- Where can we find more resources for CLTs?
The National Community Land Trust Network is the umbrella organization supporting the work of Communtiy Land Trusts across the United States. The resources section of the Network’s website provides a wide range of tools for CLTs including the CLT model ground lease. The Network manages a national CLT Academy which offers full day, in depth trainings for CLT practitioners in various locations around the country.
In addition, Burlington Associates in Community Development, is a national consulting firm specalizing in community land trusts. The Burlington Associates web site includes an indepth CLT Resource Center with extensive resources related to forming a new CLT or growing an existing one.
- Can we use Federal NSP funds to create shared equity homes?
Yes. Congress requires that foreclosed properties purchased with Neighborhood Stabilization Program (NSP) funds be preserved as affordable housing “for the maximum period practicable.” HUD requires only that program sponsors adhere to HOME program standards which require 5-15 years of affordability, depending on the level of public investment. However, this is intended to serve as a minimum guideline only and many communities are attempting to achieve lasting affordability for all or a portion of their NSP assisted units. NCB Capital Impact produced a report and a webinar outlining the relevant regulations.
- How many Communtiy Land Trusts are there in the US?
A 2006 survey by the Lincoln Institute of Land Policy identified more than 200 community land trusts in 41 states and the District of Columbia.
- Can shared appreciation loans really provide long term affordability?
Yes. But it is also true that many of these programs do not. Either because they recapture too small a share of price appreciation, because they don’t have a clear mechanism for reinvesting the recaptured equity or because they use recaptured funds for some other purpose entirely, many loan programs fail to replace affordable units that are sold. While any shared equity program can occasionally require additional subsidy to maintain affordability, many of the existing shared appreciation loan programs have selected equity sharing formulas that are likely to require some level of additional public investment when prices are rising rapidly.
Nonetheless, many shared appreciation loan programs have very effectively built growing portfolios of affordable homes and maintained that affordability between buyers. In some cases, the loan program sponsor retains a right of first refusal which enables them to identify a new lower income buyer for the same house and they are able to reinvest the proceeds from the repayment of the loan to assist the second buyer. In this way they can function similarly to a deed restriction program but under a different legal structure.
- What is the best way to ensure that co-ops are properly managed?
While direct resident control of cooperative housing corporations is a key strength of the co-op model, there have been situations where resident boards of directors have failed in their basic responsibilities, either by failing to adequately plan for maintenance costs, failing to enforce affordable housing restrictions or by failing to adequately supervise processional property management firms. In response to these problems it has become more common for sponsors of Limited Equity Cooperatives to remain engaged with the co-ops over the long term and provide some level of ongoing support to co-op boards.
In New York, UHAB provides a set of support services to strengthen the effectiveness of co-op boards and provides monitoring services to the City to ensure that co-ops remain a source of affordable housing for generations to come.
- Who governs the Community Land Trust?
The Community Land Trust Legal Manual contains model organizational bylaws which many CLTs in the United States have used as the basis for their organizational governance structure. The model bylaws describe an organization with an innovative structure which balances three distinct interest groups on the board of directors. Homeowners leasing and living on the CLT’s land (leaseholder representatives), residents of the CLT’s service area (general representatives), and individuals representing the public interest (which may include municipal officials) each make up a third of a typical board of directors. This tripartite structure ensures that
different land-based interests will be heard, with no single set of interests allowed to dominate.
Not every Communtiy Land Trust follows exactly this structure.
- What happens to the homes if a land trust fails?
Each CLT utilizes a ground lease a which contains provisions designed to protect the homeowner and their lenders in the event that the CLT fails. The model CLT lease allows the CLT to transfer the property only to another nonprofit which shares the goal of holding land to preserve affordable housing. Should a CLT ever attempt to sell its land to any other potential owner, the model lease requires that the CLT first give the homeowner the option to buy the land. Any transfer must leave all of the homeowner and lender rights under the lease undisturbed.
Some cities require that the City have the option to purchase any CLT land that the city has subsidized – a right that might be assigned to another housing nonprofit.
- What evidence is there that consumers are interested in this kind of homeownership?
As part of a Ford Foundation-funded symposium that NCB Capital Impact and NeighborWorks sponsored in December, 2007, RCLCO, a leading national real estate market research firm, conducted a study of consumer interest in Shared Equity Homeownership. RCLCO found that after receiving a tutorial on the concept and potential workings of shared equity housing, 70.8% of those surveyed were somewhat (56%) or very (14.8%) interested in purchasing a home under a shared equity scenario, as compared with only 3.5% before the tutorial.
