Boston.com: Truth in Affordable Housing Edward Glaeser
THROUGHOUT MASSACHUSETTS, politicians, activists, and the press have been shocked — absolutely shocked — by Inspector General Gregory Sullivan's assertion that builders of some affordable housing developments overstated their costs to hide profits. Some have called for more regulation and greater oversight. A better response would be to change the system to make it less tempting to lie.
The projects in question were built under Chapter 40B, a law that is something of a "get out of jail free" card for developers facing tough land use controls in areas with little affordable housing. Developers can use Chapter 40B to escape from the ever-thickening web of local rules, if at least 20 percent of their units are affordable. By law, their profits are capped at 20 percent; any profits beyond that are to be turned over to the town where a development is located. Ivory-tower types can find much in this law to debate, but there is no debating that Chapter 40B has been an important creator of affordable housing in the state.
Massachusetts should take the opportunity to make it better. If the profit cap were replaced with a flat charge for each non affordable unit built using Chapter 40B, then the incentives to misstate costs would disappear.
Right now, Chapter 40B's limit on profits creates a strong incentive for developers to lie — to overstate costs to make profits seem smaller. They sure have responded to those incentives, if the inspector general's audit is correct. One technique seems to have been using two related firms: a land buyer and a builder. The land buyer purchases the land and then sells it to the builder at a huge markup. The builder then earns no profits because he has spent so much for the land. This technique works equally well with a related lender, who overcharges for interest, or a related subcontractor, who overcharges for services.
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A flat fee for each non affordable unit would give builders incentives to make their units more attractive, so that they rent or sell easier. A profit cap hampers builders' ability to earn more by improvements. A flat fee means that builders have strong incentives to keep down costs. A cap that limits profits to a percentage of costs actually provides incentives for builders to boost costs, since their profits are limited to 20 percent of those costs.
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