Since the mid-1990s, the average price of a single-family home has risen considerably across the nation. In some areas, home prices have grown faster than household income over the same period, making it more difficult for a typical household to buy a typical home. Housing affordability may be at its lowest level in the past 15 years. According to the Housing Opportunity Index,1/ in the last quarter of 2006, 42 percent of homes nationwide were affordable to families earning the median income in their region, down from a rate of close to 60 percent through much of the 1990s and early 2000s.
There have been a number of public and private responses to the housing affordability issue. Some target homebuyers, especially first-time homebuyers, and are designed to ease the financial barriers to homeownership. These programs and incentives include down payment or closing-cost assistance, forgivable loans, and the federal mortgage tax credit. Another response is to build more housing that is affordable. This approach typically involves the use of federal, state or local funds to subsidize the development of owner-occupied housing units.
Recently, alternative strategies for increasing housing affordability have developed. One such alternative is the community land trust, or CLT. CLTs fall in a broad category of resale-restricted housing initiatives referred to as shared equity homeownership.2/ In CLT arrangements, the ownership of the home rests with the homeowner, while the ownership of the land, which is leased back to the homeowner, lies with the trust organization.
CLTs appear to have the potential to make homes permanently affordable. However, some players in the homebuying industry have raised questions about the CLT model. Here, we explore the workings of CLTs and examine some of the challenges to this innovative form of homeownership. Our exploration suggests that only time will tell whether the CLT strategy is truly effective at preserving affordability.
Variety and commitment
The Institute for Community Economics (ICE), a Massachusetts-based support organization for land trusts, counts approximately 170 CLTs in operation nationwide.3/ There are 12 CLTs in the Ninth Federal Reserve District, 8 of which are located in the Twin Cities region.4/ (For a list of Ninth District CLTs, see the sidebar below.) Most CLTs are located in markets where housing prices grew rapidly from the mid-1990s through the early 2000s and concerns were raised about housing affordability.
ICE estimates the network of CLTs across the country has created over 6,000 units of affordable housing worth over $1 billion. While most CLTs tend to be newly founded organizations with small portfolios, several are of greater longevity and scale.5/ One example is the Burlington Community Land Trust (BCLT) in Vermont, which controls close to 400 land trust units.6/
CLTs differ in terms of the scope of their operations. Some are actively involved in the development or redevelopment of housing. Others, such as the City of Lakes Community Land Trust (CLCLT) in Minneapolis, are not involved in housing production per se. Instead, they create their land trust portfolios by working with individual homebuyers to carve out land trust set-asides with the aid of public subsidies from for-profit and nonprofit housing developers. (For more on CLCLT’s approach, see the accompanying interview.) While the history and business practices of CLTs vary, they all share a common commitment to creating permanently affordable homeownership.
The dual-ownership model
How do CLTs create and preserve affordability? The key lies in a dual-ownership model with divided ownership rights. The nonprofit land trust organization owns title to the land and the homeowner owns title to the building, which can be a detached single-family home or an attached unit in a multifamily dwelling, such as a townhome or a condominium. The land trust provides a ground lease to the homeowner, giving the homeowner the right to occupy the land on which the home is located. The lease can vary in length according to state law (most last 99 years) and is renewable and inheritable.
The CLT’s position in the dual-ownership model allows the organization to control property modifications and, more importantly, stipulate the future sale price of the home, thereby preserving affordability. The typical ground lease contract contains the following stipulations:
- Limitations to building improvements and subleasing, including stipulations that limit absentee ownership;
- A clause allowing the CLT the first right to repurchase the property at sale or when a mortgage is in default; and
- A formula for determining the resale price of the property.
The resale formula is probably the most distinctive feature of the CLT model. In an effort to maintain affordability by reducing the effect of market appreciation, CLTs limit the share of the increased value of the property that is due to the homeowner following the sale of a land trust home. In the land trust model, a third-party market appraisal is used to determine a home’s value. The homeowner then receives a share of the increased value of the home from the sale. Homeowners typically recoup their original down payments and any principal paid over the life of the mortgage.
CLTs use a variety of resale formulas to calculate the amount owed to the homeowner. As a rule, the greatest share of the increase returns to the property via the land trust organization. If there is a loss or no gain in equity, the CLT and the homeowner usually share the burden. The chart below illustrates how the resale formula works.
For example, if a property originally appraised at $100,000 appraises for $160,000 when the home sells seven years later, the homeowner will receive a specific share of the $60,000 increase. In our chart above, the homeowner's share amounts to $15,000. The CLT sets the new sales price for the property by adding the amount paid to the seller to the old sale price for the property. This limits the level of appreciation in the property's sale price and preserves a degree of affordability for the next buyer. On the front end, CLTs are able to buy down the initial market value of a property through a variety of private grants, gifts or public subsidies.
