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Protecting Public Investment:
"Recapture" vs
"Resale"
View Recapture vs. Resale Chart
A Community Land Trust (CLT) functions to preserve public investment and to recycle and protect affordability. The CLT is an entity, typically a non-profit organization, which acquires and retains ownership of the real property and, in effect, sells the improvements via a 75-year ground lease to a homeowner, another non-profit, a cooperative housing corporation, or for-profit entity. This arrangement between the owner and the CLT protects housing affordability in perpetuity by ensuring that the housing is made affordable to low- to moderate-income persons upon the sale of a single-family, multi-family, and/or commercial property. For purposes of this report, the CLT focus will be on residential housing models.
1. Recapture of Public Investment. The recapture policy holds that the public investment is "recaptured," or collected, upon sale of the property receiving the public investment. Subsidy recapture provisions require the homeowner, when the home is sold, to repay particular subsidies that have reduced the cost of buying the home. Most cities treat this subsidy as a deferred loan, payable when the home is resold, refinanced, or is no longer the primary residence of the homeowner. The City reinvests this recaptured money back into affordable housing. Once sold, however, the property no longer requires low moderate-income household to purchase the property, and the sales price is not required to be affordable. Most cities adopt a subsidy recapture policy because it discourages homeowners from "flipping," or quickly reselling, their homes.
The subsidy recapture policy serves cities well when vacant land is inexpensive and available, and the public investment can then be re-invested in producing affordable housing. Given the increased costs and limited land availability in Missoula however, this policy no longer satisfies the needs of the City in creating and maintaining affordable housing opportunities. The Community Land Trust Legal Manual, produced by the Institute for Community Economics explains:
Subsidy recapture alone will not move a community toward a long-term resolution of its housing problems, particularly in appreciating real estate markets. The fact that subsidies are recaptured does not prevent subsidized homes from returning to the unrestricted market, with prices that may be greater than what is affordable for lower-income households. In communities where real estate prices are appreciating faster than the incomes of local residents, the recaptured subsidy will seldom be sufficient to reduce the cost of another home of similar type to a level affordable for another lower-income household. Over time, even if subsidy-recapture provisions have not expired, the buying power of the pool of recaptured subsidies becomes less and less and the number of homes that can be subsidized becomes fewer and fewer, unless the purchasing power of this subsidy pool is repeatedly renewed through further public investment. Programs relying solely on subsidy recapture, in the end, preserve neither the affordability of assisted housing, nor the subsidy put in to make the housing affordable. Both are lost.
2. Resale Price Restriction Policy. An alternative to the subsidy recapture policy is resale price restriction. Resale price restrictions go an important step beyond subsidy recapture in an effort to keep the subsidized home affordable for subsequent lower-income purchasers. Resale restrictions do not require the repayment of subsidies; instead, they preserve the value of subsidies - as well as the value of community efforts that increase real estate values - by fixing the subsidy in the home so that the subsidy is passed on to subsequent owners.
"Resale" policy requires that when a property is sold, the subsequent buyers must be low to moderate income; and the property must be sold at a price that is affordable to the new buyer while providing a fair return, not a market return, to the seller. Resale price restrictions are implemented by three basic methods. First, the nonprofit or public agency retains a pre-emptive right, or right of first refusal, to either purchase the home or find another income-eligible buyer to purchase the home. The effectiveness of a preemptive right depends on the continued ability of the nonprofit or public agency to exercise this right. Second, short-term resale price restrictions, generally lasting from 5 - 20 years, are imposed by a deed restriction or restrictive covenant running with the land. While short-term restrictions are more effective than subsidy recapture provision, they do not preserve long-term housing affordability or allow the amount of public investment to be recycled. The third method is by perpetual resale price restrictions.
Perpetual resale price restrictions can be implemented in two primary ways: 1) Restrictive Covenants that run in perpetuity, or 2) The Community Land Trust Model that utilizes a 75-year, renewable ground lease (the longest allowable by law in Montana ). Resale restrictions are typically defined in restrictive covenants, deed restrictions, or ground leases and define the resale requirements. For example, the Land Stewardship Program has resale restrictions that require a property be sold to households at or below 80% of median family income and that the property be sold at a price that is affordable to the subsequent buyer. The resale restriction also stipulates that the property is sold to a subsequent buyer at a price that provides a fair return to the seller. The resale price formula is provided in the resale restrictions. The CLT Model provides distinct and important advantages over a restrictive covenant in securing and maintaining perpetual affordability. The CLT typically charges a ground lease fee for the use of the land, so the CLT entity is actively engaged, on a monthly basis, with its homeowners. The CLT model also provides the cornerstone for homebuyer education and homebuyer support, including foreclosure prevention.
