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Ruling Could Threaten Linkage Fees in Massachusetts

Supreme Court Compares Some Payments to ‘Extortion’
By Christopher R. Vaccaro
Special to Banker & Tradesman

 

This month’s unanimous U.S. Supreme Court decision in favor of a California homeowner may have implications for inclusionary development and linkage regulations here in Massachusetts.

California’s El Dorado County is nestled between Sacramento and Lake Tahoe. Much of its area is within a national forest. The county has recently seen significant population growth, with increased burdens on its roads. To address this problem, El Dorado’s board of supervisors adopted a development plan, imposing scheduled traffic impact fees on real estate developments.

When George Sheetz sought to build a modest home there, the county made him pay a $23,000 traffic impact fee to obtain his building permit. He paid the fee under protest, then sued the county in California state court, claiming that the fee violated the Takings Clause in the Fifth Amendment of the U.S. Constitution.

The Druker Co. of Boston is required to pay $7.5 million toward affordable housing and job training programs for a recently-approved 588,000-square-foot office-lab project at 1033-1055 Washington St. in South End under Boston’s linkage fee policy for large commercial developments.

The Takings Clause states that private property shall not be “taken for public use, without just compensation.” Sheetz argued that the impact fee was an unlawful exaction that violated the Takings Clause, because the fee was assessed without a specific determination of the traffic impact of his new home. The California courts rejected Sheetz’s claim, ruling that he could not prevail because the fee was imposed by a schedule developed through legislative action, instead of being assessed on an individual discretionary basis.

The U.S. Supreme Court agreed to hear Sheetz’s case, and issued a unanimous decision, authored by Justice Amy Coney Barrett, vacating the California judgment and remanding the case to the state’s appellate court. The county now must justify the imposition of the $23,000 traffic impact fee on Sheetz’s new home.

Various statements appearing in the Sheetz decision are noteworthy. The Supreme Court began its analysis by declaring that the Takings Clause protects “individual property owners from bearing public burdens which . . . should be borne by the public as a whole.”

 Payments Must Roughly Match Effects

The court recognized that states have substantial authority to regulate land use, and governments can place conditions on land-use permits that serve legitimate police-power purposes. For example, a municipality’s requirement that a developer transfer property to the municipality for road improvements is acceptable, if designed to mitigate anticipated traffic congestion.

However, according to the court, if such conditions are unconnected to legitimate land-use interests, they “amount to an out-and-out plan of extortion.”

The Supreme Court justices cited a two part test to measure the constitutionality of such permit conditions. First, the conditions must have an “essential nexus” to the government’s land-use interest. Second, the conditions must have “rough proportionality” to the development’s impact on that interest.

The court suggested that permit conditions that require landowners to pay monetary exactions that are more than necessary to mitigate harms caused by a development, can violate the Takings Clause.

Given this analysis, it may be worthwhile to examine local land-use regulations that require developers to make linkage payments or create affordable housing to obtain permits.

These policies are common in Massachusetts, particularly in Boston, which adopted a linkage policy for commercial developments during the 1980s.

 Will Boston’s Fees Be Challenged?

Boston’s program currently applies to projects having more than 50,000 square feet of space. Developers are required to pay $30.78 per square foot for lab space and $23.09 for other commercial uses, in increases approved in 2023 that are being phased in during 2024 and 2025. This program has raised nearly $300 million since its inception.

Boston’s inclusionary development policy (IDP), established in 2000, is also of interest.  Until recently, Boston’s IDP generally required residential developers of projects having 10 or more units to set aside 13 percent of the units as affordable housing. Boston amended its IDP last year to increase this obligation. The number of residential units that trigger the IDP was reduced from 10 to seven, and the required percentage of affordable units can be as high as 20 percent, depending on the project.

The IDP allows for the possibility of developers making cash payments to Boston’s Inclusionary Development Fund, instead of building affordable units, subject to approval by the Mayor’s Office of Housing.