- What is the asset building potential of shared equity homeownership?
Rick Jacobus of Burlington Associates has done a detailed analysis of the potential of well-structured shared equity homeownership programs to generate individual wealth in a variety of different markets. His analysis shows that shared equity produces a sizable return on investment that exceeds most other investment opportunities for moderate-income families, even if it falls short of the extreme gains sometimes made during housing price booms. At the same time, shared equity homeownership provides protection against the downside risk of home price declines. For this reason, the risk-adjusted return of shared equity homeownership is comparable and may even surpass that of traditional homeownership.
- When a CLT splits the value of the land and buildings, don’t the buildings actually decline in value over time?
Over time buildings should decline in value as they become older and closer to the end of their useful life. Land, on the other hand, generally rises in value over time. However a land trust homeowner owns not only the building but also the right to occupy the land which is conveyed for 99 years through a ground lease. The value of this combined property (called the leasehold value) generally rises over time along with other property in the market. For this reason, CLT leases must impose a resale pricing formula to cap the sale value of the home. Without such a restriction the homeowner’s leasehold value could easily rise beyond the affordable level. Simply “removing the land” is not sufficient to protect affordability in a rising market.
Anyone interested in the arcane details of the appraisal of leasehold property should consult Fannie Mae’s well thought out appraisal guidelines for leasehold mortgages.
- To what extent has shared equity homeownership been evaluated?
There has been some data collection, but no rigorous evaluation. The most comprehensive data collection was done by John Davis evaluating the Burlington Community Land Trust. The Burlington study looked at 259 moderately-priced units that were developed between 1984 and 2002 and 97 resales that occurred between 1988 and 2002. The study found that individuals modestly increased their wealth and that affordability was preserved. Of the 97 resales tracked, 60 of the residents made the leap to market rate homeownership when they left the BCLT.
- Are resident owned manufactured housing parks a form of shared equity homeownership?
They can be. Resident owned manufactured housing parks are generally organized as cooperatives with each homeowner owning a share in the cooperative corporation which owns the park. Many of these parks are organized with the specific purpose of preserving affordability of this form of housing. While it is rare for these cooperatives to impose specific price restrictions on individual homes, they typically limit lot rents to preserve affordability and limit the resale value of co-op shares. This shared ownership of the land and park infrastructure is generally sufficient to protect ongoing affordability of the housing.
- How much ongoing monitoring is necessary for deed restriction programs?
Every shared equity homeownership program requires some level of ongoing monitoring and oversight. Someone must ensure that homeowners occupy their homes as their primary residence and assist with the resale of restricted units. Many programs go further by providing ongoing education to homeowners or by stepping in to help owners avoid foreclosure. There is currently a very wide variety in the level of ongoing staffing that different programs provide for these ongoing functions but it is clear that many of the most common problems that these programs experience can be tied to understaffing this monitoring function.
Increasingly, governmental sponsors are entrusting nonprofit organizations or special purpose public agencies to monitor the use and resale of deed restricted homes. For example, ARCH (A Regional Coalition for Housing) in King County, Washington continuously monitors several hundred units of deed-restricted housing on behalf of 16 different local jurisdictions.
- How many Limited Equity Cooperatives have been built?
The Natonal Association of Housing Cooperatives estimates that there are over 1.2 million cooperative housing units in the United States including at least 425,000 limited equity housing cooperative units.
- Are all co-ops self managed by residents?
No. Larger co-ops tend to utilize professional management, but co-ops in general may be either resident or professionally managed. Both typically elect a board of directors from among the residents which sets policies. Some co-ops also have ongoing support from outside sponsors or support organizations which help the resident boards to manage the finances and oversee property management contractors.
- Where have neighborhood revitalization strategies employed shared equity homeownership?
Perhaps the most famous example is Boston’s Dudley Street Neighborhood Initiative, a 25 year old comprehensive community revitalization effort which turned to the CLT model to preserve community ownership of new housing built on formerly vacant neighborhood properties. Another example is Albuquerque, NM’s Sawmill Community Land Trust which grew out of a comprehensive community planning process focused on preserving a historic Mexican-American community. PolicyLink has posted a detailed description of the formation of the Sawmill CLT as part of their equitable development toolkit.
