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.