Community Land Trusts, Urban Land Reform and the Commons
How do Community Land Trusts relate to the Commons? Mike Lewis and Pat Conaty developed this argument in detail in their book The Resilience Imperative - Co-operative Transitions to a Steady-state Economy.
To promote the wider arguments in the book, Lewis and Conaty produced a series of very short articles. The following Special Report features their series on Community Land Trusts, Mutual Home Ownership, the Garden City Model and the Co-operative Land Bank. The Garden City Model merits special attention, as Garden Cities that took land out of the market were a full expression of radical socialist and co-operative economy planning. Nowadays, a number of parts of the world are showing an interest in reviving them.
These three short illustrated articles contained in the report provide a crash course in what CLTs and the CLB is, and how practical land reform can be systematically implemented to return land to the Commons. You may read the articles separately in PDF form, or jump to the relevant section through the links below.
- Affordability Locked In Read Now(Download as a PDF)
- The Best of Three Worlds Read Now(Download as a PDF)
- The Co-Operative Land Bank Read Now(Download as a PDF)
- 1 Part 1: Affordability Locked In
- 2 Part 2: The Best of Three Worlds
- 3 The Co-operative Land Bank:
- 4 References
- 5 Credits
Part 1: Affordability Locked In
Community land trusts – good news for households, communities, & taxpayers
As the crisis of affordability grows, the capacity of governments to deal with it seems to diminish. CLTs are a strategy that removes land from the housing market without disconnecting residents from their interest in owning, maintaining, and improving buildings.
With wages barely keeping up with inflation for the last 30 years, an increasingly large number of households face a common dilemma: they cannot afford to live in the communities in which they work. Teachers, nurses, and policemen face long commutes daily because the price of a door knob on Salt Spring Island, B.C. (or London, England for that matter) is well beyond their means. Affordable rentals are likewise in short supply. Shelter costs rise inexorably. Are there any alternative courses of action that realistically can stem the tide?
Three things push the cost of housing steadily upward: construction costs, mortgage interest, and the cost of land. Reducing construction costs is not that easy, barring the availability of some sweat equity to invest.
With respect to interest costs there are clear alternatives. Since the drop in mortgage rates ten years ago this has not been such a big problem. However, the 30-year average in mortgage rates is about 8%. Fee-based lending involves no interest charges. For example, the JAK Co-operative Bank in Sweden charges a blend of fees, so that the costs of a loan over 40 years would be comparable to about a 2.5% interest rate. That would make a big difference to what you would pay for a house in Canada. Assuming you put 10% down on a $361,000 house (the average price of a house in 2011), the difference between 8% and 2.5% would reduce your interest costs by a whopping $328,000. Going from compound interest to fee-based mortgages is a huge culture shift, for consumers and for financial institutions. But it offers enormous benefits to the economics of households. Credit unions seem the obvious institution to take up the challenge and take the lead in adapting this innovation to Canada. (See “Sweden’s JAK Bank,” Making Waves, Vol. 20, No. 3, pp. 51-57.)
Land is the last of the Big Three in terms of cost. How much of a difference would it make to long-term affordability if we had a way to remove the spiraling cost of land from the equation? Might we preserve affordability in a gentrifying neighbourhood, and regain control from absentee land owners? Could we enable average wage earners to live where they work? Would we help preserve over the long term government investments in affordable housing, rather than allowing both public subsidies and capital gains to accrue to whoever sells the house? These are tough questions.
The Community Land Trust (CLT) movement in the United States has been providing answers to them for over four decades. For the first 20 years, it stayed small. After 1990, having proven what can be achieved, CLTs have grown in size and number. CLTs have several unique features.
- Nonprofit, tax-exempt corporations: It is the mission of CLTs to preserve affordability, promote sound maintenance, and prevent foreclosures on buildings located on the CLT's land. CLTs are very flexible. They can provide housing for rent or for purchase. They can be used for such “place-shaping” facilities as workspace, gardens, renewable energy, and amenities. They can acquire land through purchase, tax abatements, and public or private donation.
- Dual ownership and dynamic property rights: CLTs separate the ownership of the land from the ownership of the buildings on it. The land is retained forever in trust by the CLT for the surrounding community; that effectively and permanently removes the land from the market. By contrast, buildings on the CLT’s land are sold to and owned by families, co-operative housing corporations, small businesses, or nonprofit organizations.
- Leased land and housing affordability: The trust’s land is never sold to the inhabitants; it is leased. Each CLT develops a resale formula to keep the housing affordable over the long term. The aim is to differentiate the land which the CLT retains for community use in perpetuity from the stipulated equity share an owner-occupant can receive on the sale of the housing units. The CLT exercises this power through a pre-emptive right to buy when housing units are resold. Each CLT maintains a waiting list for housing and those leaving a CLT have a contractual obligation to sell back their housing to the CLT at a price set by the resale formula in the lease.
- Open and place-based membership: CLTs operate within a specific geographical area. In the U.S.A. it may be a rural town or rural county, an urban district, or an entire city.
- Tripartite governance: The board of a CLT is composed of three types of stakeholder. Normally a third of board members are elected representatives of the CLT’s lessees. Another third are elected by residents of the wider community who are neither leaseholders nor tenants of CLT property. The final third are appointed to represent the local public interest, and may include public sector officials, non-profit service providers, and local funders.
