If you live in an area where home prices are spiraling out of control, you’ve probably heard about someone trying to start a community land trust (“CLT”). A CLT is a type of community-controlled nonprofit that limits rising home prices. Perhaps you’ve seen how rent control limits rising rents in cities like New York? The idea is similar.
In essence, a CLT is a partnership between the members of the community and working class homeowners. A homeowner gets a roof over their head at less than market-rate, and the community ensures that the home will always provide shelter to a low-income individual.
To ensure that the homeowner keeps his or her promise of a perpetually affordable home, the CLT retains control of the land, while the homeowner owns the house itself. There is no practical difference for the homeowner.
The homeowner will be able to mortgage the home and pay it off ensuring that it acts as a savings account just like any other home. Further, just like how a homeowner’s association collects assessments for the betterment of all of the homeowners, the CLT collects lease fees for the same reasons.
It is when the homeowner goes to sell their home that the main differences between community land trust homes and market-rate homes come to light. Because the homeowner entered into a partnership with the community when they received a subsidy from the trust to buy the home, to compensate the community for the risk of helping the homeowner acquire the home, any appreciation of the home’s value is divided between the homeowner and the trust. The trust then uses their share of the profits to help subsidize the next homeowner. Let’s use numbers to help explain this.
At the start of the year, Joe, a renter, wants to buy a his first home. Joe finds a perfect home in a neighborhood of $100,000 homes. The problem, however, is that Joe can only afford to pay $50,000 for the home. Fortunately, the local community land trust is willing to help Joe, and puts up the other $50,000. In exchange for contributing $50,000, the CLT tells Joe that he can sell the house whenever he wants, but he can only sell it to another low-income person. Further, when he goes to sell the house, the trust will get 80% of any increase in value, and Joe will get 20%.
A year later, the home is now worth $110,000, and Joe wants to sell it to buy a market-rate home so he can keep all of the profits for himself. The CLT helps Joe find an eligible purchaser, and the home is sold to a new owner at a price below market-rate. To determine the portion of the $110,000 owed by the new owner, we must calculate the trust’s profits from the sale, which will in turn be used to subsidize the next homeowner.
From the sale, the trust receives its initial $50,000 plus its share of the increase in home value, $8,000 [(110,000-100,000) x 0.8 = $8,000]. Add them together, and we find that the trust now has $58,000 to subsidize the next homeowner. Therefore, if the home is worth $110,000, and the trust is willing to pay $58,000 to help the new low-income homeowner purchase the home, the new homeowner needs only pay $62,000 to purchase the home and live in a community where the homes are worth $110,000.
In case you were wondering how much money Joe received, he made back his original $50,000 plus his share of the increase in value, $2,000 [(110,000-100,000) x 0.2 = $2,000]. Thus, Joe now has $52,000 to put down on a market-rate home.
Should Joe instead decide that his first home is his forever home, and never sells it, he certainly has the right to do so. Joe’s land lease agreement with the trust is a 99-year agreement renewable by Joe.
The point of a community land trust is not to help working class people find a “forever” home. Its intent is to be a stepping stone for market-rate homeownership. Not only will the homeowner make more money in the long run with an unencumbered home, but moving to a market-rate home opens up space for another low-income individual to make the transition from renting to homeownership with the help of the CLT.
Thus, after a few years of owning a CLT home, the homeowners should (1) understand how to take care of a house, (2) have built up enough savings for a downpayment on a market-rate home, and (3) earned a high enough credit score to receive a fair mortgage from a lender.
There is so much to know about these amazing programs dedicated to homeownership, financial independence, and overall community improvement. Please feel free to send us your questions!
The Third Estate Team