returns) with city money, it dramatically reduces the overall cost of the project, freeing up significant cash flow on the back end that can be used on maintenance and capital improvements and buying the agency a majority stake in the general partnership.
“It’s a more active role, frankly, than local government is typically taking in affordable housing development,” says van Deursen. “We were able to stretch that fund so much further and achieve the types of products, ultimately, that are not achievable through the federal financing and [that] aren’t reliant on federal financing.”
Invest Chattanooga is in talks with several private, for-profit multifamily developers that are trying to build institutional multifamily projects but are facing funding challenges in the current market. They are also working with other co-investors. “One partnership that we’ve finalized is a relationship with American South Capital Partners,” says Bedsole. “[They’re] a mission-aligned affordable housing investment group out of [Calhoun], Georgia, that primarily invests in mixed-income affordable rental housing.”
They recently inked their first agreement. “We’re in partnership with Tucker Missionary Baptist Church, [which] has a beautiful piece of property next to [its] church that [it’s] been working for 3 years now to develop into affordable housing,” says van Deursen. “We’re partnering with Chattanooga Neighborhood Enterprise as the builder; [it’s] our most prolific nonprofit developer here locally.” Of the development’s 53 units, van Deursen says, 25 are going to be for seniors—all permanently affordable for those making 50 to 65 percent of AMI. The rest are going to be for families, with 20 percent permanently affordable at 50 percent of AMI and 10 percent at 80 percent of AMI.
[RELATED ARTICLE: How We Rewrote a Tax Incentive to Encourage More Affordable Housing]
That the Invest Chattanooga maintains ownership in the developments is crucial. “[In the] long term, we will have at least 51 percent majority interest in the general partnership,” says van Deursen. “What this means is [that] there’s long-term control. And that’s where … the permanence of the affordability is coming from. That is a real distinction … from your typical build, sell, build, sell, build, sell approach in the private development space. We saw this as an opportunity to . . . leverage the long-term returns that come from holding revenue-generating real estate and redirect those over time to further development.”
Flexible Local Funds
In Lexington, Will Hanrahan was left scrambling after learning that the federal funding he’d been counting on wouldn’t be coming through. But when he began to explore local funding sources, he was relieved to learn that he had options.
Like many cities across the U.S., Lexington has seen precipitous increases in both home prices and rents in recent years. Since 2019, Lexington rent prices have increased 47 percent, and according to a recent report, Fayette County is more than 22,500 units short of housing demand. Lexington is unusual in that it has an “urban service boundary” law that confines the town within strict boundaries. Passed in 1958, the law sought to protect the area’s agricultural assets—such as its famous horse farms—from suburban encroachment. These twin pressures incentivize a certain type of infill development embodied by Hanrahan’s project, which is built on the site of what was originally a railyard and then an auto repair shop.
Lexington’s public infrastructure program offered Hanrahan money to support streetscape and access improvements, as well as upgrades to the stormwater system. Because The Railyard is sited on a brownfield, there was state funding for an environmental assessment and cleanup support. Ultimately, the city of Lexington, in partnership with Fahe, a CDFI serving the Appalachian region, contributed just over $1.6 million to subsidize The Railyard: a forgivable 0 percent loan of $800,000, a $200,000 loan at 1 percent interest, and various grants. This money subsidized 12 affordable housing units that will be reserved for residents making 80 percent or less of the area median income (AMI) for the next 20 years.
Hanrahan had to get a little creative to make the money work, but there were intangible benefits to using local funding. “With the federal programs, there [are] a lot of decisions and competition for this money,” Hanrahan says. “It felt more, on the city funds, that if I did what they asked and followed the criteria, there was a very strong likelihood that this money would be available. So, it felt like less of a risk. Working with the federal government, there’s just a whole load more … boxes to check and things that need to be done—consultants and additional fees that I would have incurred—whereas it felt like I could kind of navigate the city funding mostly on my own.”
Cross-Subsidizing
In California, a slightly different model of affordable housing development is taking shape—one that forgoes not only federal subsidies but also state and local funding. The developers pioneering this model, some of which are for-profit firms, are betting that using money from social impact funds instead of navigating the often onerous approval process for government funding will save them “millions of dollars just in soft costs.” One such developer claimed to be able to build affordable one-bedroom apartments for under $200,000 per unit; housing that received tax credits cost an average of over $600,000 per unit across the state in 2023, and sometimes tops $1 million in expensive markets.
While it’s unlikely that this method will be scaled up sufficiently and reach affordability levels deep enough to meet the full scope of the national housing crisis, the approach offers some interesting lessons.