The CLT concept is foreign to the usual way we think about private home ownership in North America. We think about getting a down payment, qualifying for a mortgage, buying a house and the land under it, settling down, and at some point selling again for a significantly higher price than what we originally paid. We own it and we plan to benefit from it – all of it, land included. Some of us have learned to anticipate the advantages that might derive from public investments in infrastructure, transport, and amenities in the vicinity of our abode. If we have the money and the smarts to locate in an area for which such public investments are slated we can expect to benefit from a bubble in the value of the land. We can flip it and make a wad of cash, what can rightly be termed “unearned equity.”
But this way of doing things is leaving more and more of our fellow citizens behind. As the crisis of affordability grows, the capacity of governments to deal with it seems to diminish. Larger and larger taxpayer-funded subsidies are required to keep units of social housing affordable to poor and moderate income people.
CLTs are a strategy that removes land from the housing market without disconnecting residents from their interest in owning, maintaining, and improving buildings. Here is how one of the most advanced CLTs in North America has achieved this.
The Champlain Housing Trust
Vermont is a rural, mountainous state with very few large employers and the lowest wages in New England. Many residents commute 2-3 hours to work each day. The gap between average incomes and housing costs in Vermont is one of the highest in the United States: 47% of renters and 38% of homeowners pay more than 30% of their gross income on housing.
Burlington is a small university town in the state and the home base of the Champlain Housing Trust (CHT) the largest CLT in the U.S.A. and the first to expand its landholdings through partnership with a municipality. The trust’s origins lie in the mid-1980s, after the first Reagan administration ended federal government programs to fund affordable housing. An expanding downtown and rising enrollment at Burlington’s three colleges pushed housing prices through the roof. The attempts of Burlington Mayor Bernie Sanders and his Progressive Coalition to achieve rent control failed. They turned to the Institute for Community Economics which had been developing and promoting the CLT concept since the early 1970s. Sanders and the Coalition established a Community and Economic Development Office at City Hall and in 1984 drew up a strategy to create two nonprofit organizations, the Burlington Community Land Trust and Lake Champlain Housing Development Corporation. The Land Trust was started with a $200,000 grant from the city and later, a $1 million line of credit from the city employees’ pension fund. Over time, the geographic territory, services, and funding sources grew to overlap and the two organizations merged to form the Champlain Housing Trust in 2006.
At present, CHT has in its portfolio over 2,000 units of permanently affordable housing inside Burlington city limits and scattered across three adjacent counties. Approximately 60% of the units are resale-restricted, owner-occupied houses and condominiums; the other 40% are rental apartments. Since 2001 the organization’s staff has grown from four to over 70. CHT offers several components that in combination can serve to improve the quality and affordability of housing dramatically.
Two Homeownership Centres, one in Burlington and one in the rural town of St. Albans, integrate homebuyer education with debt and budgeting advice and home maintenance courses for first-time homebuyers. Over 300 people a year learn how to meet the criteria of conventional mortgage lenders and steer clear of predatory lenders and mortgage brokers. The advisory service helps households bring consumer credit and other debt problems under control.
Financing packages offer down payment grants funded by local, state, and federal government sources in addition to mortgages at interest rates almost 2% lower than the average. CHT has worked with local banks to develop financing packages with payment structures affordable to low-income households.
CHT mobilizes its membership to contribute to a pool of funds that is used to cover operating costs. Currently, there are 4,000 members in a region with a population of 100,000. Members include local businesses as well as individual citizens. Some join with a payment of $50 or less (the “carpenter” rate); others make a larger investment (the “community developer” rate is $250-$500 and the “visionary” rate is $1,000 and over). Many members regularly donate to further the Trust’s work. These grassroots funds are used to leverage additional capital grants from the Vermont Housing and Conservation Board, the City of Burlington Housing Department, and the federal government. Support from the City and the State has been crucial in expanding the Trust’s operations since 1999.
To complement its housing work, the CLT has developed a day centre for the elderly, a nursery facility, social enterprise and nonprofit offices, a shop front for the local credit union, an office for the community legal advice centre, and a multi-unit business incubator.
A Double Bottom Line: Taxpayer Savings – Household Benefits
American CLTs use a variety of methods to purchase real estate at less cost. The process involves considerable time and effort, but CLTs have been able steadily to acquire land for affordable housing and/or to acquire existing housing and make it more affordable over time. The combination of private donations and public subsidies enables CLTs to leverage and maintain subsidies at a cost to the public purse that is far lower than conventional approaches to the subsidization of low-income housing. Let’s look first at the CHT Homeland Grant program. It enables low-income households to buy properties on the open market. A grant of $22,000 (raised mainly from federal, state, and municipal sources), a low interest-rate mortgage, and a resale stipulation accomplishes two things. First, the quality of the housing affordable to low-income households increases significantly in the here and now. Second, the same housing remains affordable to low-income households in perpetuity. Table 1 shows how the program works for a family of four with an annual income of US$39,350, compared to similar household with a conventional mortgage.
Their monthly mortgage entitlements are similar. However the household that qualifies for the CHT option benefits both from a grant of $22,000 and the lower interest rate of 4.25%. This combination of grant and low-interest mortgage enables the household to afford a property that is $48,926 (42%) more expensive for virtually the same monthly payment.
This analysis shows how the CLT can stretch the impact of a public subsidy. Another study has revealed how this model can achieve dramatic savings for taxpayers. The costs of a CLT-funded unit of housing were compared with those of a traditional government subsidy program. Table 2 (see below) shows how conventional and CLT subsidy performances compare when the same property is resold five times over 30 years.
