Re: [Mpls] affordable housing & density seminar...

[Jeff Washburne]

Community Land Trusts (responses to comments and questions offered by Bill Cullen) Bill Cullen writes: "1) This program was granted $125,000 from MCDA and $50,000 from General Mills to build "one or two" units.  Each unit is sold for $155,000 -- not including the land.  So, the non-profits are selling townhomes, charging rent for the land, and netting income of $242,500/unit ($155,000 + $87,500). Using the MLS, I searched Hennepin County for townhomes listed under $155,000.  It found 80.  When I searched on townhomes for under $242,500, it found 446.  What problem did this land trust solve?" Jeff Washburne responds: This is how it works.  Let's take the Hope Community townhomes as an example (from the Star Tribune Article, 11/16/03).  Hope Community is developing 4 units that will market appraise for approximately $180,000 each.  Those units will be sold for $138,000 to $155,000 to homeowners (equaling $25,000 to $42,000 affordability subsidy).  (NOTE:  Before the City of Lakes Community Land Trust was formed, Hope Community knew that affordability would one day be lost on these units if not protected, so they wanted to put them into the land trust so that the subsidy THEY raised for these units wouldn't be lost.)  Back to the example (using $155,000 purchase price as an example):  So, at closing, Hope Community will convey the land to the CLCLT and a buyer will purchase the "improvements" or home through a mortgage for $155,000.  No big deal as this is not very different than how affordable homeownership has been done in Minneapolis over the past decade (only more recently are affordability capital funders ensuring that the affordability subsidy is recapture at resale, typically structured as 0% loans, due on sale - allowing the recaptured affordability subsidy to be used on another household). The essence of the CLT model is it's ability to not only be a vehicle to create affordability today, but also tomorrow.  Let's assume that 5 years later the household decides to sell and the home's market appraisal is now $230,000 - a $50,000 increase in value (assumes only 5% annual increase in housing values, 6% 30 year mortgage, 3% annual income increases).  Over the past 30 years, housing values have risen at an average of 7.5% annually, while wages over the past 20 years have risen at an average of only 4.7%. The City of Lakes Community Land Trust has a 25% Appraisal-based resale formula which means that the CLT home seller would receive $12,500 (25% of $50,000), plus down-payment paid, plus principal retired to total approximately $24,500 received at selling.  Let's be clear that this amount does not equal the approximately $64,000 that a 100% equity situation would offer if the CLT model was not used.  But it is also important to recognize that the CLT household assisted would not have been able to obtain a $180,000 mortgage. The next CLT homebuyers will be able to purchase (using assumptions above) the above-stated home for approximately $167,500 versus $230,000.  The CLT is an effective tool to assist households that otherwise would not be able to purchase a home and it allows for the precious affordability invested to be retained and grow over time.  It is important to note, we will be able to assist households at 60% of MMI for the initial sale.  Through the CLT model and the example above, will be able to serve a household at 59% of MMI five years from now.  Through a conventional transaction, the initial MMI served would have been 70% MMI and five years later is 77% MMI.  It is also important to note that if a deferred loan was used instead of the CLT model the new selling price would have been $205,000 ($230,000-$25,000) versus the new CLT price of $167,500 ($230,000 - $25,000 (initial subsidy) - $37,500 (75% of $50,000 appraisal value increase)). We owe it to every potential homeowner to evaluate every opportunity and if it's better for them to hold off on a CLT purchase so they can clean up credit issues so that they can buy a 100% equity home, then we all need to support that buyer in that decision. On the rent issue.  It is true that the City of Lakes Community Land Trust owns the land and leases it back to the homeowner, but it is at a rate of $15/month ($180/year).  This lease fee serves three purposes: 1.)  "Canary in the coal mine" - if a household is having a tough time paying $15 a month, then there might be greater problems in their lives and it allows the CLT the opportunity to step in and assist so that their mortgage doesn't go into foreclosure.  2.)The lease allows the homeowner to all the rights of homeownership and can do as they please (within rationale reason) with the land.  3.)Supports, in a small way, the operational costs of the CLT. Bill Cullen writes: "2) The owners cannot sell for more than 25% above original purchase price. And the owner only gets 25% of that gain.  This is messy.  Homeowners will be trapped in these homes.  They will have SOME equity, but they will never be able to sell and "buy up" as their equity will not appreciate at the rate of the market." Jeff Washburne responds: Most of this is hopefully explained above.  