The timing of these changes in Boston is peculiar, given the challenges that developers already face because of higher interest rates and construction costs. In any event, it is debatable whether Boston’s IDP and linkage programs are properly tailored to mitigate harms caused by specific projects.  Considering the Supreme Court’s Sheetz decision, a developer may decide to challenge those programs, or similar programs in other communities.

Download the article as seen in  Banker & Tradesman on April 29, 2024. Learn more about Christopher R. Vaccaro.

AG Gets Serious About Enforcing MBTA Communities Law

Milton Vote Forces Legal Test of State’s Authority
By Christopher R. Vaccaro
Special to Banker & Tradesman

Massachusetts Attorney Gen­eral Andrea Campbell’s recent law­suit against the town of Milton shows that some of the state’s most pow­erful politicians will not tolerate cities and towns that fail to estab­lish multi-family zoning districts required under the MBTA Communities law.

The MBTA Communities law, which be­came law in 2021, is intended to facilitate multifamily housing development in com­munities served by public transportation. The statute added a new Section 3A to the Zoning Act, applicable to “MBTA communi­ties” – generally defined as municipalities with access to commuter rail, subway or ferry service, and those nearby.

There are 177 MBTA communities in eastern Massachusetts. The statute requires those communities to create at least one zoning district where multi-family housing is allowed as of right, without the need for variances or special permits. The districts must be near public transportation and allow at least 15 dwelling units per acre.

The Executive Office of Housing and Liv­able Communities (EOHLC) published guide­lines governing compliance with the statute. The guidelines recognize four classes of MBTA communities – rapid transit communi­ties, commuter rail communities, adjacent communities (cities and larger towns with­out nearby transit stations) and adjacent small towns. Different requirements apply to each class. EOHLC expects all MBTA com­munities to adopt compliant zoning amend­ments over the next several months.

MBTA communities that fail to comply are ineligible to receive funding from 13 state programs; Those include the MassDe­velopment Brownfields Redevelopment Fund; the MassWorks infrastructure pro­gram, which provides financial assistance for local infrastructure; and the Housing­Works infrastructure program, which provides grants and loans for rental housing projects. The effectiveness of these sanc­tions remains untested.

EOHLC classifies Milton as a rapid transit community because it hosts several stations along the Mattapan trolley line. EOHLC guidelines required that Milton establish by Dec. 31, 2023, a zoning district accommo­dating at least 2,461 multifamily housing units and having at least 50 acres.

The John Adams Courthouse, seat of the Massachusetts Supreme Judicial Court.

Opposition Organized to Overturn Zoning Vote

Milton’s town government initially sought to comply with the statute. It obtained a $50,000 grant from EOHLC for consultants and community outreach. The Milton Select Board directed the Planning Department to develop an action plan. EOHLC later ap­proved an additional $30,000 grant for the town to engage a consultant to draft a com­pliant zoning amendment.

Local opposition arose and organized it­self. Many residents questioned EOHLC’s classification of Milton as a rapid transit community, the enforceability of EOHLC guidelines and whether Milton was legally required to comply with the statute. Never­theless, Milton’s select board submitted a proposed zoning amendment to the plan­ning board for review last September.

After several weeks and a public hearing, the Milton Planning Board recommended that the proposed amendment be returned to the Select Board for further study. Mil­ton’s warrant committee made a similar rec­ommendation. However, last December Mil­ton’s town meeting overwhelmingly voted in favor of the proposed amendment. The op­position persisted, and successfully called for a referendum. Milton’s voters decisively voted against the amendment in February. EOHLC promptly notified Milton that it was not in compliance with the MBTA Commu­nities law.

Lawsuit Follows Warnings

Attorney General Campbell has been clear that her office would insist that MBTA communities create multifamily housing districts. Last year she warned that non­compliant communities risked civil enforce­ment actions, and even possible liability under federal and state fair housing laws. Within two weeks after Milton’s referen­dum, she filed a lawsuit with the Supreme Judicial Court, alleging that Milton violated the statute. Her suit seeks a declaratory judgment that Milton failed to meet its obli­gations under the statute and EOHLC guide­lines, and an injunction requiring Milton to adopt a compliant zoning amendment.