In the example, a $50,000 public subsidy, when protected by the land trust and the CLT resale formula, preserves a CLT home’s affordability over 30 years even if the home is resold every seven years to a new family. In contrast, under the conventional affordable housing subsidy program, the public subsidy is repaid each time the home resells and the seller is allowed to claim all the capital gains. As a result, a greater public subsidy is required after every sale just to keep the housing affordable. With an annual house price inflation rate of 6%, raising the house’s sale price to $375,000 for the second low income owner, the government would have to invest 60% more, for a total of $80,000, to keep the house affordable. The public subsidy just keeps going up after every sale: $132,000 in Year 14, $216,000 in Year 21, and $342,000 in Year 28.
- The Homebuyer Loan is repaid without interest upon resale of the house. It enables the buyer to afford the home, but does not reduce the actual price of the home. The CLT subsidy stipulates that the resale price may not exceed the initial price, plus an adjustment based on the annual change in the Area Median Income (AMI).
- The home is assumed to have a value of $250,000 in an area where the family in the target income range can afford $200,000.
- The home is assumed to have a value of $250,000 in an area where the family in the target income range can afford $200,000.
- Assumes 6% annual inflation in home price, 3% annual income inflation, and stable interest rates.[/caption]
It does not take a rocket scientist to figure out which system is more beneficial and efficient. The CLT model costs taxpayers $50,000. To achieve the same affordability objective, the conventional subsidy approach costs the taxpayer $820,000. The results demonstrate how important it is to take the land permanently out of the market and to impose permanent controls over the resale price of the housing in order to assure long-term affordability. It also shows what CLTs alone can accomplish, namely, the capture of any public subsidy or land gift within the land trust balance sheet, thus preserving for perpetual community benefit a public or social investment in land.
The affordable housing crisis in the U.S. has accelerated the development of CLTs. They are increasing in number whenever and wherever real estate markets are very hot. (See "Irvine Community Land Trust,” below.) Through the Homeownership Initiative, the Vermont Housing and Conservation Board has supported the development of five more CLTs throughout the state, each operating in an area with a population of about 100,000. Across the U.S. there are now over 250 CLTs. Interest from local government, especially in the wake of the credit crunch, is growing. Linking land, affordability, and a trust model of tenure is a revolution in the making.
BALTA Research: Community Land Trust Models for Affordable Housing in B.C.
This 2-part research project examined alternative land tenure and property models in a variety of jurisdictions. It assessed the applicability of these models in the social economy of British Columbia and recommended strategies for making that application a reality.
Phase 1, “Alternative Land Tenure and the Social Economy” by Karen Heisler, involved a literature review and an investigation of the range and scale of four models of shared-equity land tenure in use in the U.S.A, the United Kingdom, and Canada: Conservation Land Trusts, Community Land Trusts, Cooperative Land Banks, and Community/Municipal Land Banks. The legal, financial, operational, geographic, regulatory, and social features and dynamics of each model were examined, as well as the organizational structures employed and the ethos of its users. Finally, a judgment was made as to the transferability of each model to B.C. and Alberta.
Phase 1 concluded that land trusts could be important in B.C. and Alberta for developing community and regional responses to affordable housing and food security. Both provinces have a good record of applying land trusts to environmental conservation. However, to date little interest has been displayed in applying the model to affordable housing or agriculture. Nor has there been much enthusiasm for broadening the mandate of conservation-oriented land trusts to encompass social purposes.
Phase 2 of the research is currently underway. It concerns the expansion of land trusts in B.C. in particular. Attention is being devoted to the organizational details and operations of housing-related land trusts now active in the province, and the opportunities, barriers, and possible strategies for developing and scaling up land trusts for affordable housing.
Irvine Community Land Trust
In 1975, the City of Irvine, California launched a pioneering “inclusionary-housing” program. Of all newly-built housing, 15% had to be affordable to low- or moderate-income households for up to 30 years. Developers could pay a fee in-lieu of providing the housing. By this means Irvine had produced 3,155 units of affordable housing by 2005. Unfortunately, by that time 1,000 of those units already were selling at market-rate prices, and more would soon follow. Whereas the median housing price in town was about US$800,000, the area median income (AMI) of households was about $60,000.
At the same time, the city found itself in possession of a property windfall. Six years before, a 4,700-acre military base adjacent to the city had closed. The city had elected to turn it into a giant urban park and surround it with a mixed-income, mixed-use community.
With both a problem and an opportunity in its lap, city council convened a housing task force. It proposed the development of 9,700 new affordable-housing units in the city by 2025. Properties could be houses, apartments or condominiums, for sale or rent. Under the terms of a ground lease, they would remain under the stewardship of a municipally-sponsored community land trust that was to ensure that they remained permanently affordable.
Irvine Community Land Trust (ICLT) was incorporated in March 2006. It was not to act as a developer. That would be the job of private and nonprofit corporations. ICLT would help gather and leverage resources, while finding and screening buyers for the homeownership units and monitoring those units over time. To support the Trust, the City projected $143 million in redevelopment funds set aside from the park project and another $125 million in in-lieu fees.
Sales work this way. ICLT applicants must pre-qualify with a prime mortgage lender and have 5% of the total purchase price available at time of purchase. Most units are limited to households earning less than 120% of the AMI; many are limited to those earning less than 80%. People who have been living and working in Orange County for a year prior to application get priority.
Applicants must also agree to the resale formula:
- Initial Purchase Price
- + Increase in price based on the change in AMI (about 2.6% lately)
- + the Value of approved capital improvements
- = Maximum Resale Price
When a homeowner wishes to sell, the ICLT has the right to purchase the home at the resale formula price (or the appraised market value if this is lower). If the Trust does not exercise this option, the homeowner still must sell the home to a qualified buyer for no more than the resale formula price.
