Cambridge Civic Journal Forum

Follow-Up Memo on Inclusionary Zoning Ordinance Concerns Under MBTA Communities Act Compliance – by Patrick Barrett

To: Cambridge City Council
From: Patrick W. Barrett III, Esq
Date: June 11, 2025
Subject: Follow-Up Memo on Inclusionary Zoning Ordinance Concerns Under MBTA Communities Act Compliance

“Liberal legalism – and through it liberal government – had become process-obsessed rather than outcomes-orientated. It had convinced itself that the state’s legitimacy would be earned through compliance with an endless catalog of rules and restraints rather than through getting things done for the people it claimed to serve.”
— Abundance

Introduction
The above quote from Ezra Klein’s book “Abundance” describes more apply than I ever could the current state of affairs in the City of Cambridge in nearly all aspects, but no more acutely than in Cambridge’s zoning and housing policy. While intended to address housing affordability, the City’s focus on procedural compliance (“Policy”), reinforced by a flawed Economic Feasibility Analysis (“EFA”) to gain MBTA Act certification, a weak and deeply flawed nexus study three years overdue that was “forgotten,” and continued misleading data presentations, has undermined effective outcomes, revealing a paper thin veneer of a housing market held up by labs, hubris, and wishful thinking.

• This is an update from a memo I issued a few weeks ago to clarify a few points made previously (EFA) and to put into public view some exciting updates from our friends at CDD and new legal actions across the country. I also read Klein’s book … not too shabby.

Violates the MBTA Communities Act (M.G.L. c. 40A, § 3A)
The MBTA Communities Act mandates multi-family housing as-of-right with a minimum gross density of 15 units per acre, suitable for families and without age. EOHLC guidelines permit up to 10% affordability at 80% AMI without an EFA, while higher percentages, up to 20%, require a robust EFA demonstrating financial viability. Cambridge’s 20% affordability requirement, applied citywide since 2017, lacks a credible EFA, by using weak anecdotal data without citing sources, project addresses, or any specific material fact about the projects used to set policy. On June 27, 2024, the consultant issued a report to the Housing Committee wherein it stated, “No scenario is financially feasible under existing market conditions” and “Higher density does not overcome financial barriers in current market.¹” He was quick to retract this in an email dated September 17, 2024 where the consultant states, “Based on the original EFA analysis and these economic conditions, I conclude that both rental and ownership housing development projects of different sizes that conform to the densities, dimensional requirements and minimum parking requirements under as of right zoning in the qualifying district can be feasibly developed² with Cambridge’s existing inclusionary zoning requirements.” No calculation, no attachment, no underlying data to support this conclusion other than the email equivalent of a thumbs up. The consultant’s email cites improved interest rates, cap rates, and investment return thresholds as the basis for his conclusion. On June 27th, 2024, the avg interest rate hovered at 6.89%. This dipped by 69 basis points on September 17th, 2024 in anticipation of the federal reserve’s rate cut, and the current interest rate as of this writing is 6.89%. Cap rates between September ’24 and May ’25 have only increased and, given the risk associated with construction, tariffs, and other regulatory hurdles that exist in Cambridge, investor thresholds have only become more stringent (see also: The Bank). However, since CDD likes bar graphs, let’s deliver the information in a form they are accustomed to:

Basing housing policy on razor thin margins, whether we accept the consultant’s assessment or not, is not sustainable and sets the city up for confrontation where the only answer is either to dig in on failed policy or reassess. Did a mere two months change all that?

Misleading Representation of Inclusionary Housing Production

Presented on May 12th, 2025 the Director of Housing issued the above chart in his report on inclusionary housing production. (COF 2025 #81³) The cumulative graph of IHP units from pre-FY99 to FY24 (above) suggests robust production, with FY24 as the tallest bar (~1,400 units). Spoiler: the FY24 tallest bar in the graph is where the least amount of “inclusionary housing” was permitted (zero actual IZ units).

