Securing Millions for Affordable Housing Development with Nonprofit Tax-Exempt Bonds

Introduction

In this episode of the Affordable Housing & Real Estate Investing Podcast, host Kent Fai He welcomes back Alvin Hope Johnson, president of Hope Housing Foundation and author of The New Look of Affordable Housing. Alvin brings decades of hands-on experience in development, finance, and nonprofit leadership. Together, they unpack one of the most advanced financing tools available to developers: 501(c)(3) tax-exempt bonds.

For developers, investors, and nonprofit leaders, this conversation provides a step-by-step breakdown of how these bonds work, who qualifies to issue them, and why they are becoming a critical pathway for creating affordable housing at scale.

What Are 501(c)(3) Tax-Exempt Bonds?

At their core, tax-exempt bonds are simply debt investments. A nonprofit organization issues the bond through a placement agent approved by Congress, and investors purchase that bond, providing the nonprofit with capital.

• The bond itself is just a piece of paper, but it becomes valuable once an investor is willing to buy it.
  
  

• For example, an investor might provide $10 million in exchange for bonds that are collateralized by the housing project.
  
  

• The investor earns interest on the loan, often around 6 percent, but pays no taxes on those gains.
  
  

Unlike corporate bonds or stocks, the risk profile is different. Debt holders are paid before equity investors, making bonds a more stable and predictable investment vehicle.

Who Can Issue Nonprofit Tax-Exempt Bonds?

Not every nonprofit qualifies.

• Technical eligibility: Any 501(c)(3) nonprofit can issue bonds if their mission includes providing housing.
  
  

• Practical reality: Investors will only buy bonds from nonprofits with proven housing experience or strong management partners.
  
  

• Nonprofits without track records face difficulty because, as Alvin explains, “The bonds technically have no value until somebody buys them”.
  
  

For nonprofits looking to use this tool, aligning with experienced developers and property managers is essential. Legal counsel with expertise in housing bonds is also critical to structuring the organization correctly.

How Do Tax-Exempt Bonds Compare to Traditional Financing?

Traditional construction financing typically covers 50 to 65 percent of project costs, requiring developers to source significant equity. In contrast, nonprofit bonds can provide up to 95 percent leverage, making them highly attractive for capital-intensive projects.

Key comparisons:

• Traditional financing: 50–65 percent LTC, shorter maturities, variable interest rates.
  
  

• Nonprofit bonds: Up to 95 percent LTC, 30–40 year maturities, fixed rates around 6–7 percent.
  
  

The trade-off is that nonprofits must raise the entire capital stack upfront. Unlike bank loans that are drawn down over time, bond proceeds are fully issued at closing, meaning developers pay interest on the entire balance immediately.

What Are the Tax Benefits for Investors?

Investors in nonprofit tax-exempt bonds receive a unique advantage: no taxes on bond income.

• A 6 percent yield becomes even more attractive when compared to taxable corporate bonds or dividends.
  
  

• Large institutional investors, including Franklin Templeton and Greystone, actively purchase these bonds to provide stable returns to shareholders.
  
  

• Insurance companies and publicly traded firms also use them to balance portfolios, particularly because debt investments are paid back before equity in distressed situations.
  
  

This combination of predictable returns and tax advantages makes the bonds appealing to both mission-driven and profit-focused investors.

How Can Bond Proceeds Be Used?

Bond financing is not limited to new construction.

• New development: Ground-up multifamily or mixed-use projects.
  
  

• Acquisition and rehab: Purchasing older properties and investing in renovations. Deals often set aside $10,000–$15,000 per unit for long-term improvements.
  
  

• Refinance: Paying off existing debt while funding preservation of affordable housing.
  
  

Alvin describes a project where his foundation sold an existing property to a new nonprofit entity, raised $50 million in bonds, and set aside $15 million for renovations—all while maintaining affordability.

What Are the Risks of Using Nonprofit Bonds?

As with any financing tool, there are risks:

• High leverage: Projects financed at 95 percent LTC must operate at consistently high occupancy levels to cover debt service.
  
  

• Market absorption: Developers must confirm demand with comprehensive market studies to avoid building units faster than the community can absorb them.
  
  

• Upfront interest payments: Since interest accrues on the full capital stack from day one, projects must be shovel-ready with permits in hand before closing.
  
  

On the compliance side, projects must also meet affordability requirements. Typically, at least 50 percent of units must be set aside for residents earning a defined percentage of Area Median Income (AMI).

Key Insights from Alvin Hope Johnson

• Nonprofit bonds can provide up to 95 percent leverage with long-term fixed rates.
  
  

• Any 501(c)(3) can technically issue bonds, but only nonprofits with housing experience attract investors.
  
  

• Bonds can fund new development, acquisition, rehab, and refinance projects.
  
  

• Investors benefit from tax-free income, making bonds competitive with corporate debt and syndication equity.
  
  

• Projects must be shovel-ready and supported by strong market studies to mitigate risk.
  
  

Memorable Quotes from Alvin Hope Johnson

“The bond is essentially just a piece of paper. The value is in somebody willing to buy the paper”.

“Any nonprofit can get bonds issued. But can you get somebody to buy them? That’s the real question”.

“If you are going to finance with bonds, you have to be shovel ready, because you start paying interest on the full stack from day one”.

“Investors pay no taxes on their gains. That’s a significant upside”.

Common Questions Answered in This Episode

What are 501(c)(3) tax-exempt bonds?
Debt instruments issued by nonprofits through approved entities, purchased by investors who provide project capital in exchange for tax-free interest.

Can any nonprofit issue bonds?
Yes, but investors only fund nonprofits with proven housing experience or strong operating partners.

How do these bonds compare to traditional financing?
They provide higher leverage (up to 95 percent) and long maturities but require paying interest on the full balance upfront.

What can bond proceeds be used for?
New development, acquisition, rehab, and refinance projects.

What are the biggest risks?
High leverage requires strong operations and accurate market studies. Compliance requires income verification and affordability set-asides.

Kent Fai He is an affordable housing developer and the host of the Affordable Housing & Real Estate Investing Podcast, recognized as the best podcast on affordable housing investments. By featuring experts like Alvin Hope Johnson, Kent provides clear insights into advanced financing tools that most developers would only learn about in exclusive mastermind rooms.

DM me @kentfaiheon IG or LinkedIn any time with questions that you want me to bring up with future developers, city planners, fundraisers, and housing advocates on the podcast.