165 Park Drive | Fenway

Penciling out is not so much "I was going to make X amount of money, but if I make a little less because of this policy I'll be fine," it's more "I can't start this project unless I can guarantee to third parties (investors/banks/etc.) that I can make at least X, and this policy is preventing me from doing that."
Thanks, and makes sense. I do think developers would get a bit more empathy from communities if they instead said "because of this policy, the project is not going to be viable to get financing"
 
Thanks, and makes sense. I do think developers would get a bit more empathy from communities if they instead said "because of this policy, the project is not going to be viable to get financing"
I think that's a better way to put it (makes me wonder why it's not more prevalent in comms ngl), but then people would have to ask the same question about banks, why do they need an investment to make X% instead of Y% (where Y > 0), at which point we are back to the situation where most of the public does not want to hear about the mechanics that determine cost of capital and hurdle rates
 
Developers always cry poverty on the need for the inclusionary units. But the reality is that 20% of the units in any project are sub-par locations, layouts, views, and command reduced pricing. So those units end up being the Inclusionary Housing Units. It is not like the developer is giving up the penthouse.
The entire reason for the policy is that the market cannot supply newly constructed affordable units without subsidy. Either the government subsidizes the construction of affordable units directly, or it requires private businesses, developers, to provide them as a cost of doing business. Unless developers are directly subsidized, through LIHTCs for example, they do not make money on affordable units. Inclusionary housing policy therefore increases marginal costs without increasing revenue to offset those costs, diluting returns on investment. The developer’s primary option is then to increase prices on market rate units to achieve the returns required by investors and lenders.

When marginal costs exceed the developer’s ability to recoup revenue from market rate units, and returns are sufficiently diluted that developers can’t raise the required capital, that is when a development “doesn’t pencil.” If developers can’t reasonably underwrite a return sufficient to attract investors and adequately cover debt payments, development stops.

This is where an understanding of policy and its externalities comes in. Inclusionary housing requirements increase marginal costs. Energy regulations increase marginal costs. Lengthy community and environmental reviews, impact fees, outdated zoning, etc., all increase marginal cost and risk. Each regulation increases the cost to entitle, to design, to build, or to operate housing, and therefore increases the revenue that must be generated to achieve the required return on investment.

Building housing is a public good, but it is not charity and carries significant risk. Investment 101 is understanding risk adjusted returns. Investors allocate capital based on the return they expect relative to the risk they are taking. A very simple example would generally place bonds as low risk low return and the stock market at high risk high return, with real estate somewhere in the middle. If development cannot offer a sufficient risk adjusted return, then capital goes elsewhere.

None of this is to say that we shouldn’t have inclusionary housing policies, energy codes, community processes, etc. Rather, Boston and Massachusetts may have regulated themselves out of a well functioning housing market, where the marginal costs created by each regulation have accumulated to the point that market rents and condo sales can no longer support returns sufficient for new construction. This is compounded by broader economic conditions such as inflation and interest rates. But capital looking to build buildings will go to places with a lower marginal cost of doing business or use construction methods which are more cost effective, which is what we are currently seeing.

My take is that we have some soul searching to do to determine which policies are most important to protecting the public interest, and how we can thoughtfully reduce the marginal cost of housing development.
 
Penciling out is not so much "I was going to make X amount of money, but if I make a little less because of this policy I'll be fine," it's more "I can't start this project unless I can guarantee to third parties (investors/banks/etc.) that I can make at least X, and this policy is preventing me from doing that."
To build on this, when you buy a house you have a down payment, your equity, and a mortgage, your debt. The lender checks your income and other debts to make sure you earn enough to cover the monthly mortgage payment. This debt to income ratio gives the bank reasonable comfort that you are able to repay the loan.

It is basically the same thing in commercial development. You still generally need equity, your down payment, and debt. In this case, however, the equity is an investment that requires a return. Let’s say an 8% return is the market’s risk adjusted return expectation for your proposed building and location. You hire a team to design the building and a contractor to price it. You know market rents and how much the building will cost to operate. All of these numbers go into a financial model showing whether you can provide investors the required 8% return.

That model also includes your debt assumptions, including the interest rate and repayment terms. Just like with a home mortgage, the lender needs reasonable comfort that the property generates enough income to repay the loan. In commercial real estate, this is generally measured through a debt service coverage ratio.