The attorney general’s lawsuit suggests that she will not wait to find out whether the loss of access to specific state funding pro­grams will eventually persuade Milton to adopt compliant zoning. Her suit invokes Section 7 of the Zoning Act, which gives the Superior Court and Land Court jurisdiction to restrain zoning violations by injunction. Courts often use this power against property owners to enjoin zoning violations caused by non-compliant buildings and uses. The attor­ney general’s suit seeking an injunction forc­ing a municipality to adopt a specific zoning bylaw is unusual, but also unsurprising.

Milton residents have a choice. They can support expensive litigation with an attor­ney general determined to enforce the MBTA Communities Act, or they can dust off the zoning amendment approved by town meeting – take a deep breath – and support adoption of the amendment. Resi­dents of other MBTA communities will be watching.

Download the article as seen in  Banker & Tradesman on March 25, 2024. Learn more about Christopher R. Vaccaro.

Court Upholds Defective Foreclosure Deed

Bankruptcy Petition Filed Too Late to Prevent Sale
By Christopher R. Vaccaro
Special to Banker & Tradesman

The vast majority of mortgage loans are repaid without incident, but when they go into default, peculiar twists and turns can ensue. A federal district court decision issued in January, involving a home in Framingham, offers an example.

Andy Tran mortgaged his home to Citi­zens Bank in 2008, to secure a modest home equity line of credit. He defaulted several years later, resulting in a foreclosure auc­tion sale by Citizens Bank in 2022. Herbert Jacobs was the successful bidder at the foreclosure sale, with a $235,000 bid price. Jacobs signed a memorandum of sale after the auction.

A recent court decision applies to debtors who seek to prevent a foreclosure sale by filing for bankruptcy.

A few weeks later, a foreclosure deed to Jacobs was recorded, together with an affi­davit of sale from Citizens Bank stating under oath that the foreclosure complied with Massachusetts law. However, the re­corded foreclosure deed to Jacobs was missing Citizens Bank’s notarized signature page. This omission turned out to be a costly embarrassment for those involved.

After the defective deed was recorded, Jacobs demanded that Tran vacate the property. Tran promptly filed a Chapter 13 bankruptcy petition and an adversary pro­ceeding in the bankruptcy court to recover the property. Tran claimed that the foreclo­sure deed was defective because of the missing notarized signature, and therefore the property remained part of his bank­ruptcy estate. Citizens Bank and Jacobs contested Tran’s claim, and the parties filed cross-motions for summary judgment with the bankruptcy court.

The bankruptcy court ruled in favor of Citizens Bank and Jacobs. According to the court, Tran could not undo the foreclosure sale to Jacobs, because Tran lost his rights to the property, known as an equity of re­demption, when the foreclosure auction concluded and Jacobs signed the memoran­dum of sale. The delivery of the foreclosure deed was unnecessary to extinguish Tran’s equity of redemption, and Citizens Bank’s recorded affidavit of sale provided adequate notice of the foreclosure sale to third par­ties. Accordingly, the foreclosure sale extin­guished Tran’s equity of redemption, and Tran could not use bankruptcy law to dis­rupt the sale to Jacobs.

A Question of Applying Bankruptcy Law

Tran appealed the bankruptcy court’s de­cision to the U.S. District Court for Massa­chusetts, maintaining that his rights to the property were not extinguished by the fore­closure auction alone, and the defective foreclosure deed failed to extinguish his eq­uity of redemption. Tran also argued that Citizens Bank’s recorded affidavit of sale did not serve as a substitute for a valid fore­closure deed.