CLTs typically use family income thresholds of between 50 to 80 percent of the area median family income to identify potential homebuyers. However, eligibility requirements vary depending on local housing conditions and the mission of the organization. For example, some CLTs extend the income threshold to up to 100 percent of an area's median family income. By identifying their area of operations, CLTs can also target their efforts to specific neighborhoods. According to a recent study of a sample of CLT organizations, the services provided by CLTs also vary. Some provide no services to their homeowners, while others provide a wide range of services, including mortgage preapproval, targeted homeownership training workshops and post-purchase support programs.7/
Sources of support and revenue
Like other nonprofits, CLTs receive support through a wide variety of sources. In the early 1990s, the U.S. Department of Housing and Urban Development (HUD) decided to allow Home Investment Partnerships Program funding to support land trust activities, essentially categorizing CLTs as Community Housing Development Corporations. The decision made CLTs more attractive to localities that receive this form of funding. Recently, Fannie Mae has also moved to support the land trust movement by developing a mortgage option that offers qualified CLT homebuyers low down payment and closing-cost requirements, reduced income qualifications, and higher loan-to-value ratios and debt qualifications.
In terms of revenue sources, many CLTs rely on developer fees and income associated with the acquisition and rehabilitation of properties. CLTs may also receive properties through outright donations. Each CLT homeowner also pays an annual lease fee, which can range from $200 to $400 a year. CLTs often use lease fee revenue to support their operations, especially if they have a large property portfolio.
Challenging the model
The CLT model has met with concerns and challenges, including a lack of full support from several key public and private sector actors. While HUD and Fannie Mae support the development of CLTs, other national housing entities—in particular, the Federal Housing Administration (FHA)—are not as supportive. FHA, an agency designed to expand access to mortgages for low-income, first-time homebuyers, requires the elimination of resale restrictions—a requirement that conflicts with the CLT goal of maintaining permanent affordability. The agency has been reluctant to purchase CLT mortgages without the addition of a rider eliminating the resale restrictions that are a key part of the land lease. Due to problems with securing FHA insurance, some CLTs have encountered obstacles in obtaining financing for projects where the mortgages contain resale restrictions.8/ The ICE and other organizations are working to resolve this issue with FHA.
Some private lenders have also hesitated to embrace the CLT model. Financing CLT homes through traditional mortgages is a legitimate form of lending, but lenders who are unfamiliar with the dual-ownership model have concerns about the fact that the loan collateral consists only of "improvements" (i.e., the building) plus the leasehold interest in the land, not the fee interest in the land. Similarly, they view resale and occupancy restrictions as factors that could further compromise the value of the home as collateral. The response from CLTs has been to increase outreach to specific lenders in order to alleviate these concerns through education. In addition, some CLTs credit Fannie Mae's support as a key factor in increasing lenders' comfort level for financing land trust homes.
Other concerns about the model focus on the unequal burdens and outcomes CLT homeowners face and the paucity of information about land trusts' success at maintaining affordability over time. In terms of unequal burdens, CLT homeowners typically pay all the taxes associated with the property, not just those associated with the building they own. While some trust organizations may offer limited tax abatements, most do not share this burden with the homeowner. Municipalities tax CLT properties at the same rate as other properties, even though CLT properties are not sold at the market rate. Consequently, CLT homeowners pay proportionally more property taxes for their homes.
In addition, some critics question the dual-ownership model that is the foundation of CLTs. They argue that homeownership is one of the only ways for low- and moderate-income households to create assets and wealth. Gaining only a limited share of the equity from a home sale could severely limit this ability. CLT advocates counter that the model may not make sense for all potential homebuyers and that the focus of their efforts is on long-term affordability, not asset development.
Lastly, little is known about the ability of CLTs to maintain affordability over time. While one study suggests the BCLT in Vermont has sustained an affordable portfolio of units,9/ there has been no broad-based study of all CLTs. Moreover, the vast majority of CLTs are nascent organizations and it would be premature to base any conclusions on their results.
The test of time
CLTs offer an innovative approach to creating and maintaining housing affordability. The small network of CLTs nationwide appears to fill an important niche in specific, high-cost housing markets and seems well poised to grow in size and scope. However, as they move into newer markets, these organizations will continue to meet questions about the underlying land trust model, especially its resale component.
Support from HUD and Fannie Mae, along with the outreach efforts of land trust organizations to lenders and policymakers, should help mitigate concerns. Still, the true test of the CLT model lies ahead, as more land trust homes undergo multiple sales over time. As the number of these transactions grows in the coming years, it will become possible to evaluate whether CLTs have succeeded in their mission to preserve affordability.
Community Land Trusts in the Ninth Federal Reserve District
Cannon River Community Land Trust
Chaska Community Land Trust
City of Lakes Community Land Trust
First Homes Community Land Trust
Greater Frogtown Community Development Corporation
St. Paul, Minnesota
Northern Communities Land Trust
Rondo Community Land Trust
St. Paul, Minnesota
Two Rivers Community Land Trust
West Hennepin Affordable Housing Land Trust
Woodbury Community Land Trust
North Missoula Community Development Corporation
Bayfield Home Trust
Source: Institute for Community Economics, www.iceclt.org.