The housing crisis is endemic in many parts of the country, and its impact isn’t limited to low-income individuals and families.
A shortage of workforce housing — also known as middle-income housing, typically for those earning 80% to 135% of the area median income — is often cited by employers, business and civic leaders as a major threat to future economic growth. Without workers, economies shrink, and this is already happening in urban centers in Massachusetts and other states, areas that have experienced out-migration since Covid.
Despite these conditions, Jennifer Schultz, partner and leader of the nationwide real estate development team at Nixon Peabody, said there are robust, if still insufficiently used, tools available to address the workforce housing shortage.
“Despite Gov. Maura Healey’s identification of this problem and funding of a new Momentum Fund aimed at workforce housing, the funding to this program is insufficient to make any sizable impact, and even the municipalities that have recognized the problem, have yet to offer their own workable solutions,” Schultz said.
But rather than standing by for the government to come up with a solution, Schultz asked, “Need we wait?”
Many municipalities, large employers and developers would like to get started given the urgent need, Schultz said. This calls for new and novel public-private partnerships to address the housing crisis, said Schultz, who presented two solutions.
The first is 63-20 financing. Named after a 1963 IRS ruling, 63-20 financing allows a form of public-private partnership to access tax-exempt bond financing to build facilities. Originally used for various government facilities and infrastructure projects, it has also been employed to provide worker housing in high-cost resort areas of Colorado, Schultz said.
“This approach can be imported to other states and combined with other incentives to lower the cost and increase the feasibility of workforce housing efforts,” she said. “For any location where a workforce, essential or not, needs or wants to live close to their jobs, this approach can be a good fit.”
This form of financing involves the formation of a nonprofit corporation that becomes the owner of the project, and which contracts with a private developer, contractor and property manager to build and operate the facility on a fee basis. The 63-20 corporation is formed under state law, and need not be a 501(c)(3) charity.
The local municipality issues tax-exempt bonds on behalf of the 63-20 corporation, meaning the municipality doesn’t need to take on debt or play an active role in the project, Schultz said.
Like any other development, the project must meet permitting and underwriting requirements, but tenant demand is a given, Schultz said. Using the 63-20 approach also can qualify the project for property and state sales tax exemptions against the cost of construction materials. This makes the 63-20 approach a material cost-savings approach to development, but without any equity in or out.
“This may be just what fee developers, vertically integrated construction companies, and/or large land owners and employers who are not themselves developers, such as hospitals, colleges, casino owners and resort owners need,” Schultz said.
Schultz said that using 63-20 to build workforce housing is a relatively new use case for P3 financing.
She added that since the conduit bonds would be expected to cover 70% to 80% of project costs, additional support would be provided in the form of land contributions, grants or subordinated debt provided by investors such as impact funds.
“While this approach is not simple and requires a true partnership with a municipality, it’s still an effective strategy,” Schultz said.
A second approach that can work to accelerate the development of workforce housing requires a Massachusetts municipality to pass a local ordinance for tax abatements under the 2023 amendment to Massachusetts General Laws c. 59, section 5O, she said.
This amendment makes it easier for municipalities to control and decide on property tax abatements for any housing offered to residents at up to 200% of the AMI, she said. By adopting a local ordinance to use the section 5O abatement, each municipality has broad powers to apply the abatements in either a limited or far-reaching manner.
Schultz said a section 5O ordinance can be written to apply only to a particular district or development and can even create tranches of abatements paired with different levels of AMI.
“So long as the municipality can articulate reasonably supportable grounds as to why such limitations make sense and will benefit the community, the ordinance provisions should pass constitutional muster,” she said.
While local governments have limited experience in addressing the workforce and middle-income housing crisis, Schultz said tools like 63-20 financing and section 5O represent hope.
“There are workable approaches if the government does what it can in the form of tax abatements, land contributions and grants, coupled with the private development community, which can help tackle this problem with creativity and resolve,” Schultz said. “If the numbers can work for the private sector, the government side of things should be a no-brainer, and the solution is desperately needed for housing.”
This article was produced in collaboration between Studio B and Nixon Peabody. Bisnow news staff was not involved in the production of this content.
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