Montgomery County, Maryland is Building a Network of Social Housing at Virtually Zero Cost- Here is How They Do It.
I ran for political office in 2020 on a platform that centered social housing as a way to solve the District’s affordable housing crisis. When I was running, the concept was picking up steam in the United States but there weren’t any concrete domestic examples to offer proof of concept. That being the case, my campaign focused mostly on international models to show social housing’s remarkable effectiveness. At that time “housing experts” and some District leaders argued that social housing couldn’t work in DC. Although they never gave a clear reason why, the implication was that there was something unique about the DMV housing market that would prohibit success. Well, those arguments have been proven to be dead wrong.
In fact, to understand how to finance and scale social housing in the District, we can look right across the border to Montgomery County, Maryland and its Housing Authority, known as the Housing Opportunities Commission (HOC). HOC’s social housing model has shown that with a minimal up-front investment, a government agency operating in the DMV housing market can stand-up a network of social housing that is replicable and scalable. In fact, the most remarkable aspect of the Montgomery County system is its efficiency. Recently, HOC created a $50 million revolving Housing Production Fund (HPF) that is projected to create around 750 units of municipally owned social housing in its first 4 years. The cost to the county for all this? About $600,000 annually. Yes, you read that correctly- $600,000 per year. Now, consider that Montgomery County’s annual budget is almost $6.7 billion and it becomes clear that for budgetary purposes, the County’s social housing model cost virtually nothing. Its first project, a building called the Laureate, was recently featured in the New York Times. Below is an explanation of how HOC officials are doing this, and their plan for moving forward.
In August of 2021, HOC issued a $50 million bond, that bond was backed by the commitment of an annual $3.1 million appropriation from Montgomery County each year for a period of 20 years. HOC took this $50 million and converted it into the HPF. Next, HOC took this money (all $50 million) and loaned it to developers to use as capital to construct housing. As the New York Times article points out, the fact that the funds were loaned in the construction phase of a project is important. Normally these construction loans come from private equity and those firms charge extremely high interest. HOC loaned this money out at 5% interest. These lower interest rates save millions of dollars in the construction phase of the buildings.
In the case of the Laureate, once the construction phase of the project was completed, the building was leased up with tenants. This is called the stabilization period (construction completed and leased up with tenants). It is during this stabilization period that HOC refinanced the project. Upon refinancing, HOC took a majority stake in the project; thus, creating municipal ownership. Permanent financing also allowed HOC to repay the initial Housing Production Fund investment. Once repaid, that money reverted back into the Housing Production Fund so that it could be deployed as construction capital for HOC’s next social housing project.
Understanding how HOC leveraged debt to recapitalize the Housing Production Fund is crucial to understanding the power of its model. By being able to pay back the initial low-cost construction financing every-time a project becomes stabilized, HOC has made the Housing Production Fund revolving in nature. This means that the initial $50 million fund will be able to continue working to fund new projects into the future without additional government investment. This debt leverage allows HOC to operate with a huge source of capital. This capital, which is always looking to be deployed into the next social housing projects, allows HOC the ability to be nimble and close on projects quickly. The first rotation of the Housing Production Fund is slated to produce around 750 units of social housing between two projects. Each building is designed to pay for itself in 20 years, and once owned outright, will become assets HOC can use to leverage the creation of more social housing.
So, how does the model I just described only cost Montgomery County $600,000? To understand it, first remember how the $50 million dollar bond was created. It was backed by a $3.1 million allocation from Montgomery County to be paid every year for 20 years, these payments represent the principal and interest payments on the bond. HOC then took that $50 million and lent it out (deployed it) to developers as construction financing at 5% interest. The interest payments on that deployed capital are $2.5 million per year (5% interest on $50 million= $2.5 million). These interest payments revert back to the county which reduced the annual principal and interest payments from $3.1 million per year to $600,000 (3.1 million-$2.5 million = $600,000). But wait, there’s more! After 20 years, once the original bonds supporting the $50 million Housing Production Fund are paid off, the revolving nature of the fund means it can persist at zero cost to the county.
To sum it up, the power of the HOC model is this. First, it uses public resources for the public good. This means using municipal bonds to create a revolving fund which provides, low-cost, construction-period financing to build social housing. By providing loans at 5% interest, as opposed to the much higher interest rates private equity demands for those projects, millions of dollars are saved in the construction phase of the project. These savings are realized in the form of lower rents once construction is completed. Controlling the construction period financing also allows HOC to control the type of project being built (social housing v. luxury apartments). Lastly, municipal ownership allows HOC to maximize the public good. This means that HOC can maximize affordability to the greatest extent possible in every deal, while ensuring the projects remain self-sustainable. As one Montgomery County official put it, “we do not need a high return on investment, our return is the public good”. The fact that the model is scalable means that, with a larger annual investment, a larger Housing Production Fund could be issued which would result in more social housing being built.
While Montgomery County is using tax payer dollars efficiently and effectively to create a de-commodified network of social housing, DC is spending huge sums of money and achieving dismal results. In the District, the official policy has been to give away massive amounts of public money, public land, and tax breaks to the private sector. These privatization schemes have had a devastating impact.
Consider that between 2003 and 2013 the District gave away a staggering $1.7 billion in subsidies to private developers. Over the same timeframe that DC enriched developers with this $1.7 billion, the number of low-cost rental units in Washington DC fell from about 58,000 in 2002 to around 33,000 by 2013, a loss of about half of its deeply affordable housing stock. Conversely, during the same time period, the District saw its high-cost housing stock nearly triple in size, growing from 28,000 units to 73,000 units. These numbers suggest the low-cost units were eliminated and then replaced with high-end units. More recently, from 2015 through 2022, the District spent over $1.4 billion on “affordable housing”. However, between 2010 and 2020 rents in DC have increased by an astounding 55%.
Knowing all this, the question is not whether social housing can work in the District, the Montgomery County model shows that it can. Clearly, social housing is a less expensive and more efficient model to produce affordable housing in a way that fights back against the root cause of the affordable housing crisis- the increased financialization of housing. So, the real question is whether the District is ready to fight back against financialization or continue to feed it through privatization schemes. Residents should demand that our leaders have the vision and political courage to create DC’s own network of social housing which can lay the foundation to solving our affordable housing crisis. If public officials fail to act, District residents can expect the same speculation, rent inflation and hyper-inequality that we are experiencing today. The choice is clear and a better DC is waiting.