121A-B-Cs: Part 5, Is this merely a rigged game for fat cats?

October 2, 2015 | Affordability, Boston, Chapter 121A, City budgeting, Development, ED4ED, Eminent domain, Housing, PILOTs, Real estate taxes, Redevelopment, Urban renewal, Zoning | No comments 136 views

[Continued from yesterday’s Part 4 and the preceding Part 1, Part 2, and Part 3.]

By: David A. Smith

In yesterday’s Part 4 on Chapter 121A abatements, we saw that assessing the value of a Chapter 121A abatement depends on precisely what ‘market failure’ the subsidy aims to help cure: derelict property, current tax-exempt (or non-revenue producing) use, or prevention of jobs emigrating to lower tax states.

Sources used in this post

Streets of Hope: The Fall and Rise of an Urban Neighborhood 1994; red font.] 

One Beacon continues to receive tax breaks (Boston Herald, February 9, 2003)

Recent Decisions by Owners in Expiring Use Housing in Massachusetts, May, 2008; blue font)

Shirley Kressel on Open Media Blog (February 26, 2014; green font)

Boston Globe (August 1, 2015)

All these are potentially valid reasons to agree on an abatement, yet the Globe observes that those making the case – pleading poverty, as it were – invariably seem to be doing well themselves.  Should the public be giving incentives to people or companies that evidently have plenty of walking around money?


Motivate me; I need incentives

5. Does Chapter 121A ‘reward the wealthy’ (i.e. is it deadweight)?

This must have been the hook that the Globe intended for its piece, for it made the claim even though it offered no actual source saying anything like this.  The best the paper could manage was a combination of circumstances:

  1. Many real estate developers or development companies are rich.
  2. Many of these companies are seeking or obtained chapter 121A agreements for particular large flashy high-end properties they did. 


Context is everything, isn’t it?

From these two sets of juxtaposed facts, the Globe hoped its readers would infer the connection and causation, but it didn’t even do as good a job as Shirley Kressel on Open Media Blog (February 26, 2014; green font):

One of the recent 121A projects is the Landmark Center, built in in the Fenway in 1997, which is about to be massively expanded.   Billionaire developer Jeremy Jacobs was granted a 121A tax break for building the new Boston Garden (now TD Center) 18 years ago, and another 121A was just approved for the billion-dollar three-tower project on the old Garden site in which Jacobs partners with Boston Properties.   

The Globe’s reports undoubtedly noticed that all of the applicants securing Chapter 121A agreements over the last decade of the Menino Administration were large-scale, well-heeled, sophisticated real estate developers, but that correlation overlooks a more fundamental point:

To develop a large property in Boston, you have to have deep pockets.


That’s quite a bulge you’ve got there

It’s simple: between the cost of acquiring the land or the property, and then the agonizing multi-year public review and approval procedure, you’d best bring a big wallet and be prepared to dip into it continuously.  Don Chiofaro’s development company bought the Atlantic Avenue garage in 2007 for $155 million, and today – eight years later – still hasn’t been able to develop it, having been blackballed by Mayor Menino’s BRA, and having been before Mayor Walsh’s BRA for ‘only’ twelve months so far, though he appears on the verge of preliminary approval.  

And look at the sites developed:

Other 121A projects include the Prudential Center, Post Office Square garage, Christian Science Center, all three Commonwealth Flats seaport towers, Harvard’s Medical Area Total Energy Plant (MATEP), One Beacon Street, Marriott Hotel Long Wharf, Genzyme Allston Landing, New Boston Food Market, the Devonshire tower, Lafayette Place Mall in Downtown Crossing, and One Summer Street (Macy’s).


MATEP got a Chapter 121A

Who has deep pockets?  Who can take really big risks?  Why yes, those are rich developers!

Unfortunately for us and for its readers, the Globe asked the question badly: The right question is this:

Are Chapter 121A tax incentives awarded only when they are cost-effective, and only in the amount needed to be cost-effective?

In economic parlance, ;’deadweight’ is an incentive or cost that adds nothing to the final product, and of course in policy deadweight is what private parties like (free money whose cost to obtain is less than the cash got) and public watchdogs seek to sniff out.


Waste, fraud and abuse over here

For any given property, that question can be further divided into two parts:

  1. ‘But-for’ incentive.  Does the Chapter 121A real estate tax concession move development forward where otherwise it would not?
  2. ‘In exchange for’ incentive.  Does the Chapter 121A agreement translate into ongoing public benefit (e.g. affordable housing, public amenities) that would have been omitted without it?

Neither question is answered in the story; in fact, neither question is properly asked.  Instead, we get speculation – plausible speculation, to be sure, but that’s not reporting, it’s just speculation.


It could be a lot, it could be a little

“When you see [the breaks] showing up in premier development sites,” said Gregory Sullivan of the Pioneer Institute, “your question is whether this is just an inside ballgame where the BRA gives away money that’s not needed as an incentive.”

[Once again, observe the conflation of ‘inside ballgame’ with ‘giveaway’.  The program can be an insider’s game without being a giveaway, and it can be a giveaway without being an insider’s game … but we’ll let this go.  – Ed.]

The but-for and in-exchange-for questions are property-specific – they can’t be answered in the abstract, because they depend on the real estate economics of each property at the time the negotiations were held and agreed.  So they aren’t necessarily flaws in the program, they’re potential flaws in the administrator. 

