Scattered-Site Properties
and Community Land Trusts
A Strategy for Long-Term Stabilization
of the Stock of Affordable Housing
in Economically-Stressed Communities
Edward J. Dodson, M.L.A.
[A Paper Presented at the Annual Conference of the
Council of Georgist Organizations, held in Cleveland, Ohio, Thursday,
August 6, 2009 ]
The rapid increase in the number of vacant and abandoned properties
is a problem all across the United States and beyond. For many low-
and moderate-income households, the prospects for maintaining
homeownership have almost disappeared as the economy has faltered.
Housing savings has dropped to the lowest level since the Great
Depression years, while tightened credit standards imposed by our
banks is forcing even more individuals into that segment of the credit
market dominated by pay day lenders and check cashing services.
What has made housing an issue of national concern is the fact that
there is no sign of a recovery on the horizon; and, to the extent
businesses increase production, economists are forecasting a jobless
recovery. We are certain to see continued increases in the number of
households evicted from apartments as well as from homes lost to
foreclosure. My former employer, Fannie Mae, reported last week that
serious mortgage delinquencies (those behind 60 days or more) have
increased on its $793 billion portfolio from 1.3 percent a year ago to
3.68 percent. With property values continued to slide in many markets,
the loss per incidence to mortgage investors and the mortgage
insurance providers is a worsening financial drain.
Another aspect to the disappearance of affordable housing options for
lower income households is that rental options had been declining for
more than two decades. The depth of the problem was succinctly
described in a 2007 press release by the National Low Income Housing
Coalition:
Nationwide, there are only 6.2 million homes renting at
prices affordable to the 9 million extremely low income renter
households -- a shortage of 2.8 million homes. Housing is considered
affordable if it costs no more than 30% of household income.
Not
a single Congressional district has enough rental housing affordable
and available to extremely low income families. Nationally, there
are only 38 affordable and available rental homes for every 100
extremely low income renter households.
With a scarcity of affordable housing, households end up having to
spend a precariously high percentage of their income for housing;
71% of extremely low income renters spent more than half of their
incomes for their homes. Or they pay the price in other ways by
working multiple jobs often at the expense of time for their
children, doubling or tripling up creating overcrowding, or living
in substandard housing that threatens their health. Under these
conditions, those who have the fewest coping skills and weakest
social networks are the ones who have the highest risk of becoming
homeless. [1]
In response to the worsening national crisis, the U.S. Congress
passed bills creating a National Housing Trust Fund. Unfortunately,
the defined funding sources - Fannie Mae and Freddie Mac - are under
government control and have not been able to make the anticipated
contributions to the Fund. Alternative funding has not yet been
approved, leaving the task of providing affordable housing to those
most in need to state governments and local communities already
seriously lacking the financial resources. Funds for down payment
and/or closing cost assistance, interest rate buy downs, property
upgrades or subsidizing of new construction are scarce.
During that portion of the current property market cycle when land
prices were climbing, the most effective way for communities to
achieve an increase in the supply of permanently affordable housing
units was the imposition of inclusionary zoning, requiring developers
to construct a certain number of affordable units within an approved
subdivision or planned unit development. A distant second but
potentially effective measure is to bring housing into a community
land trust, where the housing units are privately owned but are
subject to resale restrictions.
What the advocates of the community land trust model understand is
that every parcel of land has some rental value in the marketplace.
The difference between this market rental value and the annual revenue
collected via the property tax represents an imputed income stream to
landowners. This income stream is capitalized by market forces into
the price for land. In communities and regions blessed with strong
business activity (and, therefore, a sound employment base) the demand
for housing -- and for sites upon which they sit -- always translates
into highly speculative land markets that pull up the cost of building
sites to levels where the construction of units affordable to many
households is nearly impossible without substantial public subsidy.
The community land trust responds to this outcome by removing land
parcels from the sales market - forever.
One of the great ironies of the current crash in property prices is
that while land prices have fallen, so have household incomes and
savings as well as funds available to channel into affordable housing.
A small number of first-time homebuyers are benefiting by the property
crash, but taking on mortgage debt at a time when employment security
is problematic may result in a higher level of defaults and losses
coming from these homebuyers than mortgage investors are prepared to
absorb.
The community land trust has been recognized by affordable housing
advocates as a unique and potentially self-sustaining vehicle for
mitigating the long-term problem of providing affordable housing. And,
I believe the case can be made for establishing and funding citywide
community land trusts as an important tool for neighborhood
stabilization and revitalization.