One of ICLT’s biggest partners is the nonprofit developer Jamboree Housing Corporation, which aims to supply over half of those 9,700 units. Jamboree has just completed Doria Apartment Homes (see photo, below), a joint venture to which ICLT contributed $1.6 million. Doria’s first 60 units were made available to households earning 30-60% AMI. Ten units were reserved for recipients of mental health services. It was fully rented within 30 days of opening, and has a long waiting list.
Part 2: The Best of Three Worlds
Mutual Home Ownership combines housing affordability with equity and fairness
You’ve heard of things that offer “the best of both worlds.” Mutual Home Ownership combines the best of three – community land trusts, tenant co-operatives, and co-operative land societies. The model keeps housing permanently affordable while giving current member-tenants incentives to maintain their dwelling and to contribute as much as they can to paying down the collective debt.
As this article hits the airwaves, a brand new housing model is seeing the light of day. Devised to help scale up affordable housing solutions in the cities of England and Wales, the first Mutual Home Ownership Society (MHOS) will celebrate a sod-turning in Leeds in December 2011. They call the development LILAC (Low Impact Living Affordable Community), an apt description for an urban eco-village that promises convivial, multigenerational living in high-efficiency, low-carbon co-operative housing. And affordable too: its unique structure accommodates a mix of income groups – not an easy thing in cities where land-flipping drives property values up and affordability down.
Take Michael here, for instance. Were he to try and buy the little 900 square foot, 2-storey apartment where he lives in Vancouver, B.C., he would have to come up with at least $530,000. Five years ago it was $300,000. Derek, a buddy of his who lives on the street, laughs, “I chose music over shelter years ago; I could not afford to live in an apartment and do what I love!”
Mutual home ownership is a fascinating stratagem designed to leverage the advantages of three very different models, all of which have been around for the last 40-100 years: community land trusts (United States), shared equity tenant co-operatives (Sweden), and the vision of the Letchworth Garden City (England). The result could well become a generative 21st-century model of fair and sustainable housing.
Community Land Trusts (CLTs)
CLTs ensure that a $100,000 property does not double in price every five years. In the U.S. where the model has advanced the furthest, CLTs are attracting more and more attention for three reasons: they preserve affordability in perpetuity; they preserve taxpayer investments in low income housing; and they have super-low incidences of foreclosure.
Why? It is simple, really! First, the ownership and control of land is separated from the ownership and control of the buildings on that land. The land is held outside of the market in a trust that is legally bound to preserve the land for affordable housing. Second, when they buy a house on CLT land, homeowners agree to a resale formula which allows them to make a modest gain in equity, but never a windfall profit.
It is a powerful model. In Burlington, Vermont the Champlain Housing Trust has about 2,000 housing units which are now permanently affordable. That makes a big difference in a town with a population of only 40,000. (See Part 1 of this report: “Affordability Locked In")
Sweden’s Tenant Ownership Co-operatives
Tenant ownership co-ops differ in several ways from the housing co-operatives common in Canada. Under this Swedish model, the co-op owns the land and the building and grants occupancy rights to the co-op’s apartments to the member tenants under the terms of a member’s agreement. The members are also voting shareholder-owners of the co-op. Members also have a limited equity stake (typically 30%) in the value of the apartment they occupy. They buy this stake when they become a member and sell when they leave.
It is big – tenant ownership co-operatives comprise 18% of Sweden’s national housing stock, in fact. One of the main reasons is that nationally they have created two key co-operative development organizations – the “mother” or secondary housing co-ops, HSB Riksförbund and Riksbyggen. Both help new co-ops to get going by mobilizing savings and by helping to organize other low-cost financing from additional bank loans. The “daughters” are the 5,500 primary tenant ownership co-ops. They are locally based, manage their own affairs, and get help from the “mothers” as needed for further development.
Finance is a mix of down payments (often personal savings and a personal loan – typically 30% of cost) on the part of the tenants, and bank financing (a corporate loan to the co-operative). When members leave the co-op, they sell their equity share to new members. In this way, people can earn a limited equity stake in the value of their home. HSB and Riksbyggen assist the daughter co-ops in managing the sale of the occupancy rights and the equity stake when a member departs.
In some urban areas with high land values, like Stockholm and Gothenburg, housing price inflation has become a problem, at least for lower income people. They can no longer afford to join a tenant ownership co-op. Restrictions on the sale price of members’ limited equity stakes were removed by government deregulation of the housing co-op sector in the 1980s. This allowed the value of occupancy rights to float in a free market for member’s equity stakes. Without a re-sale formula such as the CLT model provides, the Swedish model in some areas has moved upmarket to become the preserve of people with higher incomes.
The Garden City of Letchworth
This third inspiration to the MHOS designers dates back to 1899 when Ebenezer Howard established a “co-operative land society,” First Garden City Ltd., to raise initial share capital of £20,000. His vision was to use the money to build new cities where the land was owned collectively. Letchworth, Hertfordshire, 50 km north of London, was launched in 1903. In 50 years its population grew to 33,000 and it thrived for a short period after that. By holding the land (5,600 acres), the co-operative land society was able to capture lease income from the land, from commercial buildings, and from a variety of social enterprises it owned, and continuously reinvest that money in community improvements. Residents were engaged in a mutual benefit system of unprecedented scale. Living was affordable, convivial, and people had what they needed close by.
