What is a “Reasonable Rate of Return” for an Affordable Housing Project?

Robert M. Ruzzo

The long wait is over. Since its enactment fifty-three years ago, the question of what constitutes a “reasonable rate of return” for an applicant pursuing a comprehensive permit under M.G.L. c 40B, §§ 20-23 (the “Affordable

Housing Law” or “Chapter 40B”), has hung out there in the ether. By answering the question of whether the Housing Appeals Committee (“HAC”) could strike permit conditions the HAC believed made a development “significantly more uneconomic” than the one previously proposed, the SJC in Zoning Board of Appeals of Milton vs. HD/MW Randolph Avenue, LLC, gave the affordable housing community its (unsurprising) answer. Reasonableness is in the eye of the beholders—the Department of Housing and Community Development (“DHCD”) and the HAC.

Once described by a proponent as “vague, even obscure,” the Affordable Housing Law is far from a model of clarity.  Out of necessity over the years, DHCD and the HAC have added administrative meat to this admittedly bare set of legislative bones. Chapter 40B is particularly unenlightening when it describes the permissible rate of return on an affordable development. Section 22 gives the applicant the right to appeal to the HAC “whenever” an application “is denied, or is granted with such conditions and requirements as to make the building or operation of such housing uneconomic” (emphasis added). How does one know when a condition is “uneconomic?” Section 20 defines “uneconomic” as “any condition… that makes it impossible for a limited dividend organization to proceed and still realize a “reasonable rate of return” on its development.

 “Uneconomic” and “Significantly More Uneconomic” Conditions.

For much of its life, the Affordable Housing Law lacked any coherent, collected statement of guidance for implementing the statute. DHCD undertook to remedy this situation by issuing comprehensive guidelines in February, 2008 (the “2008 Guidelines”), but DHCD guidance on the issue of a reasonable rate of return did not come until much later. Building on work outlining various methods for measuring return begun by the Massachusetts Housing Partnership in 2005, DHCD amended the 2008 Guidelines in 2013 (the “Amended Guidelines”). These Amended Guidelines did not add substantively to the definition of an “uneconomic condition,” but DHCD did definitively adopt the “Return on Total Cost [ROTC] Method” as the method for calculating a reasonable return. DHCD then established the “Minimum Return on Total Cost” for a comprehensive permit development as the sum of the Ten-Year US Treasury Bill Rate, plus the “ROTC Threshold Increment” (a figure established as of December 2014 as 450 basis points). The Amended Guidelines only addressed the Minimum Return on Total Cost needed to determine if a proposal was indeed “uneconomic;” they were silent about how to handle cases when a developer decided to pursue a project even though it failed from the outset to meet the Minimum Return on Total Cost standard.

As far back as 2007, the HAC had addressed this very issue in administrative decisions. Arguably ignoring the word “whenever” while interpreting Section 20, the HAC in 2007 upheld a town’s refusal to grant a municipal sewer hook-up in Avalon Cohasset vs. Cohasset Zoning Board of Appeals. Because using an on-site septic system only lowered the development’s ROTC from 5.50% to 5.39%, the HAC concluded a Zoning Board of Appeal (“ZBA”) condition prohibiting such a sewer hook-up did not render the development “significantly more uneconomic” than it was originally. In Avalon, the HAC recognized that “under some circumstances a developer may choose to go forward with an uneconomic development,” although it noted back then, “we have seen few such cases.” Sadly, by the time of the Randolph Avenue case, the Attorney General’s brief noted that this cohort represented “an entire category of viable affordable-housing projects,” that by now had earned their own moniker at the HAC: “Uneconomic as Proposed.”

Randolph Avenue Facts and Rulings Below.

HD/MW Randolph Avenue, LLC (the “Developer” or “Randolph Avenue”) secured a project eligibility letter from MassHousing and then applied to the Milton ZBA (“ZBA” or “Board”) for a Comprehensive Permit in November, 2014. The Developer sought approval for 90 rental apartments, 23 of which would be for persons of “low or moderate income.” Under the “expedited” procedure of Chapter 40B, the ZBA voted on July 30, 2015 to issue a Comprehensive Permit for 35 units, subject to a total of 62 conditions. As one might expect, the Developer proceeded directly to the HAC, appealing 49 of the Board’s 62 conditions. After thoroughly sharpening the steak knives, the HAC struck or modified most of the ZBA’s handiwork on conditions. Under DHCD’s guidelines, the Minimum Return on Total Cost for Randolph Avenue as proposed was 6.84%. The HAC concluded that the ZBA’s conditions had lowered the Developer’s projected ROTC from 5.88% to 4.26%, thus rendering the development “significantly more uneconomic.” The ZBA appealed to the Land Court, which largely upheld the HAC’s position. The ZBA appealed again, and the Developer sought direct appellate review by the Supreme Judicial Court.

The SJC’s Ruling.

Despite an admirable attempt by counsel for the ZBA to weave what admittedly was statutory straw into gold, the SJC made relatively quick work of the ZBA’s arguments. Given the boldness of the Board’s primary contention “that where ‘a project is uneconomic as proposed’ [the HAC] has no jurisdiction, and the board is free to impose whatever conditions it so desires,” the SJC decided to address this argument on the merits, even after concluding the ZBA had waived this position below. Good thing, too, as the Board’s position would have created a most untenable situation. It would have allowed a ZBA to impose unlimited and unchallengeable local conditions on the most economically borderline Chapter 40B developments, while more financially robust affordable housing developments could still petition the HAC to delete economically challenging conditions.

The Board also argued the “significantly more uneconomic” standard should have been developed by regulation, rather than by adjudication, noting further that no precise line of demarcation between “significantly more uneconomic” and merely “uneconomic” existed. Alas, this was to no avail. The SJC once again pronounced itself comfortable with granting “substantial deference” to guidance provided by DHCD and the HAC under the Affordable Housing Law, a legislative enactment replete with statutory gaps. Such deference was due “as long as it is not inconsistent with the statutory language or purpose.”  In this instance, the SJC affirmed (yet again) that as a “reform” law, the deference to be afforded DHCD and the HAC is particularly great.

In the end, the SJC definitively endorsed the state’s methodology for determining a “reasonable rate of return” under Chapter 40B. All it took for the Developer was a seven-year appeal under our “expedited” permitting statute. Anyone wonder why we have a housing crisis?

Co-chair of the REBA Affordable Housing Section, Bob Ruzzo possesses a wealth of public, quasi-public, and private sector experience in affordable housing, real estate, land use planning, environmental impact analysis, transportation, transit-oriented development, and public-private partnerships. He has served as the General Counsel for no less than four public entities: the Massachusetts Executive Office of Transportation; the Massachusetts Turnpike Authority; the Massachusetts Housing Finance Agency (MassHousing) and the Massachusetts Development Finance Authority (MassDevelopment). Bob also has extensive private sector experience in real estate development, affordable housing, and, nearest to his heart, the Massachusetts Comprehensive Permit Act (Chapter 40B).  He can be contacted at bonruzzo@comcast.net