Subsidy Retention in New Affordable Housing October 24, 2008 Hampton, New Hampshire October 24, 2008 Hampton, New Hampshire Benjamin D. Frost, Esq., AICP

Subsidy Retention in New Affordable Housing

Subsidy Retention in New Affordable Housing

October 24, 2008

Hampton, New Hampshire

October 24, 2008

Hampton, New Hampshire

Benjamin D. Frost, Esq., AICP

Director of Public Affairs

New Hampshire Housing

Benjamin D. Frost, Esq., AICP

Director of Public Affairs

New Hampshire Housing

Subsidy Retention in New Affordable HousingSubsidy Retention in New Affordable Housing33

Municipal Desire: Create Opportunity for Affordable Home

Ownership

Municipal Desire: Create Opportunity for Affordable Home

OwnershipUse incentives to create units having a lower

purchase price (RSA 674:21)

Match the long term effects of incentives with the term of affordability

Incent the creation of units having a lower purchase price

Don’t allow “cheap” units

Don’t allow instant equity

Impose long term affordability restrictions

Use incentives to create units having a lower purchase price (RSA 674:21)

Match the long term effects of incentives with the term of affordability

Incent the creation of units having a lower purchase price

Don’t allow “cheap” units

Don’t allow instant equity

Impose long term affordability restrictions


Developer’s Desire: Maximize Profit and Minimize Risk

Produce units to sell at a profit

Maximize margin per unit Reduce Cost per Unit

Maximize the number of units

Minimize restrictions on sale

Have a predictable permitting and development process

Produce units to sell at a profit

Maximize margin per unit Reduce Cost per Unit

Maximize the number of units

Minimize restrictions on sale

Have a predictable permitting and development process


Assurance of Continued Affordability

Assurance of Continued Affordability

Binding Commitment

Maximum Resale Value

Maximum Rent Increase

Documentation of Restrictions Planning Board Records Registry of Deeds

Binding Commitment

Maximum Resale Value

Maximum Rent Increase

Documentation of Restrictions Planning Board Records Registry of Deeds


High

Low

Degree of Municipal/3Degree of Municipal/3rdrd Party Control of Party Control of

PropertyProperty

Buyer’s RightsBuyer’s Rights

Administrative Administrative BurdenBurden

Duration of Affordability

Potential Wealth Building in Unit

Fee SimplePublic Housing

Choosing a Term of Affordability

Conventional Lender

Participation

Conventional Lender

Participation

First Buyer Only “Permanent”“Long Term”

Subsidy Retention

Model

Land Trust Model


Affordability Retention Model: Basic Principles

Affordability Retention Model: Basic Principles

Long-term affordability Initial sale—80% area median income (AMI)

Subsequent sales—up to 120% (market based)

Fairness to all Municipality / Developer / Buyer

Little impact on conventional financing

No decrease in local tax revenues

Ease of administration

Suitable for use with inclusionary zoning ordinances

Long-term affordability Initial sale—80% area median income (AMI)

Subsequent sales—up to 120% (market based)

Fairness to all Municipality / Developer / Buyer

Little impact on conventional financing

No decrease in local tax revenues

Ease of administration

Suitable for use with inclusionary zoning ordinances


Incentives: Inclusionary Zoning

Density bonus and others

The Regulatory Crux: Developer must receive something of value, which in turn allows the purchase price to be lower—a quid pro quo

Subsidy: There must be a measurable subsidy to future buyers that can stay with the property and be passed to the next buyer

Converting the incentive to the subsidy is the municipality’s role

Incentives: Inclusionary Zoning

Density bonus and others

The Regulatory Crux: Developer must receive something of value, which in turn allows the purchase price to be lower—a quid pro quo

Subsidy: There must be a measurable subsidy to future buyers that can stay with the property and be passed to the next buyer

Converting the incentive to the subsidy is the municipality’s role

Converting Incentives to SubsidiesConverting Incentives to Subsidies


Model Municipal OrdinanceModel Municipal OrdinanceInclusionary zoning provides a density bonus in

exchange for some affordable units

Base value of all units must be similar in construction, appearance, and value to others

Affordable units must be sold at less than base value (creating the subsidy)

Lien: When affordable units are sold, a lien to the municipality is recorded (value of subsidy accrues to municipality) Lien value = FMV – affordable sale price

Restrictive covenant is filed, controlling future sale price and limiting future buyer’s income

Inclusionary zoning provides a density bonus in exchange for some affordable units

Base value of all units must be similar in construction, appearance, and value to others

