Three years after being told one of its most ambitious housing programs could render the organization financially insolvent, the Massachusetts Housing Finance Agency says it’s about halfway out of the hole and on the road to recovery.

Citing enhanced discipline in the management of many of the affected housing developments, workout plans negotiated with some property owners and an award-winning program designed to bring in new capital investment, MHFA should be able to make bond payments associated with the State Housing Assistance for Rental Production program.

“Through these improvements, we are on track to meet our bond service requirements,” said MHFA consultant Tod McGrath. “Still, we need to recover as much above that [minimum requirement] as we can. This has been an enormous drain on the finances and staff resources [of MHFA], but we’re pleased with where we are right now.”

As the state’s affordable housing lender, MHFA set up the SHARP program in the 1980s as a way to increase the state’s inventory of affordable housing units. In return for reserving a minimum of 25 percent of their units as affordable, property developers were given financing that included 15 years of decreasing state subsidies and below-market interest rates.

For the program to work, however, rents would have to increase 5 percent each year for 30 years to make up for the declining state subsidy.

In the heated real estate market of the mid-1980s, some 87 developments were constructed in 39 communities between 1984 and 1988, resulting in about 9,900 total units of housing.

No other housing program in the country had ever been designed that way, though, said MHFA Executive Director Steven Pierce. Furthermore, he said the program was never tested to see if it would work as full-scale housing, and production began immediately instead.

“Nothing ever increases 5 percent a year for 30 years,” said Brian DeLorey, MHFA’s director of multifamily asset management.

A 1997 study conducted by consultants McCall & Almy found that without change, the SHARP developments would fall $500 million short of mortgage obligations and $250 million short of allowing MHFA to meet bond debt service obligations over the next 15 years.

Since that 1997 study, MHFA terminated operating deficit loans it was giving to underperforming SHARP properties and began working on bringing financing stability to the program.

Although a lawsuit filed in 1998 by SHARP property owners against MHFA because the loans were terminated is still being negotiated, agency officials are reporting overall progress.

For example, McGrath said major overhauls in management practices at the SHARP properties, in addition to rent increases, has resulted in greater net operating income, which helps reduce the deficit.

“We brought in discipline that had never been used before [in affordable housing projects],” Pierce said. “You should increase market-rate rents as often as the market will allow for that, and that wasn’t happening.”

He added that because of changes in operating procedures as well as the spike in rents statewide because of the hot real estate market, the SHARP properties are ahead of MHFA’s projections for their net operating income.

‘Colossal Failure’
Of the approximately 23 plaintiffs that were involved in the lawsuit, Pierce said his agency has worked out settlements with about six or eight of them, including a restructuring of two SHARP developments in Lowell owned by Joseph R. Mullens, president of Responsible SHARP Owners, the group that filed the lawsuit in the first place.

Just last month, MHFA won an award for significant achievement from the National Council of State Housing Agencies for the second part of its plan to get the properties back on track, resulting in an additional $15 million in funding and a significant dent in MHFA’s debt obligations for SHARP.

Specifically, the agency structured an investment pool of partnerships that diluted existing partnership interests and invited owners to consider joining. The properties’ tax losses presented good opportunities for the right investor. New investors purchased a 94 percent controlling interest in each of the pooled partnerships, while current owners continue to receive allocations of income, loss, gain, credits and cash reduced to 6 percent.

Although interests were diluted because they were facing default and loan foreclosure, eight properties joined the pool.

Pierce said investors were attracted by a guaranteed annual after-tax minimum return of 7.75 percent of the investors’ capital account balance at the beginning of each year, along with a guaranteed cumulative return and cash distributions of at least $100,000 yearly. At the end of the investment term, the properties will be sold, with loan repayments coming from sale proceeds.

While MHFA officials feel the progress they’ve made on fixing the SHARP portfolio has been remarkable, they agree that it was something they never should have had to deal with in the first place.

“If we spent one one-hundredth of the time we spent on litigation and negotiations to look at what would happen with the program before it started, we wouldn’t be in this position,” DeLorey said. “You do nobody a favor by building what cannot be sustained. It becomes a colossal failure.

“You can build as much affordable housing as you want if you’re writing hot checks,” he said.

“This teaches us lessons that should never be repeated,” Pierce said, adding that despite all the SHARP changes, the amount of housing in the portfolio set aside as affordable has remained constant.

“We want to solve our problems one property at a time,” McGrath said. “We’re never going to solve all of it, but we want to preserve affordable housing for as long as we can.”

“SHARP will always be a losing proposition for MHFA,” Pierce said. “I just want to know that the agency will be stronger because of what we did [to fix the SHARP program] 20 years from now.”

Mass. Housing Finance Agency Working to Ease SHARP Pains

by Banker & Tradesman time to read: 4 min