So we can ask the question the Globe didn’t:


6. Is Chapter 121A being exploited (because the city isn’t doing its job)?

The risk of Chapter 121A exploitation is much greater now, in the fourth era, where the sites being redeveloped aren’t blighted (they’re just obsolete or under-invested in) and the housing affordability is a sliver instead of purpose-built and deeply rent-discounted.  And the revival of Chapter 121A now, in a booming real estate economy, and against the backdrop of the city’s aggressive linkage-payment policy, invites the inference that developers pursue Chapter 121As because, as long as they’re stuck going through the BRA mangler, they might as well get a consolation prize at the end.


Just put your hand into our review process … right here …

In previous posts, I’ve explicated that the Boston Redevelopment Authority, which negotiates Chapter 121As and then administers them, is incompetent at keeping track of money, and that it’s still got a leadership vacuum.  The Globe found this as well:


Money?  Am I supposed to keep track of it?

A Globe review found that city records are incomplete for most of the tax breaks the city awarded during the past four decades. 

It appears that only recently did the city begin to project how much deals would cost taxpayers.

Actually, the Globe could have decoupled those two points into two distinct questions:

  1. Does the BRA do a quantitative cost-benefit analysis before it approves transactions?
  2. Does the BRA do an after-the-fact evaluation of deals it approved some years before?

The former is negotiation; the latter is administration.  Of the two questions, the second one is to some degree irrelevant, because of Heraclitus’ rule of urbanization.


City Hall could provide cost projections for only 10 major tax deals signed since 2008, totaling an estimated $78 million in lost tax revenue.

Argh!  The revenue isn’t ‘lost’, it’s deliberately foregone compared to a counterfactual.  The money is lost if and only if you believe that the exact same property would be developed in exactly the same way with exactly the same revenue potential even if the city had done absolutely nothing.

Put that way, the statement is absurd, yet the Globe chose to peddle it.


What’s wrong with pedaling absurdity?

Moreover, one of these ‘lost revenue’ properties hasn’t even been developed yet:

These include the $9.7 million awarded for the new State Street Corp. office and adjacent garage on A Street, and $7.8 million for the bottom floors of a tower planned for land next to TD Garden.

By that reasoning, every time I fail to buy a stock that rose in price last week, I’ve lost capital gains.


I coulda been a billionaire, instead of being a blogger, which is what I am

Far better, as a basis for critique, was Shirley Kressel on Open Media Blog (February 26, 2014; green font):

Further, Ch. 121As are “limited dividend corporations”; profits over 8% must go to the City, up to the level of normal property taxes.  The multi-corporation structure hides these profits – and if they do somehow appear on the 121A’s books, the corporation keeps them in a “reserve,” to pay back investors for years when profits fall below 8%; this violates the statute, which allows that excess profits pay back previous shortfalls, but does not allow retention of excess profits in anticipation of shortfalls.   The Mayor and the BRA never even ask about excess profits, and have never collected any.


I post, but does anybody listen?  Shirley Kressel

That’s a legitimate critique, and one that runs directly to the Administration – both the Menino Administration and the Walsh one.  And since Mayor Walsh chose the easy way out and after an extensive search, appointed the interim director to the post permanently, director Brian Golden ought to make it a priority. 

After the Globe inquired about the city’s incomplete records, the Walsh administration pledged that it would keep better track of the costs of tax deals, almost all of which were signed by previous mayoral administrations.

“There are some longstanding, existing agreements for which the city does not currently maintain estimates due to the amount of personnel and resources it would take to assess these comprehensive parcels,” city spokeswoman Bonnie McGilpin said in a statement.

That’s a total thumb-sucker – a non-story masquerading as journalism.



I can’t afford to learn to do arithmetic

Realizing this, I wondered why the Globe chose to publish something that so fizzled out, but parsing through the detritus of the chunks not yet quoted above, I eventually realized why the Globe ran it – and while that has precious little to do with Chapter 121As per se, it has something to do with journalism and is amusing enough to warrant a few more words – tomorrow, anyhow.


Tomorrow … is another post!

[Continued tomorrow in Part 6.]

121A-B-Cs: Part 4, Is the subsidy ‘just enough’, not too much?

October 1, 2015 | Affordability, Boston, Chapter 121A, City budgeting, Development, ED4ED, Eminent domain, Housing, PILOTs, Real estate taxes, Redevelopment, Urban renewal, Zoning | No comments 141 views

[Continued from yesterday’s Part 3 and the preceding Part 1 and Part 2.]

By: David A. Smith

Through the first three parts of this post we’ve seen something of the case for Chapter 121A real estate tax abatements as part of urban development – the turnaround in blighted neighborhoods, the boost of job creation, and the creation of affordable housing still in use today and needed more than ever. 

All these things are benefits, though their true value (versus the ‘deadweight’ of not giving the developer the incentive) can be hard to calculate, especially for the counterfactual case of what would have happened without the 121A-assisted development.

Sources used in this post

Streets of Hope: The Fall and Rise of an Urban Neighborhood 1994; red font.] 

One Beacon continues to receive tax breaks (Boston Herald, February 9, 2003)

Recent Decisions by Owners in Expiring Use Housing in Massachusetts, May, 2008; blue font)

Shirley Kressel on Open Media Blog (February 26, 2014; green font)

Boston Globe (August 1, 2015)

But all benefits have costs, and these too are hard to quantify, though, notwithstanding Master Yoda, let us try:


Blog.  Or blog not.  There is no try.