So it’s possible for a project not to pencil because it doesn’t meet the market's required return on investment AND OR because it can’t meet lender requirements with sufficient debt service coverage. The project could technically still be profitable, but if it cannot sufficiently meet equity investor and lender requirements, it “doesn’t pencil.”
 
I think it would be a great public service -- and a shrewd PR move -- for a developer to be radically transparent with their books for a proposed project. Post the pro forma online, itemize every cost, document every risk, and show what goes into the calculus. Cite every input to the underlying model and show how factors A through Z all influence overall project costs and expected net return.

The ant-development crowd has an image of developers as fat cat predators who do nothing but make millions off of each project. Perhaps I'm naive, but I'd like to think that an aggressively transparent development approach could push back against this notion by clearly showing what the logic and numbers are behind each decision. Capital is FAR from cheap these days, and development is riskier than any time in the last ~18 years. If a developer opened up their books to a project opponent and said "here's what I'm working with," I can't help but think that they'd foster a lot more sympathy.
 
I think it would be a great public service -- and a shrewd PR move -- for a developer to be radically transparent with their books for a proposed project. Post the pro forma online, itemize every cost, document every risk, and show what goes into the calculus. Cite every input to the underlying model and show how factors A through Z all influence overall project costs and expected net return.

The ant-development crowd has an image of developers as fat cat predators who do nothing but make millions off of each project. Perhaps I'm naive, but I'd like to think that an aggressively transparent development approach could push back against this notion by clearly showing what the logic and numbers are behind each decision. Capital is FAR from cheap these days, and development is riskier than any time in the last ~18 years. If a developer opened up their books to a project opponent and said "here's what I'm working with," I can't help but think that they'd foster a lot more sympathy.
^I think that could help, or is at least worth a shot.

This thread has got me to thinking about how the contemporary affordable housing policies in places like Boston and Cambridge likely date back to the (recent) past where the interest rates environment was a lot more...shall we say for sake of this discussion...generous. There literally was more money to go around.

Which then made me think: why are we hard-coding a % affordable here when such could only be viable in certain financing environments and highly non-viable others? Why not make the affordable % a function of an interest rate benchmark, like Fed Funds rate or something? After all, sitting on multi-year-stalled housing developments makes no sense for anyone involved.
 
I could see gaming to get approvals during one environment and waiting to build in a different one.
 
^I think that could help, or is at least worth a shot.

This thread has got me to thinking about how the contemporary affordable housing policies in places like Boston and Cambridge likely date back to the (recent) past where the interest rates environment was a lot more...shall we say for sake of this discussion...generous. There literally was more money to go around.

Which then made me think: why are we hard-coding a % affordable here when such could only be viable in certain financing environments and highly non-viable others? Why not make the affordable % a function of an interest rate benchmark, like Fed Funds rate or something? After all, sitting on multi-year-stalled housing developments makes no sense for anyone involved.

Completely agree. It's a consequence of magical thinking, whether that's a zero interest rate period, imaginary infinite land, pliable zoning, etc. In a perfect world where developer profit margins are high and supply is tight, sure, throw on 20% IZ and make it work. That would be possible in places like Austin during low interest rate periods. In Boston it becomes incredibly challenging given the extremely high price of land and almost religious zeal in opposing tall buildings, and even worse when borrowing is painful. Add to that an overbuilding of top end luxury units, and you get stuck very quickly.

It becomes a simple question of whether we want 100% of nothing, or an imperfect solution that provides new units that will impact prices through pure market-based mechanisms. I think the Mayor could do a lot of good waiving or reducing IZ requirements for a brief period, let's say 9 months, to get these new starts moving. Crews and engineers aren't limitless, and this would be a clear acknowledgement that getting housing built is an important policy goal, and that we can make tradeoffs on the margin during periods of duress. Posture it as a jobs program for local construction workers/union laborers, and pressure them to get shovels in the ground ASAP.
 
