Building More Units Without Building More Staff: How PHAs Partner With Nonprofits
Two things became true at the same time this year, and most housing authorities have only noticed one of them.
The first is that development capacity got cheaper. Starting in 2026, the One Big Beautiful Bill Act permanently increased state 9% credit allocations by 12% and permanently cut the tax-exempt bond financing test for 4% deals from 50% of aggregate basis to 25%. The bond test change is the bigger of the two. In roughly half the states, private activity bond volume was oversubscribed and 4% deals were rationed by cap, not by feasibility. Cutting the test in half means the same volume cap supports something close to twice the deal flow.
The second is that this does nothing for an authority that has no one to run the deals.
Most PHAs are not short on opportunity. They are short on a development director, a predevelopment budget, a balance sheet that can sign a completion guarantee, and the fifty unglamorous months it takes to move a project from concept to certificate of occupancy. Faircloth authority sits unused at hundreds of authorities not because the units are unwanted but because nobody has the capacity to build them.
That is the gap a nonprofit development partner fills. Done well, it is the single highest-leverage relationship a small or mid-size authority can build. Done badly, you have paid a fee for a logo and kept all the work.
First, be clear about which kind of partnership you mean
The phrase "nonprofit partner" covers two very different arrangements, and conflating them causes real problems.
Your own instrumentality. Many authorities have formed an affiliated 501(c)(3) or nonprofit instrumentality. These are useful. They hold property outside the public housing program, act as general partner in tax credit deals, and can generally be engaged without competitive procurement because an instrumentality is not a third party. What they do not do is add capacity. If your instrumentality's staff is your staff and its board is your board, you have created a legal entity, not a development team. Authorities routinely stand one up and then wonder why the pipeline did not move.
A genuine third-party nonprofit developer. This is an independent organization with its own staff, its own audited balance sheet, its own lender and investor relationships, and its own closed transactions. It brings things you cannot manufacture internally, including several federal dollars you are structurally ineligible to touch on your own.
Both have a place. A mature authority often uses both in the same deal, with the instrumentality as co-general partner and the third-party nonprofit as managing general partner. But understand which problem each one solves before you choose.
What a good nonprofit partner actually brings
Access to credits you are competing for on better terms
Section 42(h)(5) requires every state to set aside at least 10% of its 9% credit ceiling for projects in which a qualified nonprofit organization owns an interest and materially participates throughout the compliance period. Many states go well beyond the floor. Pennsylvania, for example, targets a minimum of 25% of its competitive 9% credits for nonprofit developments.
That is a smaller, less crowded pool. With the 12% allocation increase drawing more competitors into 9% rounds generally, access to a set-aside pool is worth more in 2026 than it was in 2024. Beyond the set-aside itself, most QAPs award points for community-based nonprofit participation, local partnership, and resident services capacity.
Material participation is a real requirement, not a formality. The nonprofit has to participate on a regular, continuous, and substantial basis, and most state agencies now require the nonprofit to be the managing general partner or managing member with a controlling interest, and to be neither an affiliate of nor controlled by a for-profit entity. Paper partnerships get caught.
Federal money you cannot access alone
This is the most underappreciated benefit and the easiest to verify.
Under the HOME program, 15% of a participating jurisdiction's allocation must be set aside for housing developed, sponsored, or owned by Community Housing Development Organizations. A PHA cannot be a CHDO. The definition requires organizational independence from government, including limits on how much of the board a public entity may appoint. That set-aside is a meaningful pot of soft money in most jurisdictions, and it is available to your project only through a qualified partner.
The same logic runs through Federal Home Loan Bank Affordable Housing Program awards, Capital Magnet Fund allocations, CDFI lending, and Continuum of Care resources. Different doors, same principle: a nonprofit sponsor opens some that are closed to a public agency.
Charitable capital
A PHA cannot run a capital campaign. A nonprofit can. Foundation grants, program-related investments, donor equity, congregational land contributions, and community fundraising routinely fill the last $500,000 of a stack that has run out of conventional sources. In deals serving hard-to-house populations, philanthropic capital is often the difference between a project that closes and one that gets shelved for a year.
Guarantee capacity
This one gets skipped in the mission conversation and then blows up in the term sheet conversation.
Tax credit investors require construction completion guarantees, operating deficit guarantees, and tax credit adjuster and recapture guarantees. Somebody with a balance sheet has to sign them. Many small authorities cannot, and HUD program funds generally cannot be pledged for the purpose. A nonprofit developer with meaningful unrestricted net assets solves a problem that otherwise ends the deal, and it does so without bringing in a for-profit co-developer who will want a larger share of the fee and a different exit.
Ask early and specifically: who signs, and what is behind the signature?
Services, for the housing that is hardest to build
Permanent supportive housing, recovery housing, senior housing with a service component, and housing for people leaving institutions all require a service delivery apparatus. Housing authorities are landlords and subsidy administrators. They are generally not clinical service providers, and building that competency from scratch is a multi-year project with its own funding streams and its own liability profile.
A nonprofit that already runs services, bills Medicaid where applicable, and holds CoC contracts lets you build the population-specific housing your waiting list actually reflects. Pair their services with your project-based vouchers and the operating model works.
