Affordable housing developers are increasingly turning to newer financing tools to make deals work in a challenging environment. Two common approaches are ground leases from private investors or an accruing debt structure, such as B-Bonds. These tools can help fill funding gaps and get projects off the ground that might not otherwise happen, which is an important benefit given the ongoing housing shortage.

However, both approaches share a key feature: when a property doesn’t generate enough cash to pay its bills, payments are delayed and added to a growing balance rather than being addressed right away. It shifts risk to the future, creating challenges if a project struggles or needs to be restructured.

“While these tools can help projects move forward, they also introduce a longer-term tradeoff,” said John Nunnery, Executive Vice President and Manager of Tax Credit Originations at PNC. “Postponing financial pressure in the immediate term can limit options and flexibility when challenges emerge down the line.”

Deferring problems instead of solving them

In traditional affordable housing deals, stakeholders are empowered to step in and take action if a property can’t meet its obligations. That could mean restructuring debt, adding new capital, or replacing the developer. These steps happen in real time, which helps prevent problems from growing.

Newer structures, though, work differently. If a project falls short, payments can be deferred instead of addressed. The unpaid amounts accumulate over time, increasing the project’s obligations. While these accrual-based solutions allow the project to continue operating in the short term, it can make things much harder to fix later because the financial burden keeps growing in the background.

Different types of ground leases

Ground leases are a popular solution for affordable housing and commercial real estate, but they now serve different purposes depending on who provides them. A ground lease is when a tenant develops and owns a property while leasing the land from a landowner for a long term; at the end of the lease, ownership of the improvements transfers to the landowner. In many traditional cases, public entities, such as housing authorities, offer land at little or no cost to help make a project feasible. These arrangements are mission-driven and aren’t meant to generate a profit.

In contrast, private investors may provide ground leases as a way to earn a return. In these cases, the lease payments function much like a loan. If the property can’t generate enough revenue to make payments on the lease, that debt accumulates over time. Importantly, because of the structure of the lease, this often doesn’t trigger a default during the early years of a project, meaning the growing obligation may not be immediately visible.

Hidden leverage and weaker financial cushion

Most affordable housing deals are designed with a financial buffer to handle normal ups and downs, such as rising expenses or slower filling of vacancies. This buffer is commonly measured using a metric called the debt service coverage ratio (DSCR), with a typical target of 1.15x. This means the property generates 15% more cash than it needs to pay its obligations.

Accrual-based structures weaken this cushion. By allowing some payments to be deferred, they effectively bring the project closer to a break-even level. On paper, the deal may still look healthy, but in reality, some obligations are simply being pushed into the future rather than paid.

“That’s where hidden leverage builds,” Nunnery said. “Small shortfalls don’t go away, they compound over time, leaving the project more exposed than it looks.”

Complicating fixes when things go wrong

When a project struggles, investors might look to replace the developer to stabilize operations. It’s a well-established strategy that relies on bringing in a new partner willing to take over the project.

Accrual-based structures can complicate the process, though, because by the time a replacement is needed, there may already be a large accumulation of unpaid obligations. A new developer must take on not only future challenges but also the accumulated debt. This can reduce the number of willing partners or make the deal less attractive, slowing down the recovery process and limiting options for investors.

Impact on investor returns

Investors in affordable housing typically expect value from tax credits and predictable losses tied to depreciation. These benefits are carefully planned and form the foundation of the investment.

When projects rely heavily on deferred payments, financial stress can show up in the form of unexpected losses during the life of the investment. While these losses might technically increase returns in some models, they are not typically the kind investors are looking for. Instead of stable, predictable, and structured tax benefits, investors face more volatility tied to operational challenges.

Broader impact of these structures

Both accruing debt and profit-driven ground leases introduce similar risks, but they affect projects in different ways. Accruing debt mainly affects the financing structure and becomes a key issue if a deal needs to be restructured.

Ground leases from private investors, however, can have a wider impact. Because lease payments are treated as operating expenses, they reduce the property’s income from the outset of the project. At the same time, unpaid rent can continue to build over time. When combined, the two factors affect both day-to-day performance and long-term financial outcomes.

Ways to reduce risk

Neither accruing debt solutions nor ground leases are inherently bad, but they require careful structuring to avoid unintended consequences. Consider the following safeguards to reduce risk:

  • Limit how much unpaid debt can accumulate so obligations remain manageable;
  • Avoid compounding interest on deferred amounts, which can cause balances to grow quickly;
  • Maintain a strong financial cushion by underwriting deals to include all obligations—not just those paid today;
  • Ensure investors retain control over key decisions, such as replacing the developer or restructuring the deal; and
  • Set clear rules for how unpaid amounts will be handled if the project runs into trouble.

It’s also important to consider how these structures affect the balance of value in a deal. In some cases, additional financing is used to support higher developer fees. While compensating developers is appropriate, using deferred capital to fund those fees can shift risk onto investors by increasing future obligations.

Ultimately, the question is not just whether a financing structure helps a project close, but whether it will remain workable over time. It’s often possible to make a deal look feasible on paper by adding more capital and deferring payments. However, this can come at the cost of flexibility later on.

“The strongest deals balance making projects work today with preserving the flexibility to manage challenges tomorrow,” Nunnery said. “Overreliance on deferral can limit the options investors need to protect their investments when conditions Body