MassHousing Launches Preferred Equity Product to Help Move “Stuck” Projects Forward

MassHousing will launch a preferred equity product this month designed to move shovel-ready projects forward that have stalled economically.

Dubbed Momentum Equity, the product is designed to blend with private equity and fill a financial gap that has stalled projects that otherwise might be under construction.

“We see nationally and in Massachusetts one of the highest levels of multifamily projects that are approved by their local authorities to go to building permits and would have gone in the ground but have failed to progress…usually because of economic infeasibility,” explains Mark Attia, director of capital formation at MassHousing. “The idea is, but for this product, the projects would remain infeasible.”

The product, approved by the Massachusetts legislature in August and signed into law by the Healey-Driscoll administration and expected to begin funding projects in January, will be senior to all other forms of financing in the capital stack except for debt.

“Its position in the capital stack is safer, but also more patient…,” says Attia. “This is sort of the lynchpin in the capital stack. It has become the key ingredient in creating feasibility on the debt and equity side.”

A “Patient” Ten-Year Investment
Attia explains that similar commercial products usually offer shorter terms with three to five years of investment horizons. Momentum Equity, from MassHousing, a quasi-public housing finance agency, is expecting to invest for about ten years, says Attia.

“We are basically pricing it similarly to very attractive debt (tied) to the ten-year treasury rate up to 200-basis points,” says Attia. “The virtue of that structure is it provides capital contribution to a project, which many projects need due to increased costs, and also provides a predictable level of funding cost.”

MassHousing expects to provide 25 percent of total equity for development through the fund, which will mix with private equity. The Momentum Equity investment will be coterminous with the senior loan and will be considered eligible subsidized financing under Chapter 40B, the state’s streamlined mixed-income permitting law, according to MassHousing’s website.

To be eligible for equity funding, the developments must produce at least 50 new units though the average project is expected to be more than 100 units. Developments must have minimum affordability levels for 20 percent of units restricted to 80 percent of AMI. Developments that are approved and ready to permit will be given priority.

Not Ideal for Every Project
Attia stresses that every project is a “snowflake” with its unique characteristics and this product is “not meant to be a panacea for everybody.”

“It is meant to be a targeted solution for very particular types of projects,” he says.

Attia says a similar product exists in the commercial market but is “very, very expensive.” The Momentum Equity fund is “meant to be impact-oriented.”

“We have a goal to accelerate the pace of production and create affordable housing, which we might not otherwise be able to achieve,” he says.

Attia says MassHousing has been “building a pipeline of qualified projects through various meetings, working with major borrowers and networking with local planning boards, such as in the City of Boston.”

 “We hosted open houses with a target audience to set the expectation that our first pilot project would be committed to in Q1,” he says.

Attia adds that the response to the new product “has been very, very strong.”

“We can safely say that demand has outstripped our initial capital capacity by many times over,” he says.

Why Equity Instead of Debt?
Projects using Momentum Equity might more easily attract private capital, explains Attia, making the product even more attractive for some developers.

“Debt has its place. We are comfortable using debt…but debt can only go so far,” he says. “By creating a non-debt source (of funding) we create options for sponsors.”

Attia says he is aware of a few other quasi-public entities and states that are considering developing a similar product, but he is not aware of any that are offering them now or in the near future. As to whether the product could bring risk to MassHousing, Attia says he and others in the agency have confidence in the underwriters who assess each project and Momentum Equity’s role in its funding.

“We are confident in our ability to finance these projects,” he says.

Some people ask whether the stalling of projects will abate if interest rates fall. Attia says that may be the case, but there will still be a role for the product with some projects, particularly those in suburban or low-income areas where capital may be unavailable or the most expensive.

Attia acknowledges that as a nation, billions of dollars are needed to make an impact on the affordable housing crisis. Funding local projects, even one, can have an outsized impact on a local community.

“One project may add five to ten percent of new housing opportunity in that community,” he says. “That is hugely meaningful.”