Section Review

The Ardemore Case and the Future of Zoning Overrides under General Laws Chapter 40B

Michael MalamutMichael E. Malamut is a senior attorney with New England Legal Foundation, a not-for-profit public interest foundation whose mission is promoting public discourse on the proper role of free enterprise in our society and advancing free enterprise principles in the courtroom. On behalf of NELF, Malamut filed an amicus brief in the Ardemore case.


You represent the owner of a rental complex developed under a Chapter 40B comprehensive permit overriding local zoning. The government-subsidized financing is about to expire and, with it, the owner's agreement to maintain 25 percent of the units as subsidized affordable housing. The rent subsidy program that accompanied the subsidized financing has also expired. The complex is located in the suburbs away from major public transportation routes. Your client has difficulty filling the subsidized units because of the location. Furthermore, the staff resources devoted to subsidy-related documentation and the gap between the subsidies and free market rents all contribute to marginal profitability. The client has been looking forward to the date when he can raise the subsidized rents to market rates and his investment will start to pay off.

Since the Supreme Judicial Court's recent decision in Zoning Board of Appeals of Wellesley v. Ardemore Apartments Ltd. Partnership, 436 Mass. 811 (2002), your client faces some difficult long-range planning decisions because the complex will have to maintain the "affordable" units in perpetuity or as long as the complex is out of compliance with local zoning. This article explores some of the options for a property owner in your client's situation and contains pointers for developers seeking new Chapter 40B comprehensive permits in light of Ardemore.


Statutory background

The average home prices and rental rates in Massachusetts are among the highest in the nation. The high cost of housing in Massachusetts is caused in large part by local zoning controls that decrease housing supply, such as large lot requirements and bans on multi-family housing. Such practices play a significant role in driving up all housing costs, not just costs for low- and moderate-income families. Sharon Perlman Krefetz, The Impact and Evolution of the Massachusetts Comprehensive Permit and Zoning Appeals Act: Thirty Years of Experience with a State Legislative Effort to Overcome Exclusionary Zoning, 22 W. New Eng. L. Rev. 381, 383 (2001). These trends were apparent even 33 years ago when the General Court passed Chapter 774 of the Statutes of 1969, codified as c. 40B, ßß 20-23, as a response. Often known as the Anti-Snob Zoning Law, the Comprehensive Permit Law, or "the builder's remedy," the statute is most commonly called simply "Chapter 40B," because Sections 20 through 23 are the most frequently utilized portions of the Chapter.

Chapter 40B did not attempt a comprehensive solution to the local land-use impediments to affordable housing in housing in Massachusetts. Instead, it focused exclusively on providing housing for those of "low or moderate income." For more comprehensive approaches, see, e.g., Anthony Flint, Planners seek to revamp 'outdated' zoning legislation, Boston Globe, Sept. 3, 2002; Jack Clarke, Writing zoning laws that work, Boston Globe, Aug. 17, 2002. The essential provisions of the law, which apply when government subsidies cover less than 10 percent of the housing stock in a municipality, allow housing developers to override local zoning through a "comprehensive permit" for a development that sets at least 25 percent of its units aside as "affordable" to those of "low or moderate income." The minimum percentage set-aside is a regulatory provision of the statewide Housing Appeals Committee ("HAC"), which regulates Chapter 40B, and Chapter 40B incorporates all state or federal subsidized housing programs' definitions of "low or moderate income." The developer first applies to the local Zoning Board of Appeals ("ZBA") for the comprehensive permit. If the ZBA denies the permit, the developer can appeal to the HAC, which has historically sided with developers. In contrast to other states that have adopted regional planning or New Jersey's Mount Laurel model, in Massachusetts Chapter 40B remains the sole statewide legislative approach to the constriction on the supply of affordable housing caused by local land-use controls. See N.J.S.A. ßß 52:18A-196 et seq. (implementing Mount Laurel, imposing obligation on municipalities to provide realistic opportunity for affordable housing under local zoning code); Southern Burlington County N.A.A.C.P. v. Mount Laurel Township, 92 N.J. 158, 456 A.2d 390 (1983); Southern Burlington County N.A.A.C.P. v. Mount Laurel Township, 67 N.J. 151, 336 A.2d 713, cert. denied, 423 U.S. 808 (1975); Symposium, Affordable Housing in Suburbia: The Importance but Limited Power and Effectiveness of the State Override Tool, 22 W. New Eng. L. Rev. 323, 327-328 (2001).


