Capital For Affordable Housing: Launching the Momentum Fund in Massachusetts
Introduction
Capital for Affordable Housing: Launching the Momentum Fund in Massachusetts represents a pivotal shift in how public agencies address chronic housing shortages through innovative financial mechanisms. As housing costs surge and supply dwindles, traditional grants and loans often fail to bridge the gap between development feasibility and affordability mandates.
This policy brief, authored by Samya Mishra during her Rappaport Fellowship with the Massachusetts Housing Finance Agency (Mass Housing), details the design and execution of the Momentum Equity Fund. By introducing concessionary equity into the capital stack, the state aims to unlock stalled projects, reduce the weighted average cost of capital for developers, and attract private investment. The following analysis explores the structural innovations, policy considerations, and early outcomes of this groundbreaking initiative in capital for affordable housing.
The Crisis Context Driving Capital for Affordable Housing
Massachusetts faces a severe imbalance between housing supply and demand. Over the last four decades, housing permit approvals have steadily declined despite population growth. The Unlocking Housing Production Commission estimates that the state requires 222,000 new homes by 2035 to meet projected demand.
Since 2020, high housing costs and limited supply have fueled domestic out-migration, with the Boston-Newton-Cambridge metro area ranking among the top five U.S. regions for net migration losses. These pressures disproportionately affect low-income households, creating barriers to both homeownership and rental stability.
The COVID-19 pandemic intensified these challenges. Nationwide, construction material prices surged, with the Producer Price Index increasing by nearly 50% from March 2020 to May 2024. In Massachusetts, residential construction costs have doubled since 2016, driven by rising labor and material expenses alongside higher interest rates.
This high-interest environment made access to debt and equity costly, causing many projects to stall and creating a backlog of permitted but unbuilt homes. To address this, the Healey-Driscoll Administration passed the $5.2 billion Affordable Homes Act, which includes $50 million to launch the Residential Production Momentum Fund. This fund serves as a critical tool for deploying capital for affordable housing in a constrained market.
Innovative Financial Structures for Capital for Affordable Housing
The Momentum Fund introduces a novel approach to public investment by utilizing equity rather than traditional debt or grants. Globally, governments use financial incentives to spur infrastructure development, typically falling into capital-based mechanisms like subsidies or operating revenue-based tools like vouchers.
The Momentum Fund builds on Massachusetts’ legacy of policies like Chapter 40B, which encourages private development by easing zoning restrictions. However, it goes further by offering next-generation equity-based public investment to accelerate mixed-income housing production.
Lowering the Cost of Capital
A primary goal of the BILD (Bringing Innovation to Lending and Development) program is to reduce the weighted average cost of capital (WACC) for borrowers. By investing in Momentum Equity at 10%–20% of the capital stack at rates below market norms, and pairing it with a subordinated FORGE Loan, the fund lowers developers’ blended cost of capital.
This structure preserves the upside potential of returns for reinvestment, which is particularly helpful when rising interest rates increase borrowing costs. Unlike traditional debt, Momentum Equity allows the state to participate in higher risk without increasing the burden of upfront fixed cash flow returns, thanks to its flexible accrual feature.
Market-Acceptable Returns with Concessionary Equity
The equity offering operates with a preferred return capped at threshold coupon rates in waterfall distributions. This means the fund takes more risk than traditional secured debt while drawing capped cash flows akin to a fixed-income product.
Any shortfall in distributions is accrued for repayment at the time of sale, capped at the repayment of principal, along with the cumulative threshold rate of return. This flexibility frees up borrower capital and returns compared to pari-passu equity share distributions.
Furthermore, there is greater flexibility in the end use of equity capital proceeds compared to traditional debt financing, making it a versatile tool for capital for affordable housing initiatives.
Revolving Public Dollars for Sustainable Growth
The Momentum Fund is designed as an evergreen fund that continually revolves capital earned by reinvesting in new deal commitments. This self-sustaining model minimizes dependence on additional state or federal funding, allowing the agency to stretch public dollars further.
By supporting stalled or cost-burdened projects, the fund provides a targeted alternative to grants. Equity funds disbursed during stabilization and prior to lease-up can replace expensive sponsor equity or cover reasonable cost overruns, offering a sustainable stimulus for development.
