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
[A paper presented at the annual conference of the Council of
Georgist Organizations, held in Cleveland, Ohio, 6 August 2009.
Reprinted from
GroundSwell, September-October 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."
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 tract 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.