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SCI LIBRARY

Community Land Trusts:

Fighting Speculation When
Land Value Taxation Won't Fly

Lee Hachadoorian



[Reprinted from Quicksilver, Winter 2001-2002]


The 1990s were a period of unprecedented growth but very low inflation. Inflation nationwide averaged under 3% a year for the decade. Housing costs, however, skyrocketed, and areas that saw significant growth in the technology sector (such as the Bay Area) saw housing easily outstripping the earning potential of the average non-technical wage earner. Solutions to the problem of taking care of those left behind by the rapidly growing economy range from the conservative "Let them work for a living" dodge, to the liberal "Let us run your life" approach, replete with indiscriminate use of broad-based taxes, rent control, and state-controlled public housing and affordable housing.

Land-value taxation (LVT) offers a way to transcend the dual non-solutions offered by mainstream political thought. Socializing land and resource rents leads to smarter urban land use (which reduces rents by encouraging housing development where it is needed most) and to higher average wages for even unskilled labor. Combined with a guaranteed income or citizens' dividend, it would bring adequate housing within the reach of all working Americans, as well as providing a fund to care for those people who were truly unable to provide economically valued labor.

While some localities are using split-rate taxation as a modest move in this direction, in California we have an insurmountable hurdle in the form of Proposition 13. This extremely popular tax-relief measure caps property taxes and freezes assessments until the property changes hands or capital improvements are made, guaranteeing that the vast majority of California properties are seriously underassessed. If shifting taxes to land from labor and capital will be difficult everywhere else, in California it will be all but impossible.

This doesn't mean we should give up, but I think it is important that we look for appropriate solutions that do not rely upon the good sense of the electorate or the good intentions of politicians. Basically, if we can't convince the state to take ground-rents, maybe we should ourselves become the owners of ground-rents, and control and redirect them for socially useful purposes. This idea was kicking around in my head when I first learned about Community Land Trusts.

Community Land Trusts (CLTs) are nonprofits that acquire land and hold it for the benefit of the community. They make the land available for affordable housing, and sometimes for other community purposes as well. People who may not be able to buy houses in the community at current market rates are allowed to purchase apartments, condominiums, or houses from the CLT at reduced prices. Importantly, the CLT retains title to the land, and the ground-lease specifies a resale formula which requires the owner to pass on the cost savings to the next owner-occupant. In this way, every property acquired and developed by the CLT remains affordable in spite of rising real estate markets. The ground-lease also specifies that owners must be occupants, and can only sublet for short periods under special circumstances.

In order to learn more about CLTs, I spoke with David Jay-Bonn, Executive Director of the Berkeley-based Northern California Land Trust. NCLT has been around since 1973, and Jay-Bonn has been Executive Director for the last year-and-a-half. Previously he set up a CLT in southwestern Washington state, near Portland.

NCLT gets most of its money from city governments and the Federal Government. It uses this money to buy and develop land and housing, and also occasionally acquires land through donation. Once a property has been acquired or developed, it is sold to owners whose household incomes are within defined percentages of the Area Mean Income. (AMI is currently $85,000 for San Francisco and $71,600 for Oakland.) If a buyer's income is around 80% of AMI, they might be able to buy a single-family home. If it is lower, they might be able to buy a condo, or a share in a limited-equity cooperative (a shared-living arrangement). NCLT develops for all income levels, and Jay-Bonn stressed that it's important to understand who you are trying to serve before you decide how to develop. If s unrealistic to try to put a single mother in a single-family home, but you can help her acquire an appropriately-sized apartment at a price she can afford.

NCLT retains tide to the land and the ground-lease has various stipulations, including a resale formula, which is based on AMI. CLTs use different methods for their resale formulas. Many use appraisal-based formulas, where the seller is allowed to retain (typically) 25% of the increased equity. For example, let's say that I were allowed to purchase a CLT-subsidized home for $100,000, even though it has a market value of $150,000. If five years later that same home has a market value of $200,000, the market price has increased $50,000. I'm allowed to resell at a markup of 25% of the increase, or $12,500. In this manner, I am allowed to grow equity in a home, but while the market value has increased, so has the subsidy ($200,000 - $112,500 = $87,500). Some CLTs use a time-based sliding scale formula where, for example, the seller might retain only 15% equity after 10 years, but can retain 40% equity after 25 years.

NCLT, however, uses an AMI-based resale formula. This means that if AMI increases by 10%, the seller is allowed to take a 10% profit on the resale, even if the house's market price is significantly higher. The formula is community-approved, since the other important aspect of CLTs is that the community is allowed a voice in CLT decisions. Most CLTs have a tripartite Board, with one-third being residents, one-third non-resident members, and one-third representatives from community organizations.

In spite of Prop. 13, there are still some property taxes to pay in California, and I asked Jay-Bonn who pays the property taxes, and whether they are divided between the land and the structure. He told me that the occupant pays all property taxes. But this did lead to the interesting point that, though the CLT retains title to the land, "land value" is defined as the gap between market value (or development cost) of a property and the amount of housing that can be afforded at AMI. NCLT does not concern itself with separating the land and capital components of property value. He went on to say that the tax situation varies somewhat arbitrarily, but sometimes CLT properties can get lower tax assessments based on the fact that the housing is being provided to lower-income residents. In general, preferential assessment is of course the bane of a smoothly functioning LVT, but it seems less harmful in this case since the owner is not allowed to resell at full market value.

