In a decision that may offer some relief for developers of
financially struggling affordable housing projects permitted and
constructed under G.L. c. 40B, §§ 20-23 ("Chapter 40B") prior
to the market slow down, the Housing Appeals Committee ("HAC") has
confirmed that it will approve changes to a comprehensive permit
issued pursuant to Chapter 40B even after a project has been
constructed and is operational. In 511 Washington Street LLC v.
Hanover Board of Appeals, Permit Session Case No. 38149 (April
2, 2009), the Land Court affirmed a ruling of the HAC that a
developer was entitled to lift an age restriction on an affordable
housing project where the project as a "55 plus" rental community
was operating consistently in the red due to a high vacancy
rate.
Significantly, in its analysis of whether the developer was
entitled to this project change, the HAC acknowledged that
developers can and do make mistakes in the planning and execution
of these projects and did not base its decision on whether the
project's financial difficulties were the fault of the developer
for originally choosing to permit the project with the age
restriction or other alleged missteps in the conception and
marketing of the project. The critical issue in the case was
whether the project, in its current condition, was economic
pursuant to 760 CMR 56.07(2), not who was to blame.
The age-restricted rental project
On March 29, 2002, 511 Washington Street LLC (the "developer")
applied to the Hanover Board of Appeals (the "board") for a
comprehensive permit pursuant to Chapter 40B to construct a project
located on 3.88 acres in Hanover consisting of 74 age-restricted
rental apartment units, including 19 affordable units. The board
granted the comprehensive permit for the project, called North
Pointe, on Jan. 21, 2003, which was subsequently amended in 2004 to
allow the developer to change its subsidizing entity to the New
England Fund. Condition 6 of the comprehensive permit memorialized
the age restriction, requiring that at least one person who is age
55 or older occupy each unit. The project was constructed in 2004
and was marketed in early 2005.
The developer hired a professional real estate marketing company
that included on-site staff at the project and extensive
advertising and marketing efforts. Despite high traffic through the
project by prospective renters over the course of several months,
the project's market-rate units remained largely unrented. For
example, in August 2005, only 30 of the project's 74 units were
rented, and of the 30 rented, only 11 were market-rate units. The
vacancy rate for market-rate units was 80 percent (11 of 55
market-rate units rented). As a rental project providing heat and
hot water as part of the base rent for the units, the fixed costs -
particularly those that were rapidly escalating as energy costs
skyrocketed - and carrying costs pushed the project to the brink of
financial ruin. At one point, the developer estimated it was losing
as much as $50,000 per month.
Faced with this unsustainable financial reality, the developer
sought to change the project in two different ways to increase
demand, either by changing from rental apartments to for-sale
condominiums or by lifting the age restriction on the rental
project. Either of these changes required an amendment of the
comprehensive permit by the board.
The notices of project change
The regulations implementing Chapter 40B provide a procedure for
making changes to a proposed project. 310 CMR 56.07(4).1
Although the regulations do not directly address a change after
permitting is complete, by practice, review of such proposed
changes begins with the filing of a notice of project change
("NPC") with the local reviewing board, with appeals again going to
the HAC. Generally, NPCs are filed prior to the completion of a
project to allow developers to incorporate adjustments or
alterations that arise during the planning and construction phases.
In this case, however, the developer sought to amend a
comprehensive permit for a project that had been completed and
operational - albeit not successfully - for months.
The developer first filed an NPC with the board in August 2005
to convert the project from age-restricted apartments to
age-restricted condominiums. The board denied that NPC, and the
developer appealed that decision to the HAC. While that decision
was pending, the developer filed an alternative NPC to lift the age
restriction on the project but to leave it as a rental development.
The board also denied that NPC in December 2006, and the developer
appealed that decision to the HAC.
The HAC appeal
The HAC's rejections of the board's collateral
arguments
Although both appeals were consolidated before the HAC,
ultimately the developer only pursued lifting the age restriction
(leaving the project as rental apartments) through the hearing. The
developer argued that the failure to grant the NPC rendered the
project uneconomic under the burden-shifting standards of 760 CMR
56.07(1)(c) discussed below. However, before addressing these
substantive standards, the board raised two threshold questions.