In 1961 a group of corporate raiders and financiers attempted to take over the land, demutualize the organization, and break the back of the “co-operative land society.” The national government successfully fought off the onslaught, but victory came at a cost. The co-operative ownership of the land was transformed into public ownership. Then in 1995 it was changed back to a tax-exempt mutual structure and the land assets transferred to the new Letchworth Garden City Heritage Foundation (with a legal structure like that which Ebenezer Howard established in 1903). Essentially a CLT, this new “co-operative land society” has regained a number of land assets with 999-year leases.
Many of the homes were established with 99-year leases, however. The 1967 Leasehold Reform Act gave owner-occupiers in the U.K. the right to buy their lease at an affordable price. As a result, as the 99-year leases come up for renewal at Letchworth, residents are purchasing the properties and, following the logic of the real estate market, reselling them at a significant profit.
The MHOS Model
Mutual home ownership leverages the advantages of three very different models: community lands trusts, shared equity tenant co-operatives, and the vision of the Letchwoth Garden City. The result could well become a generative 21st-century model of fair and sustainable housing.
How to combine the best features of each of these models while avoiding their respective weaknesses – this was the puzzle Pat Conaty of the New Economics Foundation set out to solve with a team of researchers. Their novel solution was the MHOS, and it has since been cham-pioned by CDS Co-operatives, England’s largest co-operative housing service agency, and its CEO, David Rodgers.
As the diagram shows (above), the community land trust is central to the MHOS model. The trust owns the land and holds it for the purpose of preserving affordability in perpetuity. The trust issues a head lease to a tenant ownership co-operative which enables both the land trust and the co-op to organize the financing, with help from CDS. The tenant ownership co-op is then responsible for getting the actual construction completed with support from an expert development agent, a service which CDS also provides.
The eventual mortgage that pays for the build cost is held corporately by the co-op. Like the Swedish model, member-owners lease their units from the co-op. One prerequisite is a deposit of 5%-10% which is converted into equity shares in the co-op. Thereafter equity shares are also funded through members’ rental payments. These payments, the asset and the land security provided by the trust, and the co-op’s projected lease income together form the basis for financing each project. The pooling of resources into a single mortgage package helps reduce the cost of financing, which is an important contribution to affordability. (In the U.K’s current risk-averse market, individual mortgages are especially hard for prospective home owners to come by.) Another cost savings flows from the assignment of equity shares and occupancy rights by members. This eliminates the legal and other closing costs that are part of buying and selling houses.
Once construction is complete, the co-op issues 20-year renewable leases to members. They can stay as long as they want, so long as they meet their obligations. One of the most important obligations is to make lease payments calculated at 35% of monthly household income, after taxes and deductions. If my household’s take-home income is $1,500 per month, we will pay $525. Were we earning $5,000 per month, we would pay $1,750 per month for the same unit.
This seems fair and equitable. (It’s a formula widely used by co-ops in Canada.) However, the designers wisely found a way to recognize the higher contributors. This is where the shares come in. Everybody pays the deposit up front. These become shares, with a face value at their issue date of £1,000 each. As the corporate debt goes down and as (or if) average earnings rise over time, the value of the shares goes up. Since the lease payments are what pay down the debt, those who pay higher lease rental charges finance more equity shares. The designers also learned from the Swedish experience and built a re-sale formula into the lease to ensure long-term affordability. That is why equity share value is linked to average earnings.
Lastly, co-op members democratically control the management and the maintenance of their homes. They jointly organize housing repairs and control management and services. As LILAC demonstrates, low or zero-carbon housing solutions can be planned and implemented, including combined heat and power systems, photovoltaics, and (perhaps in the future) electrolytic power generation from co-operatively-owned hydrogen fuel cells, potentially the cleanest fuel on the planet.
A Closer Look at Mutuality & Equity
With the growing interest among social investors and pension funds in longer term, safe, and performing assets, there is much to recommend the MHOS model. It is welcome news to municipalities where housing is growing unaffordable to large numbers of residents.
Those are the basics of the model. Now let’s look more closely at the equitable mutuality it features. The table below illustrates how Mutual Home Ownership provides for equitable lease rates based on income level, and how lower and middle income members can earn limited equity returns as well.
To keep things simple, the table below applies the model works to a 2-bedroom household occupied by two working adults living either on their own or with one to two children. The income figures are aggregated for both earners and net of U.K. tax, pension, and other wage and salary deductions.
The key is the monthly payment (line 4) and the equity shares funded and “owned” by the member (Line 8). The corporate debt that a leaseholder services through his/her lease payments or deposit is progressively converted into equity shares. As members service the debt of the co-operative at different levels (because their payments are income-related), it is fair that they “own” units of equity, represented as their household’s shares in the mutually-owned housing assets. The net value of the member’s equity shares increase in value as the collective corporate loan is repaid and in line with the increase in average earnings over time. (This assumes that average earnings increase. If they do not, equity share values could fall.) Line 5 shows the smaller and larger portions of debt to be repaid by members with different levels of income.
A resale formula permits a modest return on the sale of equity shares. The following example of a resale formula assumes an annual increase of 4.5% in household income (i.e., an annual rise of 3.5% in the Retail Price Index plus a growth of 1% in real earnings.) In ten years this example would yield members a net equity value (net of the outstanding corporate loan balance) as follows:
- 71 shares = £13,314
- 86 shares = £16,271
- 100 shares = £18,919
- 128 shares = £24,217
- 149 shares = £28,190
- 191 shares = £36,136
Scaling Up Mutuality
Financing is key – for land acquisition and for mortgages. With the growing interest among social investors and pension funds in longer term, safe, and performing assets, there is much to recommend this model.