- Do the limited prices of shared equity homes reduce the appraised value of nearby market rate homes?
No, they do not. Market rate homes and shared equity homes are appraised on a very different basis. Just as condo sales prices don’t end up impacting appraisals for detached homes, shared equity units are understood by appraisers as a different kind of asset from market rate homes. Appraisal guidelines instruct appraisers to avoid using price restricted homes as market comparables when they evaluate the value of unrestricted homes. This only makes sense as the price of a restricted home is set by a formula and therefore provides no indication of the market value of nearby homes. While an appriaser may occasionally make a mistake, it is not common for appraisers to use units that are identified as restricted in their market appraisals.
- How much appreciation can shared equity homeowners earn?
- How does shared equity compare with other asset building strategies available to lower income households?
Buying a home has the ability to generate wealth for the homeowner through appreciation and tax deductions. However, buying a home comes with costs. Through shared equity homeownership, the initial amount of the home is reduced. Therefore, the monthly payments are reduced, creating affordability in an otherwise unaffordable market. When some low income families pursue market rate housing, they may be spending more than 30 percent of their income on their home. Some may be spending more than 50 percent. This rate of spending equals less money available for food, healthcare and long term investments like college tuition. Studies show that low income families spending more on their homes have a greater possibility of foreclosure. While shared equity homeownership means a lower share of appreciation, through stable monthly payments families are saving money, taking advantage of the federal benefits of homeownership and still have the probability of taking equity with them upon resale as do traditional homeowners. Of course, families may not generate as much wealth as they might have if they had purchased a market-rate home. For low income families, however, the reality is that they may never have the opportunity to afford market rate homes. And like many other families, low income families may only gain wealth from their homes if they remain in the home for many years.
- Are shared equity homes eligible for FHA financing?
Yes. FHA rules (24CFR Section 203.41) specifically allow restrictions imposed by government or nonprofit affordable housing programs intended to preserve affordability. The rule explicitly allows restrictions on resale price, requirements that homes be resold only to income-qualified buyers and requirements that owners occupy their homes as their primary residence. Sponsors are also permitted to make loans which require sellers to repay a share of market price appreciation. However, several issues in the language of this rule, interpretation of the rule in a subsequent mortgagee letter (94-2) and inconsistent interpretation of both by regional FHA staff have meant that many shared equity homeownership programs have not been able to take advantage of FHA insured mortgages.
- What happens to shared equity homes when market housing prices fall?
There are several common approaches to setting resale prices in shared equity homeownership programs and they differ in important ways, but most provide owners with significant protection against falling home prices. For example, San Francisco imposes price restrictions tied to the change in the Area Median Income in its Below Market Rate (BMR) homeownership program. BMR buyers purchase their homes for far less than their market value. Declines in the market value of units have no direct impact on the maximum resale price. As long as the market price remains well above the restricted price, BMR owners are likely to be able to realize limited appreciation even in a falling market. However, the program does not guarantee that sellers won’t lose money. Recent dramatic drops in condo prices in San Francisco have resulted in market prices that are only slightly higher than the affordable prices in some buildings which makes it difficult to sell BMR units for their maximum formula price. In this situation, owners may choose to wait for prices to recover or they may sell for less than their maximum price.
Similarly, for homeowners whose prices are limited to some percentage of the market appreciation, the public investment is generally at risk before the homeowner’s equity. For example, Salina, CA uses a shared appreciation loan to protect affordability of homes created through its inclusionary housing ordinance. In a rising market, sellers must repay the initial subsidy that they received plus 3% interest, as well as a share of the increase in market value of the home. But when prices decline the city forgives all or a portion of its subsidy to allow owners to recover their full investment in the home whenever possible. In this way, while shared equity owners are not guaranteed to get their investment back, they are significantly less likely to face a loss than most owners.
Not every shared equity program is structured this way and it is therefore important to closely study the details of each resale restriction.
- Can we use HOME funds for Shared Equity Homes?
HUD rules for the HOME program require participating jurisdictions to preserve the public investment either by recapturing HOME funds at the time of resale or through the imposition of resale price restrictions. The HOME program, however, only requires that affordability be preserved for 5-15 years, depending on the level of public investment. Programs are free to exceed these minimum affordability periods and many do. The home program has been a primary source of public investment in shared equity homeownership programs in many communities.
- Will homeowners maintain their homes if they don’t keep all the equity?