The federal district court noted that all of the material facts of this case were uncon­tested; namely, Citizens Bank conducted a foreclosure auction where Jacobs emerged as the winning bidder, a foreclosure deed and affidavit were recorded at the registry but the deed lacked a notarized signature page, and Tran filed his bankruptcy petition after the deed and affidavit were recorded. Because these crucial facts were uncontested, the dis­trict court only needed to determine whether the bankruptcy court properly applied Massa­chusetts law in ruling that Tran lost his equity of redemption to the property before he filed his bankruptcy petition.

The district court examined decades of Massachusetts appellate court decisions when considering the parties’ arguments. Tran relied heavily on a 1924 Supreme Judi­cial Court case holding that a borrower’s eq­uity of redemption was not extinguished until the foreclosure deed was recorded. But the district court cited more recent Massachusetts appeals court decisions holding that the foreclosure auction and the signing of the memorandum of sale extin­guished the borrower’s equity of redemp­tion. The district court observed that the SJC had agreed with those later decisions. The district court also noted that the bank­ruptcy court in Massachusetts, which is a federal court, had concurred with the more recent approach taken by the Massachu­setts courts.

The district court followed those later de­cisions, and upheld the bankruptcy court’s ruling in favor of Citizens Bank and Jacobs. The court also affirmed the bankruptcy court’s holding that, even though the fore­closure deed lacked a signature page, the recorded foreclosure affidavit provided suf­ficient notice of the foreclosure sale to po­tential good faith purchasers. Therefore, Tran could not successfully invoke provi­sions of the Bankruptcy Code that allow bankruptcy trustees and debtors in posses­sion to avoid real estate transfers that are not recorded at the registry of deeds.

The district court’s decision makes it clear that if a debtor wants to prevent a foreclosure sale, it should file a bankruptcy petition before the auction begins, instead of waiting until after a foreclosure deed to the winning bidder is recorded.

Download the article as seen in  Banker & Tradesman on February 26, 2024. Learn more about Christopher R. Vaccaro.

Perseverance Pays Off in Fitchburg for Nonprofit Developer

Neglected Real Estate Repurposed for Artist Community
By Christopher R. Vaccaro
Special to Banker & Tradesman

The new Fitchburg Arts Community demonstrates a potential playbook for successful financing of housing through public subsidies in Massachusetts’ Gateway Cities.

In the 19th century, Fitchburg was a mill town where facto­ries along the Nashua River manufactured textiles and paper prod­ucts. Many of the fac­tories are gone now, but today’s Fitchburg is home to impressive Victorian architecture, an MBTA commuter rail station, Fitchburg State University and the Fitchburg Art Mu­seum.

The new Fitchburg Arts Community demonstrates a potential playbook for successful financing of housing through public subsidies in Massachusetts’ Gateway Cities.

The art museum is a valuable cultural asset to northern Worcester County, with over 7,000 pieces, including 19th century American art, African art and photography. Thanks to the vision and perseverance of key members of Fitchburg’s nonprofit and creative communities, the museum will soon share its neighborhood with the Fitch­burg Arts Community (FAC), a housing de­velopment offering 68 affordable apart­ments for artists and other creative individuals. It is expected to open early next year.

The FAC’s developer, NewVue Communi­ties, is a Fitchburg-based nonprofit commu­nity development corporation that pro­motes housing and small business growth in north central Massachusetts. The FAC is the brainchild of NewVue’s executive director Marc Dohan and the art museum’s director Nick Capasso, who envisioned converting nearby abandoned historic school buildings and a stable into artist housing.

Eastern Bank Reinvests in a Gateway City

The $45 million project broke ground last fall, after securing traditional bank con­struction financing, support from MassDe­velopment’s Transformative Development Initiative (TDI) program for Gateway Cities, and low-income housing and historic reha­bilitation tax credits.