While we are just starting up as a CLT, there was a recent study conducted by the Burlington, VT CLT that contradicts the comments above.  While Burlington, VT is a very different city than Minneapolis, we feel it begins to legitimize the use of the CLT model nationally.  Burlington CLT has approximately 600 CLT units in the county they serve.  Over the past 15 years, they've had 97 resales.  Of those resales, they were able to track 81 of the households.  What they found was: a.)that 60 of the households sold and bought 100% equity market-rate housing within 6 months of selling; b.)4 households made a lateral move within the CLT to another CLT purchase; c.) 16 moved back into rental housing; and d.)1 died.  Resales occurred at an average after 5 years (similar to national resale averages).  Bottom line:  75% of the households had enough equity to purchase market-rate homes.  Granted, lifestyles, wages, situation may have also changed for these households during that time, but CLT ownership allowed them the peace of mind to focus on opportunities like going back to school, getting married, clean up debt, etc.  I don't have an electronic link to this study, but would be happy to send it to any list members - please email me off-list.  My experience, albeit only a year in this capacity, has quickly opened my eyes to the realization that households looking to buy a home are doing just that...aspiring to buy a home.  While equity and ability to create wealth are important, they have not been the driving forces for the people I'm meeting with.  This is an opportunity for them to be successful homeowners, allowing a constant environment for their children to grow, and a place to call "home". Bill Cullen writes: "3) How is the next owner selected?  If a property cannot sell for more than 25% over purchase price and the owner has it 10 years, the property will be under market.  Everyone will want to purchase it.  How will the next buyer be picked?  Lottery?  What will keep the second buyer from immediately re-selling and pocketing a 25% gain?" Jeff Washburne responds: We've developed a CLT homebuyer selection policy that I would be happy to share with anyone.  We have numerous minimum threshold criteria that mandate households must be less than 80% of MMI, meet lender mortgage financing criteria for the improvement portion of the purchase price with a qualified CLT lender, and understand the CLT model (the resale formula, ground lease, benefits, etc.).  Additionally, we require that all CLT buyers complete the Home Ownership Center 9-hour homebuyer education course, meet with a Home Ownership Center Counselor, attend a CLT orientation, meet with us individually, meet with a mortgage lender, and then meet with an attorney (of their choice, paid for by us) to review the ground lease.   Once a household has met the minimum criteria, we have selection criteria that gives households points for 1.) being first time homebuyers, 2.) income (lower-income households receive more points), 3.) appropriate household size (size of household best matches home size), and 4.) missed CLT opportunities (in the event a household has attempted to purchase CLT homes in the past.  After that, if all points are equal between buyers in the process, there will be a lottery to select a buyer. Using the example from the first of Bill Cullen's questions:  The market appraisal (well actually, it is technically a lease-hold appraisal, but doesn't vary significantly from a fee simple appraisal and will be the same lease-hold appraisal methodology from resale to resale) will be used in establishing a price.  So say a household buys the home mentioned above valued now at $230,000 (they only pay $167,500 for the home).  Assuming they sell tomorrow, in all likelihood the home will still be valued (appraised) at $230,000.  0% of $0 is still $0. Bill Cullen writes: "It is my opinion that creating a housing market which operates outside the real housing market is unlikely to be successful." Jeff Washburne responds: There are numerous housing models that "operate outside the real housing market".  Less than 60 years ago, mortgage lending as we know it didn't exist.  Condos, Coops, Interest Adverse Financing, Reverse Mortgages, Jumbo Loans, etc. were all at one time considered "outside the real housing market" housing tools.  Just using Limited Equity Coops as an example. Based on what I've experienced, mortgage lenders still seem to be more comfortable with the CLT model than that of Limited Equity Coops at this time and I feel that Limited Equity Coops are also a great housing tool that the residents of Minneapolis should also have at their disposal.  No one model is going to fix the housing problem in Minneapolis.  It it going to take a variety of tools the create a continuum of housing opportunities and target a wide range of need. Thank you. "Trying to do my part in making Minneapolis a better place today, tomorrow, and when I'm long gone." Jeff Washburne Corcoran Neighborhood Resident Program Director, City of Lakes Community Land Trust