I asked Jay-Bonn about possible problems with the model, including whether owners ever surreptitiously sublet their units at market prices. He stressed that owners are also members of the CLT, and that this community aspect prevents people from taking advantage of the opportunity the CLT offers them. I suspect that if CLTs achieve significant market penetration, that this form of gouging would become as common as it is in any market where goods are sold at a discount from fair market value, the same way that illegal or quasi-legal subletting is common in cities with rent control.

I also asked whether a significant increase in an owner's income would jeopardize their status, but he said that eligibility was based on a point-in-time income assessment To me this seems to have a signal-dampening effect that would tend to lock owners into inexpensive units even though they could afford more, since they can't capture full market value on the resale, but might no longer be eligible for CLT-subsidized housing.

Possible synergies between LVT and the CLT model became clear as we discussed the NCLT position on a number of policy issues. NCLT supports targeted infilling to increase urban density, and transit-oriented development. Both of these are logical outcomes of LVT, as higher taxes on desirable locations - and the elimination el die development disincentive of a traditional property tax - will bring undercapitalized sites to their highest and best use.

Jay-Bonn also assailed the mortgage interest deduction as a vast subsidy from the poor to the rich. He pointed out that the deduction is not limited by home size, so its benefits accrue disproportionately to the wealthy. It is so entrenched politically that it has practically become an entitlement, and the amount of revenue given up by the deduction is 2-3 times the HUD budget. He offered this comparison as an indication of how little we politically value affordable housing. I'll add that since the wealthy tend to occupy more valuable land, the significant thing about the mortgage interest deduction is that it subsidizes land more than capital. The entitlement isn't even really to home buyers, but to homeowners, since it is widely understood that eliminating the mortgage interest deduction would reduce the resale value of existing housing - a clear indication that it is a subsidy to land rather than capital.

Finally, Jay-Bonn spoke in favor of a real estate transfer tax to recapture community-generated value. This idea is fundamentally Georgist, and its use alongside LVT has been suggested by Mason Gaffney as a way to recapture land rents that are uncollected due to misassessment or other inefficiencies.

Jay-Bonn said that support for, and opposition to, CLTs has sometimes come from strange quarters. In spite of the progressive commitment to affordable housing, support from liberals has been lukewarm. He attributes this to the fact that the CLT model takes decision-making power out of the hands of planners and restores it to the homeowner and the community. About the San Francisco Redevelopment Agency he said "The last thing they want is for a neighborhood to be self-determining." Conversely, CLTs have garnered support among conservatives because conservatives like the "fiscal sense" of investing once, and having the subsidy self-perpetuate, and in fact grow with the market-as opposed to a rental subsidy, which is an ongoing public expense. One of their biggest supporters is the Fannie Mae corporation, a buyer on the secondary mortgage market Congressionally chartered to encourage low- and middle-income housing. The CLT model opens up new homeownership markets to them, markets comprised of people who just would not be able to afford to buy a home otherwise. Fannie Mae's backing undoubtedly makes it easier for the CLT to arrange mortgages for CLT properties.

Interestingly, Jay-Bonn's remarks about who supports CLTs and who opposes them mirrors my experience in trying to spread the word about LVT. LVT is a very progressive form of taxation (at least with regard to wealth, though it may be regressive with regard to current income since a large number of retirees are property-owners but live on fixed incomes), and has environmentally beneficial effects as well as economically progressive effects such as raising the wages of unskilled labor, increasing housing stock for low-income households, and reducing mortgage costs for everyone (which especially helps the poor, who frequently pay a premium on borrowing). It seems like it would be an easy sell to progressives, but I find myself unable to engage progressives with this idea because it is fundamentally a market-based solution. Once I start talking supply and demand, progressives turn a deaf ear.

Jay-Bonn closed by saying that one of the biggest obstacles to CLTs is that they can't change the market. This suggests that the CLT model may be a natural complement to LVT because LVT can change the market, but we still need tools to work with within the current market. CLTs can be a valuable middle-term solution as we continue to work towards acceptance of LVT. CLTs can help us put the concept of the community-created value of land on the political map, while providing immediate assistance to many families desperately in need of housing, hi fact, since land is permanently retained by the CLT, as the model grows in popularity, more and more property will be CLT-contiolled. Once a critical mass is reached within a local community, the CLT member-owners will be a political force to be reckoned with. Since CLT home-owners are partially insulated from the real estate market, they may see that they have less to lose (and more to gain) in a shift to LVT than the traditional homeowner does. If we can educate this constituency now, while CLTs are gathering steam, we may be in a strong position to promote LVT several years down the road. My conversation with Jay-Bonn leads me to believe that we can expect a sympathetic hearing from CLT proponents. The real estate transfer tax is already clearly premised on Georgist foundations. Maybe we can convince CLTs that split-rate taxation (a lower, though nonzero tax rate on buildings combined with a higher tax rate on land, usually implemented in a revenue neutral way) is also an idea worth advocating for as a step on the path to full LVT.