NewVue acquired the FAC’s site from the city of Fitchburg and a private owner sev­eral years ago for a modest price. Last year, NewVue transferred the site to an affiliated for-profit limited liability company. Eastern Bank committed $26 million in construction financing. Commitments like that explain how Eastern Bank earned an “outstanding” rating from the Massachusetts Division of Banks under the Community Reinvestment Act.

The TDI program and tax credits at­tracted additional project financing. The commonwealth of Massachusetts arranged for $7.2 million of syndicated financing from several governmental and quasi-gov­ernmental agencies. NewVue obtained a $3.9 million state Low-Income Housing Tax Credit loan and a $7.4 million state historic tax credit loan, and also invested $4.1 mil­lion from a MassDevelopment Brownfields Grant, another grant from the Fitchburg Re­development Authority, and its own capital campaign.

The tax credits are the most complicated aspect of the FAC project. Investors relying on them should seek expert tax advice be­fore proceeding. The federal Low-Income Housing Tax Credit (LIHTC) program offers tax credits to investors who provide fund­ing for affordable housing developments. The state Executive Office of Housing and Livable Communities manages this program in Massachusetts, in addition to a separate but similar state tax credit program.

According to the commonwealth’s web­site, eligible investors can qualify for tax credits of up to 9 percent. But available tax credits are limited. The maximum tax credit award is generally $1 million per project, but EOHLC may award up to $1.3 million in credits for larger scale projects considered more transformative for the surrounding neighborhood.

The historic rehabilitation tax credit can offset up to 20 percent of a developer’s ex­penditures to rehabilitate an historic build­ing. Qualifying projects must be certified by the Massachusetts Historical Commission. The credit is earned when the completed project is placed in service. However, the commonwealth cannot authorize more than $55 million towards this tax credit annually, so investors must go through an approval process to qualify. The program is sched­uled to expire in 2027.

A Spread of Incomes

To ensure that the FAC’s apartments in Fitchburg remain affordable in perpetuity, the project is subject to an affordable hous­ing restriction, limiting rents and requiring that tenants’ income not exceed certain thresholds. Under this restriction, 21 apart­ments are now set aside for tenants earning up to 110 percent of area median income (AMI) but that percentage may change, 31 apartments for tenants earning up to 60 per­cent of AMI, two apartments for tenants earning up to 50 percent of AMI and 14 apartments for tenants earning up to 30 per­cent of AMI. NewVue is responsible for en­suring that only tenants within those in­come limits reside at the project. These restrictions are necessary for investors in the FAC to qualify for low-income housing tax credits.

New Vue’s Marc Dohan of NewVue said the project “is a great win for Fitchburg and the region. It creates desperately needed housing, and preserves three historic build­ings by putting them on the National Regis­ter of Historic Places, all while taking ad­vantage of Fitchburg’s diversity, history, walkability and strong cultural institutions. It will bring dozens of creative artists and entrepreneurs to our region.”

Dohan’s efforts might have a positive im­pact beyond developing affordable apart­ments in Fitchburg, if Massachusetts com­munity development corporations can follow his playbook in other Gateway Cit­ies.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

The Transit Zoning Rules that Matter

EOHLC Guidelines offer a Roadmap to Compliance
By Christopher R. Vaccaro
Special to Banker & Tradesman

Massachusetts communities with rapid transit service have until Dec. 31 to enact zoning complying with the MBTA Communities act encouraging multifamily development.

A 2021 amendment to the Massachu­setts Zoning Act requires “MBTA com­munities” to establish zoning districts that facilitate multifamily housing development.

The amendment de­fines MBTA communities, in effect, as cities and towns that have commuter rail, subway, ferry or bus stations, or are adjacent to cit­ies and towns having those services. There are 177 MBTA communities in eastern Mas­sachusetts. Boston is excluded because its zoning code is authorized under a separate enabling act.

MBTA communities must create at least one zoning district “of reasonable size” where multifamily housing is “permitted as of right.” Districts must be located within a half-mile of transit stations and allow a min­imum gross density of 15 dwelling units per acre. The amendment has ambiguities. For example, what is a zoning district “of rea­sonable size,” and what does it mean for a project to be “permitted as of right”? Where are MBTA communities without public tran­sit stations expected to locate multifamily housing districts? When must MBTA com­munities comply with the statute?

