Partners (Number 3, 2006)
Partners (Number 3, 2006)
Vol. 16, No. 3, 2006
CLTs Keep Housing AffordableKeeping Pace in a Changing Environment
Housing prices are soaring in many Sixth District states, making it difficult to recruit and retain lower-wage workers including police, public safety workers and teachers.
One of the most dramatic examples is in Florida, where the average price of an existing single-family home has jumped 80 percent since 2002, greatly outpacing the 1.4 percent increase in median family income.
As local and state governments, the nonprofit sector, and private business interests look for solutions to this crisis, one of the newest tools under consideration is the community land trust (CLT).
A community land trust is a nonprofit that acquires and holds land for the benefit of its local community, with the particular goal of making land and housing more affordable for those who have been priced out of the market. CLTs will either buy vacant land for the development of housing or buy land and buildings together. When a CLT sells a home, it leases the underlying land to the homeowner through a 99-year renewable lease. The CLT continues to hold title to the land and manages the ground leases on the properties.
The most important component of a community land trust is its ability to maintain affordability of the unit for future low- and moderate-income homebuyers. Many affordable housing programs impose limited affordability restrictions, usually in the form of 'soft second' mortgages with a term of five to ten years and no shared equity component. In contrast, the terms of the CLT's 99-year ground lease place limitations on the resale of the home. These restrictions are particularly important in regions where housing prices are appreciating rapidly.
Ground lease restrictions preserve affordability
Community land trusts typically impose two types of restrictions. First, limits can be placed on the resale of the home, preventing transfer to a household that is not eligible under the stipulations of the ground lease. This provision may restrict the sale to households with very low, low or moderate incomes, depending on the level of subsidy provided. The lease sets forth a 'resale formula' that determines the maximum allowable price. CLTs usually maintain the right of first refusal to purchase the property and provide assistance finding qualified buyers.
Second, restrictions govern resale prices and shared appreciation on the homeowner's equity. Each CLT designs its own resale formula based upon various factors and goals. Two primary goals in designing a CLT resale formula are: (1) to ensure fair access to homeownership for subsequent lower-income residents by maintaining the affordability of the CLT home over time and (2) to give the present homeowner a fair return on their investment when the CLT home is sold.
Developing this formula is clearly a difficult undertaking and must balance the needs of the homeowner with the overall goals of the CLT to provide affordable housing for the community that it serves. An important secondary goal of CLTs is to encourage long-term occupancy by imposing disincentives for quick resale (flipping). Ultimately a CLT aims to maintain stable communities and long-term security for the families residing in the neighborhood.
CLTs provide another option
The community land trust concept is another important tool in creating and sustaining affordable housing. While it does not offer fee-simple ownership and may not afford the ability to create substantial wealth, it does provide low- and moderate-income individuals an alternative to rental housing in high-cost areas along with a somewhat modest return on their investment. Additionally, CLTs make it possible for government and private funding sources to underwrite permanent affordable housing units with a one-time subsidy. Through CLTs, communities with high housing costs gain another option for recruiting and retaining essential workers.
This article was written by Janet Hamer, regional community development manager in the Atlanta Fed's Jacksonville branch.