"Expiring use" and Chapter 40B

A significant concern in the development and affordable housing communities has been how the state would treat "expiring use" developments under Chapter 40B. "Expiring use" describes the fall-out of a favored government approach to stimulating affordable housing from the 1960s through the mid-1980s-subsidies to private developers to build housing that was mandated to remain "affordable," as defined by statute, for definite time period, usually at least 15 years. The theory at the time was that developers would not be willing to submit to permanent affordability requirements in exchange for subsidized development financing, so the affordability restrictions were designed to expire when the developer paid off the government-subsidized financing. At the time, the focus was on creating more housing, rather than the effects on subsidized tenants of the eventual expiration of affordability restrictions on their homes. The Ardemore case arose in this context.


The facts

Ardemore concerns a 36-unit apartment complex called "Ardemore Apartments" built pursuant to a Chapter 40B comprehensive permit in Wellesley. The Massachusetts Housing Finance Agency ("MHFA") financed the building pursuant to the State Housing Assistance for Rental Production ("SHARP") program, G.L. c. 23B, ßß 25-27; 760 C.M.R. ß 49.02. The SHARP program required the developer and its successors to maintain nine of the 36 units as "low or moderate income" units until July 8, 2000 (the "cliff date"). As was typical through the 1980s, neither the HAC decision to override Wellesley zoning nor the Wellesley ZBA comprehensive permit mentioned any temporal limitation for the project's income restriction. As the cliff date approached, Wellesley sued for declaratory and injunctive relief to prevent complex owner Ardemore Apartments Limited Partnership ("AALP") from charging market-based rents for the nine affordable units after the cliff date. The Superior Court agreed with Wellesley and AALP appealed. The Supreme Judicial Court took direct appellate review and affirmed.


The decision

The essence of the SJC's Ardemore opinion was that "where a comprehensive permit itself does not specify for how long housing units must remain below market, [Chapter 40B] requires an owner to maintain the units as affordable for as long as the housing is not in compliance with local zoning requirements, regardless of the terms of any attendant construction subsidy agreements." 436 Mass. at 813. The SJC apparently chose not to accept a maximal interpretation of Chapter 40B that would have required permanent affordability and prohibited temporal limitations, even if they were included as conditions in the comprehensive permit as authorized by the HAC or the local ZBA. The SJC similarly rejected a minimalist approach that would have allowed affordability restrictions of the comprehensive permit to expire when the affordability restrictions of the relevant building financing agreement expired. Instead, Ardemore took a middle ground, which was to adopt permanent affordability restrictions as a default unless the development's comprehensive permit contains a temporal limit on affordability. (Some dicta in the discussion section of the opinion appears to conflict with the language quoted above and might lead to a more maximal interpretation: "[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." 436 Mass. at 825. This potential conflict may lead to additional litigation to flesh out the SJC's true intent.)

In other cases, the SJC has imposed a reasonable time frame when the relevant documents contain no explicit restrictions. Barclay v. DeVeau, 384 Mass. 676, 684 (1981). In this case, however, the SJC expressed solicitude for municipalities faced with the prospect of an ever-receding safe harbor of 10 percent affordability as older non-conforming multi-family projects assumed market-rent status. Ardemore, 436 Mass. at 814, 824. It therefore adopted the permanent affordability default instead of imposing a "reasonable" time period for such restrictions.


