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State to cap profits on affordable housing law

Developers may have to post bonds

WORCESTER -- The Patrick administration is planning new steps to control the lucrative profits pocketed by some developers of affordable housing projects, in response to growing outrage in Boston suburbs and criticism by the state inspector general.

"The new administration is very concerned," Mark Siegenthaler, policy director for the state Department of Housing and Community Development, told a group of town planners at an annual conference in Worcester yesterday.

In his department's first public response to the controversy, Siegenthaler said that the state will probably require developers to post a bond when they launch a project under Chapter 40B, the law designed to encourage affordable housing. The bond money would not be returned to the developer until the project is completely reviewed for excess profits.

Siegenthaler also said the state is planning to take a stronger role in checking the costs of the projects and is considering training independent certified public accountants to review the developer's profits. Local planners told him yesterday that there is great confusion about who should be reviewing the profits, which are generally supposed to be limited to between 10 percent and 20 percent.

The issue of profits for 40B developers has been raging since February, when Sullivan reported that, with virtually no state oversight of the law's profit cap, some developers have exaggerated their project costs and minimized project revenue as a way to reap excessive profits.

One 40B developer installed a carpet in his summer home, then billed it to a 40B development; another developer sold eight condominiums to himself, for significantly less than the market rates, as a way to suggest that the project's revenues were lower than expected, Sullivan said.

"For certain 40B developers, this has been a pigfest," he said last year.

Developers who build under the 40B law are allowed to bypass local zoning codes, as long as they set aside at least 20 percent of the housing units for low- and moderate- income people.

In exchange for that reprieve from zoning, developers are required to limit their profits. In rental developments, profits are typically capped at 10 percent of the project's annual operating costs, while in ownership developments, profits are to be capped at 20 percent of total project costs.

In general, excess profits are to be given to the communities that house the new developments.

In October 2005, Sullivan began a review of 10 40B developments that had been built, sold, and cost-certified, or double-checked for excess profits. The bulk of the projects were reviewed by a group that encourages affordable housing.

"We saw widespread problems and abuses," Sullivan said yesterday. "We believe that the cost- certification process is ineffective and broken."

His investigators determined that in the first six developments reviewed, all the developers underreported profits.

"Not one of them reported exceeding the profit cap," Sullivan told the planners yesterday, "but we found that their profits ranged from 14 percent to 55.9 percent.

"They took home $3 million that should have been remitted back to the town."

Some developers paid out excessively high consulting fees to business associates, while others hired their own companies as project subcontractors and paid those companies well beyond competitive rates, Sullivan said.

Many of the town planners said they need help reviewing already completed 40Bs that have not been checked for excess profits.

Steve Sadwick, town planner in Tewksbury, told Siegenthaler: "We've got three [40Bs] that still haven't been cost-certified."

A Globe review has found that of the approximately 900 40B developments built since 1969, only about 10 percent have been reviewed for excess profit.