CHARACTERISTICS OF THE TRADITIONAL COMMUNITY LAND TRUST
The CLT has the following characteristics:
1. Dual Ownership. The CLT acquires multiple parcels of land within the geographic service region of the CLT. The CLT retains ownership of the land in perpetuity. Existing improvements (homes), or housing that is subsequently constructed, are then sold to individual owners, cooperative housing corporations, non-profit developers of rental housing, or other types of entities.
2. Leased Land. The CLT intent is to retain ownership of the land forever, and it provides use of its land by the owners of the improvements located on its property. The real property is conveyed to individual homeowners (or rental housing owners) through long-term, 99-year ground leases. This two-party contract between the CLT and owner protects the lessee's interests in security, privacy, legacy and equity, and the contract enforces the CLT's interests in preserving the appropriate use, structural integrity, and continuing affordability of any buildings located on the CLT land.
3. Perpetual Affordability. The CLT retains an option to repurchase the housing unit(s) located on its land should the owner/lessee choose to sell. The resale price is set by a formula contained in the ground lease that is designed to give present low-income homeowners a fair return on their investment, while also providing future homeowners access to affordable housing.
4. Perpetual Responsibility. The CLT, as owner of the land underlying the housing unit(s) and as owner of an option to repurchase the housing unit(s), has a continuing interest in what happens to the buildings and to those who occupy them. Should the property owners allow their buildings to become a hazard, the ground lease gives the CLT the right to step in and mandate repairs. Should these property owners default on their mortgages or fail to pay their property taxes, the ground lease gives the CLT the right to step in and cure the default by paying the past due taxes or mortgage payments, forestalling foreclosure.
5. Community Control. The CLT is typically a community-based organization, drawing members from its own leaseholders and from residents of its community.
6. Balanced Governance. The board of directors of the CLT model is traditionally composed of three parts, each with an equal number of seats. The traditional CLT board model consists of the following representation: 1). One-third leaseholder representation; 2). One-third community representation; 3). One-third public officials, local funders, nonprofit housing providers or social services and other individuals representing public interest. Control of the board is balanced to ensure that all interests are heard and none predominate.
7. Flexible Development. The CLT is a community development tool that accommodates a variety of land uses and a diversity of building tenures and types. CLTs around the country construct, acquire, rehabilitate, and resell housing of many kinds, e.g. , single-family homes, duplexes, condominiums, cooperatives, single-room occupancies (SROs), apartment buildings, and mobile home parks.
C. BENEFITS OF A COMMUNITY LAND TRUST
The CLT model has six primary benefits to the community it serves:
1. Stewardship: Preserving Scarce Resources;
2. Mobility: Enhancing the Housing Continuum;
3. Security: Backstopping Low-Income Households;
4. Stability: Supporting Development without Displacement;
5. Flexibility: Adapting to Sites, Funds, & Constituencies; and
6. Frugality: Shifting Administrative Burdens and Cost.
1. Stewardship: Preserving Scarce Resources
As a "steward" of the land, the CLT is able to preserve and recycle public subsidies. Through the 99-year ground lease, the CLT preserves affordability for future homeowners. The initial investment in affordable housing units is recycled by the resale restriction contained in 99-year the ground lease. For example, if public funding is used to purchase the land, the public investment in affordable housing is dedicated to creating affordable housing opportunities for future CLT leaseholders/owners. In addition, the value of S.M.A.R.T. HousingT incentives and fee waivers is preserved for affordable units that are part of a CLT.
2. Mobility: Enhancing the Housing Continuum
The CLT model provides an additional rung on the housing continuum ladder for low-income households interested in home ownership opportunities, presenting another option to low-income people seeking to improve the type and tenure of their housing. The CLT model allows low-income households to step-up to "feesimple" home ownership by providing an "assisted home ownership" option.
3. Security: Additional Support for Low-Income Homeowners
The CLT model supports homeowners after they purchase a home by intervening to cure defaults on property taxes and mortgages. In this mode of support, the CLT is able to mitigate foreclosure. The CLT Ground Lease, coupled with separate addenda and riders, contains provisions that allow the CLT to step-in and forestall the foreclosure process to cure defaults.
4. Stability: Supporting Development without Displacement
The CLT can direct investments in neighborhoods undergoing revitalization efforts with a minimum negative impact. Public funding invested in a CLT benefits low-income households in rapidly appreciating neighborhoods by providing long-term resident renters and homeowners an opportunity to secure affordable home ownership in housing that is code compliant and poses no risk to health and safety. For example, long-term homeowners of a neighborhood may own and occupy housing that is dilapidated. The CLT can function as a component of a housing rehabilitation strategy that would provide decent housing to long-term neighborhood residents.