The board argued that because the developer had not challenged the
condition imposing the age restriction at the time the
comprehensive permit was originally granted, it had waived its
right to do so in an appeal of the NPC to the HAC. Second, the
board alleged that because the developer proposed the project with
an age restriction, the age restriction was not "imposed" by the
board within the meaning of 760 CMR 56.07(1)(c), notwithstanding
that in the permit itself that the "Project shall be subject to an
age-restriction …." However, the HAC dismissed these arguments,
concluding that "our regulations clearly permit the developer to
petition for changes without regard to whether the permit
conditions or design parameters were imposed by the board,
negotiated, or proposed by the developer." 511 Washington
Street, Slip Op. at 6.
The board also attempted to dodge the HAC's substantive
standards by arguing that the developer itself was responsible for
the project's economic difficulties and that the HAC should not
rescue the project and absolve the developer of its missteps by
lifting the age restriction. The board claimed that the project's
difficulties were a result of the developer's own choices, from the
initial formulation of the project as an age-restricted development
and a failure to adequately examine the market, to rents that were
set too high and an insubstantial amount of time devoted to
marketing the units. Essentially, the board argued the developer
should be left to lie in the bed it made, regardless of the
economic viability of the project, or, at the very least, should be
forced to try for a significantly longer period of time to lease
the units.
The HAC disagreed, concluding that where there is no allegation
of fraud or other misconduct, which were not present here, a
developer should not be prohibited from making changes to a project
that has become uneconomic unless the board establishes there are
countervailing local concerns in accordance with 760 CMR 56.07(2).
Id. at 9.
The HAC acknowledged that the developer in this case bore some
responsibility for the project's financial difficulties but
concluded that was irrelevant, noting that in nearly every
unsuccessful or struggling project, a combination of factors,
including miscalculations by the developer, unforeseen construction
difficulties, changing market conditions and overly restrictive
permit conditions may be at play. Id. at 8-9. Such
miscalculations, the HAC concluded, are "normal risks" associated
with development as much as those market risks that are entirely
outside a developer's control. Id. The HAC therefore
disclaimed responsibility for apportioning fault in such cases. The
HAC also noted that the alternative - to let a project fail - would
not be in the interest of the town or its residents.
The board's denial of the NPC makes the project
uneconomic
Having rejected the board's collateral arguments, the HAC
addressed the age-restriction condition under its familiar
burden-shifting analysis of 760 CMR 56.07(2). An applicant seeking
to lift a condition imposed by a board - in this case, through the
board's refusal to lift a condition - must demonstrate that the
challenged condition renders the project uneconomic. 760 CMR
56.07(2)(a)(3). If the applicant satisfies its burden, the burden
shifts to the board to prove first that there is a valid health,
safety, environmental, design, open space or other local concern
which supports such conditions, and then, that such concern
outweighs the regional housing need. 760 CMR 56.07(2)(b)(3).
The developer presented the expert testimony of its real estate
finance and development consultant regarding the return on total
cost ("ROTC") for the project and comparing the return on the
project with the age restriction to the return from a 10-year
Treasury note. Under guidelines published by the Massachusetts
Housing Partnership ("MHP"), a projected ROTC of at least 2.5 to
3.5 percent above the current yield on a 10-year Treasury note is
required to fairly compensate capital investors for the risks
associated with permitting, construction and operations. In this
case, the developer's expert testified that while the MHP
guidelines indicated a rate of 7.5 to 8.5 percent return would be
economic, the project ROTC would be lower, ranging from 5.44 to
6.71 percent. Under the MHP guidelines, therefore, the project
would be considered uneconomic, the developer argued.
