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HomeMy WebLinkAboutAgenda - 12-07-1999 - 9c1 ~ ~ ORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: .December 7, 1999 Action Agenda Item No. ~~'~ SUBJECT: Long-Term Housing Affordability DEPARTMENT: Housing/Comm. Development .PUBLIC HEARING: (Y/1~ No ATTACHMENT(S): INFORMATION CONTACT: Report Tara L. Fikes, ext 2490 TELEPHONE NUMBERS: Hillsborough 732-8181 Chapel Hill 968-4501 Durham 688-7331 Mebane 336-227-2031 PURPOSE: To present a report regarding long-term housing affordability strategies. BACKGROUND: Included. in the FY 1999-2000 Board of County Commissioners Affordable Housing Goal is a request for the County Attorney and the Housing/Community Development Director to prepare a report regarding long-term housing affordability. Specifically, this report would include the following items: 1.' Development of a process for evaluating affordable housing projects in terms of how they have achieved, for past projects, long-term affordability. 2. Develop criteria which can be used by the County Commissioners in evaluating long term affordability for new projects to include the following: a. A list of outcomes for accomplishing long term affordability; b. A list of outcomes expected from Community Land Trust in Orange County, Inc. and how land trustsimpact long term affordability; and c. An evaluation of the Housing Bond project review criteria. This report has been prepared and is provided with this abstract. FINANCIAL IMPACT: None. RECOMMENDATION(S): The Manager recommends receiving the report as information. 2 ~ Long-Term Housing AffordabilitX November 1999 Foreword The Orange County Board of Commissioners requested that the County Attorney and the Housing and Community Development Director prepare a report to include the following items: 1. Development of a process for evaluating affordable housing projects in terms of how they have achieved, for past projects, long-term affordability. 2. Develop. criteria which can be used by the County Commissioners in evaluating long-term affordability for new projects to include the following: a. A list of outcomes for accomplishing long-term affordability; b. A list of outcomes expected from the Community Land Trust in Orange County, Inc. and how land trusts impact long-term affordability; and c. An evaluation of the Housing Bond project review criteria. The following report seeks to address these items by defining and describing long-term affordability in academic terms as well as in terms of existing County programs. It also presents strategies for consideration by the Board of County Commissioners in their efforts to promote affordable housing in a manner which insures long-term affordability. ' Introduction 3 The First-time Homebuyer Programs of Orange County and other local housing non-profit organizations were designed to address the following barriers to homeownership for low income families that exist in our community. These include: 1. High property costs; 2. Insufficient funds for downpayment; 3. Insufficient funds for closing costs; 4. High existing debts and poor credit; and the 5. Need for property repairs. Thus, the primary objective of first-time homebuyer programs is to overcome these barriers to increase the level of homeownership among low-income households while increasing the number of affordable housing units in the community. (Low-income households is defined as families earning 80% or less of area median income.) This report looks specifically at how these programs can not only increase the number of affordable housing units in the community but also identifies strategies for maintaining long-term affordability. The. report outline is as follows. A. Definitions B. Current County Programs C. Available Strategies D. Concluding Comments Definitions Affordability -Affordability to the original purchaser and subsequent purchaser is a function of property value changes, income changes, and the prevailing interest rates or the cost of money. Traditionally, the U.S. Department of Housing and Urban Development (HUD) has determined that affordability means that the actual principal, interest, property taxes, and insurance (PITI) for the purchase cannot exceed more than 30 `percent of the family's monthly income. This definition means that different properties will be affordable to .different families depending on .their monthly income. For example, a family at 80% of median income may be able to afford a home that is not affordable to a family at 60% of median income. Thus, each prospective family's income will need to be examined in relation to the sales price of the home to be purchased under this program. First-time homebuyer - A first-time homebuyer for the purposes of this program is any low income household .that has not owned a home within the past three (3) years including households living in manufactured housing not permanently affixed to a foundation, or owner- occupants of homes not feasible for renovation. Current Cou Programs 4 There is not a current established methodology