5. Flexibility: Adapting to Sites, Funds, & Constituencies
The CLT abandons a one-size-fits all approach to community development and allows for mixed-use land development and a mix of types of housing in scattered-site projects. For example, the CLT model can accommodate affordable home ownership, rental, and commercial opportunities.
Most importantly, the CLT is not confined to serve only neighborhoods that are currently undergoing revitalization or neighborhoods that are considered "blighted." Rather, the CLT model presents a unique opportunity to provide affordable housing "West of I-35," in neighborhoods that do not traditionally present affordable housing opportunities for low income households. For example, city surplus land located in West Austin that is rendered unaffordable due to the land value and resulting taxes can be made affordable to low-income households by the CLT model. With land values for single-family, residential lots frequently valued at $100,000 or more, removing the value of the land (or reducing the value of the land according to its ground lease value) would allow a low-income household to afford housing in West Austin .
6. Frugality: Shifting Administrative Burdens and Cost
The City of Austin is able to delegate responsibility for monitoring publicly-funded projects, using the CLT model. Over time and with an increasing volume of affordable housing units, the CLT can become financially independent. The CLT generates income from two primary sources: 1). The ground lease fee paid by the lessee; and 2). The potential income generated when a CLT home is resold. The amount of the ground lease fee should contemplate the administrative and operating costs of the CLT. The potential income generated when a CLT home is resold can be the result of a mark-up in sales price when the CLT purchases the home from a departing homeowner/lessee, or the income can result from a fee charged by the CLT for assigning its right to purchase when the home is resold directly to another homeowner/lessee. Using the CLT Model, the City of Austin could delegate the responsibility for enforcing publicly-mandated controls, such as enforcing resale restrictions and enforcing "evictions" when homeowners/lessees fail to comply with the ground lease requirements. As a separate, non-profit entity, the CLT would be responsible for handling issues related to lessee communications and lessee relations including the process of foreclosure/eviction in the event of default under the mortgage or provisions in the ground lease. While the City of Austin protects its public investment, it does not necessarily have to be the entity responsible for enforcing the restrictions that insure the public investment.
D. DISADVANTAGES OF A COMMUNITY LAND TRUST
The CLT model has several disadvantages that are detailed below.
1. Cultural Perception: Most notably, the CLT model has not been tested in Texas : Austin would be the first municipality in Texas to adopt a community land trust. The market demand for a CLT home in Austin , or in Texas , is uncharted territory. Cultural values could render a CLT home "undesirable" because the homeowner does not own the land. The CLT Model often suffers from a negative perception as a land ownership regime.
2. Limitation on Wealth Creation: A corollary to the first disadvantage is the limit on equity participation and wealth creation. In deciding whether or not to support the CLT model, the City of Austin must determine whether the public goal is: 1). To create permanent affordable housing opportunities; or 2). To perpetuate a system where a few low-income households can benefit from market appreciation of their homes in order to build and create wealth. (The CLT Model does provide a fair return on the homebuyer's equity investment; however, the homebuyer's participation in the full market rate appreciation of the home is limited.)
3. Perceived "Competition" with Non-Profit Housing Providers: A CLT will change the manner in which non-profit housing providers participate in publicly funded housing activities, and, as such, the CLT competes with the scarce public resources that are available to other non-profit housing providers. For example, AHFC provides forgivable loans to Habitat for Humanity to purchase land to develop home ownership opportunities for households at or below 50% MFI. AHFC also provides deferred payment, homebuyer assistance loans to homebuyer's who purchase CHDO-developed housing. If a CLT is adopted, AHFC must re-evaluate these types of loan products to non-profit housing developers, because the assumption is that the CLT offers a model for permanent affordable housing development.
4. Market Competition: Several volume builders, such as CENTEX and KB Homes offer housing that is priced affordably for low- to moderate-income home buyers. It is important to understand the impact of market-rate, unrestricted homes: These homes may be affordable to the initial homebuyer, but these homes will not be guaranteed affordable to the next homebuyer. A CLT is successful by offering a competitive product in a competitive, desirable location for a price that is more affordable than similar market-rate products, and the CLT model guarantees affordability for the next homeowner. Austin can provide such opportunities, especially in emerging communities like the Robert Mueller Municipal Airport (RMMA) Redevelopment Project.
5. CLT Model to Avoid Property Taxes: The concern of higher-income neighborhoods forming nonprofit CLTs to avail themselves of property tax exemptions provided to a CLT is unfounded. Property tax exemption for nonprofits requires that the housing serve low-income households. Further, public funding for a CLT must be conditioned on serving low-income households. |
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