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Mayor Wu’s Development Rate Hike Proposal Seen as Inapt by CRE Representatives

December 27, 2022
Seaport District, Boston MA

BOSTON — On Thursday, December 16th, Boston Mayor, Michelle Wu proposed changes to the city’s Inclusionary Development Policy that would require new multifamily buildings of seven or more units to include 20% affordability, an increase from the existing rules that require buildings over 10 units to have 13% affordability.

The mayor also proposed changes to the city’s Linkage Policy, lowering the threshold for projects that must pay linkage fees from 100K SF to 50K SF while doubling the fees that lab buildings would pay.

Both proposals will need approval from the Boston Planning & Development Agency and Zoning Commission, while the IDP changes also must pass a City Council vote. The BPDA plans to begin holding public meetings on the changes in January.

Changes to linkage fees, the amount a developer contributes to a city-run affordable housing fund, would rise from $15.39 to $30.78 for lab space and $23.09 for all other commercial developments. The threshold for when the linkage fees kick in would drop from 100K SF to 50K SF. The last time the fee was raised was under former Mayor Marty Walsh’s administration, in February 2020.

Lab buildings that also include office space would be considered on a “pro-rata basis,” meaning they would pay the higher lab fee for the percentage of the building that use occupies.

The Real Reporter sat down with real estate attorney, Eric Allon, of Bernkopf Goodman, whose firm represents several local real estate investment companies on current projects in Boston to discuss what it would mean to developers and its overall impact on the industry as well as the local business community.

Q: In general, how would the changes affect developments going forward? A: In a word, adversely. Inflation, rising interest rates, supply chain problems, construction costs, and rising labor costs are already definite headwinds to development projects. The Federal Reserve has made clear that it will increase rates until inflation reaches 2% annually, which may trigger a recession. The real estate community shares Mayor Wu’s concern to build more affordable housing. However, the unintended consequences of the dual moves of increasing the inclusionary development (IDP) requirements and linkage fees are likely to impede housing development, having a particularly adverse effect on smaller developers, including those from minority communities. How does a developer make the numbers work if you are doing a development of 10 units and need to reserve two for affordable housing?

Q: What is the consensus amongst developers, builders, the real estate community, and businesses in Boston or those who do business in Boston?

A: The general consensus is that the proposal is well-intentioned but ill-timed and will not produce the intended result. Mayor Wu should focus on incentivizing housing, not penalizing those developers producing housing. Massachusetts needs over 150,000 housing units/homes. With three-quarters of the revenue of Boston coming from property taxes and the majority from commercial real estate, there is a need for Mayor Wu to personally listen to the real estate community that already financially supports her goals; however, there is a concern that Mayor Wu has not made herself available to the extent of Mayor Menino and Mayor Walsh.

The Mayor needs to be collaborative with all stakeholders, including the real estate community and neighborhood associations, to come to a consensus on the right approaches. These are uncertain times nationally and in Boston. We just learned that Mass General Brigham, the biggest private employer in the state, Beth Israel Lahey and Tufts each suffered losses in the hundred millions of dollars, which will have significant impacts on their development plans as each struggles to cut costs and reign in spending. The Greater Boston Area has attracted capital locally, nationally, and internationally, which has spurred all aspects of the MA economy, creating thousands of new jobs. However, capital investment in real estate will move to other markets if the returns shrink in Massachusetts. Capital investment for real estate in Cambridge and Somerville recently enacted similar linkage provisions, and, although likely not the only factor, there has been a slowdown in development projects in those cities.

The real estate community shares the same goals as the Mayor on a variety of topics, including housing, but differs on the methods to reach those goals. Many of us who work in various aspects of the real estate industry are members of The Builders of Color Coalition, which has assisted minority-led real estate companies to partner with experienced players in all aspects of the real estate industry to develop skill sets to take on various real estate projects. Graffito SP is a real estate development and urban design firm that focuses on ground-floor development and community involvement and also works with its clients to tackle systemic inequalities. Those are just two of many initiatives that the real estate community has taken to address issues of concern that we share with the Mayor.

Q: How impactful do you think it would be to the proformas of multifamily and mixed-use developments going forward?

A: Some projects will not occur, particularly in this economic climate. Mayor Wu’s timing is off in proposing these changes now. In general, the real estate community feels that it wants to be part of the solution without bearing an undue part of the cost burden.

Q: In your opinion/your client’s opinions are these changes necessary?

A: No. This should be shelved for the time being. Particularly now, we do not want developers to move to other communities for projects. Recently, there has been a slowdown in bio-life sciences.

Q: Are there other ways to develop more affordable housing without putting more financial burdens on investors?

A: Yes. There are solutions that both the Mayor and the real estate community support, including projects that are collaborative and include private developers, public funding, and neighborhood groups that focus on community housing. In East Boston, the collaboration of The Grossman Companies in a joint venture with Hodara Real Estate Group on a $47 million sale of 36 buildings of 114 units in East Boston to a Trust sponsored by East Boston Community Development Corporation preserved affordable housing. The Mayor gave a full endorsement: “This acquisition of over 100 units in East Boston is a great example of what is possible when we use every tool as a city and partner across sectors to Boston a city for everyone.” It is noteworthy that the JLL Capital Markets Multi-Housing Team assisted in the financing, showing investors supported this project as well.

Q: Why do you think so much of the Linkage fee hike proposed is allocated to the life science buildings?

A: The Greater Boston Area is the center of the universe for bio-life sciences. However, there is competition from several other states, and we could lose market share quickly if we become known again as ‘Taxachusetts.’ It is important to note the flight of companies from California to Texas during the pandemic.

Q: If the policies pass, do you think this will have an effect on developers doing business in the city?

A: Yes. There are unintended adverse consequences that will result from this proposal, including less new housing in Boston. One result is that the little guys, many from minority communities, will get hurt. There is already little margin for error for developers doing small projects of between 7 and 20 units, with rising costs for loans, labor and materials and delays due to supply chain problems and subcontractors being backed up on projects. This really needs to be tackled at a national, state, and city level with well-devised plans. You also need to collaborate with surrounding cities and towns to solve affordable housing issues. Developers will welcome being included in those conversations to meet the goal of providing affordable housing in the Greater Boston area.

Eric Allon is a partner at Bernkopf / Goodman, a Boston-Based law firm. He specializes in the practice areas of real estate law and business law.

Eric Allon