for evaluating past affordable housing projects in .the County in terms of how long-term affordability has been.achieved. In reviewing the current programs. below, past activities have been reviewed to determine what has occurred with the initial homebuyers and the units that they originally purchased with the assistance of public subsidy. It should be noted. that the County. began a second mortgage program for first-time homebuyers in 1992, thus, the review covers a seven year period. It is recommended that in the future, a formal methodology should be established that provides detailed tracking of program beneficiaries to determine the continued impacf of these projects on the county's goal of preserving affordable housing in the community. This system should also require private, for-profit and/or non-profit agencies to provide long-term monitoring of affordable housing projects that receive public subsidy and report their findings to the County on a periodic basis. HOME Investment Partnership Program Since 1992, the County has utilized HOME Investment Partnership Program funds from HUD to assist families become first-time homebuyers. This funding has primarily been in the form of a homebuyer subsidy made directly to or on behalf of .the homebuyer. The subsidy includes all or a portion of the downpayment, closing costs, or the financing for the balance of the .property purchase price and rehabilitation where applicable. The subsidy averages $15,000 per family that allows potential buyers to purchase property in the County by obtaining a lower cost or smaller first mortgage. Approximately 47 families have been assisted to date. The HOME subsidy has been provided in the form of an interest free, deferred loan for a period of 20 years which is considered the period of affordability. The loan is not repaid during the 20 year period unless the property is sold. If the property is not sold, the loan is forgiven at the end of the 20 year term. If the property is sold during the 20-year period the loan becomes due and the full amount of the HOME subsidy must be repaid from the proceeds of the sale. However, if the property is sold to a subsequent qualifying first-time homebuyer, the subsidy is transferable to the new buyer. If the property is not sold to a first-time homebuyer, the HOME subsidy repayment is returned to the County and must be used to assist another low-income buyer. "The seller is able to retain any proceeds from. the sale above and beyond the repayment of the first and second mortgage repayments. Since 1992., of the 47 families assisted with home purchases, approximately. four (4) families have sold their homes to non-qualifying families and been required to repay the subsidy. Community Development Block Grant (CDBG) Program Since 1996, the County has utilized Small Cities Community Development Block Grant Program funds to assist families become first-time homebuyers. This funding has primarily been in the form of a development subsidy that is an .investment of funds in the acquisition, construction, and/or rehabilitation of the project prior to the initial sale to the first-time homebuyer.. The subsidy has then been converted to a homebuyer subsidy to the. subsequent homebuyer. The subsidy averages $13,000 per family. Approximately 17 families have been assisted to date. The subsidy has been provided in the form of an interest free, deferred loan for a period of 20 years which is considered the period of affordability. The loan. is not repaid during the 20 year 5 period unless the property is sold. If the property is not sold, the loan is forgiven at the end of the 20 year term. If the property is sold during the 20 year period the loan becomes due and the. full amount of the CDBG subsidy must be repaid from the proceeds of the sale. However, if the property is sold to a subsequent qualifying first-time homebuyer, the subsidy is transferable to the new buyer. If the property is not sold to a first-time homebuyer, the subsidy repayment is returned to the County and must be used to assist another low income buyer. The seller is able to retain any proceeds from the sale above and beyond the repayment of the first and second mortgage repayments. Since 1996, approximately one (1) family has sold their homes and been required to repay the subsidy. Two (2) other families sold their homes to another low-income buyer and the subsidy has remained with the dwelling unit. Impact Fee Reimbursement Program The County Impact Fee Reimbursement Policy requires any organization requesting impact fee reimbursement to certify in writing, that, for owner-occupied housing, it will remain affordable to the anticipated beneficiary or beneficiaries for a period of a minimum of twenty (20) years or longer if required by applicable HUD policy. There is no document that requires repayment of the impact fee to the County if the property is sold within this time period. However, most families receiving the impact fee reimbursements have received second mortgages under either the HOME or CDBG Programs and thus have