Shared equity housing offers families stability, like in traditional homeownership. Families in shared equity housing may remain in their homes as long as they want, thus they generally have a the same interest in quality maintenance as traditional homeowners. Most shared equity homeownership programs also allow homeowners to recapture the value of capital improvements that they make to the home. A study by Susan Saegert and Gary Winkel found that housing cooperatives in New York City were better maintained than similar properties, in spite of strict limitations on the resale value of these units.
- Is it hard to sell shared equity homes?
Generally not. Most communities maintain waitinglists of eligible buyers who have few other homeownership options. However, because shared equity is an unfamiliar concept for many buyers and because the specific restrictions imposed can be complex and intimitating, it often takes additional effort to ensure that buyers understand and will truly benefit from the program. Where marketing problems arise, mistakes in the pricing of the affordable units are often the source. Shared equity homes must be priced well below comparable market rate homes to ensure that buyers will accept the restrictions.
- Will Fannie Mae purchase loans made to buyers of shared equity homes?
Yes. Fannie Mae has developed guidelines that allow buyers with resale price restrictions to take advantage of any of Fannie Mae’s community lending products. The rules are designed to protect the lender and Fannie Mae’s ability to ensure repayment of the loan while allowing program sponsors to meet their public policy goals. They allow for restrictions that survive a lender’s foreclosure on the home under certain circumstances. Deed restrictions must be reviewed and approved by Fannie Mae in advance but for Community Land Trust ground leases based on the Model Lease Fannie Mae has developed a standard lease rider that can be attached to ensure conformance with their guidelines.
- What happens to price restrictions when a lender forecloses on a shared equity home?
Currently most shared equity homeownership programs allow price and owner occupancy restrictions to be terminated in the event that a lender forecloses on an assisted home. This provides the lender with maximum flexibility in reselling the home and recovering their investment. However a number of programs in especially strong housing markets require that restrictions survive foreclosure and this approach has been apporved by Fannie Mae. In those cases, upon foreclosure the lender must ensure that the home is sold to an income qualified buyer for no more than the maximum affordable price. In either case, sponsors of shared equity homeownership programs can often help prevent foreclosures by assisting owners with refinancing or facilitating sale to another eligible buyer.
- Is it fair to homeowners to limit their appreciation?
Shared equity homeownership programs maintain affordability by limiting the extent to which homeowners can profit from rising home prices. This limitation strikes some people as unfair. Why should low-income home buyers face such limits when others earn unlimited appreciation? Others feel that when the public invests scarce resources to help a family attain homeownership, letting that family retain all the profit from the public investment is unfair to all the other families who did not receive asistance. Shared equity homeownership programs offer a middle ground that allows buyers to earn real wealth and experience all of the other benefits of ownership but also allow today’s public investment to serve one family after another.
For homebuyers without the ability to afford market rate home prices, the benefits of this approach outweigh the drawbacks. Such benefits are fixed and sustainable housing costs, mortgage interest deductions and, most important to many, a place to call home that allows homeowners freedom and control over living space. In terms of public subsidies, by limiting appreciation the public portion of the resale stays with the home allowing more low income families to benefit from homeownership.
- How does shared equity compare with other approaches to affordable homeownership?
[Excerpt from and link to Center for Housing Policy Paper]
- Is shared equity relevant in weak markets?
It is certainly true that rapidly rising housing prices led many communities to establish shared equity homeownership programs. But with the recent market decline, interest in shared equity homeownership has continued to grow. We have seen the lasting negative results of the ongoing cycle of boom and bust in housing markets. With lower prices, we have a rare opportunity to purchase homes at affordable prices and preserve them before the next boom. Shared equity can be used as a tool to stabilize declining neighborhoods and can provide homeowners with real protection against falling prices.
If we didn’t expect home prices to ever recover, resale price restrictions would be unnecessary – housing would remain affordable naturally – but homeownership programs that offered an ongoing partnership with homeowners to ensure occupancy and adequate maintenance and to prevent preditory lending and protect against foreclosures would, nonetheless, help stabolize neighborhoods. But, more realistically, we do expect housing markets to recover in most places. Even in communities that didn’t experience rapid housing price increases in the past decade, the threat of rising prices remains real. Many weak market cities have central neighborhoods that have been experiencing increased housing demand due to their proximity to transit. Where we are directing significant public investiment to revitalize transit friendly neighborhoods, we are likely to create future housing affordability challenges which can be addressed with shared equity homeownership.