IG says builders hid profits
Probe examines low-cost housing
Developers of five affordable housing projects in Massachusetts concealed nearly $4 million in profits by grossly inflating their costs and understating revenues, according to an investigation by Inspector General Gregory W. Sullivan, who is calling for money to be returned to local taxpayers.
Three of the developers, who built projects in Acton, Berkley, and Reading, each exceeded the 20 percent profit limit set in Chapter 40B, the state's controversial affordable housing law, Sullivan said in an interview.
Michael Jeanson and James Fenton, developers of the Acton project, made a profit of nearly 56 percent, Sullivan said, and reported dubious expenses, including $3,200 for carpeting that one of the partners installed in his summer home on Lake Winnipesaukee in New Hampshire.
The inspector general is midway through his review of 10 affordable housing projects he selected as representative of the hundreds built in Massachusetts this decade.
His is the first state agency to examine the housing program, which has spurred at least 400 developments and more than $1 billion in construction since 2000. Under the law, developers are exempt from local zoning requirements in exchange for agreeing to set aside some of their housing units as affordable. The developers are required to limit their profits from the projects to no more than 20 percent, and turn over any profits that exceed that to the local community.
Already, Sullivan said, a pattern is emerging: Developers use a variety of tactics to conceal their profits, including exaggerating land costs and hiring companies in which they have a financial interest as subcontractors, then paying the subcontractors excessive amounts to inflate the project's expenses. In addition, he said, some developers are "permit brokering -- buying land and securing the coveted 40B permit from the community, then selling the suddenly more valuable land and the permit to another developer at a significant profit, without reporting those profits to the state.
Sullivan said the developers of the Acton project, and those in Berkley and Reading, should repay a total of $1.6 million to the towns that released them from their local zoning rules. He has sent letters to the three communities, describing his findings and recommending they pursue reimbursement from the developers.
It is not clear what steps Sullivan, who expects to complete his investigation this spring, may take to enforce his findings. The inspector general, in cases where he believes criminal violations have occurred, may refer the matter to the state attorney general's office.
Sullivan would not comment on future plans, saying he is focused on finishing the probe. "There are good developers out there, but there are also unscrupulous developers who abuse the system," he said.
Officials in Acton said they have begun negotiations with Jeanson and Fenton as a result of Sullivan's findings. Reading officials said they are discussing the inspector general's recommendations with their town counsel. Berkley officials, who were sent the letter just last week, could not be immediately reached.
The inspector general found that developers of two other projects, in Leominster and Wareham, also concealed profits, though they did not exceed the 20 percent limit. The Leominster developers reported losses when the project made a profit of more than 14 percent, he said. The developer in Wareham claimed to make just 1 percent when the project had a 17 percent profit, he said.
The projects reviewed by Sullivan were Crossroads in Acton; the Preserve at Padelford Woods in Berkley; Lancaster Estates in Leominster; Sumner Cheney condominiums in Reading; and Cedar Farm Estates in Wareham.
Several of the developers challenged his findings.
Brian Hurley, a lawyer for Jeanson and Fenton, denied that his clients made a profit of almost 56 percent. Hurley said it cost them $396,334 to prepare the Acton land for 12 condominiums, rather than the $40,000 estimated by Sullivan, which was based on his review of a similarly sized development. But the inspector general said the developers rebuffed repeated requests for invoices to back up the $396,334, which he said was paid to a subcontractor that the developers have a financial interest in.
A second lawyer for Jeanson and Fenton, Diane McGlynn, acknowledged that Jeanson submitted the $3,200 carpet that was installed in Jeanson's vacation home as a project expense, but blamed it on a billing error by the carpet firm. McGlynn said Jeanson and Fenton have hired an accountant to review Sullivan's findings.
In 2004, in a separate case, Jeanson and Fenton paid Boxborough $1.2 million to settle a lawsuit after the town alleged they made a 45 percent profit on a 40B project, Boxborough Meadows. Jeanson told the Globe the developers never admitted wrongdoing in settling the case.