a required period of affordability. The Impact Fee Reimbursement Policy also requires any organization requesting impact .fee reimbursement for rental housing certify that the property will remain affordable for ninety-nine (99) years. The rental housing certification must be secured by a "deed covenant", requiring repayment to Orange County of the impact fee if the rental housing does not remain affordable during the period of affordability, which covenant will be further secured by a note and deed of trust. Evidence must be provided that agency and/or program guidelines are in place to assure affordability compliance. Housing Bond Program The evaluation criteria approved by the Board of County Commissioners in December 1998 has the following point structure. A. Affordability 30 points Income Targeting 20 points. Affordability 10 points B. Leveraging 20 points C. Design 10 points D. Community Sponsorship/Support 10 points E. Project Feasibility 15 points F. Developer Experience 15 points Of a possible total of 100 total points, ten (10) points awarded for affordability. If a proposed bond project is designed to remain affordable for over 40 years the full 10 points are awarded. Those designed to remain affordable for 31 - 40 years are rewarded five (5) points. The period of affordability will be reinforced by deed restrictions. 6 Future evaluation of bond criteria should include a determination of the relative weight (assuming a point system is used) should be given to long-term affordability. Further, all bond proposals recommended for funding to date propose to keep the projects affordable for 31 to 40 years or more, however, the mechanism. to be utilized is not always clear. It will be incumbent upon the County to recommend a preferred method in order to protect the bond investment. The recommended long-term affordability mechanism will then be a condition of bond award funding. Community Land Trust in Orange County The Community Land Trust in Orange County (CLTOC) began their first year of operation as a non-profit organization in July 1999. It is anon-profit, community based organization whose purpose is to acquire land and make it available to individual families and others, such as cooperatives, through along-term lease for a term up to 99 years. The leaseholders or homebuyers do not hold title to the land -the title is retained by the CLTOC -they own the improvements or housing units/structures on the land. The benefits of this model include the ability of the Land Trust to provide .greater local control over the land and housing ownership and protection of affordability for future residents in the sale of buildings and other improvements on the land. The land lease gives the CLTOC the first option to purchase the home, when and if it is sold, at an affordable price set by a resale formula. The resale formula gives homeowners a fair return for their investment, while keeping the price affordable for future residents. Specifically, the Land Trust utilizes resale formulas that adjust the resale price by considering inflation; maintenance, repairs, and depreciation; penalties for unusual damages; and market appreciation. An analysis of a resale formula is provided on the next page that provides for graduated percentages of appreciation shared with the family at 30%, 35%, 45% and ultimately 50%. This model has been successful in the neighboring city of Durham and. other cities across the country including Burlington, Vermont; Syracuse,. New York; and Cincinnati, Ohio. The first project of the Community Land Trust in Orange County is the joint development of fourteen townhouses in a development known as Scarlett Drive on land owned by the Town of Chapel Hill. Additionally, it has been recommended that CLTOC amend its Charter .and Bylaws to ensure that if it is dissolved its assets will transfer to another owner with the same housing affordability goals as CLTOC. Any County money supporting CLTOC projects should be contingent on the accomplishments of those amendments. Resale Formula Artayals Community Land Trust 1n On nge County Hypothetical Performance of?ropceed Formuk House apprecfatlon set al historical average (1991-1 g99y of b.25% Income increases set at historical average (1991- f989~ Of 8.98% Based upon hags purohase of 187,400 in 1991 Bak Prfce tNHh ~'~ Proposed 100 Perosnt of i Amount of Formula Formula Affordable Ptlce Actual Appraciatlon Appraelation 1998 119 000 Percetltage Appreolatton Resale Prtce Income Required % of Median Median Income 8076 htedlan , 130,488 2000 123,738 137 319 43,089 48 818 0.30 35 0 _ 12,921 (00,321 .40,128 0.67 68,b00 47,800 , 2001 128,881 144,528 , 57,128 . 0.35 17,472 19,996 (04,872 107,395 41,949 42,958 0,68 0.67 81,888 84 330 .48,494 51 461 2002 133,782 .152.118 2008 139 108 ' (80 102 84,718 7 0.35 22,850 f 10,050 44,020 0,86 , 68,891 , 53,513 , , 2004 144,843 168,507 2,702 81 107 0.33 0 33 25,448 28 307 112,848 115 787 45,136 0.88 89,563 55,642 2005 150,399 177,954 , 89,834 . 