Community Development Innovation Review

April 2013

Pay for Success: Building On 25 Years of Experience with the Low Income Housing Tax Credit


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.

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Other articles in this issue

Community Reinvestment Act (CRA) Banks as Pioneer Investors in Pay for Success Financing

The Real Revolution of Pay for Success: Ending 40 Years of Stagnant Results for Communities

Pay for Success is Not a Panacea

The Promise of Pay for Success

Social Impact Bonds: Lessons Learned So Far

Pay for Success: Understanding the Risk Trade-offs

The Ethics of Pay for Success

Learning from the Low Income Housing Tax Credit: Building a New Social Investment Model

Using Social Impact Bonds to Spur Innovation, Knowledge Building, and Accountability

Social Impact Bonds: Using Impact Investment to Expand Effective Social Programs

Innovation Needs Foundation Support: The Case of Social Impact Bonds

Pay for Success: Opportunities and Risks for Nonprofits

Success Begins with a Feasibility Study

Government’s Role in Pay for Success

Rikers Island: The First Social Impact Bond in the United States

Human Capital Performance Bonds

Can Pay for Success Reduce Asthma Emergencies and Reset a Broken Health Care System?

Supporting At-Risk Youth: A Provider’s Perspective on Pay for Success

Tax Increment Finance: A Success-Driven Tool for Catalyzing Economic Development and Social Transformation

Bringing Success to Scale: Pay for Success and Housing Homeless Individuals in Massachusetts

Making Performance-Based Contracting Work for Kids and Families