4. Does Chapter 121A ‘cost money net’ (i.e. a bad use of public money)?

If this post ended her, a reader might conclude that Chapter 121A was clearly an overall benefit to Boston, but of course up to now I’ve been describing how the program is written and supposed to work, with each proposed arrangement scrutinized before it is negotiated and inked and subjected to a sound benefit-to-cost analysis.

Four eras in Boston’s use of chapter 121A

Era 1 (1945-69): Urban renewal.  Exemplified by the Prudential Center.

Era 2 (1970-82): Affordable housing.  Over 250 properties statewide, many of them in Boston.

Era 3 (1983-97): Hibernation.  Rendered uneconomic by Proposition 2½.

Era 4 (1998-now): Upzoning linkage.  The consolation prize for surviving BRA approval.

We’ve also seen, though the Globe was unable to express it properly, that in the fourth era of Chapter 121As – say, the last fifteen years, since the turn of the century – they’ve been used for a brand-new purpose: to be a yield booster on complex large-scale developments that add to Boston’s visible skyline.  They’re not (really) urban renewal, and they’re not (really) affordable housing, they’re something else.

The Globe evidently wanted to conclude that the City was negligent in its arithmetic, but is curiously unable to get quotes on point:

The Boston Redevelopment Authority can award property tax breaks as part of an incentive package that includes zoning relief, such as allowing a building to go much taller than what the city’s zoning code would allow for the property.  

For that reason, Gregory Sullivan of the Pioneer Institute, a think tank that favors small government and free markets, said he believes many of these breaks are simply unnecessary.


Unlike some other people the Globe could have quoted, Sullivan will go on the record as being against unnecessary tax breaks

I too favor small government and free markets, but the reality of technological urbanization requires that, if we are to have functional and expandable/ adaptable cities, we have to have large-scale infrastructure and rational zoning.  Eminent domain is a sharp-edged tool, and direct municipal control can be an unwieldy and blunt instrument, but there is no alternative to both.


It’s the only tool we’ve got

“If the city allows someone to take something that’s zoned for two stories and allows them to build 16 stories, that creates a tremendous value to the owner,” said Sullivan.

Of course it does – though the value flows through to the land owner, who may not be the property developer, which means that if giving out abatements or upzoning approvals case by case, rather than by a formula set in advance, is tricky.  Most developers will not actually own the land they’re proposing to develop; instead, they’ll have it under option, held by some amount of earnest money, and if the city squeezes too hard, the developer will forfeit its earnest money and the property won’t be developed at all.

Just that situation happened with the old Filene’s Building – now topping off as Millennium Tower.  Though demolition had begun, when the 2008 credit crunch came, Vornado couldn’t make the numbers work, so construction stopped dead. 


A hole in the ground for three years

This to Boston having an open hole in a key location for two years, leading to folly-oriented Globe speculation as to what the property could be developed into:


Giving new meaning to urban fallow: a sheep pasture while waiting for development

This was followed by Mayor Menino fuming incoherently that he would use eminent domain to compel Vornado to develop the property, thus proving not only was he imperious, he was clueless about a key law. 

To avoid squeezing too hard while assuring you squeeze hard enough, you need to be technically sharp, on top of local market conditions, experienced in negotiations, and – oh, yes – honest and transparent.  (One can understand why Mr. Sullivan of Pioneer, a former Inspector General of the Commonwealth, might have his doubts about finding such a person on the city’s staff.)


I’m here to throw light on the Chapter 121A and upzoning calculations

And you need to establish the distinctions among multiple cases:

Properties that are derelict and dysfunctional.  Some properties have outlived their utility but can’t be demolished because they are historical landmarks.  If they’re to avoid becoming struldbrugs – derelict but untouchable until they collapse – the city must add development incentives.

The Marriott hotel chain, for example, has a tax break on its property at the Custom House through 2057. The 1995 deal was part of an effort to save the tower, a landmark that had been vacant.


The Custom House, as built in 1849, before 1913


Boston’s first skyscraper: the Custom House, circa 1915

For nearly ten years, my company’s offices were just across State Street from the Custom House, and throughout that time I always loved the building – but I never set foot inside it, because there was nothing inside.  Between 1987 and 1998, the property was closed, empty, a net zero for the city.

If it took a 60-year Chapter 121A to get Marriott to develop the property into a new form of use – extended-stay one-bedroom suites – that was still a good deal for the city, because while the tower was vacant, it was generating next to no revenue.

Properties that are currently tax-exempt now and will become taxable after development.  Then there are properties where it’s not the change in use that generates value for the city, but the change of ownership:

The city received relatively little in taxes from the property before Liberty Mutual expanded its Back Bay headquarters to the site because the nonprofit Salvation Army owned much of the land, DiCara said.  

Despite Boston’s best efforts to wheedle them into guilt payments, non-profits remain exempt from real estate taxes.

As a result, the Liberty Mutual project pumped tens of millions of dollars in property taxes into the city that would not be there without the new construction.

“From the point of view of the city, the math was pretty simple,” DiCara said.


Just push the 121A button

Properties that are risky and could easily fail.  Everything looks easy … after the fact.  Before the fact, there’s plenty of risk to go around.


You get it; I’ll watch

Then too, even though the city ‘owns’ 15% of the upside in any successful development, it owns none of the downside, because if the property is vacant now, a failed development won’t produce any fewer real estate taxes than the minimal taxes it’s paying now – and if the city actually owns the property (as it did with the Custom House Tower), then it’s receiving precisely zero beforehand.


