Community Land Trusts and long-term affordable homeownership
How can we deliver long-term homeownership affordability in continually urbanizing and appreciating markets? One approach involves capturing land for long-term affordability use via community land trusts, as illustrated by this recent story from the Portland Oregonian:
Stacey Dolezal tiptoes behind her Realtor through a tiny two-bedroom house in
“Does it feel slanted?” she asks, looking over the living room. She likes the house’s ample kitchen cupboards, but she’s skeptical of the lack of closet space, the uneven floor, and the fact that there’s a space heater positioned in the center of the living room.
Still, she’s willing to take a closer look because the house, listed for $169,750, is near her price range.
Dolezal is the first of 30 new buyers the Clackamas Community Land Trust plans to help buy homes in north Clackamas County in the next three years.
Southeast of
… and getting closer!
The land trust, which keeps home prices down by covering the cost of the land where houses sit, aims to preserve a stock of permanently affordable homes in an area that faces the arrival of light rail and pressure for redevelopment.
This is a very effective means of unpeeling the orange by separating it into distinct parts:
If the house is the orange, the land has a peel …
Dividing land and building slices apart the benefits of homeownership in exchange for some affordability.
The nonprofit agency has raised enough federal money and private donations to aid in eight home purchases so far and expects to receive money for 10 more next year.
For the moment, the scale is minuscule, and the land assembly is being done by individual buyers. Still, it’s a bench test, a prototype.
Just add free land, and presto!
The land trust’s three-year initiative, called the Smart Growth Community Land Trust Homebuyer Program, is the only organized effort to preserve affordable home ownership in
Because land value is a residual, as economic value of homes rises, most of that passes through into higher values for development land. This is the weakness of demand-side programs (those that increase buying power of target customer groups): even as we raise their ability to pay for housing, the cost of that housing runs away from us, the proverbial pot of gold.
Demand-side affordability is right — over — there
The median sales price of a home in
Just as every silver lining has a cloud,
Man, who’d have thought a development moratorium would do that!
The rising prices mean that even prospective home buyers with stable, family-wage careers are often priced out of the market.
Enter the land trust, which helps by buying the land … at today’s market price:
The land trust helps families earning 80% or less of the area’s median income, or about $54,000 for a family of four.
Even though the land trust will give Dolezal up to $45,000 toward the purchase price of her new home, it’s been tough to find anything she can afford.
So tough, in fact, that the land trust has had to move farther from downtown
I’m sensing lower property prices on Mars …
Growing pressure for redevelopment has pushed the land trust to launch its three-year effort in the
“We’re targeting an area where smart growth is leading to a new quality of living,” said Nancy Yuill, executive director of the land trust.
“It definitely is going to appreciate. It’s what land does,” said Barbara Cartmill, who manages the urban renewal district for the Clackamas County Development Agency.
Meanwhile, Ms. Dolezal too has been reluctantly migrating her search outwards:
Since she qualified for a mortgage, the simple one-story cottage is only the third house that she’s found in her price range within the target area.
If you want to live in a desirable area, your first home is likely to be quite small.
Dolezal has been renting an apartment nearby for nearly five years but wants to stop dumping money into rent and longs for her own space.
Very human, and in some ways very shortsighted. “Dumping money into rent” could also be translated as “living more cheaply in your desired community.” Still, when the id is engaged, what can one do?
Smell a bargain?
Supply-side programs create new affordable homes. In rental, it’s straightforward to keep them affordable; either the owner or the property itself is subjected to income or rent caps. But when we sell a home to a home buyer, that buyer normally expects to capture full appreciation by being able to improve, refinance, or sell the home as she pleases. As a result, many first-time home buyer programs, however commendable in helping individual families improve their lot in life, often do little for long-term affordability, because the second owner is a market buyer.
The community land trust is different, aiming at permanent affordability. Like preservation land trusts, these community land trusts specifically take a property rather than household perspective:
When the land trust helps a buyer obtain a home, it becomes permanently affordable because the land trust retains ownership of the land. When homes are sold, they’re passed along to other qualifying buyers.
Key to the scheme’s enforceability is a land lease, as buried deep within the Clackmas Web site:
The homeowner purchases the house and pays a modest lease fee (currently $39 a month) to lease the land on a 99-year renewable lease.