A flagship example of this new model is an 800-unit housing complex (184 units affordable up to 80 percent of AMI for 55 years) in Los Angeles that is set to be built on top of a Costco. Known as 5035 Coliseum and located in Baldwin Village, an area with a poverty rate double that of the national average, the complex seems to be an ideal candidate for housing subsidies. But Thrive Living, the project developer, didn’t even apply for low-income housing tax credits (LIHTCs)—or any state or local housing subsidies.
Instead, Thrive is leveraging Costco’s desire to enter a dense urban market by using part of the rent it pays for its retail space to subsidize the complex’s affordable units.
Thrive originally took on the site, which was home to an abandoned office building, with an eye toward residential development. In 2022, soon after Thrive was able to remove a retail restriction on the property, Costco approached Thrive about being an anchor tenant. “Retailers with significant space needs are often priced out of urban markets due to the high cost of land,” says Ben Shaoul, Thrive’s founder. “With 5035 Coliseum, we had the ability to split the land cost across the retail and residential uses to make it affordable enough for the retailer to lease at this location, creating the path for affordable housing to be built [here].”
The 5035 Coliseum project will also unlock affordability by using modular construction that will be assembled off-site, thereby reducing construction costs.
And the project isn’t entirely free of state assistance: it will be the first development under A.B. 2011, a California law that enables faster development for projects meeting specific affordability standards. Once leasing begins, many tenants will be able to use rent vouchers. Additionally, Thrive is reportedly seeking ways to use New Markets Tax Credits in the project. Still, the prospect of privately financed affordable housing construction, especially in a high-cost state like California, shows a lot of promise. Thrive believes the model will prove to be self-sustaining.
“[We’re] committed to supporting the affordable housing efforts in LA, with a goal of developing 5,000 affordable apartment units per year [and] recycling the profits from those projects back into future projects in LA,” says Shaoul. “Some projects are 100 percent affordable, while others include a mix. … Certain developments may incorporate retail or other uses, while others [will be] purely residential.”
Using County Land
At the National Association of Counties (NACo), Spence is working to help counties free up untapped local resources—particularly land—to radically reduce building costs. NACo represents 3,069 U.S. county governments, and a key part of its mission is to facilitate the sharing of ideas and best practices among these counties. Counties are increasingly seeking new ways to make housing affordable.
Spence says that recent polls of NACo members show housing is usually among their top three concerns. In response, NACo has launched Counties for Housing Solutions, modeled after an initiative in Miami-Dade County, Florida.
The Miami model, championed by Mayor Eileen Higgins (then a county commissioner), is deceptively simple. After an audit of all county-owned land, certain parcels—often vacant lots or parking complexes—are offered to developers, on the condition that their projects include a certain percentage of units that are sold or rented to people making no more than 120 percent of AMI. This approach has produced thousands of units of housing in Miami-Dade County, says Spence.
NACo partnered with Smart Growth America to provide free consultations to 23 counties, helping them assess their housing needs and implement a similar strategy to Miami’s. Together, NACo and Smart Growth America worked with counties ranging from Baltimore to Honolulu and Harris County, Texas, to a rural county in northern New England.
“The goal was to get these counties to a point where they could issue an RFP [request for proposals] or an RFQ [request for qualifications] to have the housing built in under a year,” Spence says.
In most counties, there is no formal process for repurposing county-owned land into housing. Some, says Spence, including Shelby County, Tennessee, have enacted legislation that establishes a formal process for transferring parcels out of the county land bank for this purpose. Shelby County has also established a process to collaborate with the government of its major city, Memphis, on zoning and permitting. In Miami, some local officials pushed back on the idea of giving away land worth millions of dollars, but none of the counties NACo has worked with since have faced similar resistance, says Spence. Still, Spence emphasizes that this is “a coalition of the willing.”
While the Miami model works best in expensive real estate markets where land value is high, Spence says the model can still work in modestly priced markets—but, he notes, “It’s harder to make the math work sometimes. It still needs a public subsidy.” Some counties are using this method to build affordable housing for county employees—counties employ 1 in 50 working Americans, Spence points out—while others are going for maximum affordability.
Partial Answers
From Lexington to LA, the affordability crisis has generated political will that can help push novel approaches to affordable housing development across the finish line. But that’s only half of the equation. While state and local governments and mission-minded developers can pick up some of the slack, they simply lack the financial capacity of the federal government—and their current capacity is shrinking.
Looking at the bigger picture, Spence notes, there has been a wholesale shift of federal support away from local governments—and “not just in housing,” he says. “The biggest-ticket items are SNAP and Medicaid cuts that county governments will have to fund a larger share of.” This means local governments will have even less funding to spend on new affordable housing initiatives. In the meantime, states are left to somehow do more with less. “Getting the most bang for your buck has always mattered,” Spence says, “but it’s more of a constraint now.”
Editor’s note: This story has been updated to reflect that Invest Chattanooga is the entity that maintains ownership of the projects it works on, not the city of Chattanooga.
About the Author
Comments