Affordable units must be sold at less than base value (creating the subsidy)

Lien: When affordable units are sold, a lien to the municipality is recorded (value of subsidy accrues to municipality) Lien value = FMV – affordable sale price

Restrictive covenant is filed, controlling future sale price and limiting future buyer’s income


Fair Market Value

Limited Selling Price

Subsidy

Initial SaleInitial Sale 1st Re-Sale1st Re-Sale

HO

US

ING

CO

ST

HO

US

ING

CO

ST

Sales Under the Subsidy Retention ModelSales Under the Subsidy Retention Model

AppreciationAdmin Fee

Seller’s Equity

Downpayment

1st Mortgage

2nd Mortgag

e+ CPI

Paid Principal and Downpayment

2nd Mortgage

Based on Income


1st Re-Sale1st Re-Sale

Subsidy

Fair Market Value

HO

US

ING

CO

ST

HO

US

ING

CO

ST

2nd Re-Sale2nd Re-Sale

Subsidy

Downpayment

1st Mortgage

2nd Mortgage

Paid Principal and Downpayment

Appreciation

Admin Fee

Seller’s Equity

2nd Mortgage

+ CPI

Limited Selling Price

Based on Subsidy

Sales Under the Subsidy Retention ModelSales Under the Subsidy Retention Model


Appraised Value of Unit = $152,400

Targeted Sales Price = - $132,000

Initial Subsidy with the Property = $20,400

Initial 2nd Mortgage

Example: Year 2000


First Re-sale Target Income (Initial 5 Years)

First Re-sale Target Income (Initial 5 Years)

Beginning of: 2001 2002 2003 2004 2005

Appreciation Rate (prior Year) 13% 17% 13% 10% 3%

Re-Sale Price$151,200 $179,846 $205,390 $227,489 $234,314

Required Income$49,459 $57,054 $61,891 $68,600 $69,937

Buyer’s Income Cap

(Percent of Median)

86% 97% 94% 101% 103%

Subsidy increased by $2,560 to $22,960 If the income cap exceeds 120%, the lien can be paid off

(recaptured) and the funds can be reinvested in another affordable housing project.


Formula Notes Example

Initial Purchase Price (2002) Affordable to 80% AMI ~ $45,840

$140,000 (includes $7,000 downpayment)

Initial Appraised Value (2002) $215,000

Initial Municipal Lien (2002) ($215,000 - $140,000) = $75,000

Current Appraised Value (2007) $280,000

Current Municipal Lien (2007) CPI-Shelter Boston increased 17.04% from 2002 to 2007

$75,000 + 17.04% = $88,000

Current Market Price (2007) Affordable at 93% AMI ~ $66,000

($280,000 - $88,000) = $192,000

Administrative Fee to Municipality

2% of Sale Price $192,000 x 2% = $4,000

Seller’s Potential Equity Includes initial 5% downpayment

$192,000 - $4,000 - $140,000 + $7,000 = $55,000

Subsidy-Based Formula


Income Testing

Calculations of Price and Income Caps

Verification of Home Buyer Training

Municipally Required Buyer Priorities

Procurement of Appraisals

Second Mortgage Issuance

Participation at Closings

Subordination Requests

Pay-offs, foreclosures

Reporting

Income Testing

Calculations of Price and Income Caps

Verification of Home Buyer Training

Municipally Required Buyer Priorities

Procurement of Appraisals

Second Mortgage Issuance

Participation at Closings

Subordination Requests

Pay-offs, foreclosures

Reporting

Administrative TasksAdministrative Tasks

Most occur at the time of property transfer

Most occur at the time of property transfer


ConsiderationsConsiderations

Most municipalities don’t want to administer the long term covenants or qualify buyers

Other local or regional entities may lack the capacity, credibility, longevity, or desire to administer the requirements

The model is suitable for use with an inclusionary zoning ordinance

If local or regional entities are not available to administer the re-sales, New Hampshire Housing will do it (if you adopt our model unamended!)

Most municipalities don’t want to administer the long term covenants or qualify buyers

Other local or regional entities may lack the capacity, credibility, longevity, or desire to administer the requirements

The model is suitable for use with an inclusionary zoning ordinance

If local or regional entities are not available to administer the re-sales, New Hampshire Housing will do it (if you adopt our model unamended!)


ResourcesResources

Workforce Housing Council

• www.workforcehousingnh.com

• Documents tab

• "Housing Affordability”


Finis

Ben Frost

(603) 310-9361

[email protected]

Finis

Ben Frost

(603) 310-9361

[email protected]