Long-term stewardship at Year 15
Section 42(i)(7) allows a qualified nonprofit to hold a right of first refusal to acquire the property after the compliance period at a price tied to outstanding debt plus exit taxes rather than market value. That is the mechanism by which a tax credit property becomes permanently affordable community-owned housing instead of a disposition event.
It also aligns with why your authority exists. A nonprofit partner whose mission is permanence wants the same Year 15 outcome you do. A syndicator's captive entity may not.
One caution: the ROFR has generated a decade of litigation over whether it functions as a true right of first refusal requiring a bona fide third-party offer, or as an option exercisable at will. Courts have split. Congress has been asked repeatedly to convert it to a clean purchase option and has not. Negotiate the exit terms explicitly at closing, in the partnership agreement, with counsel who has litigated one. Do not rely on custom.
Credibility you cannot buy
A neighborhood nonprofit with thirty years of local relationships can carry a rezoning hearing that a housing authority cannot. That is not a knock on your agency. It is a description of how land use politics work in most American cities.
How the deals are usually structured
There is no single model, but four recur:
Fee developer. The nonprofit is engaged under a development agreement to run the project for a fee. The authority or its instrumentality retains ownership and control. Simplest, least capacity transfer, and appropriate when you have the balance sheet and want the staffing.
Nonprofit as managing general partner, PHA affiliate as co-GP. The most common structure for a real partnership. The nonprofit controls the ownership entity, satisfies the set-aside and material participation tests, and signs the guarantees. Your instrumentality holds a co-GP interest, a seat at the table, and a negotiated share of the developer fee and cash flow.
PHA as ground lessor. The authority retains fee title and ground leases the site for 75 or 99 years to the nonprofit-controlled ownership entity. You keep the land permanently, generate ground rent, and avoid a sale. This pairs naturally with a Section 18 disposition or a Faircloth-to-RAD new construction phase.
PHA as subsidy and soft-debt source. Land at nominal value, a seller note from disposition proceeds, and project-based vouchers as the operating engine, with the nonprofit assembling the rest of the stack. You supply what only you have. They supply what only they have.
How to tell a good partner from a well-intentioned one
Mission alignment is necessary and insufficient. Diligence the organization the way an investor would diligence you.
- Closed transactions in the last five years. Not projects in predevelopment. Not "we have been wanting to get into development." Closings, with names, dates, and lenders you can call.
- Audited financials, three years. Look at unrestricted net assets and actual liquidity, not total assets. Ask what portion is committed elsewhere.
- Who signs guarantees, and what supports them. If the answer is vague, that is the answer.
- Asset management performance on the existing portfolio. Inspection scores, occupancy, reserve balances, deferred maintenance. An organization that develops well and operates poorly will hand you a problem in year six.
- Staff depth. If the entire development function is one executive director, you have key person risk on a thirty-year commitment.
- Board governance and independence. If you intend to use CHDO funds, verify the board composition rules before you build a schedule around them.
- Year 15 track record. Have they taken out an investor? How did it go?
- Honest fee expectations. A partner who will not discuss the developer fee split and scope allocation early is not going to get easier later.
The failure modes are predictable. A nonprofit with mission and no capacity means your staff does the work while the partner collects a fee for eligibility. A captive nonprofit controlled by a for-profit developer will not survive QAP scrutiny or the material participation test. An undercapitalized guarantor discovers this at investor closing, not before. And a partner who assumed service funding that was never committed leaves you operating supportive housing without supports.
The compliance overlay
Fold these into the schedule from day one rather than discovering them at month nine.
Procurement. Selecting a third-party development partner generally requires competitive solicitation under your procurement policy and federal requirements. Engaging your own instrumentality generally does not, because it is not a third party. Know which situation you are in and document the determination.
Conflicts of interest. Overlapping boards and staff create real problems, particularly if CHDO eligibility, arm's-length transaction requirements, or identity-of-interest disclosures are in play. Get counsel to map it before anyone is appointed to anything.
HUD approvals. Mixed-finance approval, Section 18 or disposition approval, RAD milestones, subordination and use agreements, and use-of-proceeds commitments each carry their own timeline. Faircloth authority needs to be verified in writing, not assumed from a spreadsheet.
Davis-Bacon, Section 3, and environmental review. All applicable where HUD funds or public housing units are involved, and all routinely underestimated by partners whose experience is entirely conventional LIHTC.
The practical takeaway
Credit capacity expanded meaningfully in 2026 and will stay expanded, because both changes are permanent. That advantage flows to organizations positioned to use it. For an authority with land, vouchers, and unused Faircloth authority but no development shop, the fastest route from asset to units is a partner who already has the shop.
Pick that partner on evidence, not enthusiasm. Write the Year 15 terms at the beginning. And be honest internally about whether you are looking for capacity or for control, because the structures that maximize one tend to cost you some of the other.
PHA Development advises housing authorities on RAD conversions, Section 18 dispositions, mixed-finance structuring, developer solicitations, and capital stack strategy. If you are evaluating a nonprofit partnership or planning a new construction pipeline, we can help you structure it.