Several technical matters:
· The lease is 99 years, because for historical legal reasons, longer leases are suspect.
· However, it is renewable, a clear attempt to circumvent the perpetuity restriction. Someone, somewhere, some time, will challenge the renewals. You just watch. [Safe prediction, since it’s 98 years away! — Ed.]
· The land lease costs the homeowner $458 per year.
Still, as the Clackmas Web site cheerily notes, this allows buyers to enjoy many of the ‘benefits of ownership’:
As a homeowner, you have full rights to use of the land, without having to purchase the land. You enjoy all the tax benefits of homeownership, you have the opportunity to build equity in your home, and you are able to participate in a fixed portion of the appreciation if you decide to sell the home.
“Fixed portion?” says the skeptical blog reader. “What means this fixed portion?”
Here then is the economic tension revealed. For the home to be affordable to a future owner — that is, somebody other than the first buyer — price appreciation has to be capped. The land lease is the enforcement vehicle, for it can have contingent payments that swallow any stipulated portion. In fact, although it’s not highlighted, rooting around in the web site reveals the following:
Upon sale, the seller agrees to sell the home to another qualified homebuyer or sell it back to the land trust. CCLT maintains an active list of qualified potential homebuyers who are able to buy our homes.
[…]
Permanent Affordability
If the homeowner decides to sell the home, they agree to sell the home at a price set by the resale formula.
Rocket fuel for home appreciation?
Resale formula? What resale formula?
CCLT’s resale formula rewards long-term owners by offering incremental increases in the homeowner’s portion of the appreciation at the time of sale. The resale formula balances the fair return on investment made by the homeowner with the community need to keep the home affordable for the next family.
‘Fair’ return? Please stop throwing reassuring vague adjectives my way — tell me the formula!
You vill tell me ze resale formoola
Through the community land trust model, the subsidy used to create the affordable home is only invested once, and it stays there forever. Talk about a permanent return on investment!
Permanent return to whom? By now my cynicism meter was on tilt. Further digging led me to the Sustainability Statement (link in .pdf), which, after one wades through two pages of homilies, says:
When one of our homeowners sells, they receive what they paid for the home plus 25-35% of the market appreciation that accumulated on the home while they owned it. This enables them to receive a fair return on their investment while the home stays affordable to the next family.
Thus we find the land lease is shared appreciation by another name. Is the sharing fair?
“Why wouldn’t it be fair?” asks the reader. “After all, this is a non-profit.”
“Well,” says the jaded blogger, “people aren’t necessarily numerate.”
To help its customers, Clackamas also points customers to down payment assistance and homeowner education workshops. Maybe someone will point them to this blog J.
Out of more-than-idle curiosity, I constructed a simple projected split of appreciation, using Ms. Dolezal’s example, and fitting in the largest possible land price and the asking price of the house she looked at. I further assumed 4% appreciation in market home value, something above baseline inflation. The results are less than rosy for Ms. Dolezal:
In other words, if the property appreciates 4% a year — and remember, it’s Ms. Dolezal’s occupancy, maintenance, and possibly upgrades (are those counted as adding to her share, I wonder?) — Ms. Dolezal’s share will appreciate about 2% a year, while the land trust’s share will appreciate 6% to 10% annually.
The economic bargain isn’t quite as good as it looks. Ms. Dolezal would do better to get the land price from an extended family member … but presumably she cannot, which is why she has arrived at the land trust’s door.
Although we hope folks will use our homes as stepping stones to move into market rate housing, they are not required to sell.
Since appreciation is limited, and affordability is embedded, there’s a risk, perhaps insignificant and perhaps not, that some families will become mildly (or severely?) house-locked, enjoying an affordability bargain compared with any other housing alternative and poorly placed to reap equity value and move elsewhere.
How long will she stay?
CCLT homeowners can own their homes for as long as they live, and they can pass it on to their children as their family legacy.
Legacy? Pass it on to their children? Is this neighborhood affordability, or some lucky individuals? Whom are we helping here? Whom should we be helping?
Multiple answers are defensible. The key is knowing what answer you want, and designing a program that gives you the answer you seek.