The Fenway Center site today: vacant, undeveloped, revenue-less

To developer John Rosenthal, property tax breaks play a key role in making a big infrastructure investment — in his case, a deck over the Massachusetts Turnpike — financially feasible for a private company.

In the case of Fenway Center, it will be the private developer who funds the infrastructure, turning what is now completely undevelopable air into structurally sound footings for a mixed use site. 


The site map

[Full disclosure: John Rosenthal is a friend, but that doesn’t change my view of the value of developing this site – Ed.]

Equally relevant, Rosenthal has been working on the site’s development for thirteen years of “community planning and the City and State permit and approval process,” and if that sounds excruciating, it is.


He’s biting my finger … for ten years!

In this case, the Chapter 121A agreement will last for only six years – scarcely the blink of an eye.

He said the agreement he struck with city and state officials for his Fenway Center project will give him reduced property taxes over six years, including three years of construction, in an incentive package worth at least $4 million.


Fenway Center, current vision: if the air rights and development rights can be sorted out

The wind-swept parking lots he plans to build on between Brookline Avenue and Beacon Street generate about $150,000 a year in property taxes now, he said. Rosenthal said his 1.3-million-square-foot project will generate more than $5 million in property taxes annually after it’s done.

“It’s a small investment with a huge return,” Rosenthal said.


Do you see 1,300,000 square feet of mixed-use development here?

[Continued tomorrow in Part 5.]

121A-B-Cs: Part 3, What does the city get for its tax abatement?

September 30, 2015 | Affordability, Boston, Chapter 121A, City budgeting, Development, ED4ED, Eminent domain, Housing, PILOTs, Real estate taxes, Redevelopment, Urban renewal, Zoning | No comments 184 views

[Continued from yesterday’s Part 2 and the preceding Part 1.]

By: David A. Smith

In its first two eras – the Urban Renewal era up through 1969 and the Affordable Housing era through at least 1982 – Chapter 12212A was integral to the redevelopment of Boston (and many other cities in Massachusetts), as it was part of the three-legged stool of eminent domain for economic development, major infrastructure retrofit and upscaling, and tax abatements for the urban pioneers who developed based on the city’s investment and representations.


We’re fixin’ to invest some capital

Sources used in this post

Streets of Hope: The Fall and Rise of an Urban Neighborhood 1994; red font.] 

One Beacon continues to receive tax breaks (Boston Herald, February 9, 2003)

Recent Decisions by Owners in Expiring Use Housing in Massachusetts, May, 2008; blue font)

Shirley Kressel on Open Media Blog (February 26, 2014; green font)

Boston Globe (August 1, 2015)

Then too, any development cerates economic activity, which invites the next question:


Does my Right Honourable Friend rally believe that twaddle, or is he just spouting for the tabloids?

2. Does Chapter 121A create jobs?

Development, being an intensive capital expenditure, always creates jobs, though these are principally short-term construction jobs.  Does that carry over into permanent jobs?


Brighton Marine Health Center: advertised by the BRA as 101 apartments, 80 of them affordable, and 121 construction jobs

The property tax breaks are often granted by City Hall as part of negotiations between the city and a developer. Many remain in place for 20, 40, and even 60 years, although some will last less than a decade.

While it’s inevitable that reporters will call these agreements ‘tax breaks’, they forget that the city itself is the biggest beneficiary of economic development, all of which is funded privately.  In terms of economic, every time a private owner invests in real estate, the city ‘owns’ roughly 15% of the increase in total economic value, simply from the property taxes.

City governments economically own 15%

of the urban built environment

Real estate taxes on urban property typically range from 1% to 2% of property assessed value.  Income producing property is normally valued at a multiple of its net operating income (NOI), and because NOI is normally financed with debt, the multiple is normally expressed as its reciprocal, a percentage cap rate.  (A 5.0% cap rate is equivalent to 20x free cash flow.)  If income-producing property’s NOI is capitalized at 8.0%, and its real estate taxes are 1.0% of value, then the taxes are equivalent to a 1/8 ownership share.  With cap rates historically ranging from 5.0% to 10.0%, the city’s real estate taxes are worth 10% to 20% of the property’s value.  In low-rate environments, like the current one, the city’s effective share of the ownership rises.

In addition, the city owns all the associated revenue of commuters working in Boston – all those sales taxes, taxes on parking, and all the related economic activity.  And the city can save jobs that would otherwise decamp out of state, for instance to friendly convenient low-tax New Hampshire.

One of the biggest tax breaks in city history came in 2010, when Boston officials handed Liberty Mutual a package valued at $16 million at the time, over a 20-year period. (The insurer also landed a similarly sized state incentive package.)

Lawrence S. DiCara, a lawyer at Nixon Peabody who represented Liberty Mutual in those negotiations, said the tax incentives played a crucial role in preventing the insurer from building the approximately $330 million project in a less expensive place, such as New Hampshire, and taking some 600 jobs elsewhere.


Witness to Boston’s political history

“I was in the room with [then-Liberty Mutual chief executive] Ted Kelly,” said DiCara, a former Boston city councilor. “That deal had to happen for him to justify spending the money to construct here.”


