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The Affordable City

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Municipal Support for Community Land Trusts and Other Models of Shared Equity Homeownership

John Emmeus DavisPhoto by Jason Vanderhill

John Davis of Burlington Associates introduced himself as a practitioner not an academic. In the small town of Burlington, Vermont he has been one of the pioneers of a way to make home ownership possible for people on low incomes. Through a variety of mechanisms a number of cities in the US have been trying to come up with mechanisms that retain the value of subsidies given to low cost housing, and over the last twenty years the movement has grown rapidly.

He spoke this evening to a small but attentive audience at SFU. He had a lot of slides filled with words and a DVD. Far more than I could take note of. But I hope that this short report will capture the essence of his ideas.

Shared equity ownership is a method used to enable people who would not qualify for a commercial mortgage have a better alternative to renting , which in the US has no security of tenure. There are also tax advantages for home owners in the US. Many municipalities have tried to do something about the provision of affordable housing since the federal government withdrew from public housing in the first Regan administration. Many states have also abrogated their responsibilities in the field of public housing.

The traditional methods of subsidizing home ownership concentrated upon subsidizing poor homeowners. While the source of funding was usually federal or state it was passed through to the home owner as a grant or low cost loan, with the homeowner taking all the risk but also all of the increase in value over time. The devolution to the cities as a result of the federal retreat from housing subsidy meant there were fewer dollars available to the cities, so they turned to regulation. While some used incentives to developers to provide affordable housing – such as bonus density – other required “inclusionary zoning”. That is, of any housing development 10 to 15% of the units would have to be affordable. In other words there is a mandated cross subsidy from market to affordable housing. The private sector in recent years has seen a major collapse in house prices, with rising numbers of foreclosures due to mortgage defaults. Many of these were due to “creative financing” – mortgages with low introductory rates but steep increases to market rates after a year or two.

Most cities are now very concerned about the lack of affordable housing, especially for essential service workers. Mr Davis said there has been “a seismic shift in municipal policy” and most cities now subsidize supply of housing especially through non-profit organizations. The intention is to retain the subsidy even though houses continue to be sold, in order to maintain a stock of affordable housing and provide a social safety net. New forms of tenure have been developed and a new class of “nongovernmental housing”. These are price restricted and are restricted to people excluded from the market. He referred to it as a third sector, which perforce has had to be very innovative.

The idea is that the equity in the home from increasing house prices is shared between the owner and the housing trust or co-op. Owner occupation gives a bundle of rights – and shared equity means that some of these rights are relinquished or reduced to reflect the extent of the assistance the owner has been given to acquire the property. When it comes to be sold it has to be offered back to the trust or resold only to a qualified buyer at a price predetermined by a formula in the original deed of ownership.

While there are a wide variety of not for profit associations organizing co-ops, condominiums and housing trusts, one of the most numerous now is the “community land trust”. The trust is set up to acquire and administer land. To do so it has to raise funds either from governments, or these days charitable organisations. (The US has far higher rates of charitable donations than most other countries , partly reflecting the widening disparity between rich and poor but also the more generous tax treatment of charitable donations.) The land is then used for a housing development – which may be carried out by the trust itself, or private developer or a non profit. The homes are sold but not the land under them. This is leased, usually at nominal rents, with the lease documents containing the restrictive covenants. He remarked that it was essential that there be an activist attitude as covenants have been shown not to be self enforcing.

In general, so far these ventures have succeeded in keeping affordable housing available and at the same time allowing the working poor to move up into the housing market. Generally there is the same pride of ownership, and properties are usually well maintained. The owner is also entitled to keep the value of any improvements made to the property itself. In the event of default, the trust usually manges to intervene early in the process to try and renegotiate or find a way to allow the owner to become a tenant. However, if the home has to be sold by the bank (or other mortgage holder) the restrictive covenants are not then binding on the new owner, but they have to pay a market lease rate. Most prospective buyers are happy to accept the restrictive covenants in return for a much lower lease payment.

The statistics he had indicated that while this is still a small segment of housing in the US, in some places it has become quite significant especially when municipal government has been active to try and promote affordable housing (e.g. San Franscisco and Chicago). The current collapse of house prices, and the uncertainties of the credit crisis mean that many of his analytic charts give no guidance as to what may happen next. Up until recently house prices were rising and equity increasing. This may not be true in future.

He emphasized that there is no one size fits all solution. There are a wide range of applications including traditional, single family homes, condominiums, co-ops, trailer parks and mixed use developments. CLTs have also become landlords to other nonprofit service groups as well as running rental housing, homeless shelters and other related activities. He also said that it is not an easy option and requires a dedicated team of people willing to work hard for little or nothing, and significant financial support. However once the land has been secured, CLTs have been successful in retaining affordability as well as allowing homeowners some ability to increase their wealth and pass it along to their heirs.

One key factor has been the structure of the board of the trust. He recommends a tripartite structure so that no one group can dominate the trust and divert its ends. Thus the home owners make up one third of the board, the neighbours (the surrounding community) one third with the rest of the seats filled by appointments made by the two groups acting together to select people will relevant skills and standing, such as local bankers or councillors. In this way no one interest can trump the others, but all decisions require some support from at least one other group.

It is clear that the situation in the US has some parallels here but there are some significant differences. For instance, there are no tax advantages from home ownership here, whereas in the US mortgage interest is tax deductible. Municipalities here have generally not been active in housing supply. While there is a non profit housing sector, it has been shrinking, not growing, mainly as a result of government neglect. And there are also fewer sources of charitable funds.

Written by Stephen Rees

May 16, 2008 at 11:17 pm

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  1. […] Emmanuel Davis (a visiting fellow there) and a new initiative in Boston. You may recall he spoke at SFU about housing affordability earlier this year Tagged with: affordable housing, community land trust « EIA Predicts […]

  2. […] other cities in North America the requirement for affordable housing would have been much more […]

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