How A New Financing Model Helps Spur More Mixed-Income Housing

The nation’s worsening housing shortage has collided with a macroeconomic environment that makes it difficult for developers to start new projects, and states across the country are looking for new ways to help advance development. 

A 2-year-old program in Massachusetts may provide the kind of solution they need, according to a new report from national think tank Urban Institute.

MassHousing's Bringing Innovation to Lending and Development program uses public money as both debt and equity to fill gaps in the capital stacks of mixed-income housing developments. It has already generated strong demand: MassHousing has funded six projects totaling 605 units and received expressions of interest from dozens of others.

“The BILD program is a sophisticated and promising model to catalyze new mixed-income housing production in Massachusetts,” wrote the authors of the Urban Institute report: Laurie Goodman, Daniel Hornung, Aniket Mehrotra and Kathryn Reynolds.

“In addition to its impact in Massachusetts, BILD could be a helpful model for other states and their housing finance agencies, particularly states that want to increase both affordable and market-rate options simultaneously,” they added.

MassHousing, a quasi-public agency, received $50M from the state to direct toward the BILD program as part of the Healey-Driscoll administration's Affordable Homes Act. The administration has set a goal of building an additional 222,000 housing units by 2035 to address the state’s shortage. 

MassHousing CEO Chrystal Kornegay told Bisnow the BILD program was designed to provide capital for mixed-income housing projects that developers were unable to finance due to high interest rates and construction costs.

"We saw a bunch of deals that have been stalled," Kornegay said. "We discovered that by using that and by partnering with Freddie Mac for the debt piece, that there was a way that we could offer a debt and equity package that could 'unstick' some deals financially, and that was how BILD was born."

The program has two components: the FORGE loan — Financing Options for Residential Growth and Expansion — and the Momentum Fund.

The FORGE Loan consists of a senior mortgage originated by Berkadia and backed by Freddie Mac as well as a subordinate loan from MassHousing. The subordinate loan accounts for 10% of the total debt.

With this model, MassHousing acts as a facilitator between Freddie Mac and a developer, taking on the first loss on a mortgage in the event of borrower default. This helps mitigate some of the risks and allows facilitation of a larger loan. The borrower also receives one combined rate on the transaction.

In what Urban Institute described as an “innovative” aspect of the program, MassHousing then provides a preferred equity investment to developers through its Momentum Fund. The equity comes with a lower required return than what traditional investors would demand: The report estimates 6% compared to 12% for market-rate equity.

This saves a developer millions of dollars over the life of the project, far greater than the subsidy they get from a below-market-rate construction loan, the report says.

"The entire solution returns the project to feasibility by low-cost, more patient leverage and significantly changes the math equation for the common equity investors," said MassHousing Director Mark Attia, who helped design the program. "For the government to participate in this way in domestic public finance is really innovative."

To be eligible for the program, a project must have at least 50 units, and at least 20% of the units need to be income-restricted for residents earning up to 80% of the area median income. The affordability restrictions must last for the majority of the loan term or 15 years, whichever is greater.

"BILD is filling an important need largely related to the dramatic macroeconomic shifts of the past five years that have caused already-permitted projects to have an unexpected capital gap to fill attributable to rising debt and construction costs," the Urban Institute report says.

Attia said the program has helped fill the gaps in capital stacks that have emerged over the last several years with higher interest rates and stricter lending regulations. Previously, he said a project could be financed with a 75% debt-to-equity ratio, but that has fallen closer to 60%.

The cheaper debt and equity that MassHousing provides fills gaps in the capital stack to move projects forward, while also allowing buildings to maintain more affordable rents by reducing the return targets they need to hit. 

"The innovation is kind of twofold," Attia said. "One is public finance becoming an investor in projects. Two is providing sort of a very elegant capital solution that looks and feels like the private market without a lot of additional regulatory burden."

MassHousing has doled out $31M in equity from its $50M Momentum Fund as well as more than $189M in debt, the agency told Bisnow.

The projects to receive the financing include the 92-unit Residences at East Milton, the 233-unit Claremont Grafton, the 40-unit Residences at Quarry Hills, the 92-unit Newburyport Crossing Phase 3 and the 60-unit Residences at Middleton Corner.

In May, the state and the city of Boston partnered to provide $10.5M for the construction of a 110-unit project at 20 Malcolm X Blvd. in Roxbury. The state provided $2.1M in Momentum Fund equity, and the city provided $8.4M from its Accelerator Fund. The project includes 22 affordable units.

Attia agreed with Urban Institute's suggestion that the program can be used as a model by other states and municipalities.

"It's scalable because, basically, you could take our three sentences of law and our term sheet, and you could fund such vehicles in other jurisdictions," Attia said. "You could basically replicate what we've done, and it would be broadly appealing to the institutional-quality multifamily market."

Massachusetts has a longstanding history of supporting mixed-income housing, a history that Urban Institute detailed in a separate report released alongside its study on the BILD program.

The organization says mixed-income projects are important because not only do they bring more affordable housing units, they also bring people with a diversity of incomes into the same property, creating more vibrant communities and giving lower-income people more opportunities for advancement.

"Large, mixed-income developments are disproportionately located in high-income, high-rent, and high-opportunity neighborhoods relative to fully affordable developments — and, in many cases, compared with large, market-rate projects as well," the report says.

Most of the projects being financed under the BILD program fall under Massachusetts’ 40B affordable development law. The law, enacted in 1969, allows developers to bypass certain zoning restrictions in localities where less than 10% of the residential stock is subsidized affordable housing. A developer must make at least 20% of a project affordable to qualify.

Many cities and towns across the state also have their own inclusionary zoning policies that require or incentivize developers to build more affordable housing. 

Between 2021 and 2025, roughly 58% of the large multifamily developments in Massachusetts were mixed-income projects, according to the Urban Institute. The 26,476 units in those mixed-income projects made up 65% of the units coming online in that period.

The report found that Massachusetts experienced a significant increase in mixed-income housing development over the last 10 years compared to prior decades, well before MassHousing implemented its program.

MassHousing may be able to expand its financing activities after Moody’s Ratings last week upgraded its issuer rating to Aa2.

"Having a rating upgrade signals to potential investors and other stakeholders that MassHousing and the work we do are good credit risk," Kornegay said. "The Moody's upgrade and the timing of that couldn't have come better."

Kornegay said other types of development and partnerships will be necessary to address the state's housing shortage. 

"We know that supply is at the heart of trying to get at that, and that supply is going to largely come from the market, right?" Kornegay said. "It's not going to be affordable that does that."

The state's $5.2B housing bond bill — which created the BILD program — had many other provisions to advance development, including making accessory dwelling units by right across the state and providing $2B to renovate the state's 4,000-unit public housing portfolio.

"Housing, by its nature, isn't the thing that changes on a dime anyway, and so this is going to be lots of years of consistent investment," Kornegay said.