This presentation is highly misleading. The cumulative format obscures annual trends, exaggerating recent progress by aggregating all prior units. In FY24, the only cited projects are 121 Broadway (99 units, project-specific zoning via contract or Planned Unit Development, not IZO compliance) and 8 Winter St (3 units, amending permit but not approved), resulting in zero permitted inclusionary units under the 2017 IZO revisions yet presented to the Cambridge City Council as the highest bar in a continuum of success and growth. Of the 20 developments from FY18-FY24 (524 IHP units, 3,227 total units), (4 projects: Mass & Main, 50 Rogers, 165 Main Street, 121 Broadway; 229 units) involve project-specific zoning, not standard IZO, and (12 projects: 305 Webster, St. James Place, 249 Third Street, 201 & 203 Concord Turnpike, 14-16 Chauncy Street, Charles & Hurley, 95-99 Elmwood, 151 North First Street, 212 Hampshire Street, 3-5 Linnaean Street; 144 units) are pre-2017 IZO projects exempt from the 20% mandate due to prior permitting or PUD special permits. Projects listed as “IZO with 2017 Revisions” include errors: 47 Bishop Allen Drive (23 total units, 3 IZ units) is part of Mass & Main (project-specific zoning, not IZO), and 8 Winter St is not yet underway and in the process of amending their plan set. After corrections, only four projects (50 Cambridge Park Drive: 55 units; 55-Wheeler Street: 99 units; 605 Concord Ave.: 7 units; 1055 Cambridge Street: 3 units; 164 IHP units over a 6 year period) comply with the 2017 IZO, comprising just 31% of IHP units, far below expectations for a 20% mandate. This data confirms the 20% requirement has not driven significant inclusionary production, and the City’s graph misrepresents the program’s effectiveness and raises serious questions regarding the viability of inclusionary zoning as a housing strategy.

Analysis of Economic Feasibility Assessment
The City’s reliance on the EFA produced in 2023 to support the 20% mandate is misplaced, as the analysis is so deficient it fails to meet EOHLC requirements for a comprehensive, transparent, and current EFA. Its outdated assumptions, lack of methodological rigor, and failure to use a sustainable economic model or account for the ordinance’s impact on smaller projects make it functionally equivalent to the absence of an EFA. Key points include:

• Outdated Cost Assumptions: The Consultant’s EFA assumes a uniform land acquisition cost of $87,000 per unit across all project sizes (small: 15 units, medium: 42 units, large: 49 units), based on three unspecified projects⁴, failing to account for economies of scale or market variations. The 2016 David Paul Rosen & Associates (DRA) Inclusionary Housing Study⁵, which informed the 2017 increase from an effective 11.4% to 20% set-aside, estimated land costs at $50,000–$170,000 per unit, with smaller projects at ~$150,000-$170,000 and larger projects at ~$50,000-$80,000. Consultant’s $87,000 per unit land cost, applied uniformly in 2023, is implausible given the consultant is using a lower land basis than used in the Rosen study. The EFA’s lack of transparency about data sources and its failure to adjust for 2023 market conditions further undermine its credibility. Even if a larger project could procure land at or below $87,000 per unit (I know of at least one), the 20% mandate remains economically infeasible due to higher costs of debt (8.5-10.8% vs. EFA’s 8.25%), equity requirements, construction costs ($400-$525/sq ft vs. EFA’s $350-$375/sq ft), and mitigating factors such as increased utility costs (e.g., electricity up 38%, natural gas up 67%), permitting delays, and new zoning requirements (e.g., Article 22, tree protection, climate resilience adding 10-25% to costs). Additionally, the EFA assumes no parking costs for all projects, including condos, despite market demand for parking in for-sale condo developments. The market typically requires 0.5-1 parking spaces per unit at $50,000-$100,000 per space. This omission underestimates costs by $500,000-$2,500,000 for a 15-42-unit project. These flawed assumptions inflate Consultant’s projected returns, as shown in the table below, which compares EFA returns with recalculated 2025 returns using current market conditions ($120,000-$200,000/unit land, $400-$525/sq ft construction cost, 9.65% lending rate, 5.3% cap rate, $13,000/unit operating expenses, $75,000/space parking for condos). The 2025 returns, significantly below developer expectations (7% ROC, 15-20% IRR for condos), confirm the mandate’s infeasibility. For example, the recalculated 5.62% IRR for a 42-unit condo project is far below the industry-standard 15-20% IRR for levered condo developments, making it unacceptable to developers and investors.