0.40 , .35,981 , 123,381 48,318 49,333 0.84 0,88 72,321 73 200 57,857 80 180 2008 156,985 188,888 2007 162 809 186 485 99,285 0.40 39,708 127,106 50,$42 0.83 , 78,193 , 82,554 , , 2008 189,08t 208,779 109,065 119 378 0.10 0 10 43,62$ 41 752 131,Q28 135 152 52,410 0.64 81,905 85,0<4 2009 175,611 217,833 , 130,235 . 0.40 , 52,094 , 139,194 34,081 66,790 0.64 0.83 81,641 87 905 67,692 70 324 2010 18?,806 229,061 2011 180 0&1 241 067 141,881 0.43 83.747 151,147 ®0,459 , 91,404 , 79,123. , , 2012 197,849 255,744 135,887 186 344 0.43 0 45 89.159 74 865 188,569 182 265 x,624 0.88 48,042 78,035 2019 203,513 287,085 ~ , 179,666 . 0.45 , BO,B48 ~ , 188,249 84,902 87,300 0.66 0.86 98,824. t8Q 758 79,080 B2 2DB ' - 2014 213,!395 281,086 2015 22? 200 285 843 196,868 0.45 87,159 - 174,559 89,$23 0.68 , 108,647 , 86,476 , , 2018 23f,044 311,375 208,449 223,97b 0.5 O.b 104,222 111,987 191,822 189,387 78,648 79,753 0.89 Obll 411,100 113 522 88,800 92 417 2017 240,239 3?7,722 2018 249 801 344 827 240,322 5 0.5 120,181 207,561 83,024 OA9 , 130,120 , 98,096 , , 2019 239,743 363,008 2 7,527 275,638 O.S 0.6 128784 137,818 218,164 223,218. 88,485 90,087 0.69 8.69 124,900 !29,871 98,920 103,887 Conclusion: Given the Continued apprgCFation of homer it 5.2591 and Ixcormas at 3.989E hams become mare affordable until the percentage of appraclatlon exceeds 40%. Available Strategies This section presents three common strategies .utilized by many local government first-time homebuyer programs to ensure long-term affordability of owner-occupied housing. Full Repayment of the Homebuyer Subsidy Right of First Refusal/Right to Purchase Fair Return/Shared Equity Full Repayment of the Homebuyer Subsidy If the original first-time homebuyer. retains ownership of the property for the full period of affordability, normally twenty years, no resale restrictions apply and the deferred loan is totally forgiven. If the property is sold during the period of affordability, the homebuyer is required to repay the subsidy from the net proceeds of the sale.. The net proceeds have been defined as the sales price minus loan repayments and closing costs. When net proceeds are sufficient to recapture the full investment, the full investment must be repaid to the County. These proceeds are then used to assist another first-time homebuyer purchase a home. If net proceeds are not sufficient to cover the full subsidy, as is the case when property values decrease, the County may accept a lower repayment and forgive the remainder of the loan. If the County does not accept a lower repayment amount, the loan is not forgiven and the property remains subject to the County's deed of trust securing the County loan. This strategy does not guarantee the affordability of the home sold for future low-income, first- time homebuyers. It does, however, allow the subsidy to be reused in the market by another homebuyer. And, it has the goal of making it possible for first-time homebuyers, through the equity in their home acquired with the public subsidy, escape altogether the need for subsidized housing. This is the current strategy used by the County under the HOME and CDBG Programs. Right of First Refusal A right of first refusal or right to purchase is accomplished by means of deed restrictions on the property purchased by the first-time .homebuyer. .Should the first buyer. choose to sell their property within the period of affordability, the County or a designated agent can consider purchasing the property for a price that is affordable to a subsequent buyer and that. results in a fair return to the seller. This is a very costly option since cash would be needed by the County to make the purchase and then locate an eligible buyer to buy the property from the County. State statues governing the acquisition of real property can also pose procedural. problems for units of local government such as counties to own property -even on an interim basis -and then resell it. Therefore, this strategy is most .easily implemented with anon-profit organization operating a first-time homebuyer program. That type of agency is in a much better legal position to obtain property via the right of first refusal, identify potential buyers in a relatively short period of time, and resell it to a new qualifying buyer. The County, however, would still need to provide funding for the home purchases. The right. of first refusal must normally be exercised within a predetermined time period such as thirty (30) days. If the right is not exercised within that time frame, the homeowner is free to sell the unit on the open market and repay any homebuyer subsidies provided from the net proceeds of the sale. The potential for exercising first refusals and keeping the housing stock in the 8 ` program can be enhanced and may only be possible by funding, publicly and privately, and both, a reserve for the buy-back. Fair Return/Shared Equity With this strategy, .the sale of the property during the period of affordability must be accomplished in a manner that will allow the seller to receive a "fair return" on investment, including any significant property improvements, while ensuring that the unit will be "affordable" to the new purchaser. There are three possible approaches to fair return. 