In the Northeast, where older communities are looking for ways to redevelop and high real-estate prices can make things tough for first-time home buyers, innovators in Massachusetts and Pennsylvania have found ways to stretch their private-activity bond volume cap limits and complete the projects they want.
The Massachusetts Development Authority used up the $94 million portion of the state's private-activity bond volume cap that it receives for the year by August, so it turned its attention to an aggressive marketing campaign to attract nonprofits in need of bond financing for community development projects -- nonprofits that wouldn't fall under the bond cap.
The results of that campaign have brought more nonprofits seeking financing from the authority, according to Mike Hogan, MassDevelopment's executive director.
This past year was a challenge to the authority because it ran out of its surplus bond cap carried forward from years before, Hogan said. The authority went from having $180 million to allocate to private-activity projects to almost half that, and so had to make some changes.
"We decided to shift from using the industrial development bond projects as our hinge projects for urban renewal to using nonprofits," said Hogan. "The trade-off can be seen in Brockton, where last year we financed three IDB projects and this year have shifted to financing nonprofits like day cares and assisted living facilities,"
The shift meant a change in marketing efforts for the authority and involved a lot of sales calls to schools, and working with the Massachusetts Cultural Council and assisted living associations. It also meant an increase in the number of grants the authority gives to nonprofits seeking to do financial analysis and business plans.
Hogan said those grants have lead to a number of new financings for the authority. During the first quarter of the last fiscal year the authority issued $47 million on behalf of nine nonprofits, but for the same period of this fiscal year the authority has issued $127 million for 15 nonprofits.
This doesn't mean the authority has stopped issuing loans to IDB projects. Now, MassDevelopment is making those loans from cash on hand and makes small loans, rather than issuing IDB bonds, allowing it to save its volume cap. But with the possible increase in the bonding cap under the pending legislation Federal omnibus tax bill, Hogan believes that he will be able to keep the current focus on nonprofit issuance while also maintaining the industrial development bonds.
"We now could have two sets of critical paths to help restore some of these communities," said Hogan. "We had shifted resources to fulfill the nonprofit issuance and with the increase we can go and backfill on the IDB end." The increase, which would be an acceleration of what was previously approved to phase in over five years starting in 2003, has been sought by issuers across the country. Under the pending legislation, Massachusetts' cap would rise to $466 million by 2002 from the $310 million it has today.
In Pennsylvania, a program initiated by Treasurer Barbara Hafer allowing lending to first time homebuyers has helped the Pennsylvania Housing Finance Agency stretch its bond cap a little farther.
The program has worked so well that Oklahoma and Tennessee have called the state interested in implementing it in their housing finance agencies. According to Brian Hudson, the chief financial officer for the PHFA, this program has allowed the agency to keep rates down by decreasing the amount of necessary taxable bonds.
The program relies on bundling pre-arranged mortgage loans into Fannie Mae Mortgage Backed Securities earning interest in the state's short-term investment pool. The housing agency would give a note to the authority and then arrange with its lending institutions to get the mortgages. Then, those would be bundled and sold to Fannie Mae for the Fannie Mae Mortgage Backed Securities earning interests of 7% to 7.5% right now.
The state then uses the rate on the Fannie Mae Securities to finance the discount they offered on the original mortgages. This way the state keeps the interest rate on these loans at half a point below the current mortgage rate.
"This wasn't intended to be a way around the bond cap, but that turned out to be the icing on the cake with this program," said Robert Hawkins, the director of the Bureau of Cash Management and Investments with the Pennsylvania Treasurer.