• Comparison with Director of Housing Contribution Rate: On January 23, 2025, CDD Housing Director Chris Cotter proposed increasing the IZ monetary contribution rate from $450/sq ft to $534/sq ft, based on $195,475,665 in subsidies for 366,298 sq ft of affordable housing across three projects (52 New Street, Jefferson Park Federal, 430 Rindge Ave). In contrast, Consultant’s EFA assumes construction costs of $350/sq ft for rental projects and $375/sq ft for condos (podium and stick-built), underestimating 2025 costs by 14-37%. This discrepancy inflates Consultant’s projected returns, making the 20% mandate appear more feasible than it is. Cotter’s $534/sq ft is wildly below the loss developers incur on inclusionary units which adds to the confusion of how Cambridge assesses proportionality impact. The number is derived from a gap in funding and not related to any nexus between the development and its impact on the City.

• Construction Costs Underestimated: The EFA’s $350/sq ft (rental) and $375/sq ft (condo) assumptions are significantly below 2025 market rates of $400-$525/sq ft, skewing return calculations and overestimating project viability.

• Unrealistic Financial Metrics: The EFA assumes a 5% cap rate and 8.25% lending rate, but 2025 cap rates are 5.3% for Class A/B and 5.3-5.8% for Class C (CBRE data), and lending rates are 8.5-10.8%, reducing NOI and valuations, especially for smaller projects. The Consultant does not distinguish between classes of building and assumes a uniform cap rate of 5%.

• Density Bonus Assumptions Flawed: The EFA assumes density bonuses (e.g., 15 units from 11 for small projects), but the 2025 zoning reform eliminated most bonuses in high-density zones (e.g., Central Square), undermining feasibility. Only a two-story increase in C-1 zones remains and its value is dubious. In most cases the extra stories are required for viability, so the “bonus” is more coercive than remunerating.

• Neglect of Smaller Project Impacts: The EFA’s scenarios (15-49 units) do not adequately address smaller projects or projects with existing structures, which face much higher per-unit costs. Using just three unnamed projects of similar size with no background data significantly limits the value of this analysis. It is the equivalent of saying “lots of people say…”

• Utility and Operating Costs: The EFA assumes $10,000/unit operating expenses and minimal utility cost increases, despite 2025 data showing electricity up 35%, gas up 65%, and heating oil up 50%, reducing NOI with more impact on lower unit buildings.⁶

• Conclusion on the EFA: Consultant’s EFA, with its reliance on anecdotal assumptions (e.g., $87,000/unit land, $350-$375/sq ft construction, no parking costs), inflated returns, and lack of transparency, would not withstand scrutiny under EOHLC guidelines, effectively leaving Cambridge without a credible EFA to justify the 20% mandate. The recalculated 2025 returns, including a 5.62% IRR for a 42-unit condo project (vs. 15-20% industry standard), and the City’s misleading FY24 data (zero 2017 IZO units despite the cumulative graph’s tallest bar) highlight the mandate’s infeasibility.

Legal Vulnerabilities

• Unconstitutional Takings: The 20% mandate lacks proportionality, failing the Nollan/Dolan/Koontz/Sheetz test, relying on the outdated and inaccurate 2016 Rosen report without the required 2022 nexus study. Removing density bonuses would exacerbate this by increasing the exaction’s burden without justified impact assessments.

