City tries closing gap in affordable housing efforts

When Mayor Thomas M. Menino five years ago ordered that housing developers set aside 10 to 15 percent of their units for middle-income families, he built in a loophole, allowing developers to cash out of the set-aside by paying a fee.

But even as the residential real estate market has soared, the cash-out fee of $52,000 per unit remained unchanged, creating an increasingly powerful incentive for developers to cash out rather than pay the much higher cost of mixing affordable units into their plans.

Boston Redevelopment Authority records show more than 20 projects where developers were allowed to pay rather than bear the cost of building affordable units. The result: dozens of affordable units that might have been built but were not.

It is a pattern that has worked to undercut the mayor's frequently stated goal of increasing the supply of affordable housing and promoting mixed-income developments. In addition, the failure to increase the opt-out fee over the last five years directly violated Menino's original order, which called for the fee to be adjusted every year.

Now, after inquiries by the Globe, Menino has directed that the fee be almost doubled, to $97,000 per unit. Menino signed an executive order making the change on Feb. 3.

Mark Maloney, executive director of the BRA, said the agency was holding off on an official announcement until it could gauge the reaction of developers.

''I don't want the mayor to make a significant announcement that's proaffordable housing and have the development community say, 'OK, but we can't develop any more housing because of it,' " Maloney said. ''I don't think that's going to happen, but I haven't done that work yet."

The cash-out fee has generated $5.9 million for the BRA and commitments for an additional $4.4 million, which the agency is using to help increase the supply of affordable rental housing and condominiums. Had the fee been raised earlier, the fund would be richer today.

The failure to increase the fee earlier is a misstep in a program that has yielded 177 units of affordable housing, with another 328 either approved or under construction. The units are reserved for moderate-income families who have been priced out of the Boston market, yet earn too much to qualify for most housing subsidies.

By allowing developers to cash out of the building part of the program, the BRA has lost an opportunity to have more moderate-income housing built. That is because the fee has covered only a fraction of the total subsidies required to build a typical affordable unit. Even the new $97,000 fee is less than the $150,000 in subsidies needed, according to affordable-housing specialists interviewed by the Globe.

Over the last five years, some developers have been allowed to use the cash out option after persuading the BRA that including affordable units in their projects would jeopardize their ability to finance their developments.

For example, Intell Boston Harbor, which is developing a waterfront hotel and luxury condominium complex at 500 Atlantic Ave., was facing a loss of more than $30 million if it had to sell 21 of its 141 planned high-end condominiums at a steep discount to moderate-income families.

As a result, the BRA allowed Intell to exercise the $52,000 cash-out option and pay the agency $1.1 million, rather than include the affordable units in the development.

Maloney said the BRA was willing to accept the cash-out in part because the agency was eager to have a developer build at the site, around ''two hideous vent towers" at the southern end of the Central Artery tunnel.

Brian Fallon, the local development partner on the project, said that if he had been forced to sell 21 units in the required range of about $175,000 to $300,000, instead of for $1.6 million, the average price of the market-rate units, it ''would have made the project unfinanceable."

Maloney said the agency has been careful to not push developers too far by insisting on the inclusion of on-site affordable units. But by failing to adjust the cash-out policy earlier, Menino and the agency may have missed an opportunity to increase Boston's supply of affordable housing at a time when the luxury real estate market is white-hot and some developers appear more willing to accommodate affordable housing requirements.

''As long as that demand is there, fueled by low interest rates, guys like me are going to build a lot of housing," said Byron Gilchrest, president of Gilchrest Associates and the lead developer of a 55-unit North End project with six moderate-income units. ''And if the price is including a certain amount of affordable housing, we're going to do it, because we're still going to make money."

When Menino signed his initial executive order five years ago, his goal was to have developers seeking permission to build market-rate housing developments of 10 or more units to include so-called work-force housing. Half of these units would be reserved for moderate-income families earning up to 80 percent of the Boston-area median income, and the other half for families earning from 80 to 120 percent of the Boston-area median income.

