JUDY JENKINS
Affordable development at risk
New guidelines aimed at addressing concerns about developer profits under Massachusetts’ controversial affordable housing law don’t go far enough, according to the state’s inspector general.
Inspector General Gregory W. Sullivan criticized the auditing guidelines, which were established after complaints about developers underreporting profits and overstating costs.
“The solutions that have been submitted are inadequate,” said Sullivan. “They would make the situation worse, not better.”
Sullivan was one of dozens to testify at a State House hearing last Tuesday about 49 bills that have been filed to change Chapter 40B. The law enables developers to seek a permit through a community’s zoning board and avoid certain other local approvals in communities where less than 10 percent of the housing is affordable. In exchange, developers must agree to set aside at least 20 percent of the units they’re building for low- to moderate-income households.
Last week’s hearing comes as Chapter 40B opponents are seeking to repeal the law. Opponents are collecting signatures to place the initiative on the November 2008 ballot.
Critics say the law is broken and has become a profit-making tool for developers who abuse the process and build projects that burden communities’ schools and other services.
But supporters credit the law with creating about 49,000 housing units statewide over the last 38 years. More than half of those units are affordable to lower-income households.
“Chapter 40B is primarily a tool for suburban communities that have restrictive zoning,” said Ann Houston, president of the Boston-based Citizens’ Housing and Planning Association.
Much of the controversy surrounding the law recently has centered on developer profits. Developers with Chapter 40B permits that build homeownership units sign agreements with financing agencies that typically include a 20 percent profit limitation. Any profits exceeding that amount are to be returned to communities in which the housing is located.
However, Sullivan, who launched an investigation of 40B projects last year, said monitoring and oversight of such developments has been insufficient and developers have concealed profits. Sullivan’s review of seven projects so far found abuses in five cases. According to Sullivan, $4 million to $5 million should be returned to those five towns.
“This 40B scandal represents one of the biggest abuses in state history in terms of dollars and lack of oversight,” Sullivan told legislators.
MassHousing, a quasi-public agency that finances and monitors 40B projects, released a manual with new auditing guidelines in August to address profit concerns. At the time, a spokesman for the state Department of Housing and Community Development told Banker & Tradesman that the department supports the guidelines and wants other agencies to follow them.
But Sullivan said the process is flawed because developers can choose appraisers to perform land appraisals and their own accountants to complete audits. And while communities can review the audits under the new guidelines, the funding agencies retain the final say in the audit.
Sullivan also criticized the 40B process for allowing developers and banks or other financing agencies to determine profit limits. “This is not the legislation’s intent,” he said.
Sullivan recommends that DHCD compile a list of qualified appraisers and accountants and that the communities, not developers, select them from that list.
“We recommend that DHCD bring some adult supervision to the 40B process,” said Sullivan.
DHCD Spokesman Phil Hailer told Banker & Tradesman that the department will work with the inspector general on improvements to the law.
“We appreciate the work the inspector general is doing and we take seriously his views regarding 40B, although we don’t necessarily agree with them,” said Hailer. “We’ve worked with the Inspector General Sullivan extensively and will continue to do so.”
A ‘High Threshold’
Tina Brooks, the state’s undersecretary for housing, said DHCD will propose several regulatory changes for Chapter 40B shortly. “The administration wants to update, not eliminate, Chapter 40B,” she said.
DHCD wants to have consistent standards for how funding agencies review and approve projects, Brooks noted. The agency also wants to randomly audit projects annually and pre-screen accountants and appraisers that are used by developers.
Brooks said DHCD will propose that developers post a bond that won’t be returned until an audit is done, and incorporate regulations that reflect past court decisions regarding 40B projects.
Some builders said the emphasis on developer profits has been exaggerated.
“It’s like every other business. We’re entitled to make a profit,” testified Judy Jenkins, vice president of Can-Four Corp. in Canton.
Jenkins and other members of the Home Builders Association of Massachusetts said Chapter 40B is needed because communities have been resistant to growth and have adopted large-lot zoning and strict regulations to block housing construction. Those local rules have made home construction more difficult and driven up prices.
“If we repeal 40B, there will be no affordable housing being built,” said Jenkins.
DHCD adopted regulatory changes to 40B in 2003 after then-Gov. Mitt Romney appointed a task force to come up with recommendations. Some maintain that the regulations adopted four years ago greatly improved the law.
Under the changes adopted four years ago, communities that planned for and increased their housing stock by 0.75 percent a year have the option of rejecting 40B projects.
At the hearing, Brooks said 0.75 percent is a “high threshold,” and DHCD would seek to change that so communities get a break from 40B projects if they increase their housing by 0.50 percent a year.
She also mentioned a pilot program under 40B that would target housing for those earning 80 percent to 120 percent of the area median income. Currently, the affordable units in 40B developments are for people earning no more than 80 percent of that median income.
Despite the agency’s proposed regulations, others pushed for some legislation.
“The law is not perfect now. Whether it will ever be, who knows? But it can certainly use some improvements,” said Sen. Richard T. Moore, D-Uxbridge, who filed a bill to require more affordable units in 40B projects and limit developer profits.