Implications of the decision

Prospectively, Ardemore forces developers to negotiate a comprehensive permit with an explicit affordability termination date, if that is a significant developer concern. This alters slightly the historic balance among the developer, the municipality and the subsidizing agency in bargaining over the extent of affordability restrictions. The practical effect of the decision, however, is entirely different and primarily retrospective. "Expiring use" financing of affordable housing went out of favor after the mid-1980s, when the implications of such programs on existing tenants became obvious.

Newer subsidy programs that qualify under Chapter 40B typically contain permanent affordability requirements. Government agencies have created new incentive structures to encourage subsidized housing construction that do not rely on the eventual conversion to market rate as a significant expectation. Moreover, even without the Ardemore decision, developers and zoning boards have become increasingly aware of the difference between temporal restrictions on affordability in financing documents and in their comprehensive permits since 1992, when HAC decided Lexington Ridge Assocs. v. Lexington Board of Appeals, No. 90-13 (HAC June 25, 1992). Lexington Ridge permitted a local ZBA to impose permanent affordability as a condition of a comprehensive permit without regard to time limitations in financing agreements. Since then, it has been more common for local ZBAs to include explicit permanent or long-term affordability conditions in comprehensive permits.


Implications for existing "expiring use" developments

While the SJC in Ardemore did not discuss the HAC's earlier Lexington Ridge decision, Lexington Ridge provides some guidance in dealing with the difficult questions raised by permanent affordability under Ardemore:

(1) Who maintains "affordability" after the financing subsidy ends? This is discussed in greater detail below.

(2) Under what circumstances can the market-rate units in a Chapter 40B development be sold as condominiums?

The condominium conversion issue is significant because, by regulation, even market-rate rental units in a Chapter 40B project count towards the municipality's 10 percent affordability obligation. On the other hand, HAC regulations do not consider market-rate condominiums in a Chapter 40B condominium development when computing a municipality's 10 percent obligation. Therefore, converting a unit in a Chapter 40B development from rental to condominium decreases the number of units counted toward the municipality's Chapter 40B obligation, even though the development remains out of compliance with local zoning.

(3) Another major concern of permanent affordability, not treated in Lexington Ridge, is the applicable definition of "low or moderate income" after the expiration of the original project subsidy. Chapter 40B incorporates the definition of "low or moderate income" of the government program that subsidizes the project. Various programs contain different definitions of "low or moderate income." Programs typically define "low or moderate" income as a certain percentage of average household income, but the percentages can vary, as can the geographical range on which the average is based. Some programs qualify tenants who meet income criteria at the beginning of their tenancies only, while others require tenants to remain within the defined income range throughout their tenancies.

It is not clear what definition would apply after the expiration of the initial subsidy for the project (in the case, for example, of a project-based financing subsidy) or of the subsidy program under which the development was created. For example, the SHARP program that subsidized the Ardemore Apartments is being phased out. Ardemore did not clarify whether the SHARP definition of "low or moderate income" continues to apply to tenants of the set-aside subsidized apartments or whether the property owner can rent to tenants subsidized as "low or moderate income" under another government program with a different definition, which may be more inclusive than the SHARP definition.

Ardemore provides no guidance in answering the post-Lexington Ridge questions, since "expiring use" Chapter 40B comprehensive permits are blank in regard to the following questions:

•  If the owner cannot locate government subsidies for the set-aside units, will the owner have to subsidize those units out of the rents on the market-rate units? If so, at what rate and on what basis?

•  Can the owner convert market-rate or set-aside units to condominium (or other individually owned status)? If so, on what terms and how will the units then be counted towards a municipality's Chapter 40B obligations?

•  What definition of "low or moderate income" will apply to set-aside units after the expiration of the financing subsidy?

So long as Section 8 subsidies are plentiful, this concern may not have many practical ramifications, but in the future it may. A regulatory or legislative solution may be warranted.