1. Market Pricing Minus Subsidy This approach allows the market to set the value of the property at the time of sale. As in the open market, the seller is entitled to any resulting increase in value that remains after all debt, including subsidies provided by the public agency, is repaid. This approach seems to work in a relatively stable market or in a market where property values and incomes are likely to increase or decrease proportionately. xample: roperty Sale Price $85,000 first Mortgage Pay-off $58,000 eferred Loan Principal 7 0 et Proceeds to the Seller $10,000 In this example, the full amount of initial subsidy of $17,000 would be repaid and the seller, the first-time homebuyer, would retain the. net proceeds of $10,000. The property may or may not be affordable to a subsequent buyer considering the market values and incomes at the time of sale. 2. Formula Pricing Under this. approach, the .fair return is determined by a formula that takes into account the original purchase .price, the value of improvements, a cost of living factor since the time of acquisition, mortgage amortization, and other contributions by the homeowner such as sweat equity. If the owner chooses to sell before the period of affordability runs out, the formula is used to set the actual return to the seller and the maximum sales .price, irrespective of actual property value fluctuations. The formula approach uses an income index, cost of living index, or consumer price index instead of property value appreciation in order to 9 ensure that the property can be transferred at an affordable-level to the new ' purchaser. The fair return to the seller in this approach will be the lesser of: • The appraised market value of the property of sale minus indebtedness; or • The original purchase price plus cost of improvements plus increases in the income index, cost of living index, or Consumer Price Index (or percentage thereof) minus property indebtedness. This approach is commonly used in markets where property values are likely to escalate faster than incomes. une a home was purchased for $120,000 six years ago with a $31,000 ebuyer subsidy. Today, the appraised market value of the property for is $160,000. If the CPI increased 3 percent a year (18 percent over 6 s) and the family made $5,000 in property improvements, the sales eeds would be calculated as follows. Sale proceeds are the lesser of: (a) Appraised value $160,000 or (b) Purchase price $120,000 Cost of improvements $ 5,000 One-third of CPI (3% per year) ~ 7,200 $132,200 The lesser number is $132,200 which constitutes the amount for which the property may be sold. Resale Proceeds Property. sales price $132,200 First Mortgage Pay-off $ 80,000 Homebuyer Subsidy Repayment (assumed by the subsequent buyer) $ 31,400 Net Proceeds to the Seller $ 21,200 ~e property is conveyed to a new low income purchaser at a lower than ~rket value purchase price of $132,200 and the seller is considered to ve received a fair return on their investment. 10 3. Equity Sharing With this approach, the share or percentage of future equity to the seller attributable to the appreciation in the market value of the property is established at the time the subsidy is provided to the homebuyer. Typically, the equity is shared "50/50". Thus, at the time of sale during the period of affordability, 50% is paid to the County and SO% to the seller. However, any rate may be established by the County given the relationship between property value and income escalations in the community. Any payments received by the County under this scenario could be used for future first-time homebuyers. Typically, this approach is used in mazkets where property values rise at a faster rate than incomes. It is important to note that often times one of the Fair Market approaches described above aze combined with the right of first refusal to create one type of "hybrid" model. Many other hybrid models are also possible given the preference of the unit of local government operating afirst- time homebuyer program. Concluding Comments In designing an effective .long-term affordability strategy, the following issues must be considered: - The primary goals of the program are 1) increasing the supply of permanently affordable housing over an extended period of time and 2) increasing the number of .homeowners in the community and potentially out of the "poverty cycle" must be balanced; - Affordability strategies normally limit the benefits of homeownership particularly wealth building; and - Implementation. of the strategies addressed in this report must be explained fully to potential program .participants prior to receiving financial assistance with a home purchase. Sources: First-Time Homebuyers and the HOME Program, U.S. Department of Housing and Urban Development, 1993. The Community Land Trust Legal Manual, Institute for Community Economics, 1991. Resale Formula Analysis, Community Land Trust in Orange County, 1999.