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When a city makes a substantial grant to develop affordable housing, an important issue is what happens to the grant down the road. How long should the grant benefit the public’s interest in affordable housing? After a set period of time, should the grant become a gift to the owner of the subsidized housing?
Under some models, all or a portion of the grant is recaptured by the city if the subsidized property is resold, and the recaptured amount may be reinvested in other affordable-housing projects.
Under another model, if the property is resold, it must be resold to a low-income household at an affordable price, which is set by a predetermined formula. In this way, the public subsidy invested in making the home affordable in the first instance is retained in the housing itself, keeping it affordable for the next generation of homebuyers.
In the case of grants of $40,000 or more made through the federal HOME (HOME Investment Partnerships) program, federal regulations require a city to recapture the grant or to impose a resale restriction on the subsidized property for a minimum of 15 years, referred to as the “affordability” or “control” period. After the affordability period expires, the subsidized home may be sold in the open market; and the owner may pocket the equity, including the equity attributable to the HOME grant.
Thus the affordability period sets the time during which the public will benefit from the public subsidy. After that, the subsidy in essence becomes a gift to the homeowner.
In its Consolidated Plan, the City of Evanston states that it bases the affordability period for HOME grants on the “minimum HOME requirements.” The plan goes on to say the period may be increased with the approval of the Housing Commission and City Council.
Affordability for 15 to 20 Years
In the last four years, the City has approved HOME grants totaling approximately $2.4 million to subsidize nine housing projects containing a total of 30 condominium units, townhouses or homes. The affordability period set for 29 of these units is 15 to 20 years. After the affordability period expires on these 29 units, they will no longer be in the pool of the City’s affordable housing, and the City will not recoup any portion of the grants made for those units.
Econ Development Corporation’s pending request for a HOME grant of $250,000 to develop three affordable condominium units at 241 Callan St. provides an example. If approved (City staff has recommended that the request be denied), the HOME funds would help finance the rehabilitation of the units and enable EDC to reduce the sale price of each unit by $83,333. City staff estimates that the HOME grant would reduce the sale price of each of the three units from $285,000 to $191,667.
As a condition for receiving the HOME grant, the three units would be subject to a 15-year resale restriction that would require the units to be sold to income-eligible persons at an affordable price. The affordable price would be the initial subsidized price of $191,667, plus three percent each year, plus the cost of certain capital improvements made after the initial sale. The resale restriction thus attempts to ensure that the subsidized units remain affordable for 15 years. It would thus preserve the public benefit for 15 years.
After the 15 years, however, the owners of the subsidized units would be allowed to sell the units in the open market, without any restrictions and without having to repay the HOME subsidy of $83,333. The unit would no longer be available as an affordable housing unit, and the City would not recapture the HOME grant to develop other affordable housing units.
Donna Spicuzza, housing planner for the City, acknowledged in a telephone interview with the RoundTable that the $83,333 in essence becomes a gift to each owner of a unit, built up over 15 years.
When asked why the City sets the affordability period at 15 years rather than a longer period, Ms. Spicuzza said the period meets the requirements of the federal regulations. She added that the life expectancy of a rehabbed condominium unit is about 15 years, and after that it may require an additional investment of funds to keep it affordable. She said staff would not recommend a change in the affordability period.
Federal regulations, however, allow for longer periods and provide flexibility.
John Emmeus Davis, a research fellow with the National Housing Institute and the author of “Shared Equity Homeownership,” (2006) told the RoundTable that federal regulations allow cities “to adopt a control period that extends longer than the 15-year period specified in the final rules for HOME. This statutory period, in other words, is a minimum, not a maximum.” He added that “HOME is an unusually flexible program that grants [cities] a wide degree of discretion.”
Debbie Willis, operations specialist for the Department of Housing and Urban Development in Chicago, also told the RoundTable that a city can impose an affordability period that is longer than 15 years. She also said that cities have flexibility in their approach. She said if it was disclosed upfront to the homebuyer and included in a promissory note, the city could impose a resale restriction for 15 years, and then if the property were sold in the open market after the 15-year period expired, the city could recapture the HOME subsidy.
In “Shared Equity Homeownership” Mr. Davis says most proponents of affordable housing prefer that subsidized housing remain affordable forever. He also states, “As the size of the subsidy required to boost a lower-income household into homeownership has grown ever larger – now exceeding $100,000 per unit in some communities – it has become harder to justify the loss of these public subsidies – and the loss of affordability these subsidies have bought.”
Mr. Davis told the RoundTable, “Cities cannot afford – and cannot justify – allowing precious affordability and scarce subsidies to be lost after 15 years (or sooner).”
The Community Land Trust Model
The Citizens Lighthouse Community Land Trust of Evanston (CLCLT), a nonprofit organization, provides another approach to preserving affordability. The housing developed by CLCLT remains affordable forever.
Betty Ester, board chair of CLCLT, told the RoundTable that she and other members of the community selected the land trust model, which is used nationwide, because under the 15-year affordability model used by the City, “every 15 years you need a new unit, because every 15 years you lose a unit.” Under the land trust model, the “house remains affordable forever and never goes back on the open market,” she said.
The City granted $99,500 in HOME funds to CLCLT to rehab a single-family, three-bedroom home at 2212 Washington St. The total cost of the project is about $300,000. Together with fundraising efforts, the grant will enable CLCLT to sell the property to a qualified family for $180,000.
Under the land trust model, CLCLT will retain title to the land and give the buyers a deed conveying title to the physical structures on the land. The land will be leased to the buyers for 99 years for a nominal rent of $25 per month.
When the new homeowners sell the home at a future date, they will be required to sell it to a qualified buyer at a price that is affordable to a family earning 80 percent or less of the area’s median income. They will also be allowed to keep the principal they paid toward the purchase price and about 25 percent of the appreciated value of the physical structure of the land. The balance of the sale price will go to CLCLT to use to further its goal of developing affordable housing. CLCLT will also retain title to the land.
Ms. Ester said CLCLT maintains a connection with the owner of the home and that it will buy the property back or help the owner find an income-qualified person to buy the home. “We’ll be there when they’re ready to do that,” she said. “Our goal is to keep homes in Evanston affordable for the next generation.”