The inspector general, who last year said "40B has been a pig fest" for unscrupulous developers, began his probe of the 10 projects in the fall of 2005 and hired an auditing firm to scrutinize them as a sampling of 40B projects.
Sullivan said the state agency responsible for enforcing the affordable housing law, the Department of Housing and Community Development, has provided little scrutiny of the program. The agency, he said, has until recently largely outsourced scrutiny of the developments' finances to the Citizens' Housing and Planning Association, an advocacy group that has championed the 40B law on Beacon Hill.
That association stopped reviewing project finances in the fall of 2005, amid criticism that it was too favorable to developers.
Tina Brooks, whom Governor Deval Patrick appointed last month to oversee the Department of Housing and Community Development, said she planned to meet with Sullivan in coming weeks to discuss his findings.
The 40B law was enacted by the Legislature in 1969. In its early years, it was mainly used by nonprofits and religious groups to build low-cost housing, and drew little controversy.
In 1999, however, a court ruling greatly expanded the funding sources that could be used under the program, and for-profit developers began flooding in.
As open space in Massachusetts has dwindled and developers have increasingly turned to 40B as a major tool for building housing, the debate over the law has intensified.
Some longtime residents have complained that the projects generate too much traffic, mar communities by bypassing zoning regulations, and use too many municipal services, especially schools, since the projects frequently draw young families.
Supporters say a dearth of low-cost housing has prompted families and young people to leave the state, and that the law has been a vital tool to address that trend.
Despite the cool real estate market, approximately 450 of the developments are planned or under construction, according to a recent Globe review.
In addition to the findings in Acton, Sullivan outlined the problems in the other communities. They include:
Berkley: Developer Paul Cusson bought land in 1998, secured a 40B permit for it, and then sold both the land and the permit, for a $500,000 profit, to a second developer. The second developer, Rod Mitchell, did not include Cusson's profits when calculating the project's final profits. Mitchell also paid Cusson nearly $120,000 to find buyers for 11 affordable units, which Sullivan said was excessive.
Cusson, in a telephone interview, said he got "lucky" with the land sale, and said he did extensive work for the $120,000 fee. Mitchell accused Sullivan of "stretching his findings."
Reading: In October 2000, developer Rocco Scippa bought land on Main Street for $270,000. That same month, Scippa formed another company, which applied to the town for a 40B project on the site. In its application, the company presented a purchase and sales agreement for the land, which showed it planned to buy the land from Scippa for $600,000. However, Sullivan said, Scippa never disclosed his role in the company.
After the town approved the permit, Scippa then sold the land -- and the permit -- to another developer, Donald Van Dyne, for $580,000, and Scippa walked away with a $310,000 profit.
Scippa could not be reached by the Globe. However, Patrick Wood, a lawyer for Van Dyne, in a letter to Sullivan, disputed the inspector general's findings. Van Dyne and Wood did not return phone calls from the Globe.
Leominster: Developer Jay Casey, a longtime owner of a Lancaster Street property, applied for a 40B permit in August 2001. In his application, Casey said he would develop the land, which he said was worth $100,000. But two months after he secured the permit, he sold the land and the permit to another builder, Peter Bovenzi, for $1.3 million. Sullivan said while Bovenzi was upfront about his project's costs, Casey's profits -- of more than $1 million -- should have been included in the project's overall profits reported to the state.
Bovenzi did not return phone calls seeking comment. Casey declined comment.
Wareham: Developer Matthew Dacey loaned money from the construction company he owns, Champion Builders, to the 40B project he was building, Cedar Farm Estates. He then charged the project 10 percent interest on the loan and listed that interest as a project expense. In addition, Dacey paid his construction company $971,000 in construction costs, which Sullivan said was excessive.
Dacey, in an interview with the Globe, said he supports the inspector general's efforts to scrutinize the 40B developments, because he does not want to see the law abused. He said he is not contesting Sullivan's findings, which still found he made less than 20 percent profit.
"As an avenue to provide housing, done the correct way, 40B can be a very good thing," Dacey said. "But rules need to be put in place to protect those guys who are trying to do it right."
Christine McConville can be reached at cmcconville@globe.com. 