The Executive Office of Housing and Liv­able Communities (EOHLC) promulgated guidelines last August addressing these is­sues. EOHLC is a cabinet-level secretariat created in 2023 to improve housing options in Massachusetts. Its guidelines recognize four classes of MBTA communities: rapid transit communities, commuter rail commu­nities, adjacent communities (cities and larger towns without nearby transit sta­tions) and adjacent small towns. Different requirements apply to each class.

A Direct Path to Approval

For multifamily housing to be allowed “as of right,” zoning districts must permit multifamily housing construction without variances, special permits or similar discre­tionary zoning relief. But communities can condition permitting on site plan reviews, if the review process does not impose unrea­sonable delays or conditions. Communities can also place limited affordable unit re­quirements on projects.

The guidelines regarding the “reasonable size” of multifamily districts are compli­cated. “Reasonableness” depends on both the acreage of the district and the district’s “multifamily unit capacity,” which is the po­tential number of multifamily housing units that are developable as of right in the dis­trict. For communities other than adjacent small towns, reasonably sized districts gen­erally must have at least 50 acres or 1.5 per­cent of the developable land in the MBTA community, whichever is less. There is no minimum area for adjacent small towns. Communities lacking transit stations should locate their districts near access to transit stations, or near downtown areas.

When determining the reasonable multi­family unit capacity for individual commu­nities, EOHLC assigns a percentage to the community, depending on its class. The per­centage is 25 percent for rapid transit com­munities, 15 percent for commuter rail com­munities, 10 percent for adjacent communities and 5 percent for adjacent small towns. EOHLC then calculates the minimum multifamily housing for each community based on whichever is greater: the number of housing units in the MBTA community, times the applicable percent­age; or the minimum land area for the multi­family district, times 15 units per acre.

However, minimum multifamily unit ca­pacity cannot exceed 25 percent of total housing in each community. The guidelines make special allowances for mixed-use de­velopment zoning districts. EOHLC has es­tablished minimum multifamily unit capaci­ties for every MBTA community, which is available online on the agency’s website.

State Grants Contingent on Compliance

EOHLC will issue determinations of com­pliance to communities that satisfy its guide­lines. These will be important to communi­ties seeking various forms of state funding and discretionary grants. MBTA communi­ties should also consider the statement is­sued last spring by the Massachusetts attor­ney general, warning that noncompliant communities risk liability under federal and state fair housing laws. EOHLC’s guidelines do not require communities to produce housing units, or meet a housing production target, to comply with the guidelines. Com­munities only need to show that their zoning allows multifamily housing as of right and that sufficient units can be added, even if such addition is unlikely.

EOHLC anticipates that all MBTA com­munities will adopt conforming zoning amendments and seek EOHLC determina­tions of compliance in the near future. The deadline for communities to submit applica­tions to EOHLC for determinations of com­pliance is Dec. 31 of this year for rapid tran­sit communities, Dec. 31, 2024 for commuter rail and adjacent communities and Dec. 31, 2025 for adjacent small towns.

Arlington, Brookline and Lexington are among several municipalities that recently changed their zoning laws to comply with the guidelines. Other MBTA communities are expected to follow over the next several months, creating opportunities for develop­ers to increase multifamily housing inven­tory in Massachusetts. The question re­mains as to how developers will finance projects, in a lending climate with high in­terest rates and reluctant bankers.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

The case for modular hotels in New England

Did you know that 80% of modular hotel buildings are produced in a climate controlled factory?  Check out Ken Mackenzie’s article written along with Jason Carter describing the benefits of building hotels using modular construction.

 

Download the article as seen in New England Real Estate Journal on November 17, 2023. Learn more about Ken MacKenzie.

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