Willing to move the jobs if the numbers didn’t work

3. Does Chapter 121A translate into ongoing affordability (efficient subsidy)?

In an earlier section, I referenced the impossibility of answering the counterfactual hypothetical: what would have happened without the chapter 121A agreement?  For office development, the case is extremely difficult to sort out, because the city’s entire fabric would have been different, and while the high-rise office tower sites would eventually have been developed into something, would they have been the same, better or worse is truly impossible to say.

When it comes to the affordable housing part, I can speak with much greater confidence, both from first-hand experience and also from the Yogi-Berra school of deduction: “You can observe a lot just by watching.”


But don’t lose the ball in the moon

Urban redevelopment corporations are exempt from real estate property taxes for a period of 15 years (and an additional 25 years in the case of government subsidized or financed low- or moderate-income housing projects).  Instead they pay lower, more stable [negotiated] excise taxes.

Though the Globe doesn’t try to quantify the impact (reasonable enough; it’s a newspaper story, not a treatise) of Chapter 121A-facilitated affordable housing, it references (even if in passing) the twofold benefits:

Other tax breaks have helped create thousands of units of affordable housing in neighborhoods such as the South End –


Alley in St. Botolph Street, 1963, the city still in decline

Dangerous though it may be to assert a counterfactual, on the South End affordable housing I can so assert, because I remember that time.  Nobody was investing except for Mark Goldweitz, who was in the process of betting big, all on condo conversions, and whose activities gentrified the neighborhood. 

“Most people understand [tax breaks] for towers,” said Samuel R. Tyler, president of the Boston Municipal Research Bureau, a fiscal watchdog underwritten by businesses and nonprofits. “They probably don’t realize how much it is used for housing.”

The affordable housing developments were very important, both for historic and neighborhood preservation, and also to enable people to stay in their homes and stabilize the neighborhood.

Some 5,000 march on Friday, Oct. 4 1974 through South Boston to protest school busing. The neighborhood has been the focal point of opposition to the desegregation plan ordered by a federal judge. (AP Photo/JWG)

Some 5,000 march on Friday, Oct. 4 1974 through South Boston to protest school busing. The neighborhood has been the focal point of opposition to the desegregation plan ordered by a federal judge. (AP Photo/JWG)

Protesting racial-integration school busing, South Boston, 1974

– before the neighborhood’s renaissance –

Even as the South End blossomed, then gentrified, then stratified, the affordable housing properties provide continuing affordability and diversity:


Affordability for forty-five bumpy years: Castle Square Apartments, South End

– where a cluster remains on the books largely from the 1970s and 1980s.

The endurance of affordable housing is a big fringe benefit of Chapter 121A that the Globe didn’t mention: if the properties hadn’t been built as affordable, they couldn’t be preserved as affordable—as they have been.  If they weren’t there now, there’s no way the neighbors would ever let them be built there.

While eligible projects include both commercial and residential income-producing properties, 90% of the 121A agreements in the City of Boston have been initiated for housing developments.

Chapter 121A, in other words, pre-empted NIMBYism.

Developers still regularly seek upfront tax agreements to ensure a predictable property tax payment plan over as long as 40 years. This predictability, said Matthew Kiefer, a development lawyer at Goulston & Storrs, can make a big difference in landing financing.

Government is an inherently unreliable counterparty, and it’s a counterparty against which it is difficult to enforce.  When it comes to real estate taxes, or for that mattervoluntary’ assessments sought by cities that desperately need the money (or think they do), there’s a big value in a contractually enforceable document, as insurance against a rogue mayor.


No, that’s not Ted whose neck I’m grasping

The length of tax deals has generally gotten shorter, said Boston’s assessor, Ronald W. Rakow, who has held his post since 1993.  

For affordable housing, the typical Chapter 121A runs forty years, which is the standard expected useful life.

So when it comes to affordable housing, the policy case for Chapter 121A is clear – it enables both feasibility of development and then an ongoing buydown of the rents.  Moreover, with affordable housing the benefits are ongoing, and the benefit-to-cost calculation can be made annually, from then-current real data.

So of the four eras of Chapter 121A, the Paleozoic (urban renewal, as in Prudential) had clear and demonstrable immediate benefits – revitalization of a decaying neighborhood with large-scale private investment – and the Meozozoic had clear and demonstrable ongoing benefits of affordable housing. 


Back then, when Chapter 121A Agreements walked the earth

When Proposition 2½ came along, Chapter 121A went dormant, and I for one thought its utility was over; so I admit to surprise to discover the fourth era – the Cenozoic commercial revival, where Chapter 121A is being used to induce development on big properties not in blighted areas, and not involving comprehensive neighborhood turnaround, but rather as an additional incentive which might or might not be a difference-maker in spurring development. 

One goal of shorter tax breaks: to focus the initial savings to offset construction costs and then require the property owner to pay more once the development is finished and generating revenue.

That’s entirely sensible, and is a good hinge for us to turn to the potential downside of Chapter 121A tax abatements.


The projections are entirely reliable

[Continued tomorrow in Part 4.]

121A-B-Cs: Part 2, Does it stimulate beneficial development?

September 29, 2015 | Affordability, Boston, Chapter 121A, City budgeting, Development, ED4ED, Eminent domain, Housing, PILOTs, Real estate taxes, Redevelopment, Urban renewal, Zoning | No comments 216 views

[Continued from yesterday’s Part 1.]

