Susan Gittelman
Producing multifamily housing in the commonwealth continues to be a challenge. One of the obstacles to building the new housing we so desperately need has been a sharp increase in the cost of construction – in particular, construction materials. One recommendation included in a report by Gov. Maura Healey’s Unlocking Housing Production Commission (UHPC) that is currently being studied by the state Senate would confront that obstacle head on.
The UHPC proposed establishing a sales tax credit for construction materials purchased for the development of new multifamily housing, or substantial rehabilitation projects that are either located in communities that have a median household income of less than 120 percent of the state average, or include a threshold of at least 15 percent of the units as affordable. The rationale is that this benefit would have the greatest impact on more cost- and revenue-constrained projects while creating the type of housing the state needs most.
The cost of construction materials has jumped more than 40 percent over five years and the sales tax on them generally accounts for between 1.5 and 5 percent of overall project costs, so the financial impact can be significant.
“If you can save 2-3 percent on a $20 million housing project, that’s around $500,000,” said Ray Mitrano, the principal of WaypointKLA, which provides real estate development and construction consulting. “That kind of money can be the difference between these projects closing and not closing.”
The commission also suggested features that would hold the program accountable and protect state taxpayers. For example, credits for projects that don’t begin construction within two years could expire, and a limit could be placed on the overall amount of credits awarded each year.
While safeguards are important, some believe the commonwealth might not incur long-term liability from the program.
“The sales tax credit is meant to push forward housing deals that nearly pencil out but still fall short,” said Levi Reilly, the head of development for Marcus Partners and a member of the UHPC. “If those projects stay on hold, the commonwealth collects no sales tax revenue anyway, so the credit effectively turns ‘zero’ into new homes and jobs.”
Credit Offers Material Cost Relief
As currently proposed, the state sales tax credit is based on a successful sales and use tax exemption the state offers for certain manufacturing activities. However, the benefits of this tool are perhaps best understood based on the experience of some nonprofit developers who have used their sales tax exemption to make highly cost-constrained affordable housing projects more feasible.
The new proposal would expand this benefit to for-profit developers, but it could also make it more impactful for nonprofit developers who are already deploying a sales tax exemption but with limitations and added complexity. Currently, nonprofit sponsors can only purchase construction materials exempt until private investors such as low-income housing tax credit investors contribute equity, which causes developers to delay admitting investors until the project is nearly complete. This can cause nonprofit developers to incur debt costs for bridge loans used in lieu of equity during construction.
Addressing the rising cost of construction materials isn’t the only reason why the sales tax credit could be particularly relevant now. The traditional rule of thumb is that materials account for 40 percent of construction costs, and labor makes up 60 percent of total hard costs on a new development. But increasingly sophisticated construction technology, the use of prefabricated materials, and a growing focus on sustainability, which requires specialized products and techniques, are changing that. Add in the threat of stiff tariffs and the typical materials-to-labor ratio is moving closer to 50/50.
For example, electric heat pumps for hot water and the use of solar panels might reduce lifecycle costs, but they come at a premium, raising materials costs. Windows that meet Passive House standards can cost 10 times as much as a regular window, and most of them are manufactured in Eastern Europe. Much of the state’s lumber and steel comes from Canada. This means tariffs could make expensive construction materials even more pricey.
The state Senate adopted an amendment to the body’s budget proposal filed by Sen. Julian Cyr that calls for studying the issue. Senate President Karen Spilka indicated at a recent Greater Boston Chamber of Commerce event that “nothing is off the table” when it comes to adopting more pro-housing policies.
Whether in the form of a tax credit or an exemption, this sales tax benefit can move the needle in terms of cost reduction, which brings real value. And in today’s multifamily housing development calculus, in which so many development costs are outside of our control, it is essential that we seize cost relief opportunities that fall within.
Susan Gittelman is executive director of B’nai B’rith Housing, a nonprofit affordable housing developer currently working in Boston, Cambridge, MetroWest and the North Shore.