Firstly, if MHOS developers can purchase land at below-market value with support from national governments or local authorities, investors can be offered a good level of security on a loan-to-value basis (the ratio of the asset value to the corporate loan); the land at less than market value providing the asset cover required by the lender/investor. This is welcome news to municipalities where housing is growing unaffordable to large numbers of residents, not least those in key public sector jobs, including teachers and fire department employees. The municipality that owns land or has leasehold land coming up for renewal would do well to use these as opportunities to jump-start and expand on the MHOS model.
Secondly, the Co-operative Housing Finance Society Ltd, established by CDS, can provide a 1-year interest guarantee, an additional level of security. In addition, the national Community Land Trust Fund can assist with initial risk financing costs and secure additional financing for the construction financing phase. Broadening the current scope of loan guarantees would be helpful and CDS Co-operatives is working with financial advisors and lenders, including the Co-operative Bank and the Co-operative Group, to determine the feasibility of establishing a £200 million lending facility to support new MHOS projects. The Welsh government has just announced a project to work with CDS to develop MHOS across Wales in the next few years.
Thirdly, MHOS can be funded corporately either by bank lenders or through mutual housing investment bonds. The latter can offer a secure rate of return for ethical, municipal, trade union, or other types of social investor. Currently CDS is using this means to try and secure 40-60 year mortgage finance from pension funds. This is much like the strategy (a mix of long-term mortgage finance below 4%) which Letchworth employed to build the Garden City a century ago.
In summary, Mutual Home Ownership is affordable because:
- lease payments are a set ratio (35%) of net household income.
- lower-income members can acquire equity shares. (In ten years the equity available to a low-income member is almost equal to their annual income.)
- members can buy more shares as their incomes rise.
- transaction costs are reduced. Properties are not bought and sold; instead, equity shares and occupancy rights are exchanged by assignment.
- over the longer term, borrowing costs should be cheaper as longer term financing is secured from pension funds.
- the linkage to average earnings helps reduce risk and maintains the affordability of the home.
You’ve heard of things that offer “the best of both worlds.” Mutual Home Ownership combines the best of three – community land trusts, tenant co-operatives, and co-operative land societies. The model keeps housing permanently affordable while giving current member-tenants incentives to maintain their dwelling and to contribute as much as they can to paying down the collective debt. As the LILAC Ecovillage shows, the model encourages environmentally sustainable housing, which is proving easier to finance. Collective mortgages can secure interest rate discounts and thereby invest in renewable energy measures and higher levels of thermal insulation. Active citizenship and community engagement are invited in two arenas, the tenant ownership co-operative and the community land trust. Quite simply, it is a model that manages to recycle its benefits from one generation of occupants to the next.
The Co-operative Land Bank:
A Solution in Search of a Home
The taxpayers of London, England invested £3.5 billion in the 1990s to extend the underground system. Following the completion of the Jubilee Line, property values within 1,000 yards of each of the eleven new stations jumped 3.7 times, to £13 billion. Who benefited from this windfall? Not average folks in Southwark, that is for sure. The spike in property values (which went up £9.5 billion) – and the rise in rents they justified – all went to landlords, most of them absentee, corporate owners. The wealth created by the investment of taxpayers’ money in the underground was sucked out of the community, right into the pockets of the wealthiest.
If that’s not bad enough, depreciation allowances will also have allowed those property owners to recover tax-free whatever money they invested in their properties. They even might have chosen to borrow against their property in order to acquire more.
These are a couple of the ways in which, year by year, exclusive forms of ownership concentrate wealth in the hands of a few at the expense of the many. Year by year, the public debt load rises and private citizens suffer the consequences: higher taxes, reduced pensions, massive cuts in public services and in state subsidies – for affordable housing, among many others. It is inefficient, it is unjust, and it has to change.
Dr. Shann Turnbull has designed a means to reverse this erosion of community wealth and accountability and in the process even restore some of the entrepreneurial spirit to a capitalism grown slothful on real estate speculation and tax breaks. His Co-operative Land Bank (CLB) creates the means to reward private investment in an area for commercial or industrial purposes more appropriately, while over the long term diverting ownership, wealth, and responsibility into the hands of local residents. In theory, affordable housing and many other social and economic benefits can be achieved without recourse to cash-strapped governments.
The Epiphanies of a Corporate Raider
Turnbull had an epiphany while taking a summer break from his MBA studies in 1962 to work as a financial analyst for Standard Oil in New York City. Proposals for refineries, chemical plants, ships, and the like came in from around the world, supported with 20-30 year cash flow projections. What amazed Turnbull was that these long-term projections did not affect the decision to approve a project or not. Instead, approval hinged on the likelihood that the invested funds could be fully recovered with a competitive profit in ten years or less, depending on the country. Any profits arising beyond that horizon were “surplus” to the incentive to invest, even if they were double or triple the original investment. This was the first revelation.
The second occurred a few years later back in Australia when he was a partner in a private equity firm hunting for undervalued companies to take over, break up, and sell off at a big profit. He looked at the financial statements of hundreds of firms listed on Australian stock exchanges. He discovered that most of the equity value of firms arose from the property they owned, not what they produced. The initial money invested in the business, and re-invested profits, were but a small fraction of their net asset value. A far greater portion derived from the rising value of the land owned by the business. But few firms included the full extent of these windfall gains on their balance sheets.
There was not then, nor is there now any mechanism for capturing for the public benefit either surplus profits or windfall gains. So Turnbull turned his mind to figuring out a way to redirect these unrecognized and unreported sources of wealth at source, through a redefinition of property rights.
Who Creates Value?
