Chapter 40B Developer May Lift Age Restriction After Project is Constructed

Beveridge & Diamond, P.C. - Massachusetts Environmental, Land Use & Real Estate Alert, February 2008

A developer utilizing Chapter 40B may lift an age restriction on a rental affordable housing project even after the project has been constructed and begun operation, the Massachusetts Housing Appeals Committee ruled recently in 511 Washington Street, LLC v. Hanover Zoning Board of Appeals, HAC Docket No. 06-05 (January 22, 2008). The case clarifies that relief from the conditions imposed by a local board of appeals continues to be available even after a project has been constructed, allowing developers to adapt to changing market conditions with greater ease.

The case concerned a 74-unit, age-restricted, rental development constructed by the developer under Chapter 40B in Hanover, Massachusetts. Accordingly, the project maintains 25 percent of its units as affordable under the applicable standards. After construction, the developer faced significant difficulties in renting the market-rate units, achieving no more than 30 percent occupancy of the market-rate units. Having determined that the market for these units was not sufficient, the developer first approached the Hanover Board of Appeals (the “Board”) with a request to convert the rental units to condominiums. The developer subsequently sought alternatively to leave the project rental and to lift the age restriction. The Board denied both notices of project change, and the developer appealed both denials to the Housing Appeals Committee (HAC). Ultimately, the developer dropped the condominium conversion and just pursued lifting the age restriction.

During the course of the hearings before the HAC, the Board made three principal arguments against lifting the age restriction. First, the Board argued that because the developer had itself proposed the age restriction and did not appeal that condition when the Comprehensive Permit was first issued, the developer could not now seek relief from that condition. Second, the Board argued through an expert witness that the economic difficulties that the project faced were caused by the developer and not by the challenged condition. The Board argued that the developer should have done more research prior to construction about the available market and the amount of time required for lease up, concluding that if the developer simply waited longer and continued its leasing efforts, eventually the project would lease up. Third, the Board argued that when a project has already been constructed, the applicable return on investment for what makes a project “uneconomic” under the regulations should be adjusted downward to take into account the diminished risk associated having already successfully permitted and constructed the project.

The developer argued that the lack of an adequate market for age-restricted rental units alone made the project uneconomic and that attempts to blame the developer were unfounded. The developer presented evidence that it took all appropriate steps in planning and executing its marketing plan, including hiring a highly reputable and experienced real estate firm, and presented evidence that an adequate market simply did not exist in the relevant geographic area for age-restricted rental units.

In its decision, the HAC agreed with the developer that the age restriction made the development uneconomic. The HAC dismissed the Board’s argument that the developer had waived its right to challenge the age restriction, stating 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.” Id. at 6.  Moreover, the HAC found that any errors in developer’s marketing judgment are the types of risk that are incorporated into these types of projects in much the same way as the market risks of increased prices for construction materials or changes in the market. “The purpose of the Comprehensive Permit Law is not to guarantee an economic return to the developer. But, where there is no allegation of fraud or other misconduct, neither should a developer be prevented from making a change in a development that has become uneconomic unless the Board has established there are countervailing local concerns.”  Id. at 9. 

In the end, the HAC accepted the developer’s analysis of the return on total cost (“ROTC”), rejecting the Board’s theory that a reasonable return for this project should be just 1½ percent above the treasury rate because the permitting and construction risk have already been resolved. Indeed, the HAC noted that not one of the Board’s ROTC calculations hit the applicable threshold to demonstrate that the project was economic.

To view the HAC’s full decision, available on its website, please click here. The Board filed an appeal of the HAC’s decision to Superior Court in February.

For further information, please contact Brian Levey at blevey@bdlaw.com or Marc J. Goldstein at mgoldstein@bdlaw.com, who served as counsel for the developer.