Leveraging Private Investment Through Capital for Affordable Housing
A key design feature of the Momentum Fund is its ability to attract and blend private capital in a 1:1 ratio by co-investors in the project’s equity capital stack. This blending can leverage state dollars up to 5-to-7 times for total development costs and up to 3-to-4 times on the equity portion.
By combining public and private resources, the fund spurs the production of more affordable units across the state. The equity investments are priced between the 10-year US Treasury rate and up to 200 basis points above it, roughly 4.5%-6.5% in early 2025. This return level is significantly lower than industry norms of 9%–12% IRR for affordable housing equity funds, balancing affordability goals with investor participation.
Returns are distributed pro-rata until the return hurdle is met. Excess returns may be shared with the sponsor or reinvested. In partnership deals, Mass Housing may offer a lower return to allow for higher partner returns, maintaining a moderated blended rate for the developer. This strategy helps stretch the agency’s money across more projects, enhancing the overall impact of capital for affordable housing programs.
Promoting Social Mobility and Climate Resilience
The fund supports economically integrated housing by requiring at least 20% of units to be affordable to residents earning up to 80% of Area Median Income (AMI). This structure promotes upward socio-economic mobility by integrating affordable units with market-rate units near transit locations, job hubs, and commercial centers.
Additionally, projects are evaluated for alignment with green building codes, climate adaptation strategies, and equity-based development priorities. This ensures that capital for affordable housing also advances climate resilience and design quality, laying the foundation for sustainable, future-ready communities.
Case Study: The Residences at East Milton
The first project approved through the Momentum Fund is the Residences at East Milton, developed by Joseph J. Corcoran Company and Falconi Companies. This mixed-income project delivers 92 rental units, including 23 affordable units. The project received a $5 million Momentum Equity investment at a 6.34% preferred return, along with a $29.82 million FORGE Loan.
Without this support, the project would have faced $3.1 million in added carrying costs, lowering its common equity IRR to 5.94%. With the fund’s support, the common equity IRR improved to 7.03%, and the cash-on-cash return jumped from 2.30% to 5.29%. This case demonstrates how strategic deployment of capital for affordable housing can make financially marginal projects viable.
Pilot Launch and Project Selection Methodology
Since its launch in October 2024, the BILD program engaged with 70 developers and received 33 proposal submissions. Ten key projects were shortlisted for pilot investment commitments.
Projects were evaluated based on readiness, cost efficiency, and impact. They were divided into peer groups and stacked in a matrix based on project readiness and spend efficiency. Category 1 projects displayed higher readiness and lower costs, while Category 2 projects were ready but more costly.
Category 3 projects showed better spend efficiency but were not shovel-ready for 6-12 months. Category 4 projects had lower readiness and higher costs, making them less competitive. This rigorous selection process ensures that capital for affordable housing is allocated to the most impactful and feasible developments.
Scaling the Impact of Capital for Affordable Housing
Mass Housing is focused on expanding the reach of the Momentum Fund through four core strategies. First, the agency is seeking additional state authorization to grow the fund’s investment capacity, including a $50 million co-investment with the City of Boston.
Second, Mass Housing is building a long-term co-investment platform by formalizing partnerships with institutional investors like Freddie Mac. Third, the agency is executing deals and strengthening asset management by developing a framework to monitor financial and nonfinancial performance.
Finally, Mass Housing is codifying an investment playbook to ensure consistency and strategic alignment in future deals. These steps are essential for scaling the impact of capital for affordable housing initiatives nationwide.
Conclusion
The Momentum Fund represents a bold new approach to addressing housing shortages through innovative financial engineering. By using concessionary capital in the form of public equity, Massachusetts is unlocking stalled projects, reducing borrower costs, and attracting private investment.
The success of the pilot phase, including the Residences at East Milton, demonstrates the viability of this model. As the fund scales, it serves as a national model for mission-driven housing investments.
For researchers and policymakers, understanding the mechanics of capital for affordable housing is crucial for replicating these successes in other regions facing similar housing crises. The ongoing evolution of the Momentum Fund highlights the importance of adaptive, data-driven strategies in achieving sustainable housing solutions.