The issues after Ardemore for owners of existing expiring-use Chapter 40B developments are therefore complex. In reality, many developers of such developments probably assumed that the developments could go to full market rate after their "cliff dates." They are now faced with several possibilities. They are not all bad:

(a) In today's housing subsidy climate, Section 8 vouchers are somewhat readily available and pay rents at a rate based on fair market rents for the metropolitan area. Development owners may well be able to fill set-aside units with Section 8 tenants that, depending on the location within the metropolitan area, may pay rents close to market rate. Several of the tenants of set-aside units in the Ardemore Apartments were portable Section 8 tenants and others received subsidies administered by the Wellesley Housing Authority. Project owners should consider establishing a long-range plan to attract tenants with portable subsidies with minimal time lost in turn-over. Owners may be able to contract with local housing authorities or non-profits to ensure a deep pool of qualified prospective tenants.

(b) Under certain subsidy programs, the owner has an option to pre-pay the subsidized loan before full term. Many federal affordable housing construction loans issued in the 1960s and 1970s had 40-year terms, with pre-payment permitted after 20 years. The SHARP program at issue in Ardemore provided a 30-year loan with pre-payment permitted after 15 years. When the loan is repaid, affordability restrictions enforced by the funding agency cease. The SHARP program provided diminishing operating subsidies alongside the subsidized construction financing. Many of the federal programs, however, provide for operating subsidies that continue until the loan is repaid. Some of the federal operating subsidies have been enhanced in order to provide incentives for "expiring use" owners to refrain from pre-payment. See 12 U.S.C. ß 4101 et seq.; 12 U.S.C. ß 1715l; 24 C.F.R. ßß 221.509(a), 221.524, 236.1, 236.30; Cienega Gardens v. United States, 265 F.3d 1237 (Fed. Cir. 2001). In these circumstances, the owner may be best served by continuing the subsidized construction loan for the maximum term, as under Ardemore the owner would not at any rate be able to convert to pure free-market tenancies.

(c) In the current economy, with rents and housing prices at historic highs, owners may be able to generate cross-subsidies from market rate tenants that will warrant continuation of affordability restrictions, even with below market reimbursement by subsidizing agencies, and still bring owners a reasonable return on investment.

It is unlikely, however, that the current frenzied real estate climate will continue forever. Subsidy trends may also change and portable subsidies may become less readily available. In such circumstances, significantly negative outcomes for "expiring use" Chapter 40B developments are possible. Some Chapter 40B developments may not be able to attract Section 8 tenants if, for example, they are located far from public transportation or employment centers. Also, depending on local market conditions, particularly in high rent areas such as Wellesley, Section 8 subsidies may not approach true local fair market rents. Cross-subsidies from market-rate units may not generate sufficient income to render the development economically feasible vis-a-vis comparable investments. In these circumstances, post-Ardemore owners of Chapter 40B developments face some difficult choices:

(d) They can walk away from the development as an unprofitable investment, leaving the development to a government or non-profit housing agency if one is willing to take it over. In Ardemore, the owner in fact had financial difficulties. MHFA had foreclosed on the property and AALP was in bankruptcy. In these circumstances, abandonment of the property to MHFA may be a viable option.

(e) They can seek a modification of their comprehensive permits from local ZBAs, which may be amenable to compromise if an owner is truly facing difficult circumstances. Any modification would address the three post-Lexington Ridge questions and might also revisit the issue of permanent affordability.

(f) Depending on the circumstances, the value of the current development, the expense of replacement and the feasibility of a conforming use that maximizes the value of the property, owners may also consider converting the development to a conforming use. Under Ardemore, this would end affordability restrictions.


Implications for new Chapter 40B projects

Developers of new Chapter 40B projects need to be clear during the comprehensive permit process about their bottom-line positions on the three post-Lexington Ridge questions and their position on permanent or long-term affordability restrictions that go beyond the terms required by any applicable subsidy. If "expiring use" financing of affordable housing ever returns to vogue, developers will have to undertake separate negotiations on the expiration of affordability restrictions with both financing agencies and local ZBAs.