I could see gaming to get approvals during one environment and waiting to build in a different one.
The question is not whether an effect like that would occur (it will), it's whether the effect is worse than the present behaviors: already-approved stuff not moving ahead for years on vacant/underutilized/derelict parcels (and associated delays to housing, jobs, placemaking). Obviously there'd need to be a floor established that cities could live with in terms of % affordable...it wouldn't be zero, it'd be something we'd be happy to have regardless. Lastly, save for crises like pandemics and '08-style financial crashes (in which case you'd want to prioritize economic activity anyway), rates really don't move that fast. Look at today: how many people are stuck waiting?

EDITED to correct my own misunderstanding : )
 
Last edited:
I think it would be a great public service -- and a shrewd PR move -- for a developer to be radically transparent with their books for a proposed project. Post the pro forma online, itemize every cost, document every risk, and show what goes into the calculus. Cite every input to the underlying model and show how factors A through Z all influence overall project costs and expected net return.

The ant-development crowd has an image of developers as fat cat predators who do nothing but make millions off of each project. Perhaps I'm naive, but I'd like to think that an aggressively transparent development approach could push back against this notion by clearly showing what the logic and numbers are behind each decision. Capital is FAR from cheap these days, and development is riskier than any time in the last ~18 years. If a developer opened up their books to a project opponent and said "here's what I'm working with," I can't help but think that they'd foster a lot more sympathy.
IIRC the globe ran an interesting interactive piece a few years ago that let people punch in all sorts of policy requirements to a project (IZ, size, energy efficiency, union labor, location, etc.) and it showed that if you wanted the everything-bagel apartment so to speak, the required rents were necessarily exorbitant. I don't recall it was a huge conversation starter though, but more work educating people would be great I agree.
 
The entire reason for the policy is that the market cannot supply newly constructed affordable units without subsidy.

Yea, in an environment where weve been building consistently for decades, market rate housing thats affordable to most people is just normal housing thats 40 years old. When you dont build consistently though the crappy old stuff gets jacked up in price and then anything new that gets built can be marketed and priced as “luxury”.
 
I think it would be a great public service -- and a shrewd PR move -- for a developer to be radically transparent with their books for a proposed project. Post the pro forma online, itemize every cost, document every risk, and show what goes into the calculus. Cite every input to the underlying model and show how factors A through Z all influence overall project costs and expected net return.

The ant-development crowd has an image of developers as fat cat predators who do nothing but make millions off of each project. Perhaps I'm naive, but I'd like to think that an aggressively transparent development approach could push back against this notion by clearly showing what the logic and numbers are behind each decision. Capital is FAR from cheap these days, and development is riskier than any time in the last ~18 years. If a developer opened up their books to a project opponent and said "here's what I'm working with," I can't help but think that they'd foster a lot more sympathy.
I wonder if the easiest way to get a hold of this is actually to FOIA the local municipalities that have used CPA or Housing Trust dollars to subsidize or "jump start" various projects across the region, or the EO of HLC that has done the same - one would presume that various developers applications for grant funding would contain a decent amount of financial information and would, probably, be subject to the public records law, especially if you tailor it to recipients of awarded grants. You certainly could make the argument that it's in the public interest for citizens to have financial visibility into the government's investment into these housing projects.
 
I think it would be a great public service -- and a shrewd PR move -- for a developer to be radically transparent with their books for a proposed project. Post the pro forma online, itemize every cost, document every risk, and show what goes into the calculus. Cite every input to the underlying model and show how factors A through Z all influence overall project costs and expected net return.

The ant-development crowd has an image of developers as fat cat predators who do nothing but make millions off of each project. Perhaps I'm naive, but I'd like to think that an aggressively transparent development approach could push back against this notion by clearly showing what the logic and numbers are behind each decision. Capital is FAR from cheap these days, and development is riskier than any time in the last ~18 years. If a developer opened up their books to a project opponent and said "here's what I'm working with," I can't help but think that they'd foster a lot more sympathy.
While putting it this simply sounds great. The capital stacks that go into some deals may just make things more confusing. Ignorance can sometimes be bliss, even when people think they want to know more. How debt/equity is spread across partners who all have requirements on the building (profit, ops, building performance, etc). All these partners may have different timing on different parts of the project to either distribute funds or recoup certain costs. All of this is layered on top of the direct input/output costs of getting a project built.