The developers were given the choice of making 10 percent of their projects affordable or to build the equivalent of 15 percent of the units in some other part of town. They could also pay the opt-out fee.

Menino created the requirement out of a belief that the city had done a better job promoting housing for the rich and the poor than for middle-income families. His ideal was that new housing developments should include a mix of incomes.

In October 2003, the city policy, known as ''inclusionary development," was toughened, raising the on-site affordable housing obligation to 15 percent of the market-rate units.

Since then, Maloney said, the agency has been more forceful in insisting that developers build affordable units on site. On Dec. 10, 2004, after the Globe's inquiries, Maloney sent a memo to his staff members, reminding them that, ''It is BRA policy that the affordable units should be presumed to be created on site."

Still, he listed eight possible exceptions to that rule, including instances when developers can demonstrate ''financial hardship."

Aaron Gornstein, executive director of the Citizens Housing and Planning Association, a nonprofit umbrella group for Massachusetts housing organizations, said the BRA's cash-out fee should be raised to $150,000 for high-end housing developers. That would cover the full cost of public subsidies typically required to build an affordable housing unit beyond the hot downtown, South End, and Fort Point neighborhoods.

Gornstein also said the recent upward spiral in prices of luxury developments has made the requirement for inclusionary development increasingly onerous to developers.

That's because a moderate-income family earning up to 120 percent of the area median income pays an average of about $175,000 to $300,000 for a unit, while the cost of producing the market-rate luxury condominium often exceeds that amount by several hundred thousand dollars.

At the planned Mandarin Oriental hotel-apartment-condominium complex near the Prudential Center, where 50 condominiums will be marketed at prices ranging from $2 million to $12 million, the financial burden of selling the units to moderate-income families would be too steep, the developers argued. So the BRA agreed to allow CWB Boylston to fulfill its affordable housing obligation by providing 10 smaller rental apartments to income-eligible families.

The Mandarin developers, who include Robin Brown, former general manager of the Four Seasons Hotel, estimate that the below-market rents will cost them $6 million to $7 million in forgone revenue over the 40 years that the apartments will remain available to moderate-income families, according to Geri Denterlein, a spokeswoman for the group.

In East Boston, where WinnDevelopment has proposed building a 400-unit luxury condominium development known as Clippership Wharf, the BRA has allowed the developers to fulfill their affordable housing obligation by including 20 moderate-income units on site and paying nearly $1.6 million to another developer that is converting the nearby Maverick Street public housing project into a mixed-income development.

''They improved the neighborhood," Maloney said, explaining the BRA's willingness to approve the arrangement.

Inclusionary zoning has been around since the 1970s and in the past decade has been adopted in a number of cities, including Boston, San Francisco, Denver, Santa Fe, and Cambridge, according to PolicyLink, an Oakland, Calif.-based nonprofit research group that tracks the issue.

The Cambridge ordinance, in effect since 1998, contains no cash-out option, said Chris Cotter, the city's housing director.

Some Boston developers say the BRA may have applied Menino's policy and the cash-out option unevenly.

John B. Hynes III, a managing partner of the Gale Co. and developer of the 42-unit Lafayette Lofts, in Chinatown, said the company attempted to buy its way out of a requirement that it include four moderate-income units in the project by paying the agency $450,000, an amount more than double required under the cash-out option.

BRA officials said the cash-out option was not available, Hynes said. The company then offered to build the units off-site, Hynes added, and was again turned aside. ''How come some guys have off-site contributions, and some guys have to stick the units in their project?" Hynes asked. ''That's the million-dollar question."

Maloney said the BRA has discouraged use of the cash-out and off-site options in Chinatown because demand for affordable housing is especially high in the neighborhood.

He also said the agency remains open to arguments by developers who say the burden of including affordable units in their projects is too great, or to developers with alternative plans that may be more attractive.

''The executive order was intentionally crafted to give us the flexibility to make compromises," he said.

Michael Rezendes can be reached at rezendes@globe.com. Beth Healy can be reached at bhealy@globe.com. Walter V. Robinson and Andrea Estes of the Globe staff contributed to this story.