Land trusts have a long and positive history in the preservation of
open space and as administrative bodies for leasehold residential
communities. For a community land trust to achieve scale, the
challenge is how to acquire a large tracts of developable land, a
near-impossibility in urban communities where single-family housing
constitutes a significant portion of the housing stock. Past programs
of "slum clearance" opened land for development but rarely
provided the type of diverse amenities that characterize an actual
community. In our cities and towns, another strategy is needed;
namely, to take advantage of existing housing units by bringing them
into the community land trust, despite the fact that they are
scattered and the land parcels have been owned fee simple.
Neighborhoods suffering an endless chain of foreclosures, with many
of the properties left vacant to be destroyed by vandals can be helped
by bringing these properties into a community land trust, the trust
charged with the responsibility to bring the property up to code. The
housing unit can then be leased to eligible households or offered on
the market for sale. The homebuyer would then be charged an annual
ground rent by the trust in accordance with a predetermined formula
(e.g., what is determined to be affordable, but no greater than the
full current market ground rental value of the location).
The benefits of bringing properties into a community land trust
during this period of declining property prices is not immediately
evident. Even so, removing the land cost component from the purchase
transaction reduces both the cash required for a down payment and
closing costs, as well as the first mortgage loan amount. The monthly
payment of ground rent to the land trust would be factored into the
homebuyer's ability to quality for the mortgage financing based on
income.
Long-term success of the community land trust as a not-for-profit
entity will depend on the availability of a revolving fund to
facilitate future land purchases, particularly as the property markets
recover and prices begin to climb once again. Potential sources of
funding include both government agencies and private foundations
committed to housing affordability objectives (and, potentially,
grants made from the new National Housing Trust Fund). The trust
should not be permitted to put up the land as collateral for borrowing
from regional financial institutions, not only because of the risk to
lenders but because of the risk to the trust itself. The experience of
providing mortgage financing where land-to-total value ratios rose
well above 50 percent has been proven to be a highly risky
proposition.
Municipalities might consider imposing a general surtax on assessed
land values as a mechanism for providing funds to the trust. As a
not-for-profit entity, the trust's ground rent income could be
exempted from taxation so that ground rents charged to homebuyers
could be utilized for future co-purchases of properties offered for
sale under "normal" market conditions and not just those
acquired from lenders who have essentially abandoned properties
following acquisition by foreclosure.
The ground rent charged to the homebuyer could be paid directly to
the trust or indirectly by arrangement with the mortgage servicer as
part of the total monthly housing payment.
What is unique about the scattered-site strategy is its potential to
eventually become self-sustaining. No restrictions should be imposed
on the resale of homes purchased with community land trust assistance.
At the time of resale, the distribution of proceeds between the
homeowner and the trust would be apportioned based on reappraisal of
the real estate. Any increase in land value will be returned to the
trust. The value of any improvements made to the house itself will be
reflected in the appraisal and distributed to the homeowner. Based on
the selling homeowner's current income, this household may still be
eligible for assistance under the trust's program but is free to look
for a new property based on the neighborhood where they most want to
live rather than only in those neighborhoods or communities where a
fixed-site trust has homes or building lots available.
Another direct benefit of the program is that once the housing stock
of a neighborhood is stabilized and demand returns, trust involvement
would be transparent to the market; only the parties directly involved
in the transaction need be aware that the homebuyers do not own the
land. No special zoning or density variances are required by
government, and the properties will be scattered within existing
communities rather than concentrated as is now the case with most
subsidized housing.
A region might eventually experience the creation of a number of such
trusts, each designed to serve a particular segment of the population
and able to secure financial support from different sources (e.g.,
labor unions, pension funds, religious organizations, corporations,
etc.). Administration of the scattered site program by the land trust
can be expected to be much less demanding than most other housing
programs because of the partnership with mortgage servicers. Employers
concerned about the expense of transferring individuals into areas as
high property prices return would find it very cost effective to
contribute to the trust in lieu of providing repeated relocation
grants and other forms of compensation adjustments to employees, to
say nothing of the tax benefits of contributing to a not-for-profit
organization. Employers need to understand that one of the reasons why
there is upward pressure on wages is the heavy cost of residential
property.
The scattered site program as described here will not solve the
problem of housing for those who are without employment or do not meet
reasonable standards of creditworthiness. However, with fewer demands
on government to subsidize the housing needs of many lower middle
income households, perhaps government can concentrate its attentions
on revitalization of depressed areas and to providing residents of
such communities with desperately needed public services (including
short-term occupancy housing). What the scattered site strategy does
offer is a promising means of preventing further destruction of
resource-strapped communities and the preservation of affordable
housing when the land markets turn upward.
NOTES
- From a press release by the National Low Income Housing
Coalition, following testimony by Sheila Crowley, President,
before the Financial Services Committee of the U.S. House of
Representatives, 19 July, 2007.
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