Opinion  EC-COI-87-14

Date:	04/27/1987
Organization:	State Ethics Commission

Section 7 prohibits a state employee from participating in a Home Ownership Opportunity Program administered by the Executive Office of Communities and Development.

Facts

The Massachusetts Housing Partnership (MHP), which is under the Executive Office of Community and Development (EOCD), finances projects through a home ownership opportunity program, established pursuant to St. 1985, c. 405, §35. You are a state employee, and are proposing to develop a condominium project in a city pursuant to this program. Approval  of the project by EOCD is awaiting a determination of whether your participation in the project will place you in violation of §7 of the conflict of interest law.

The program normally works as follows. The developer of a housing condominium project in a city requires a variance in order to be permitted to build a project at all, or to be able to build a project in such a way that it would be economically feasible. The city and the state have an interest in increasing home ownership opportunities and increasing those opportunities for low and moderate income families. The city, the developer and representatives of EOCD enter into negotiations, the purpose of which is to encourage the developer to set aside a specific number and type of units for affordable housing. The city, in partnership with the developer, submits an application to EOCD for approval of the project In this case, for example, you have committed to the city certain units to be available for affordable housing. You have agreed that the cost of the units to the buyer would be substantially below fair market value. You have also agreed to cooperate in the development of a marketing plan for EOCD and have agreed to certain deed restrictions which will ensure that the affordability of these units to lower income families is preserved over time. If EOCD approves the plan, it makes a commitment to the developer and to the City. The form of the commitment is a letter which states that the program will provide below market interest rate mortgages to first-time home buyers through the Massachusetts Housing Finance Agency (MHFA), and will further reduce the interest rates below MHFA rates through a direct subsidy program to income eligible home buyers. For example, as it pertains to the particular project in question, it is estimated that about one-half of the units would receive mortgages from the MHFA at a rate of 7.9%.  The other half would receive mortgages also provided by MHFA, and in addition subsidized directly by EOCD to a rate of 5.5%.  These reduced mortgages result from a contract between EOCD and participating lending institutions. If the developer does not go forward with his agreements, e.g., to sell the units at specified prices below market rates, then EOCD would not release the money to the participating lending institutions.

If the project is approved by EOCD, the approval is subject to the City carrying through on its obligations.  The City would screen applicants in order to assure that they meet the income requirements for potential buyers to be eligible for below market financing.  They would also hold a lottery or otherwise make a determination as to eligibility for purchase if there were an excess number of applicants.  The City would also refer the buyers to the appropriate participating lending institutions.  Finally, the City undertakes to assure that the developer receives the necessary permits and/or variances for the property in order to build in such a way that the developer can participate in the program.  If the City does not follow through on its negotiated obligations, EOCD would not release the funding to be available for the project.

The developer and EOCD do not enter into any formal executed contract with each other.  EOCD approval of the project is in the form of the commitment letter.  It is undisputed that the application by the local community and the commitment letter constitute an implied-in-fact contract between the local community and EOCD.  Further, EOCD and the lending institutions execute a formal contract relating to these direct subsidies which reduce the MHFA financing below its usual rate.

The inducement which usually forms the basis for the developer's agreement to sell units below market rates and to agree to the other terms and conditions which are negotiated is the necessity of obtaining a variance from the City.  There are, however, other benefits which accrue to the developer by agreeing to participate in the program.  Given the need for low income housing for families in Massachusetts, the developer is assured a market for his units where there may otherwise not be one.  For example, it is unnecessary for the developer to market the units through advertising or to secure purchasers through incentives such as private financing or other inducements.  In other words, his market is guaranteed for the sale of the set-aside units.  The developer also gets the benefits, whether economic or non-economic, of a mixed use development without paying the full cost of developing this type of project.  Finally, the developer secures the good will of the city officials and obtains favorable publicity which may be beneficial to future development projects.

An unusual feature of this case is the lack of a variance subject to participation in the program. The variance for this project is unconditional; you state that you desire to offer the units to income eligible buyers for the purpose of establishing good community relations.  Given the strong probable market for housing in the City, it is the opinion of EOCD that you will be giving up a significant profit to sell these units within the program.

Question

Does G.L. c. 268A, §7 permit your participation in the Home Ownership Opportunity Program of EOCD?

Answer

No.