Traditionally, the property owner has enjoyed a timeless claim to the wealth associated with a piece of land, regardless of what s/he does with it. That is one of the secrets to the concentration of wealth. This situation is especially inefficient and inequitable in cities, because the value of the entire land base is determined so heavily by public investments in roads, schools, sewerage, transport, and the like. Why should the private owners of urban land or buildings realize windfall gains from value they did not create?
Turnbull’s bold idea was to separate the ownership of the urban land base from the ownership of buildings on the land. He proposed that all the land belong to a co-operative, a Co-operative Land Bank (CLB). Its shares are distributed to residents pro-rata to the area occupied by their dwelling (e.g., one share per square meter). Ownership in a dwelling or commercial or industrial building takes the form of a transferable lease from the CLB. Whereas the leases on dwellings are perpetual (what some jurisdictions call a “strata” title), those for commercial or industrial buildings are time-limited. The CLB thereby captures all the uplift in land values created by public investment in infrastructure. Ownership and all its benefits go to those who create value by buying or renting dwellings.
Let us return to London and assume that all the land within 1,000 yards of those new subway stations was owned not by absentee landlords, but by a CLB. The CLB would be the beneficiary of the £9.5 billion uplift in property values, and higher property values would not prompt landlords to jack up residential rents. Instead, they and the lessees of offices, stores, and factories would pay higher rent-rates to the CLB. These would enable the CLB to service whatever debt it ran up as a partner in the original development. Surplus profits and profits from the sale of CLB shares would be additional sources of income with which the CLB could subsidize sustainable affordable housing and invest in other important community priorities and services. In this way the CLB would become self-financing, and all residents, as co-op shareholders, would draw benefit from community improvements. (See diagram p. 3, “Co-operative Land Bank.”)
Note that residents share in this value whether they lease their dwelling or rent it. Indeed, since rented homes and apartments only have value insofar as they are occupied, Turnbull proposed that tenants acquire co-ownership rights in their dwellings over time. Again, ownership and its benefits go to those who create value by buying or renting dwellings.
This separation of the ownership of buildings from that of the community’s land base also significantly enhances the political power of residents. With the shares comes the right to vote in CLB deliberations. Voting shares are not issued to the owners of office buildings, supermarkets, and factories.
Under this reallocation of ownership and political power, profits and rents stop leaking out of the community. Residents gain equity in the entire site, not just the area occupied by their dwelling. Tenants, as the eventual owners of their dwellings, are encouraged to maintain and improve them. Commercial and industrial investors retain ownership only until they recover their investments (with the opportunity to obtain a competitive profit). Incentive for entrepreneurship is preserved, while the system which progressively enriches the few and marginalizes the many is reversed. The implications are many and fascinating. But first let us explain a way to put a CLB in place.
Year by year, exclusive forms of ownership concentrate wealth in the hands of a few at the expense of the many. Year by year, the public debt load rises and private citizens suffer the consequences, including massive cuts in state subsidies for affordable housing. It is inefficient, it is unjust, and it has to change.
How to Establish a Co-operative Land Bank
While untested since Turnbull hatched it 40 years ago, the CLB model can be applied as readily to the construction of a new community of up to, say, 100,000 residents or to the redevelopment of an impoverished inner-city neighbourhood from upwards of 5,000. Whichever the case, several steps apply.
- A company is registered for the purpose of operating the CLB. It is thus able to issue preferred shares. However, organizationally speaking, it operates under co-operative principles. There is one vote per resident, no matter how many shares s/he may hold.
- The CLB obtains an option to purchase a large parcel of land for development or redevelopment at its existing use value.
- The CLB successfully applies for the land to be re-zoned for development. This decision will increase the value of the site just as it does when private developers obtain a rezoning permit. The increased value is captured by the CLB, thus enhancing its ability to raise loans for development.
- The land is then mortgaged. This puts money in the hands of the CLB to finance sub-division development or redevelopment. It also finances the operating costs during early stages of the development. As in private property development, this stage also increases the value of the land.
- The CLB issues leases and shares. The leases include terms and conditions that allow the land and buildings to be mortgaged. The first (“pioneer”) homebuyers are issued their shares gratis. Later buyers purchase the dwelling from the previous owner, and from the CLB, the requisite number of shares for the dwelling in question.
The CLB also issues the time-limited leases for commercial and industrial investors. The terms of these leases mimic the annual deductions that the businesses are permitted to make for the depreciation of their costs of investment. Here, however, the mechanism serves as a way gradually to transfer ownership to the CLB.
For example, a new shopping centre might be depreciated over 25 years, with a tax deduction of 4% per year. For the $80 million building (no land costs apply), the leaseholder would be able to write off $3,200,000 annually until the building was paid for. Co-ownership of non-residential developments like this would be obtained by the CLB as they are written off for tax purposes. The rights to income would remain with the commercial operator.
In residential developments, equity in the building would be transferred in a similar fashion but in this case to the tenants, who also receive shares from the CLB. In short, the landlord “writes off” ownership while s/he writes off the costs of investment. (See diagram, this page, “Ownership Goes to Those Who Create Value.”)
The accounting profits of commercial and industrial investors would not change as ownership is written off; the bottom line remains the same. At the end of the 25 years, however, all shopping centres, office blocks, factories, entertainment facilities, and all other non-residential developments would be wholly-owned by the CLB. This puts a cap on the “surplus profits” – those that did not affect the private owner’s decision to make an investment in the first place. S/he could then lease the building back or it could be leased to others or redeveloped. (Likewise, windfall gains from the long-term uplift in the value of the land would accrue to the CLB, not to the investor, as shown in the diagrams, “Equitable, Effective Distribution of Incentives,” p. 5 and “Commercial Investment and the CLB,” pp. 6-7.)