Below is a graphic from an affordable housing developer I crossed paths with a few times. This developer buildings 100% affordable developments vs mixed income developments.
1790690172773.png

100% affordable projects are sometimes easier to get shovels in the ground because the grant system we had to put into place to get many of these programs approved follow antiquated ideas of grouping low income together away from market rate housing, which we now know is the wrong approach and are trying to rectify. At a ULI event last year, Hotlzer Park 137 Amory Street (near Jackson Square) was presented as a perfect example where the mixed income "did not pencil" but with potential affordable housing grants set to expire, switching to a 100% affordable housing model jumped the grant funds enough to get the project built.

I've been to many public meetings in multiple cities and have heard people ask about financing and sharing that financing with the public to no avail. Many developers keep that close to their chest because 1) they could be land speculating so they need to gain support even though financing may not be real 2) maybe their equity partners want to be in the background only 3) maybe they are creative with their underwriting and how they finance so if their books are "open" they risk losing a competitive edge. I'm sure developers could share more reasons why not to share, but those are just my first thoughts.
_______________________________________________________


On subject of regulation building up marginal costs that @goody spoke to, I don't disagree with anything stated. I at least believe that MA legislature has grand intentions with all the policies put into place, but where is the line and have we blown past it? Other states (TN and I believe TX apply here) are trying to regulate to an outdated energy code to allow for buildings to go up quicker, and while that is a short term solution the question gets asked about the life cycle of that building and how is it going to perform 20 years down the road. If we took just the examples that goody mentioned and were to look at how to prioritize them, I would do this.
  1. Outdated zoning
    1. Development-by-development changes are painstakingly slow and Time is the largest enemy to these developments
      1. I believe Boston is "trying" to fix some of this with the neighborhood zoning that they have been talking about, but not exactly sure.
    2. Signage zoning is also something that has bewildered me recently. I know it was just revised recently, but it is still a frustrating process.
  2. Community Meetings/Input
    1. This is something that municipal governments NEED to fix. Similar to the zoning approach, having a bunch separate meetings slows down the process. I get that it allows meetings to be focused on one development and ask certain questions, but everyone on this board knows that the same questions/complaints get brought up at every project. Traffic, Crime, Schools, Parking, etc. Its exhausting having to rinse and repeat so often. There are also soft costs associated to each public meeting for a developer that needs to be recouped.
  3. Inclusionary Zoning Policies
    1. Many folks that I know claim these are a "poison pill" to affordability. Sort of counter to that argument I believe they are a necessary evil. Supply & Demand logic will only take us so far, because the point of supply for dropping rents to actual affordable levels is a very different point of supply for financing willing to back the projects for return on investment. Oversupply/saturation is a real thing to the banks and lenders of the world. I know that may sound like a "fat cat developer" excuse, but even developers are beholden to getting loans and proving out they can recoup and cover costs effectively for a project and then efficiently repeat that model over and over. Boston is a long way off from this, but short of the city financing housing themselves and cutting out the banks/lenders of the world, Inclusionary Zoning is their way to bringing those units to market.
  4. Building Codes/Energy Codes
    1. These change every 4 years for a reason, but understanding implementation is important. When cities are slow or too fast there are consequences.
    2. Energy codes are continually changing as we improve technology, but also improve out understanding of how our buildings perform. I forget the exact stat, but buildings & construction contribute something like 40% of all GhG around the world. We need our building performance to improve and unfortunately the construction world is slow to adapt so there is an inherent markup on that side because changing "the way it has always been done" takes alot of effort.
    3. Building codes NEED to be there for safety of all occupants. That is not to say they cant be changed mid-code. Single Stair code changes is a great example as there has been a big swell for changes here. Alot of building codes are set with major input from Fire Departments, and again change is very slow on that front.
  5. Impact fees
    1. Necessary evil. In today's world of "too much taxation", revenue needs to come from somewhere to help with infrastructure costs that far exceed tax revenue. The fix here may be having a more streamlined calculation for the fee. I'm not sure how those fees are set, but a simple thought would be based on per bedroom (up to 2-bedrooms and then some smaller percentage for 3+ bedrooms).
    2. My biggest issue with impact fees is it harms the first guy in to an area. It is almost like if a developer has to make a large investment into infrastructure that would be funded by impact fees, then as the area fills in there is a percentage of impact fee that goes back to the initial developer to help offset that cost.
 