By: David A. Smith

In yesterday’s Part 1, I established what my source, an article in the Boston Globe (August 1, 2015), did not, just what a Chapter 121A real estate tax abatement agreement is, why it exists in the first place, and how it’s been used for the last fifty years.

Sources used in this post

Streets of Hope: The Fall and Rise of an Urban Neighborhood 1994; red font.] 

One Beacon continues to receive tax breaks (Boston Herald, February 9, 2003)

Recent Decisions by Owners in Expiring Use Housing in Massachusetts, May, 2008; blue font)

Shirley Kressel on Open Media Blog (February 26, 2014; green font)

Boston Globe (August 1, 2015)

This sets the stage for an examination of the five policy-oriented claims or postulates – three good, two bad – that the Globe offered partway through its piece.


All l he words and pictures merely bloggers?

1. Does Chapter 121A spur investment that would not otherwise happen?

Although the statute was enacted right after World War II, as part of a broad awareness that America’s cities (Boston included) were suffering from decaying and obsolete industrial downtowns, its use in the 1950s was limited, but when urban reformer John Collins became mayor and appointed Ed Logue as the Boston Redevelopment Authority director, their visions of concrete sugar plums (like the scraping of Scollay Square to create the new Government Center and the new Brutalist City Hall) required more potent urban redevelopment tools, so


Boston 1957, looking southwest from Back Bay

[Chapter 121A] dawned in Boston’s modern era in the 1960s with the development of the Prudential Center.


Looking northeast above the rail yards into Copley Square: 1957

The modern era of property tax breaks stretches back a half century when the city inked a landmark deal with Prudential, the big insurance company, to remake Back Bay and transform a railroad yard into 23 acres of office towers, shops, and housing.

I’ve written before how the Postwar American city went through a crisis of purpose: from manufacturing and industry (prewar model) to information city (1985 and beyond), the physical infrastructure of cities had to be completely remade because the workforce requirements were completely different.

(Detroit, the ultimate pure-manufacturing city, was a special case because after the war, it turned that breathtaking industrial capacity from producing B-24’s and jeeps to Edsels and Eldorados, which bought the city another quarter-century – up through 1974 – of prosperity. 


Building the arsenal of democracy: B-24’s at Willow Run


Building Edsels, 1958

The belief the lines would thrum forever bred the arrogance that led to Detroit’s downfall.)

Cities that lost their manufacturing south, west, or overseas were left with stranded infrastructure, an unwholesome living environment, and a (mainly white) middle class fleeing in their shiny new automobiles for the leafy and safer suburbs.

To bring them back required wholesale transformation, with big visions fueled by big government – big public expenditure, big eminent domain, and big architecture:


1954: an early maquette of the envisioned Prudential Center


Boston has long been a regional and even global center of financial innovation – banking, insurance, real estate investment – so it was natural that the city wanted to build out what it called the spine of Back Bay (southwest from the old John Hancock tower):


1959: High-tech rendering: maquette superimposed on aerial photograph

To do that required removing the ugly and under-used rail yards.  (I haven’t investigated but I’ll bet train ridership dropped through the 1950s as Route 128, the original tech cluster, sucked up all the commuter traffic.)


It was true back then

Not only did the rail yards have to disappear, in their place had to appear a destination –


1963: Rai yard taken by eminent domain, site cleared, Mass Pike highway nearing completion

– for office, for residential, for retail/ commercial – and the whole thing had to be feasible enough to be financed by one of the nation’s (world’s) largest insurance companies (because back then we didn’t have securitization to create liquidity).


Mid-1960s: Prudential Center, with the office, hotel, and retail completed, the residential still to be built

(Note Boylston Street spanning over the now-being-buried Mass Pike.)

All this was a big bold vision – and it required extraordinary new powers and new incentives, so the legislature expanded and redefined Chapter 121A:

In 1960, Chapter 121A was amended so that it also promoted commercial development in ‘blighted’ areas.  This allowed its use in the development of the Prudential Center, a massive commercial, residential and open space complex utilizing a former rail yard and exhibition hall in Boston’s Back Bay.  The Prudential Center, reported the BRA, ‘was the first office tower, the first major private investment in the ‘New Boston’ era, and the first use of chapter 121A for a commercial; project ….  When construction started, it was the largest commercial complex in the world.

As an inducement to the financing, the company was granted the right to plaster its name atop the tower, a right it maintains and uses half a century later.


Advertising grandfathered even today

The Pru development is the tent pole of Chapter 121A’s first era: its use as a force for urban renewal.

Four eras in Boston’s use of chapter 121A

Changing economic and political circumstances over the last seventy years have resulted in Chapter 121A’s activity dividing naturally into four eras:

Era 1 (1945-69): Urban renewal.  Used almost exclusively for clearing truly blighted areas (cf. the rail yards that became the Prudential Center), with a handful of affordable housing properties in the mix.

Era 2 (1970-82): Affordable housing.  Used predominantly for affordable housing, especially in the City of Boston, because Boston’s real estate tax rates were so high that for an affordable housing property they could consume more than 290% of effective gross income (EGI) and render properties infeasible and affordability impossible.

Era 3 (1983-97): Hibernation.  With the passage of Proposition 2½ in 1980 (it took effect in 1982), real estate taxes in Boston were abruptly capped and cut, and there was no material benefit to an affordable housing developer to use chapter 121A.

Era 4 (1998-now): Upzoning linkage.  The combination of Boston’s growing information-age economy and the BRA’s tightening stranglehold on development resulted in most new downtown properties asking for Chapter 121As in exchange for putting up with the BRA’s mayor-driven capricious extractions.