• Update: Two cases have been filed already citing Nollan/Dolan/Sheetz/Koontz and attacking inclusionary zoning exactions as a taking.
  • Pilling v. City of Healdsburg CA (status: Settled in favor of Plaintiff 2024)
    • City settled less than two months after action filed
    • Plaintiff awarded sum of exaction taken plus damages
  • RedT Homes v. City of Denver CO (status: filed May 25, 2025 pending)
    • Denver used Rosen and Associates to provide a nexus study which in part states that new residents generate more housing demand. Much like Cambridge who also used Rosen, Denver is punishing builders working to help solve the housing crisis.

The Supreme Court determined in a quartet of rulings that governments cannot burden homebuilders with costs for problems they do not create. How does building more housing make housing more expensive? (see: Rosen’s nexus study). Taken together, those cases established that permit conditions for new construction must be proportional and directly related to its impact. Anything above and beyond is an unconstitutional property taking. Now that Sheetz has “kicked open” the door allowing for Nollan/Dolan heightened scrutiny for government exactions, developers and homeowners are taking note and, in the case of the Pilling, winning.

Revisiting Rosen (The Nexus)
In 2016, Cambridge issued a nexus study produced by David Rosen and Associates. Key findings included:

• Affordability has declined markedly in Cambridge since the inception of inclusionary zoning program.⁷

• Increased migration of high wage earners due to increased commercial growth in Kendall Square.

• Increased migration leads to decreased diversity and “continued decrease in proportion of lower-income residents if current trends continue.” ⁸

The “nexus” between residential development requiring an exaction of 20% is tied to the growth of the commercial sector. The result, and an odd conclusion in my opinion, is that because commercial development draws in more people who make more money and therefore can buy out existing homes in the city of Cambridge and displace existing residents, the City decided to levy the highest tax on the development of homes that would ameliorate displacement. The report uses exaggerated cap rates (4%) to reverse engineer viability and presents an outcome that was politically preordained. Rosen does try to backtrack slightly and states, “If the inclusionary housing provisions become so onerous as to make new residential development problematic, then new affordable units will not be created. As Cambridge looks to update the Zoning Ordinance, the city will need to balance these concerns.” ⁹ Hence the 5-year reassessment Cambridge declined to initiate or, to paraphrase CDD, just plumb forgot.

Conclusion:
Inclusionary zoning in Cambridge is at best a mixed bag. It is not certain whether it ever worked as advertised and certainly from 2016 on it has not. The City has asked small to midsized developers to play a game that the largest and most capable developers were and still are largely exempt from. Further, the lack of a defendable EFA, the “whoops” moment of forgetting to update the nexus study, the lack of follow through on any of the non-punitive recommendations within the Rosen report, and the long history of cutting deals with large developers ($5.7M paid in 2020 to remove a 25-unit obligation Biomed inherited and Special Permit PUD exemptions in perpetuity for Cambridge Crossing and other groups in 2016) all leave Cambridge vulnerable to legal challenges, as we saw in 2020 with Arnold Circle, a case that predates Sheetz. In my opinion, if you agree to build inclusionary units as part of your project at anything above 11.4% of gross area, you are a committing your capital and risk to a scheme that the City makes very few well capitalized groups commit to and, further, is likely a violation of the takings clause of the fifth amendment to the U.S. Constitution.

Notes:
1  Multifamily Zoning Analysis
2  Email Tuesday, September 17, 2024 2:39:17 PM “Cambridge EFA Analysis” Attached Hereto.
3  Attached
4  EFA_Scenario Analysis Model Results (attached)
5  Rosen Nexus Study (2016)
6  U.S. Bureau of Labor Statistics
7  Rosen pg 6
8  Id. 38
9  Id. 56

Sources:

• Rosen Nexus Study 2016
• Chamber of Commerce Memo 2016
• Seidman Housing Report 2024, EFA, EFA Analysis and Methods, EFA Update
• Arnold Circle & Cambridge Day Article
• Supreme Court’s Sheetz decision casts doubt on validity of Massachusetts inclusionary zoning regulations (Nolan/Dolan/Koontz/Sheetz Primer)
• CDD’s May 12th Report on IZ