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.
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