The Village at Wildflower Green is a 95-unit community in Raynham that was built with a comprehensive permit under the state’s Chapter 40B statute, which is designed to promote development of affordable housing.

An agency that finances and monitors housing developments under the state’s controversial comprehensive permitting law has released new guidelines that aim to address concerns about developers underreporting profits and overstating costs.

The state Department of Housing and Community Development is urging other agencies to follow the new auditing guidelines.

Some say the new guidelines, which were released by the quasi-public agency MassHousing, are an improvement but local officials still have concerns about whether they will curb developer abuses.

“It’s an improvement on existing guidelines but municipalities remain skeptical as to whether they will make a difference,” said Daniel C. Hill, a Cambridge attorney who represents towns that are trying to recover funds from Chapter 40B developers.

The changes come after critics of the law and the state’s inspector general have found that developers who receive comprehensive permits under the state’s Chapter 40B statute are taking advantage of a weak oversight system, inflating costs and hiding profits that should be returned to cities and towns for affordable housing. They contend monitoring of Chapter 40B projects was sloppy and failed to detect significant errors in audits.

The new cost certification manual for Chapter 40B homeownership projects was released by MassHousing in early August after the agency gathered public input from various sources for more than a year.

Chapter 40B enables developers to go through a community’s zoning board for a permit and avoid certain other local approvals in communities where less than 10 percent of the housing is affordable. In exchange, developers must agree to set aside at least 20 percent of the units they’re building for low- to moderate-income households. Developers with Chapter 40B permits that build homeownership units and subsidizing agencies sign regulatory agreements that include a 20 percent profit limitation.

Municipal officials in Massachusetts have complained that some Chapter 40B developers overstate costs, such as how much they paid for land. There also are concerns about how much developers are paying related entities that are doing work on the project, such as construction.

When developers report land costs, they must use the appraised value of land before it’s permitted, according to guidelines released by the Massachusetts Housing Partnership in November 2005. According to those guidelines, developers must limit related-party expenses to 14 percent of total costs. Related-party expenses refer to costs or charges billed by an entity connected or related to the developer, such as a contractor. Those standards still exist and the MassHousing cost-certification manual doesn’t change them.

Inspector General Gregory Sullivan launched an investigation of Chapter 40B projects last year.

In a letter sent to MassHousing Director Thomas Gleason last September, Sullivan reported some of the early findings that some developers “apparently concealed profits by artificially inflating the costs of services performed by related parties, understating income by transferring property to related parties at discounts, and engaging in other accounting fictions.”

The inspector general’s office wants the state to establish a uniform set of rules to be followed by all agencies.

“This office would prefer that DHCD promulgate regulations to handle these matters rather than leaving it up to the subsidizing agency,” Jack McCarthy, senior assistant to Sullivan, told Banker & Tradesman. “That way you would have one set of rules to follow rather than individual subsidizing agencies coming up with their own policies.”

He added, “Regulations would have the force of law whereas policies do not.”

In response, DHCD spokesman Phil Hailer said the agency is “currently reviewing proposed regulatory changes to Chapter 40B, including cost-certification procedures.”

“The agency hopes to hold public hearings regarding these changes by year’s end with the goal of promulgating the new regulations sometime within the first quarter of 2008,” he added.

MassHousing’s new manual provides a detailed step-by-step format for developers and accountants submitting audits to follow, explained MassHousing spokesman Tom Farmer. The developers and accountants are required to present a very detailed breakdown of costs, he said.

“Basically, the goal was to get the accountants to submit to us a higher quality work product,” said Farmer.

Farmer said the new manual enables MassHousing to conduct “test samples” to check if land acquisition, site preparation, building materials costs and other expenses are accurately reported.

Under the new guidelines, after an audit of a project is completed by the developer’s accountant, an accountant at MassHousing who is skilled in the construction industry reviews it, Farmer said. The audit then is sent to the town where the Chapter 40B development is located so officials can provide feedback.

But MassHousing still retains the final say on the audit. “The final decision is going to rest with us. It’s not like we’re giving them [the municipalities] veto power,” explained Farmer.

Inherent ‘Incompatibility’

Some observers say while it’s good that MassHousing will seek feedback from towns and cities, a subsidizing agency like MassHousing shouldn’t be checking on the profitability of projects.

“Inherently, in my mind, there’s incompatibility of asking subsidizing agencies to enforce profit restrictions when the agency has an interest in the profitability,” said Hill, an attorney with Anderson & Kreiger in Cambridge.

David J. Hedison, executive director of the Chelmsford Housing Authority, said the entity that provides financing should not conduct or oversee the auditing.

“It should be an unrelated entity,” Hedison said in an e-mail to Banker & Tradesman “Historically, MassHousing has not identified a project that has excess profits.”

Hill said questions have also arisen over whether the level of review will be rigorous enough. The MassHousing manual relies on a specific set of accounting standards that are not the same as government auditing standards, explained Hill.

“Is it a rigorous enough standard to uncover the types of fraud and misrepresentation that the inspector general has uncovered through his auditing process?” asked Hill.

However, others insist that the guidelines do address critical issues about what developers are allowed to report as costs.

“It’s the first time where the state has issued specific instructions and guidance for developers, accounting firms and municipalities regarding the cost-certification audits in homeownership development,” said Aaorn Gornstein, executive director of the Citizens’ Housing and Planning Association, a nonprofit organization that used to review audits of Chapter 40B projects.

Jay Talerman, an attorney who represents towns on Chapter 40B matters, said cost-certification audit issues must be resolved. He said the fact that MassHousing is seeking the community’s input on the audits is “a step in the right direction.”

“The problems with cost certification are manifold. While involving municipalities is one key component of it, the bigger concern raised by municipalities as well as the inspector general revolves around the method in which profit is calculated.”

He added, “What’s important ultimately is that we bridge the differences so that we can concentrate on housing. The cost-certification issues have become a sideshow that is dragging down good development along with the bad development. We won’t be able to accomplish good development until we solve these peripheral issues.”