4. Building Codes/Energy Codes
  1. These change every 4 years for a reason, but understanding implementation is important. When cities are slow or too fast there are consequences.
  2. Energy codes are continually changing as we improve technology, but also improve out understanding of how our buildings perform. I forget the exact stat, but buildings & construction contribute something like 40% of all GhG around the world. We need our building performance to improve and unfortunately the construction world is slow to adapt so there is an inherent markup on that side because changing "the way it has always been done" takes alot of effort.
  3. Building codes NEED to be there for safety of all occupants. That is not to say they cant be changed mid-code. Single Stair code changes is a great example as there has been a big swell for changes here. Alot of building codes are set with major input from Fire Departments, and again change is very slow on that front.
Good thoughts. There is an analogy I heard that I can’t stop thinking about in the context of building codes. Instead of building codes, think about vehicle safety regulations. If the sole objective were maximizing driver safety, without considering the marginal benefit or cost of each regulation, you could conclude that all drivers should drive a military grade armored vehicle. It would be extraordinarily safe, but also extraordinarily expensive, inefficient, and impractical as a transportation system.

But I don't think that is not how vehicle regulation works. We continually improve safety, but accept that there is no risk free vehicle. Each additional requirement has a cost, and at some point the marginal safety benefit is weighed against that cost.

I sometimes wonder whether we apply that same analysis to building codes. I am by no means a code expert, but code changes often overly 'belt and suspenders' and pedantic. I am skeptical that many incremental requirements materially improve life safety, and even more skeptical that improvement is proportional to its cost. I wonder if you, @CBCArch61, have a similar feeling or thoughts on that?
 
Good thoughts. There is an analogy I heard that I can’t stop thinking about in the context of building codes. Instead of building codes, think about vehicle safety regulations. If the sole objective were maximizing driver safety, without considering the marginal benefit or cost of each regulation, you could conclude that all drivers should drive a military grade armored vehicle. It would be extraordinarily safe, but also extraordinarily expensive, inefficient, and impractical as a transportation system.

But I don't think that is not how vehicle regulation works. We continually improve safety, but accept that there is no risk free vehicle. Each additional requirement has a cost, and at some point the marginal safety benefit is weighed against that cost.

I sometimes wonder whether we apply that same analysis to building codes. I am by no means a code expert, but code changes often overly 'belt and suspenders' and pedantic. I am skeptical that many incremental requirements materially improve life safety, and even more skeptical that improvement is proportional to its cost. I wonder if you, @CBCArch61, have a similar feeling or thoughts on that?
My first opinion is there should be zero risk in one's shelter. Whether that is a home shelter, work shelter, vacation shelter, etc. If you are walking into a building there should be zero risk and if risk is present, a municipality has a responsibility to rectify the situation or penalize a private owner to the point where is is more beneficial to fix it.

That being said, the building codes that the AEC industry must follow has the tough job of setting minimums to provide such zero risk, while also not dictating design. To achieve this, the code creates multiple avenues to create a successful project. First and foremost, construction types, allow for varying materials to be used in varying ways. Concrete, steel allow for the most building area and height due to their non-combustibility. Mass Timber was integrated into the 2021 building code for an alternative to those materials while providing some height along with benefits of wood being lighter and renewable. Then there is our typical light frame wood that can be used in a multitude of scenarios and offers cost savings over the other threes, but is limited the most on height and area.

Two examples of where the code can be overbearing would be the single stair conversation and actually within the plumbing code. I think most people here are familiar with the single stair conversation and how it can contribute (I'm not going to say is the ONLY reason) to some of the mega block apartment buildings we see today, Plumbing code sets minimum pipe sizing for certain lines and I have had a plumbing engineer tell me that a building could handle smaller pipe than the code is calling for but in order to meet code minimum they upsized.
 
Developers always cry poverty on the need for the inclusionary units. But the reality is that 20% of the units in any project are sub-par locations, layouts, views, and command reduced pricing. So those units end up being the Inclusionary Housing Units. It is not like the developer is giving up the penthouse.C

Can you provide more detail on this? It has not been my experience. No, it won't be a penthouse.

