Definitive Interpretive Guidance Is Needed from the State

HIGHLIGHTS:

  • As an increasing number of publicly financed projects in Massachusetts use alternative sources of financing and refinancing, the time is ripe for definitive interpretive guidance on the "limited dividend" requirement of the Comprehensive Permit Law (also known as Chapter 40B or the Affordable Housing Law).
  • Provisions in Chapter 40B state that "low or moderate income housing" must be "built or operated" by "[a] public agency or [a] nonprofit or limited dividend organization." While the term "limited dividend organization" is certainly mentioned in the Affordable Housing Law, it is not meaningfully defined.

Ever since the Massachusetts Supreme Judicial Court's 2002 decision in Board of Appeals of Wellesley vs. Ardemore, the "limited dividend" requirement of the Comprehensive Permit Law (also known as Chapter 40B or the Affordable Housing Law) has been a topic worthy of discussion.

What Good Can Come Out of a Foreclosure?

In Ardemore, the court wrestled with a comprehensive permit that was silent on the issue of how long a development's affordable units had to remain affordable. The owner argued that since the original financing documents and their embedded affordability requirements were no longer in effect, the obligation to provide affordable units had similarly expired.

The Supreme Judicial Court (SJC) undertook a thorough examination of the intent of the legislation as well as the independent financing arrangements that had been made in connection with construction of the development. Without recounting all of the details, the court ultimately concluded that the obligation to maintain affordability existed independent of the financing documents, stating:

[U]nless otherwise expressly agreed to by a town, so long as the project is not in compliance with local zoning ordinances, it must continue to serve the public interest for which it was authorized.

Thus, the issue of the duration of afford­ability was put to rest.

But what about the provisions contained in Chapter 40B stating that "low or moderate income housing" must be "built or operated" by "[a] public agency or [a] nonprofit or limited dividend organization?" While the term "limited dividend organization" is certainly mentioned in the Affordable Housing Law, it is not meaningfully defined. This is hardly remarkable for a statute which was once described by one of its co-authors as "vague, even obscure." Nonetheless, the "limited dividend" element of the statute is by no means trivial; indeed, it formed a core part of the original internal bargain contained within Chapter 40B: "The government will provide you with subsidy and an ability to override local zoning if you as developer agree to make units affordable and limit your profit." The terms of that bargain have evolved over time.

History of the Massachusetts Affordable Housing Law

A little historical digression is in order at this point. When the Affordable Housing Law was passed by the Massachusetts Legislature in 1969, it came directly upon the heels of litigation in the Supreme Judicial Court determining the constitution­ality of the MassHousing Enabling Act. In order to defeat arguments that the agency's financing might impermissibly (and unconstitutionally) benefit private parties, a "limited dividend" requirement (among other changes) was baked into the enabling statute. That notion carried over into the Affordable Housing Law.

A lot has happened since that time. Deep financial subsidies at the federal and state level have dwindled, the financing of affordable housing by non-governmental actors has become com­monplace, and development entities have become more national (and international) and sophisticated. As these changes continue and the breadth of the real estate marketplace continues to expand, the "limited dividend" requirement of Chapter 40B seems increasingly vestigial and parochial. The real question remains: is it constitutionally required, and if so to what extent?

The Limited Dividend Requirement Impacts Rental Properties

Given the manner in which the Affordable Housing Law has been interpreted by the Massachusetts Department of Housing and Community Development and the various subsidizing agencies, the eco­nomic issues associated with the limited dividend requirement in the rental context are more theoretical than real. Developers are allowed to "look back" and apply unused dividends from prior years and the developer's equity in a project can be revalued once during any five year period. Despite such developer-favorable interpretations, reasonably priced rental housing remains in short supply.

Unfortunately, even an often theoretical issue such as the limited dividend requirement can have real-world implications as more and more Chapter 40B developments are traded across an ever broader spectrum of development actors. Since Chapter 40B developments constitute such a significant portion of the overall rental housing stock in the Commonwealth (affordable and market rate), legacy issues such as the "limited dividend" requirement may very well chill investor interest in certain Chapter 40B rental properties within our borders.

Back in the immediate aftermath of Ardemore, one might have concluded that, like the affordability requirement, the limited dividend requirement had an ongoing vitality independent of a specific development's financing documents.

So much has changed since 2002. In 2007, the SJC sanctioned the New England Fund Program as a permissible subsidy source under Chapter 40B, thereby accelerating an already developing trend: affordable housing development that is built with­out the sort of state subsidy that gave rise to constitutional concerns in the first place.

Three years later in 2010, the SJC's decision in Amesbury v. Housing Appeals Committee acknowledged the primacy of state Chapter 40B programmatic requirements (such as how to calculate the limited dividend) over conflicting local interpretations.

How far does such primacy extend? Certainly, regulations or guidance cannot "erase" the limited dividend requirement from the statute, but could they not limit that requirement in time, just as a municipality could, if it so chose, limit the duration of affordability under Ardemore?

Definitive Interpretive Guidance Is Needed

As an increasing number of publicly financed projects avail themselves of alternative sources of financing and refinancing, the time is ripe for definitive interpretive guidance on this matter to be promulgated by the public and quasi-public sector. With such guidance from the state, a high degree of certainty could be provided to the development community and any unhappy parties could always petition the courts.

Only time, and perhaps ultimately the Supreme Judicial Court, will resolve this issue. But it is time to move in that direction.