A unique program seeks to spur the construction of critical mixed-income housing in Massachusetts.
Developed by MassHousing, the new Residential Production Momentum Fund provides equity financing issued in tandem with low-cost permanent debt from Berkadia and Freddie Mac. State housing agencies like MassHousing often support housing construction by providing mortgage financing. The Momentum Fund is different because it invests public dollars directly into a mixed-income housing development as equity in a project.
MassHousing can finance up to 49% of the total equity for a development through the new fund to blend with private equity, resulting in a lower cost of capital.
Officials are hopeful that the initiative will lead to the creation of 1,000 mixed-income rental homes over the next several years.
The program is focused on “80/20” projects, meaning developments must have a minimum 20% of their units restricted to 80% of the area median income. The remaining 80% of the residences are market rate. Projects must have at least 50 units.
It has been more than 30 years since the commonwealth had a formal, capitalized housing program to finance 80/20 developments.
“All of the data points to the cost of housing becoming burdensome to folks with higher incomes,” says MassHousing CEO Chrystal Kornegay. “We’re trying to help resolve the issue. When the market isn’t necessarily working at its best, those working families suffer.”
In Massachusetts, much effort has been spent on improving zoning and land-use laws to encourage affordable and mixed-used housing development. Even so, deals that made their way through the zoning and permitting stages were still often stalling. Many were even capable of generating a financial return, but that return wasn’t quite high enough to induce an equity player to come into the deal.
That led officials to create the Momentum Fund. As a mission-oriented agency, MassHousing’s expectations on returns are also more flexible than those of a private investor. It is also designed to blend with private equity.
By coming in as equity instead of debt, the program helps make the overall profile of the deal more attractive to a senior lender.
Participants are expected to be primarily market-rate developers rather than those from the affordable housing sector. The new financing will feel familiar to them, as they’re accustomed to equity financing rather than subsidies or grants, according to Kornegay.
The Momentum Fund was honored with the National Council of State Housing Agencies Award for Program Excellence in the Rental Housing: Encouraging New Construction and Promoting Preservation category in October.
MassHousing worked with the Healey-Driscoll administration to establish the $50 million investment fund last year as part of a historic $5.16 billion housing bond bill.
As part of the program, MassHousing has established the FORGE (Financing Options for Residential Growth and Expansion) Loan, a taxable lending product offered in collaboration with Freddie Mac and Berkadia. It is used in combination with the Momentum Equity investment. Its features include a 36-month forward commitment at a fixed rate. It has up to a 10-year loan term with a 40-year amortization schedule and up to 80% loan to value, with 1.25x debt-service coverage ratio.
The Residences at East Milton in Milton was the first project to receive an investment through the Momentum Fund. The Joseph J. Corcoran Co. and Falconi Properties broke ground on the 92-unit development earlier this year, with the $52 million development project utilizing $5 million in Momentum Fund equity, as well as $35.5 million in permanent mortgage financing from Freddie Mac, Berkadia, and MassHousing.
"Our model emphasizes holistic development and focuses on meeting today’s urgent call for housing stock,” says Sean McReynolds, president of the Joseph J. Corcoran Co. “This project would not be possible without the support of the Healey-Driscoll administration and their commitment to creative solutions that spur housing production. As the first recipients of public equity from the Momentum Fund to break ground, we look forward to delivering a strong case study for what’s possible through public-private partnership."
The revolving fund is also supporting the development of Claremont Grafton, a 233-unit community being developed in Grafton by Claremont Cos.
The $50 million fund has a pipeline that suggests about $250 million in demand for the Momentum equity product, according to officials. That’s about 25 or 30 projects.
While preferred equity investments in real estate developments is a longstanding method of investment, what is new here is that the investments in this program are being made by a quasi-governmental agency.