Cherrytree Group LLC Blog

By Warren Kirshenbaum

In the recent election, Question 2 on the Massachusetts ballot asked whether voters should “repeal the law allowing developers of projects that include low- or moderate-income housing to apply for a single comprehensive permit from a city or town’s zoning board” The law in question is M.G.L. Chapter 40B, which is an expedited permitting statute. Chapter 40B creates an expedited permitting procedure for those developers that include an affordable component to their development. Specifically, in order to receive a permit under 40B, 25% of the housing units to be built must be considered affordable housing. The towns in the Commonwealth that are subject to 40B are those towns whose affordable housing stock does not exceed 10% of their total housing inventory. 40B subjects the Zoning Board to a streamlined procedure greatly reducing the time and cost of the permitting procedure, and limiting the ability of the town to deny the permit.

On Tuesday, November 2nd, Massachusetts voters, in a decisive victory of 58% to 42% voted not to repeal 40B.

This trend in the voting patterns comports with conversations that I had with people, in which it seemed that there was a lot of non-information, and even misinformation on this issue, and as this movement to repeal 40B could resurface again, I am hoping to shed some light on the issue in this post.

The main underlying issue that I sensed is the NIMBY one. Not in My Back Yard is understandable, and is a concern about falling property values and the denigration of a neighborhood when some of the housing is affordable. Declining property values is indeed a fallout of affordable housing, as the financing options discussed below are very favorable to developers or affordable buyers and, therefore, their properties. These affordability factors lower the market value of a single family home, or a multifamily property, and, therefore, affect the comps of other sellers in the area. This effect is a micro-economic effect, and a relatively minor one at that, as lower comps would affect a financing appraisal in small part, and the market value of a sale with even less consequence. In any event, 40B historically has mostly been used for multi-family construction, and 95% of the projects permitted under 40B are multi-family apartment complexes or condos.

Practically speaking, if a condo development were built near your home, whether it was affordable or market-rate your property value and property enjoyment would decline, so this is not an affordable housing, or 40B issue, as much as it is a land-use or urban planning issue.

Secondly, people I spoke to understood 40B to be a financing statute, and assumed that it gave developers funding to pursue their affordable housing projects. 40B is an expedited permitting statute that allows an override of municipal zoning authority to promote affordable housing. It is not a financing statute. There are forms of financing that are available to developers of affordable housing, such as the Federal Low Income Housing Tax Credit, HUD insured mortgages, tax-exempt bonds, Community Block Grants, and other state and federal sources of funding, and developers use these sources of funding once they are permitted, whether pursuant to 40B or otherwise. 40B is not a preamble to these sources of financing.

While realizing that concern over retaining a leafy suburban lifestyle, or holding on to a paper appraisal of a home value may be important to some in the micro-economic sense, it is not a positive economic trend in the big picture that justifies the repeal of a statute such as 40B. Consider this: a community is more than just our home values; it is a collection of individuals, families, homes, stores, houses of worship, and so forth. While we are happy when we see a fire truck scooting off to tame a brush fire near our neighbor’s yard, we would be foolish to attempt to exclude the possibility that the first responders on the fire-truck also be given the opportunity to live among us in our community by creating affordable options here, and not force them to be relegated to living in a far-off town for affordability reasons.

It should also be pointed out since its enactment, 40B has been credited with spurring upwards of 80% of the new development in Massachusetts, and there are several new developments, as well as many ongoing ones that would not have been built, or will not now be completed were 40B to be repealed, or if it didn’t exist in the first place. This construction has created jobs, spending, and economic activity that we rely on for our stability, and, particularly in our economic malaise, we can little afford to repeal a statute that has created such substantial growth and employment.

The Citizens Housing and Planning Association (“CHAPA”), a prominent Massachusetts non-profit that plays a decisive role in encouraging the production and preservation of affordable housing claimed that this vote evidenced the largest victory margin of any ballot campaign. CHAPA claimed that, “over 1.2 million voters and 80% of cities and towns affirmed their support for protecting the affordable housing law for seniors and working families in urban, suburban, and rural communities all across the state.” While this is true, an analysis of the voting results shows that the larger urban centers voted strongly in favor of not repealing 40B, constituting the largest slice of the 16% victory margin, while the voting in many towns was closer than this 16% victory margin suggests. Many towns actually voted in favor of repeal. Cities and towns such as Worcester, Somerville, Quincy, Arlington, Boston, Brockton, Lawrence, New Bedford and Cambridge opposed repealing 40B in large numbers, and they were joined by the suburban bastions of Newton, Needham, Lexington, Brookline, and Milton, which all together carried the NO vote on this question. Significantly, however, there were also several towns that voted to repeal 40B, such as Abington, Amesbury, Billerica, Bridgewater, Sudbury, Stoughton, Wilmington, Westford, Chelmsford, Tewksbury, Walpole, and Canton.

... by Warren Kirshenbaum

It is my opinion that banks really do not have much incentive to lend money. Banks can borrow money from the Fed at rates that approximate zero, and they can then purchase US Treasuries and return a 3 point spread with little to no risk. Accordingly, why would they be willing to incur the time consumption of due diligence, the transaction expenses, and the inherent risk of loaning money to consumers and businesses when they can be profitable borrowing from the Fed, lending to each other, and engaging in hedging transactions. Nevertheless, as their apparent mandate is to take in deposits and then loan those funds out to borrowers while maintaining a reserve of funds to maintain net capital requirements, they need to put some money out to work in loan transactions but their documents, loan covenants, underwriting requirements, equity requirements, and debt-service coverage ratios are very restrictive, and in some cases are either unprofitable for borrowers or are putting businesses in the position of having to run business decisions by their bankers prior to accessing necessary working capital or credit line funding. I have been promoting for some time now that businesses need to create their own sources of funding, in order to decrease their reliance on bank financing, which is fast becoming a scarce resource. Private equity or corporate debt issuance is a viable option in these economic times, and I urge businesses of all sizes and levels of growth and development to formulate a plan to tap their non-bank resources for capital funding.

Interestingly, a midterm election that changes the majority party in Congress, such as the 2010 Midterm elections did can have a profound effect on the business plans of many different types of companies. For example, those businesses that supply the defense industry may find that under a Republican controlled Congress there are more dollars appropriated to defense spending, and will benefit from such a political change. Those businesses that are non-unionized may find that a Democratic Congress or state administration would be more favorable to union labor and open-shop employers may find that the cost of labor would dramatically increase, effectively turning a company’s cash flow upside down. Any of these factors would cause a company to need to seek financing to smooth out the edges while it re-formulates its business plan and carves out new market niches for itself.

My message is that if you are hoping to seek bank financing, you should add to your quiver of options the possibility of raising funds using private equity, or by issuing corporate bonds or debt instruments. As you are setting the terms of the offering or issuance you are in more of a position to control and accept provisions, terms, covenants and this will be beneficial to your business interests, and that will spur, and not hamper or restrict growth. We, as small business people are in need of capital and funding to execute many, if not most of the objectives of our business plans, but the sources of capital have become restrictive, unwieldy, and stifling. It is time to change the terms of this game, and look for alternate sources of funding.