"Making NEF eligible as a 40B funding source brings both a new capacity to cities and towns to respond to their affordable-housing needs and new business to member banks."

John Eller

When Lorraine Landsburg moved into her family's new affordable home in Newton, Massachusetts in 1998, she was the beneficiary of a first-time homeownership opportunity funded in part with the Federal Home Loan Bank of Boston's (the Bank) New England Fund (NEF).

Lorraine Landsburg (left) and Jeanne Strickland, executive director of the Newton Community Development Foundation, in front of Ms. Landsburg's Auburndale Yard home.

A single mother of three young sons, Ms. Landsburg was able to purchase one of three affordable homes for first-time home buyers in the 10-unit The Homes at Auburndale Yard development in West Newton, Massachusetts.

"This was the only way I probably would have been able to afford to live in my own house in Newton," says Ms. Landsburg, a bus driver for the Massachusetts Bay Transportation Authority for the last 11 years. "Under the first-time home-buyer program I was able to keep my kids in Newton schools and have affordable housing. It's been working out well for us."

A mixed-income development that includes both rental and homeownership units, The Homes at Auburndale Yard was built under Massachusetts' Chapter 40B, or Comprehensive Permit Law, a housing measure enacted in 1969 to help address the statewide shortage of affordable housing.

Chapter 40B reduces barriers to housing construction by enabling local zoning boards of appeals to approve affordable-housing developments under more flexible rules if at least 25 percent of their units will be "affordable" to residents at no more than 80 percent of the area median income. The units are also required to have long-term affordability restrictions.

In 1999, the state's Housing Appeals Committee (HAC) added the Bank's NEF to the list of financing mechanisms that qualify a development for consideration under Chapter 40B. The HAC defined the NEF as one of several "federally subsidizing sources" available for 40B developments.

Since 1999, the Bank has approved NEF funding to finance 196 Chapter 40B developments (18,400 units) for 71 member institutions. Twenty-five percent, or almost 5,000 of these units, will be affordable to households earning at or below 80 percent of the area median income. Because of the lengthy permitting and appeal process for initiatives developed under Chapter 40B, all of the approved funding has not yet been disbursed.

Since 1999, the Bank has disbursed over $1.5 billion in NEF funding to finance more than 7,000 units of Chapter 40B housing. In 2004, the Bank approved more than $60.4 million in advances through the NEF to finance 19 initiatives, or 1,358 units — 399 of which will be affordable.

The comprehensive permit process is one of the few tools available in Massachusetts and Rhode Island to overcome the shortage of affordable housing and its negative impact on job preservation and creation. "We think the NEF has served a very important community need in Massachusetts at a time when we were lagging behind significantly in new housing production," notes Aaron Gornstein, executive director of Citizens' Housing and Planning Association. "It filled a funding gap in the development of new housing using Chapter 40B."

Mr. Gornstein says the number of housing units built under Chapter 40B since NEF funding became an eligible funding source has increased significantly. "Over the last two years about 6,000 units a year have been built under Chapter 40B, compared with about 1,500 units a year in the late 1990s," he says, adding that a significant portion of those units were funded in part with NEF advances.

Mr. Gornstein believes the NEF is attractive to developers because it allows them to work directly through their local banks rather than through a government agency. Prior to the availability of the NEF, developers relied on government funding sources such as HUD, MassHousing, the Massachusetts Housing Partnership, the Massachusetts Department of Housing and Community Development, and Rhode Island Mortgage Finance Agency, says John Eller, senior vice president/housing and community investment at the Bank.

Mr. Eller notes that the emergence of the NEF as a major funding source for Chapter 40B developments coincided with a reduction in funding available through public sources. "By 1999, many of the older, federally appropriated funds that had been used by these agencies to finance Chapter 40B developments had been cut back," says Mr. Eller.

The Chapter 40B Fairhaven Residential Gardens in Concord, Massachusetts, was funded in part with an NEF advance.

As government funding sources became scarcer, HAC — which oversees implementation of Chapter 40B — concluded that the NEF was an appropriate alternative to traditional sources of government funding and in keeping with the "shift throughout government toward market-driven approaches" to fund new housing. It also changed the 40B process from a "state-commanded and controlled" process to one in which cities and towns could plan and direct their housing production and meet their affordable-housing needs.

"The NEF is the sort of affordable-housing subsidy program that is crucial to current efforts to fill the need for affordable housing," noted HAC in its Stuborn Ltd. Partnership v. Barnstable Board of Appeals case in 1999. "Although there is less centralized federal control in the NEF, protection for towns will nevertheless be maintained. In fact, the NEF will empower towns to make more decisions about the affordable housing that is built within their boundaries, and thus increase local control over the process."

"Making NEF eligible as a 40B funding source brings both a new capacity to cities and towns to respond to their affordable-housing needs and new business to member banks," says Mr. Eller. "At the same time, it satisfies the law's demand for a 'federally subsidizing' source of funding for the development of Chapter 40B projects."

Under Chapter 40B regulations, members who finance 40B developments must draw funding from the NEF. Since 25 percent of the units are required to be affordable, no less than 25 percent of a member's loan to a developer must be drawn from the NEF. The remaining 75 percent of the funding can be drawn from the member's own sources. "Member banks financing 40B developments must use the Bank's NEF funds," notes Mr. Eller. "They are a required part of each 40B development's funding mix and the members' and developers' legal nexus to Chapter 40B developments."

As of 2002, developers initiating Chapter 40B developments must obtain a site-approval or project-eligibility letter from MassHousing, the state-approved project administrator, before they can begin the 40B permitting process in a community or ask a member bank to submit an NEF application to the Bank. The new 40B guidelines may be found at www.mass.gov/dhcd (click "Housing Development Tools," then "New England Fund Guidelines"). "MassHousing has done an exceptional job in this new role," says Mr. Eller.

Communities in which 10 percent of the housing stock is affordable to households earning at or below 80 percent of the area median income are not subject to Chapter 40B developments. Mr. Eller noted that many Massachusetts communities have been seeking the help of experienced developers and member banks to help them reach the 10 percent goal.

"It's important to note that NEF is an economic development strategy," adds Mr. Gornstein. "These 40B projects create jobs. They provide property- tax revenue for the towns in which they're located, help in terms of workforce housing, and help to keep families in communities given the high cost of housing."

With inflated housing costs forcing many talented people to leave the area or avoid coming to Massachusetts to work, Chapter 40B and the NEF are working to increase the supply of much-needed affordable housing throughout the state.

"I think 40B is the most effective tool for building mixed-income housing in the country," says Mr. Gornstein. "I think it's unequaled. Because of the restrictive zoning that exists in most suburban communities, it's impossible to develop multifamily housing and affordable housing without using Chapter 40B. We would not have those units of housing if it were not for this law. It's very controversial because it overrides local zoning but we need that tool because the zoning is so restrictive."

In addition to funding Chapter 40B developments, the NEF is also available for other housing and economic-development initiatives. (See the Housing & Economic Growth section of the Bank's web site at www.fhlbboston.com). Member applications for NEF funding must be submitted online at the Bank's web site at www.fhlbboston.com/communitydevelopment/formsandapplication/index.jsp. NEF applicants should select the Community Development Advance (members only) link to gain access to the NEF online application.