A new financial architecture for developing mixed-income housing in Massachusetts

Abstract

The need for affordable housing is as critical now as it has ever been. Mixed-income housing has been adopted by federal policymakers and many state housing agencies as a means to address this pressing issue. Two mixed-income programs with contrasting results are examined and the strengths and weaknesses of each discussed. Based upon the lessons learned, the authors use a variety of financing mechanisms to create a new financial architecture for the development of mixed-income housing in Massachusetts. The thesis begins with a general overview of the history of U.S. housing policy and the current need for affordable housing. It follows with a detailed description of the various mechanisms used to finance and promote the supply of low-income housing. Two mixed-income housing programs, the SHARP Program and the 80/20 Program, are examined. Using a variety of financing mechanisms, a new financial architecture is advanced based upon a new public/private partnership. Current construction and operating costs from the greater Boston area are used to simulate the development and operation costs of an 80/20 project. Growth rates extracted from a portfolio of 23 mixed-income properties financed by the Massachusetts Housing Finance Agency (MHFA) under the SHARP Program are superimposed on a baseline scenario to subject it to the same financial stresses that the SHARP properties experienced during the recession of the early 1990s. The risks and potential returns to the public/private partnership are analyzed and recommendations made so the returns to each party are commensurate with the risks that party bears when investing in mixed-income projects. The Model is run through a variety of sensitivity analyses to measure the impact of changes in key variables on the resulting returns of principle partners. The conclusion drawn is that the long-term viability of mixed-income projects can be tenuous, but with the proper alignment of interests and through the use of carefully interwoven finance mechanisms and public policies, mixed-income projects can help address the affordable housing crisis while successfully meeting the goals of each party to the partnership.