MassHousing, the state’s bank for 40B, is responsible for allowing developers to earn a profit of no more than 20%; however, developers have consistently and dramatically inflated their costs to increase their profits The developer submits a pro forma, a breakdown of the costs associated with the development (land, licenses, permit, land preparation, construction, open space, etc.) and income (estimated income expected from each housing unit, other income). The developers chooses the CPA who reviews the pro forma. The bank and developer determine the cost of the property.
The Inspector General found that developers had routinely overstated their costs, e.g., cost of land, to disguise that they made over 20% profits. A few of the methods that developers used to make illegal profits included: 1) selling units to a family member or other pre-arranged individual and then reselling them at market rate, 2) hiring workmen for $10–15/hour and claiming they were paid $75/hour, 3) assigning units as temporarily affordable, and 4) using the ploy that the project would be “uneconomic” unless they built a denser development, Many developers received millions of dollars of profits they didn’t deserve. In the first five cases the Inspector General examined, he found that the developers owed the towns between $4 million and 5 million. The towns have only recovered $17,000 of the millions owed them by developers.[1] DHCD has not pursued these funds for the towns.
In 2006 during testimony before the Massachusetts House, Inspector General Sullivan called the 40B law “the biggest financial scandal of the last 20 years.”
This 40B scandal represents the biggest abuse in state history, in my opinion…State reforms let the developer pick the appraiser. That is dead wrong…State regulations today say that developers and banks should determine profits and project size. That should never have happened and is the number one problem to be rectified…Would you buy a house if the seller mandated the price according to his own appraisal?
The emphasis on increasing density is ostensibly to increase the number of affordable units. However, density only increases the developer’s profits since no additional units are designated affordable. When a town attempts to decrease the number of units in a proposed development on a small site, the developer can claim that the development would be “uneconomic.” Towns try to avoid this designation because it triggers backlash in the form of an even denser development.
Affordable Housing in Massachusetts: Failed Strategies and New Directions also argues that:
· Existing alternative affordable housing plans are more successful at producing affordable housing than 40B
· 40B is directly responsible for inflated land and housing costs and, accordingly, worsening housing affordability
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