Using a pay-for-success finance model to combat homelessness

Denver Supportive Housing Initiative

The budget for federal rental assistance has long been insufficient and regularly reduced or threatened with complete removal across different political cycles
Between 20 and 40 percent of the annual correctional population is homeless and has an arrest record for nonviolent nuisance crimes, cycling back into the justice system and raising costs of corrections services

Affordable housing projects are typically financed through two sources of capital: equity and gap funding (debt). In order to cover the remaining costs after equity financing (and thus fill the “gap”) developers often take expensive loans and mortgages
Additionally, governments raising funds to combat homelessness have faced fragmented budgets across departments further constraining financing for affordable housing

Permanent supportive housing is a social intervention policy that combines affordable housing assistance – financed by a pay for success (PFS) model – with voluntary support services to address the needs of chronically homeless peopl
Under the PFS model, investors provided an up front payment of USD 8.7M to an intermediary , which manages the financing and construction of affordable housing, on which the investors would only receive repayment (of up to USD 2.8M, plus principal) from their public sector partners2 if agreed upon social targets were met

City of Denver – Local government that provides repayments to investors
Laura & John Arnold Foundation, Living Cities Blended Catalyst Fund, Nonprofit Finance Fund, The Ben & Lucy Ana Fund at the Walton Family Foundation, The Colorado Health Foundation, The Denver Foundation, The Northern Trust Company, & The Piton Foundation – PFS lenders that provided the USD 8.7M investment
Denver PFS LLC – Intermediary and project manager

Based on previous, the expected outcomes of 35- 40% reduction in jail bed days and 83% housing stability among the target population would result in a payment near USD 9.5M
The evaluation of the DSHI1 will be among the most rigorous evaluations of supportive housing, measured by KPIs such as the number of stable housing days attained for, and the % reduction of bedding used in jails by, participants in the initiative to determine the government's repayments to investors
This is the first PFS project to include the construction of new housing units, as 160 new units are being constructed to serve the target population

The PFS model capitalized a risky construction project by reducing local government's risk in the event of the project's failure, ensuring that taxpayer's money would only be used on successful projects
The use of a PFS model provided a formalized structure for philanthropic and impact investor capital, facilitating their provision of risky, low-interest loans that commercial lenders would typically provide at prohibitively high cost
However, PFS project realization is reliant on a government entity willing and able to provide reimbursements should a project prove successful, which limits the model's usage in other contexts