Lexington Ridge provides some sample language addressing problems of permanent affordability. Under Lexington Ridge: (1) If the property owner could not locate a subsidy program to cover the units set aside as affordable, then the owner had to provide the subsidy itself based on a complex formula relating to the project's cash flow. (2) The town would allow conversion of market rate units to condominium status only on certain pre-defined conditions, among which the town could choose at the relevant time, including an increase in the number of units set aside as affordable or a payment to the town to be used to support other affordable housing. Id. at 3-4.

The Lexington Ridge solutions to these long-term affordability concerns are only possibilities. Attorneys can resolve these concerns in a multitude of ways through creative negotiations with the relevant local ZBA. Direct owner subsidy is not likely to be necessary as a practical matter in the current housing subsidy climate because the current trend in subsidy programs favors portable subsidies such as the federal Section 8 vouchers. If an owner can find Section 8 tenants for the units set aside as "affordable," direct subsidy will not be necessary. Nevertheless, in the future, with changing budgetary priorities, filling set-aside units with portable subsidies may not be as certain. Attorneys negotiating Chapter 40B agreements need to plan for such contingencies.

•  Subsidy provider. Owners may balk at the possibility of owner subsidies and request the lifting of affordability restrictions if, after a good faith effort (the parameters of which may need to be spelled out), the owner cannot locate portable subsidies for the set-aside units. If the comprehensive permit is to include an owner subsidy, the basis of the subsidy formula can be subject to negotiations. Although the Lexington Ridge owner-subsidy formula did not include tenant income or fair market rents in the area as factors, there is no reason why these factors should not be considered in drafting owner-subsidy formulas.

•  Condominiums. Condominium conversion options less complex and onerous than those in Lexington Ridge might well be available in negotiations.

•  Definitions. Attorneys should also consider including language covering a range of reasonable possible definitions of "low or moderate income" in comprehensive permit applications to cover the period after the initial subsidy expires. Sample language might include: "low or moderate income shall mean eligible for housing subsidy under any government program based on individual or household income."

•  Duration. If "expiring use" programs come back into favor or if eventual conversion to free market status becomes a major developer concern, developers will have to negotiate explicit terms for expiration of affordability restrictions into their comprehensive permits. Such terms may include recognition of the building's zoning as a nonconforming use and transition provisions for subsidized tenants in residence at the end of the affordability period.


Political implications

Every year sees the introduction of bills to change Chapter 40B to varying extent, from minor tinkering to major reforms. This past year, after considerable legislative wrangling, the legislature appeared to have reached a compromise on Chapter 40B that did not change its substance, but allowed municipalities to approach the 10 percent affordability safe harbor more gradually. On Aug. 10, 2002, however, Acting Gov. Jane Swift vetoed House Bill 5288, saying that the bill would allow municipalities to escape their affordable housing responsibilities too easily. In the wake of the veto, the HAC issued new emergency regulations on Aug. 12, 2002, modifying 760 C.M.R. ßß 30 and 31 to expand on the definitions of affordable housing to allow municipalities to reach the safe harbor somewhat more easily by, for example, counting local housing subsidy programs, group homes, and newly constructed accessory apartments towards municipalities' 10 percent affordability quotient.

With these recent developments, gubernatorial elections and no incumbent for the Senate presidency, the next legislative session is likely to take up reform of Chapter 40B again. Potential reformers are likely to start from scratch, with major reform again a possibility. This time, the ramifications of the Ardemore decision are likely to be added to the mix. Legislative efforts may again come to naught, as they have so often in the past. On the other hand, as unlikely as it now seems, the Legislature could go so far as to replace Chapter 40B with a more comprehensive solution such as updated zoning and subdivision acts that provide for regional planning.



In light of Ardemore, for as long as Chapter 40B remains largely unchanged the owners of existing "expiring use" Chapter 40B developments need to look at their available options for continuing subsidies on set-aside units. Developers of new Chapter 40B projects should plan for long-term, post-subsidy contingencies by including appropriate language in their comprehensive permits.

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