Prudential Center’s redevelopment exemplified the core tools of government redevelopment stimulus box:


1.     Eminent domain for economic development.  As cities become more vertical, parcels must get larger; that takes land rationalization, and that takes eminent domain for economic development.  ED4ED also creates air rights and development rights over (for example) an encapsulated Mass Pike.

2.     City infrastructure retrofit.  Likewise, rearranging the urban grid further requires thickening the infrastructure – water, sewer, electrical, roadways, and public transport.  These are huge municipal expenditures and they take political capital, financial capital, and public investment.

3.     Real estate tax abatement.  Via real estate taxes, cities essentially own roughly 15% of the urban built environment.  (See box in Section 2 below.)  The marginal loss to developers of that 15% of Net Operating Income represents an immense drain on financeable debt – and as we’ve seen before, in the waltz between capital and property, governments are always trying to lure developers to implant their money into the local city, and once implanted, the money cannot be extracted – it can be recouped only by selling to a new place-based investor.


Why dontcha come up and invest in me?  I’ll make your fortune

Inherent in any such trade is a judgment by the city that the combination, including the real estate tax abatement, was essential to getting the property developed at that time and in that manner. 

The assessor also noted that public tax dollars are used in a number of ways beyond property tax breaks to spur development. The building boom in the Seaport, for example, has been fueled by the investment in the Big Dig highway tunnels, construction of a federal courthouse and convention center, and the MBTA’s new Silver Line.

“Tax incentives,” said Ronald W. Rakow, City of Boston Commissioner of Assessing, “are really just one part of public support for projects.”

This is an inherently governmental function, because once the building proceeds, the what-if scenario is entirely hypothetical. 


Downtown Boston, 1969, with Government Center redeveloped and the West End largely scraped and not yet redeveloped

No one can go back to that year and day, and say with any confidence, Yes, it would have happened anyhow.


One Beacon, a dramatic change when built

“Would One Beacon Street (a 34-story office tower a couple of blocks from the State House) have been there without a [tax break]?” Samuel R. Tyler, president of the Boston Municipal Research Bureau, a fiscal watchdog underwritten by businesses and nonprofits. “The presumption [is] that a tax break allowed a development that might otherwise not be there to come to the city and, yes, get a tax break for a period of time but then come on the tax rolls.”

The real estate tax abatement is especially critical either if the venture is risky (as in all urban redevelopment) or if it has a social purpose – like affordable housing – where extra real estate taxes simply are passed through dollar for dollar to the low income residents. 


Targeting urban revival, targeting affordability

When I joined the scene, in 1975, virtually every Boston affordable housing property in which Boston Financial had invested had a Chapter 121A agreement, and even though the payments were large – I can remember one property with an 18%-of-NOI formula, which even forty years later seems usurious – they were better than the alternative. 

But property tax breaks have spawned much more than housing. The incentives have helped create modern Boston — from Post Office Square to Fan Pier, convention center hotels to a grocery store slated to open next to TD Garden.

Throughout the ensuing three decades, in fact, Chapter 121A was used almost exclusively for true redevelopment activities – urban upgrading, with affordable housing often being the first-mover into a declining or pre-blighted neighborhood. 


Trying to improve Dudley Street, yet again

The largest concentration of tax breaks can be found in Roxbury’s Dudley Triangle, dating to the late 1980s. The Dudley Street Neighborhood Initiative created a community land trust to build homes on vacant or blighted land.

That Dudley Street has been under ‘improvement’ for a quarter of a century tells you something about the relative challenges of their neighborhood and the relative efficacy of the solutions tried up to now.



Nothing’s working – try something stronger!

[Continued tomorrow in Part 3.]

121A-B-Cs: Part 1, What are we talking about?

September 28, 2015 | Affordability, Boston, Chapter 121A, City budgeting, Development, ED4ED, Eminent domain, Housing, PILOTs, Real estate taxes, Redevelopment, Urban renewal, Zoning | No comments 97 views

By: David A. Smith

Perhaps it’s my contrarian nature, or my irritation with imprecision, or simply my cussedness, but when the Boston Globe (August 1, 2015) led off its discussion of Chapter 121A real estate tax abatement agreements with the headline, City rife with untracked development tax breaks, I find myself compelled to defend, or at least to present the case for the defense, of that same City of Boston whose BRA is a continuing shambles with continuing presumptions of grandeur.

Sources used in this post

Streets of Hope: The Fall and Rise of an Urban Neighborhood 1994; red font.] 

One Beacon continues to receive tax breaks (Boston Herald, February 9, 2003)

Recent Decisions by Owners in Expiring Use Housing in Massachusetts, May, 2008; blue font)

Shirley Kressel on Open Media Blog (February 26, 2014; green font)

Boston Globe (August 1, 2015)


What do you mean, I’m disorganized?

By Andrew Ryan and Jon Chesto

1 August 2015

Lower floors in the new Millennium Tower rising above Downtown Crossing enjoys [sic: enjoy] a property tax break.  

[I lose confidence in journalists who make a grammatical mistake in the first sentence. – Ed.]


We believe in our spell-checkers

So does a pale blue three-bedroom duplex on Dudley Street in Roxbury.

The City of Boston has granted some 140 tax breaks for about 600 parcels of land over the past several decades, a Globe review has found, but officials say they do not know how many millions of dollars the city is forfeiting.