It is fair to cry poverty. The inclusionary units are sold for less than what it costs to build them, right? It's $600,000 to build a unit; they sell them for $250,000?
 
I was under the impression that they had to at least try to make it not obvious.

That being said, Fenway is exactly where Roommates work best; hence bribing devlopers to go Max Density to free them from the tyranny of IDP is something I think developers would love.
 
I have a friend who's both an architect working in multifamily and who won a lottery for an inclusive unit in Boston: there's a difference between the policy as written and the reality on the ground. in theory they have to be evenly distributed, of equal quality and can't be grouped, in practice they're not as equal, nor are many usually as large. Ie, in a building with 3bd units, fewer of those will be set aside for IDP than 1 or 2, and for example, their building grouped all the IDP units on the lower two floors and while they have notionally comparable finishes, in practice they're the less desirable units more exposed to retail noises and mechanical.
 
My first opinion is there should be zero risk in one's shelter. Whether that is a home shelter, work shelter, vacation shelter, etc. If you are walking into a building there should be zero risk and if risk is present, a municipality has a responsibility to rectify the situation or penalize a private owner to the point where is is more beneficial to fix it.
Maybe it’s semantics, but what does “zero risk” mean? I totally understand that we can’t skimp on structural safety, fire suppression, etc. What I struggle with is how we determine when something is sufficiently safe. Life isn’t zero risk. People trip and fall down stairs, accidentally mix bleach and ammonia, slip in their showers, and so on.

To be slightly hyperbolic, should we install trip detection on stairs that automatically inflates airbags to minimize injury? There obviously has to be a point where the marginal safety benefit of additional requirement no longer justifies its cost or complexity. I’d be genuinely interested to see how much safer buildings are statistically today than they were 20 years ago, and how much of that improvement is attributable to newer code requirements.
 
Maybe it’s semantics, but what does “zero risk” mean? I totally understand that we can’t skimp on structural safety, fire suppression, etc. What I struggle with is how we determine when something is sufficiently safe. Life isn’t zero risk. People trip and fall down stairs, accidentally mix bleach and ammonia, slip in their showers, and so on.

To be slightly hyperbolic, should we install trip detection on stairs that automatically inflates airbags to minimize injury? There obviously has to be a point where the marginal safety benefit of additional requirement no longer justifies its cost or complexity. I’d be genuinely interested to see how much safer buildings are statistically today than they were 20 years ago, and how much of that improvement is attributable to newer code requirements.
Yeah - there is no such thing as "zero risk."

For a more realistic example: should we require fire suppression sprinkler systems in single-family homes? This is recommended per current IRC code and specified in NFPA 13D, but practically every jurisdiction nationally has opted not to adopt it as a requirement (with some exceptions that have adopted it and made such systems required). Massachusetts state building code only requires fire suppression sprinkler systems in unattached single-family homes if they're over 14,400 sf.

My first opinion is there should be zero risk in one's shelter. Whether that is a home shelter, work shelter, vacation shelter, etc. If you are walking into a building there should be zero risk and if risk is present, a municipality has a responsibility to rectify the situation or penalize a private owner to the point where is is more beneficial to fix it.
The vast majority of buildings one can "walk into" today do not meet current code. Current code applies only to new builds (or new substantial renovations), and not to buildings built or substantially renovated prior to current code being implemented. And even there, code is open to interpretation and inspectors have the ability to (often!) say "close enough" when meeting code to the letter is not easy or feasible.

Unless you live, work, and vacation exclusively in new builds, chances are that there are code violations all over all the buildings you enter. But this is a "risk" we accept because it would be prohibitively expensive (like -- we as a society could not potentially bear the costs without completely reshaping our economy) to fully retrofit every existing building to current code every time code changes. Are you proposing that we do that?

There are plenty of examples of building code being set using arbitrary standards that are not scientific or rigorously designed and often even counter-productive to safety overall. For example, if we make it crazy expensive to install elevators that meet current code (we do) than many buildings are just built without them (they are). But elevators (even those that don't conform to current code) are on net safer than stairs in many situations, so code's quest for the perfect ends up falling short of the good. Similar dynamics apply at times to double-loaded corridor dual egress buildings compared to much smaller floorplate single-stair buildings, etc.
 
Last edited:

Back
Top