The board challenged the economic analysis on a number of
fronts, including rent levels and vacancy rates. However, even
after these adjustments, the board's expert still calculated a ROTC
of 6.6 percent, outside the MHP range. The board's expert then made
the novel argument that, in fact, the acceptable return on the
project should be lower than suggested in the MHP guidelines
because the developer had already weathered permitting and
construction risk, which the board's expert argued reduced the
range by 1 percent to just 1.5 to 2.5 percent above Treasury
yields. The HAC rejected this assertion, concluding that "[t]here
is no indication in the MHP guidelines that pre- and
post-construction risks are to be allocated within the overall risk
of developing affordable housing. … The developer in this case
should not be penalized simply because the risk that has
materialized materialized after construction was completed."
511 Washington Street, Slip Op. at 14. Therefore, the HAC
concluded that the project was uneconomic where the ROTC was below
that indicated in the MHP guidelines.
Having found the project was uneconomic and that the board
failed to raise countervailing local concerns that would favor the
condition, the HAC issued a decision directing the board to lift
the age restriction on the project. HAC Decision No. 06-05 (Jan.
22, 2008). The board appealed to Superior Court pursuant to G.L. c.
30A, § 14, and the case was transferred to the Permit Session
of the Land Court at the request of the developer.
Land Court appeal
At the Land Court, the board sought a stay of the HAC's order
pending the appeal, which was analyzed as a request for a
preliminary injunction and ultimately denied by Judge Grossman. In
both its motion seeking a stay and its cross-motion for judgment on
the pleadings, the board sought to distinguish this case from the
deferential standard applicable to administrative appeals under
G.L. c. 30A, § 14, in which an agency decision may be overturned
only if it is unsupported by substantial evidence, arbitrary and
capricious, or otherwise based on an error of law. The board
attempted to frame the questions raised in the appeal as solely
legal ones subject to de novo review in which the HAC was entitled
to no deference. The court rejected the board's view and adopted
the well-established standard of review of agency action under G.L.
c. 30A, § 14, where the court accords deference to an agency's
findings of fact and interpretation of its own regulations. Under
this deferential standard, the Land Court affirmed the ruling of
the HAC in its entirety. Board of Appeals of The Town of
Hanover v. Housing Appeals Committee, Land Court Permit
Session Case No. 381349 (HMG), Slip Op. at 10, 20.
Although the board again argued that the developer could not
pursue its claim because it had not challenged the age-restriction
condition in the original comprehensive permit and the board had
not "imposed" the condition, the Land Court agreed with the HAC
that the genesis of the age-restriction condition was not relevant
to whether it could be lifted through an NPC. The Land Court was
similarly unpersuaded that the HAC had erred in dismissing the
board's contention that the developer was at fault for the economic
condition of the project and, therefore, without a remedy at the
HAC. The Land Court agreed with the HAC that the sole question
before it was whether the project was economic, regardless of what
missteps the developer may have made that contributed to the
current financial state of the project. Id. at 12.
As to whether the project was "economic," the court concluded
the HAC's application of the MHP guidelines was within its express
statutory authority and deferred to the HAC's reasonable
interpretation of its own standards. Id. at 13-14. Further
finding that there was virtually no testimony or other evidence of
local or regional housing needs to support imposition of the age
restriction, the court ruled the board failed to meet its burden.
The court affirmed the decision of the HAC lifting the age
restriction.
Notes
1. The Department of Housing and Community Development
promulgated renumbered and issued new regulations governing
comprehensive permits effective February 22, 2008 at 760 CMR 56.00.
These replaced prior regulations at 760 CMR 31.00. Although the
project at issue in this case was permitted under the
now-superceded regulations at 760 CMR 31.00, this article cites to
the current regulations for ease of reference.
The Authors
Marc J. Goldstein is a principal
in the Wellesley office of Beveridge & Diamond PC, an
environmental, land use and litigation firm based in Washington,
D.C. Goldstein specializes in permitting commercial and residential
real estate projects and land use and environmental litigation in
court and before administrative agencies.
Krista L. Hawley is an associate in
Beveridge & Diamond PC's Wellesley office, specializing in land
use and environmental litigation as well as permitting real estate
projects, and is a former clerk of the Land Court. Goldstein and
Hawley both served as counsel to the developer, 511 Washington
Street, LLC, in this case.