Transfer Taxes And Rent Control: Massachusetts Heats Up On Housing Regulation

Boston and Massachusetts leaders are weighing a series of regulations aimed at creating much-needed housing for a region plagued with an affordability crisis.

In Boston City Hall and at the Massachusetts State House, politicians are considering a 2% transfer tax on real estate transactions of $2M or more, higher inclusionary development requirements, statewide zoning changes and even rent control to churn more supply into the housing-starved Bay State.

Developers often argue allowing density in typically height-averse Boston is key to generating more supply and bringing prices down. But simply increasing the overall housing stock, rather than requiring more affordable developments or regulating rents, won't be enough for the city's political leaders, especially after last week’s announcement that two-bedroom apartment rents at Greystar Real Estate Partners' planned development in Bay Village will run $7K/month.

“Tell me again how we should just let the market ‘do what it do,’ and how we shouldn’t concern ourselves w/ protections for those who have been left out and left behind,” Boston City Council President Kim Janey tweeted Jan. 23. “I’ll wait…”

Housing demand has outstripped supply in Boston since the 1980s, according to the Boston Foundation. That is driving up prices for the region’s lowest-income earners. Nearly 80% of Greater Boston’s extremely low-income earners (those making less than 30% of the area median income) spend more than a third of their income on housing, according to the Federal Reserve Bank of Boston. 

Affordable housing supply isn’t keeping up. By 2025, more than 9,000 residential units where those low-income earners in Massachusetts live are at risk of having their subsidies expire, according to the Boston Fed.

Developers in Boston have contributed to the city’s affordable housing stock through the city’s Inclusionary Development Policy, which calls for market-rate developers to pay into a fund or set aside 13% of the units as income-restricted in a development with 10 or more units.

Since its creation in 2000, the IDP has added about 2,700 affordable units in Boston and more than $150M in funding, according to city records. But housing advocates and city leaders want more.

The Fed estimates that the state needs between $843M and $1.03B by 2035 to preserve the existing subsidized housing supply and continue to grow supply for more residents. While the IDP is fueling new affordable units, existing affordable units are disappearing faster.

Both the public and private sector agree more needs to be done to generate more supply for housing at all price points. They just don’t always see eye to eye on what path to take.

The real estate industry is riding a successful economy, and there is a growing expectation on developers to do more for the region’s housing crisis. 

Janey, who co-filed legislation on the transfer tax, did not respond to Bisnow’s request for comment. Her measure is projected to raise $168M annually for affordable housing if the state legislature approves it. 

The bill isn’t the only Boston affordable housing measure needing a state signoff. Boston Mayor Martin Walsh submitted a home rule petition to the state last year asking for permission to adjust linkage payment rates on developments over 100K SF more frequently than the current three-year minimum. The petition also calls for strengthening the IDP.

“The City has many bills pending approval at the State House," City of Boston Chief of Housing Sheila Dillon said in a statement to Bisnow. "The Linkage/IDP proposal and the transfer tax would be strong tools which would allow the city to raise funds to build more affordable housing. Until we are able to build enough affordable housing for all of our residents, we need enhanced tenant protections. This is why we support the proposed tenant right to counsel, protections for senior tenants and the right of first refusal for tenants to buy their residences if it is being sold." 

The private sector recognizes there is an affordability problem in Boston but is vague in discussions of the best solution.

“The opportunities in Boston continue to expand, but we are arrogant if we don’t recognize there are some headwinds ahead of us,” MP Boston principal Joe Larkin said at a Bisnow event earlier this month. “Those headwinds are the expansion of the divide between the people with the opportunities and the people without the opportunities.”

MP Boston is known for its luxurious additions to the downtown skyline, including Millennium Tower and Winthrop Center currently under construction. But the developer is also pursuing a Chinatown project as part of a city requirement to provide 110K SF of affordable housing in the Winthrop Center deal.

Larkin and other developers declined interviews to elaborate further on affordable housing proposals. But the city’s real estate community has cautioned against initiatives like rent control and raising the Inclusionary Development Policy rate higher than its current 13%.

Somerville and Cambridge have both raised their inclusionary development rates to 20% in recent years. Developers have balked at such a figure in negotiations with the city due to rising costs of construction and the returns their investors expect on a project. Developers have been less resistant to a potential 18% IDP rate, Walsh said at a Bisnow event last year. 

“We have heard developers sing the ‘This is going to stop development in the city’ tune for a long time, including when the IDP was raised to 13%,” said Vanessa Calderón-Rosado, CEO of nonprofit community development organization Inquilinos Boricuas en Acción (Puerto Rican Tenants in Action). “On the contrary, cranes kept going up every day, which is great."

The private sector and housing advocates aren’t always on opposing sides of the debate. The transfer tax and Gov. Charlie Baker’s Housing Choice bill, which would allow simple majority votes to pass zoning changes across the state, get high marks from both Calderón-Rosado and Beacon Communities CEO Dara Kovel.

“We’re big fans of the governor’s bill on housing. Anything we can do locally or at the state level to help affordable housing approvals is great,” Kovel said. “Rent control has lots of other dramatic consequences for affordability, investment and development.” 

Rent control, which Boston City Councilor Althea Garrison supports, hasn’t gained as much traction.

A supporter of the housing bill and transfer tax, Kovel said Massachusetts has a strong, balanced policy that creates and preserves affordable housing without negatively impacting development. 

Multifamily investors have called rent control the “biggest threat to our industry.” New York City’s investment sales volume was down 31% in 2019, the year state leaders passed more stringent rent control laws. The city’s multifamily investment sales were down 81%, largely attributed to the new rent laws.

“Honestly, people sometimes feel like drastic times call for drastic measure, and there will be consequences for some of those policies,” said Kovel, whose firm has projects in New York. “We’re at an early stage, and still have a wait-and-see attitude.”

While Calderón-Rosado thinks rent control is a good tool in preventing displacement, she isn’t fully sold on the concept returning to Massachusetts, which banned the practice in 1994. While rent control units can benefit lower-income residents, the practice doesn’t always benefit families of color, she said. 

When Massachusetts had rent control, African Americans and Hispanics made up a quarter of the population in cities with rent control but accounted for only 12% of the population in rent-control units, according to the Journal of Urban Economics.   

"I can see the benefits in cooling off rents and preventing displacement," Calderón-Rosado said. "But it could have unintended outcomes that may not necessarily be the best solutions we are looking for."