‘Forfeiting’ implies entitlement to an asset that is somehow abandoned.  As we’ll see, the word is wrong in multiple senses.

The city has never analyzed agreements completed decades ago to determine whether taxpayers got a good deal.

If I spent my life revisiting every decision I made, and asking myself, knowing what I know now, could I have done better?, I would be madder than the Hatter I am today.


Mercury made me the quicksilver mind I am today

Then too, there’s the counterfactual-musing-intended-to-be-critical approach top hard-hitting analysis:


We’re going to the mat about this

“There could be pretty large dollar figures attached to these incentive deals that are to some extent driving up taxes for other people living in the community,” said Adam Langley, a senior research analyst at the Lincoln Institute of Land Policy in Cambridge.


Trying to bring transparency and consistency to real estate tax analysis

Of course there could, but I doubt Mr. Langley, who clearly understands the interplay between new investment and the tax base, and incentives and new investment, intended his quote to be interpreted the way the Globe wants it to be. 

Because the Globe’s article was structured in a stream-of-reader-consciousness approach, I’ve rearranged the pieces and juxtaposed statements where they fit in logic sequence. 

A good long way into the article, the reporters set out the Globe’s thesis – or actually, not its thesis, its introduction of the pugilists:


Give it your best shot

Defenders of the property tax breaks argue that the incentives:

1. Encourage construction

2. Create jobs

3. Subsidize affordable housing.

Opponents counter that tax breaks can be expensive gifts that:

4. Deprive the city of money that could be used for schools, transportation, and other basic needs.

5. Reward the wealthy.

I’ve added the numbers for reference.


Just checking the books now

As the phrase ‘expensive gifts’ is unnecessary and judgmental/ accusatory, it betrays the authors’ true feelings. 


Somebody stop me

The article then quotes people pro and contra, though without any analysis, leaving reader[x] s none the wiser to choose the sound bite they like.  The Globe further can’t make up its mind whether Chapter 121A’s are bad trades, [y] the city isn’t keeping track of whether the trades were good or bad, or [z] gosh-darnit, there must be something wrong or we’ve wasted all this time interviewing people. 

Eventually I’ll present these as well and readers may decide for themselves.

Though the Globe couldn’t be bothered to describe what a Chapter 121A agreement is, or why it might exist – perhaps space limitations intervened – let’s give the context the Globe didn’t: what a Chapter 121A agreement is, where it came from, and why it exists.  (From a masters’ thesis by Rachel L. Meredith, Recent Decisions by Owners in Expiring Use Housing in Massachusetts, May, 2008; blue font):

Chapter 121 was enacted in 1945 to give towns and cities the authority to take property for remediation of blighted conditions.  (Van Voorhis and Restuccia, 2003.  As a tool for spurring redevelopment, the statute also enabled cities and towns to enter into long-term property tax adjustment agreements with owners of redeveloped properties.  With the exception of Boston, local governments were required to secure state approval of each agreement.

Using that, together with my own experience – I first encountered Chapter 121A’s in 1976, when assisting in negotiating some affordable housing workouts – I’ve compiled the basic guide to Chapter 121A:


“Enacted in 1945 as an urban renewal strategy …”

Chapter 121A

A brief primer

What it is.  A multi-year payment-in-lieu-of-taxes (PILOT) agreement under which the [income-generating] owner pays [as excise taxes, by the way] a negotiated percentage of its annual gross revenues instead of assessed real estate taxes.

When it was enacted.  1945, though substantially amended in 1960 and tweaked from time to time, and still in effect.  See the Four eras of Boston’s use of Chapter 121A.

What it was used for.  Urban redevelopment, sometimes for neighborhood reinvention (e.g. Prudential Center, Dudley Street), most commonly for affordable housing.

How it worked.  The approved redevelopment authority (for instance, the BRA) could (x) use eminent domain to take property for economic development via parcel assembly, and (y) sign a long-term tax abatement agreement via negotiated formula.  The Chapter 121A contract was between the municipality (via its redevelopment authority) and the special-purpose redevelopment entity (corporation, partnership, or LLC), with:

·         Term of 15 years (or 40 years for affordable housing).

·         Formula PILOT payments normally set at a percentage of property effective gross income (EGI).

·         Cash-distribution dividend limitation of 8.0% annually (cumulative), with excess proceeds rebated to the city (up to the level of assessed property taxes).

Where it was used.  Although available throughout the Commonwealth (it’s a state law, after all), Chapter 121A was used predominantly in Boston.  (121A agreements for any city other than Boston required individual state approval; Boston had carte blanche.)  After the 1980 passage of Proposition 2½, which capped real estate taxes and cut them significantly in Boston, Chapter 121As became valueless almost everywhere except Boston.

[A second good source of basic reference material is Streets of Hope: The Fall and Rise of an Urban Neighborhood 1994, which chronicles the formation of the Dudley Street Neighborhood Initiative; red font.] 

Any undertaking consisting of the construction in a blighted open, decadent or substandard area of decent, safe, and sanitary residential, commercial, industrial, institutional, recreational or governmental buildings and such appurtenant or incidental facilities as shall be in the public interest, and the operation and maintenance of building buildings and facilities after construction.

With that as an evidentiary basis, we can work our way through the five arguments referenced by the Globe:


Conveniently hand-sized arguments

[Continued tomorrow in Part 2.]