Commonwealth Considers Rule Changes to Impact Multifamily Owners Under Affordable Housing Preservation Law Chapter 40T: Considerations Prior to Marketing a Massachusetts Apartment Complex

by David Abromowitz, Deborah Horwitz, Elizabeth Lintz and Steven Schwartz
February 2013
Practice: Affordable Housing & Economic Development
Offices: Boston
People: David Abromowitz, Deborah S. Horwitz, Elizabeth Lintz, Steven Schwartz

NH&RA member firm, Goulston & Storrs recently released an article detailing the recent rule changes in Massachusetts that would impact owners considering a sale of a publicly assisted affordable housing property in the State. The full article can be found on the Goulston & Storrs website and is also included below.

Overview of Chapter 40T

When an owner of an apartment complex in Massachusetts is anticipating a sale or refinancing, it is important to determine if the property received public funding or other assistance related to affordability in any way. Since 2009, many apartment complexes in the Commonwealth have been subject to MGL Chapter 40T – An Act Preserving Publicly Assisted Affordable Housing – intended to help maintain the affordability of tens of thousands of existing privately-owned affordable housing units in Massachusetts. 

The definition of “publicly assisted affordable housing” is quite broad, and at Goulston & Storrs we are finding that some owners may not realize that some of their properties fall under this statute. For example, a rental property that was built as part of a mixed-use project that received Federal Urban Development Action Grant funds, or an apartment building built in an urban renewal area with Chapter 121A involvement, might fall under Chapter 40T. As the Commonwealth’s Department of Housing and Community Development (DHCD) continues implementing Chapter 40T, it is important for apartment owners to consider if the statute is applicable to their portfolio and how it might affect them.

In brief, Chapter 40T requires certain notifications both 2 years and 1 year prior to the expiration of a public affordable housing subsidy. Specifically, an owner of publicly assisted affordable housing must deliver notices to tenants, tenant organizations, the chief executive officer of the town or city in which the housing is located, the Community Economic Development Assistance Corporation, and DHCD before the “termination” of affordability restrictions affecting the housing. The owner must deliver the first notice no less than two years, and the second notice no less than one year, before the restrictions terminate. The statute and regulations define what constitutes “termination,” which includes such events as the final principal payment of a loan, as well as the non-renewal of a subsidy contract and more affirmative actions which result in the end of restrictions under government assistance programs.

In addition, and central to how 40T works to preserve affordability, prior to an owner entering into any agreement related to selling a property defined as publicly assisted affordable housing, the owner must notify DHCD of an intent to sell and give DHCD (or its designee) a ninety day right of first offer to purchase the property. An owner does not have to accept such offer. However, DHCD (and its designee) retain a right of first refusal to purchase the property on the terms which the owner ultimately reaches with a third party. Failure to comply with the giving of either the notice of termination, or the notice of intent to sell that triggers the rights of first offer and first refusal, might cloud title or potentially have other negative consequences for apartment owners. 

Properties Covered by Chapter 40T

Chapter 40T applies to housing receiving a wide range of federal and state government subsidies including, among others, section 8 project-based rental assistance, federal or state low-income housing tax credits, mortgage insurance under sections 221(d)(3) and 221(d)(4) of the National Housing Act, interest rate reduction payments under section 236 of the National Housing Act, the Urban Development Action Grant where either the affordability of dwelling units or a project’s rents are restricted pursuant to a government agreement, state project-based rental vouchers, and alternative tax arrangements under chapter 121A if the housing is subject to affordability restrictions entered into in connection with the 121A agreement.

Potential Changes under 40T

In the three years since Chapter 40T went into effect, DHCD has been actively involved with a number of sales of publicly assisted affordable housing, and its designees have successfully purchased over 325 units of housing and several hundred more are under contract at present.  Under current regulations, the so-called Notice of Intent to Sell noted above is required in every case where an owner enters into any agreement relating to a proposed sale of the apartment complex, even if the owner definitely intends to sell to another preservation owner. From experience and feedback from owners and advocates over the past three years, however, DHCD has indicated that it plans to create a category of transactions where the current owner intends to sell to a purchaser that will preserve the housing as affordable. In such a case, the selling owner will be able to give a Notice of Intent to Sell to a Preservation Purchaser (whether a specific purchaser or just to such purchasers in general), and DHCD will hold off on exercising its right to choose a designee and make a first offer. DHCD will still retain its right of first refusal as a means of making sure the ultimate sale is in fact a preservation transaction as intended.

In addition, under current regulations even the listing of a property with a broker or any other preliminary written indication of an intent to sell triggers the notice requirements outlined above. DHCD has recognized that merely listing a property for sale often triggers a notice that comes too early in the process to serve the intended purpose, and has drafted possible changes to its regulations that would move the notice requirements later until the time an owner actually enters into some written agreement to sell to a particular party.

Both of these possible changes require a formal regulatory process, which DHCD anticipates beginning later this year. In the meantime, owners considering a sale of a publicly assisted affordable housing property can still seek an exemption and can obtain guidance from DHCD as to particular transactions.

If you own or manage multifamily properties and want to determine if they may be subject to Chapter 40T, or otherwise need assistance in complying with the requirements of Chapter 40T, please contact us.

For questions about the information contained in this advisory, please contact your usual Goulston & Storrs attorney or:

David M. Abromowitz 
(617) 574-4016 
dabromowitz@goulstonstorrs.com

Steven Schwartz 
(617) 574-4147 
sschwartz@goulstonstorrs.com

Deborah Horwitz
(617) 574-4123
dhorwitz@goulstonstorrs.com

Elizabeth Lintz
(617) 574-6495
elintz@goulstonstorrs.com