Discussion

You are a state employee for conflict of interest law purposes, and therefore are subject to the restrictions of G.L. c. 268A, §7, which prohibits you from having a financial interest in a contract "made by a state agency."  The plain and unambiguous language of §7 does not require that the state employee be a party to a contract with a state agency.  Typically, a person would not have a financial interest in a contract unless he were a party to it.  The language of the conflict law, however, explicitly recognizes that there may be situations where a person is not a party to a contract but still may fairly be said to have a financial interest in it.  See, Buss, The Massachusetts Conflict Statute: An Analysis, 45 B.U. Law Rev., 299, 375 (1965).  In EC-COI-81-189, for example, a legislator who was also a landlord was deemed to have a financial interest in an annual contribution contract between the Department of Community Affairs (DCA), a state agency, and a local housing authority.  The landlord had no informal or formal agreement or contact with DCA; he dealt with, and received a rental subsidy from, the local housing authority. Although the landlord was not a party to the annual contribution contract, the Commission recognized that he had a financial interest in a contract made by a state agency within the meaning of §7.  Thus, the fact that you are not a party to any contract with EOCD is not dispositive of this case.  Because, upon examination of the totality of the circumstances, it can fairly be said that you would have a financial interest in the contract which exists between EOCD and the city, or EOCD and the participating lending institutions, the plain language of §7 applies.

There are two contracts in this case.  In addition to the written contract which exists between EOCD and the lending institutions, there is also an implied contract that exists between EOCD and the local community.  For purposes of G.L. c. 268A, the term "contract" refers not only to a formal, written document setting forth the terms of two or more parties' agreement, but also has a much more general sense.  Basically, any type of agreement or arrangement between two or more parties, under which each undertakes certain obligations in consideration for promises made by the other, constitutes a contract.  See, e.g., Connolly v. Town of Ipswich, 350 Mass. 201 (1967).  In this case, EOCD and the local community each assume certain obligations of substantial substance.  The local community agrees to participate in and administer the program. EOCD agrees to provide funding which will make possible the provision of low income housing in the community.

Given that there are at least two contracts made by a state agency in which the commonwealth is an interested party, the only remaining issue is whether you would be deemed to have a financial interest in those contracts.

The Commission has recognized that not every financial interest in a contract made by a state agency results in a violation of §7.  In EC-COI-84-13, a physician had a consulting contract with the Massachusetts Rehabilitation Commission (Mass Rehab).  Eighty percent of the total income of the physician was derived from her contracts with Mass Rehab.  The physician entered into a lease arrangement with a state employee who owned commercial property.  The central issue in the case was whether the state employee had a financial interest in the contract between the physician and Mass Rehab.  In a practical sense, of course, the state employee had a financial interest in the contract because, but for the contract, it was unlikely that the rent would be paid. The Commission held, however, that the rental fee which was charged was independent of the physician's receipt of Mass Rehab fee payments since the rent was the same rent that would be charged to any physician who wished to use the office space.  In this case, however, the price which you intend to charge for the unit is dependent on EOCD's contractual relationship with the participating lending institutions.  The buyers cannot participate in the program unless the units are sold at specified prices, and, unlike the state employee in EC-COI-83-173, you are unable to charge what the market will bear for the units if you participate in the program.

There is no requirement in §7 that the financial interest be substantial, direct or quantifiable. Where substantiality is a requirement of a violation, the General Court  has explicitly so stated. See, G.L. c. 268A, §23(b)(1).  Therefore, a requirement that the financial interest be substantial is not required by the plain language of §7.  The explicit language of §7 states the financial interest may be "direct or indirect."  In a typical case a developer who participates in the program would have a direct interest in the contractual arrangement between EOCD and the local community.  This is because the project normally requires a variance and the variance is typically made conditional upon participation by the developer and the program.  The very incentive for many communities to enter into the program or discussions with EOCD is the possibility of providing its citizens with low income housing opportunities.  In this case, however, the financial interests which will accrue to you as the developer are not so direct. Indeed, EOCD is of the opinion that whereas many developers would benefit from the  local  community's cooperation in marketing the units, you will not financially benefit from the marketing plan in this case because of the exceedingly  high  demand  for market condominium units in that particular location.  Further, the financial benefit which you may gain as a result of establishing a track record of good will, or favorable public relations which may result from this project, is not quantifiable.  The Commission, however, cannot make an exception to application of the literal language of §7 based on a factual determination  that the financial interests involved are not substantial, direct, or quantifiable.  The language of §7 is designed to prevent the opportunity to gain financially from contracts made by a state agency as much as it is designed to prevent the reality of financial gain.  None of the exemptions contained in §7 applies to you.