- Residents buy their homes by mortgaging their perpetual lease. If they rent it out at some point, the incoming tenant (once again) becomes a co-owner at 4% per year. This provides an incentive for leaseholders to sell rather than become a landlord. Why lose 4% ownership of their house each year to a tenant?
- Revenue flows to the CLB from several sources: from residential rents and charges for services; from commercial and industrial rate/rents; from the surplus profits. In addition the CLB builds up its equity from the windfall gains associated with CLB-owned buildings, and from trading in the CLB’s own shares.
Let’s look at the latter in a bit more detail. When someone sells their home in a CLB, two types of equity change hands. The vendor sells his/her lease to the dwelling to the buyer. The vendor also redeems his/her co-op shares from the CLB. Finally, the CLB sells the co-op shares to the new buyer. Only a portion of the receipts are paid to the vendor, however. Say there are 100 shares associated with the dwelling, which the vendor (a pioneer homeowner) has occupied for ten years. In the current market, the 100 shares the vendor got for free are worth $1,000 each. The homebuyer would pay $100,000 to acquire the shares from the CLB. However, the vendor would only realize $40,000 of that (10 x 4% of $100,000); the CLB retains the remaining $60,000. The difference between $60,000 and the price at which the shares were originally issued ($0, in this case) is profit to the CLB. Transient homeowners thus get less for their homes, and extract less from the community, while the CLB shares in some of the capital gain. (See diagram below, “Two Types of Equity.”)
What Benefits Would a CLB Generate?
First, a CLB would eliminate the cost of land for pioneer homebuyers and for commercial developers new or old. CLBs could also host and thereby accelerate the development and expansion of Community Land Trusts over a portion of the land area to ensure affordability for lower income people in perpetuity. Moreover, a portion of the profit made in buying and selling CLB shares could be set aside as a reserve pool to subsidize very low income people where required.
Second, a CLB could significantly reduce, and perhaps remove the need for taxpayer support for affordable housing. As CLBs remove the cost of land from a home and land typically represents half the cost of a house, CLBs provide half-cost housing. At the same time, their revenue and equity-building features enable CLBs to become self-financing.
Third, a CLB would capture for community benefit the value created by public investments in schools, hospitals, transportation, etc. This is only fair, as without the residents these assets would have little value. It remains to work out how uplifts in value (like those experienced around the London subway) would be shared with public authorities in order to recognize the contribution of taxpayers to such large investments.
Fourth, a CLB would eliminate speculative real estate investment by commercial interests. The influence of developers on local and other governments, often applied to increase the value of existing private assets, would also diminish considerably. The role of developers would change from buying, owning, and selling to acting as an agent in the establishment or redevelopment of democratic communities. This substantially reduces the funding and business risks for developers.
Fifth, a CLB would eliminate the ability of companies to sit on property for speculative purposes. They would no longer capture windfall gains from rising land prices. Similarly, the ability of companies to misrepresent their assets to shareholders would diminish. CLBs would facilitate a back-door corporate reform that could make market economies more efficient, equitable, and sustainable.
Sixth, under a CLB, pioneer homebuyers and all residential tenants obtain, without cost, equity in their dwelling and CLB shares associated with the dwelling. A tenant’s equity in a dwelling and in shares increases pro-rata to his/her usage of the dwelling at a rate of 4% per year. This means that a tenant cannot cash out his/her equity until the dwelling has been sold. However, it also means that all tenants eventually receive a “nest egg” that could contribute to their pension. In mature CLBs both homeowners and tenants could obtain dividends from the CLB shares. The CLB shares thus provide a way to reduce welfare dependency and costs and to assure dignified retirement incomes. All this reduces the burden of transfer payments on government.
Seventh, by halving the cost of buying a home, a CLB would attract other developers to the housing market. Commercial investors would provide more rental housing. Nonprofit investors would set up CLTs to provide sustainable affordable housing.
CLBs could help democratize economies. Land speculation would give way to a positive and structured incentive to invest in transparently productive businesses, to which the cost of urban land would prove less of a hurdle. By capturing rising property values and surpluses, CLBs would pool investment assets which could be applied to local transition challenges.
Implications of the CLB for Transition
The CLB turns on its head the dominant paradigm of property rights and who should benefit from them. One illustration of the CLB concept is the garden city of Letchworth created in 1903, 60 miles north of London. As understanding grows of how property rights feed inequality and unsustainable cities, interest in CLBs is growing in the U.K.
Aside their implications for housing, if CLBs became widely adopted, they would introduce a “third” way to distribute wealth. The distribution of surplus profits as dividends to CLB members would reduce the need for government to raise taxes, pay pensions, and provide social assistance. This could create a basis for truncating the size of centralized bureaucracies. It would also reduce the constant pressure to grow the economy any which way in order to create jobs, in order to increase tax revenue, in order to pay for these public expenditures, etc.
Also, CLBs could act powerfully to help democratize economies. Land speculation would give way to a positive and structured incentive to invest in transparently productive businesses, to which the cost of urban land would prove less of a hurdle. In addition, by capturing rising property values and surpluses, CLBs would pool investment assets which could be applied to local transition challenges. Combined heat and power, retrofitting for energy efficiency, and renewable energy production are all examples of initiatives that hitherto have been starved for investment. Given their larger scale, CLBs could issue bonds. They could even establish local or regional currencies and credit systems tied to a locally created unit of value (like the electricity generated from renewable sources ).
In short, CLBs would help steer us in the direction of a steady-state economy. Turnbull argues that no public decisions regarding major infrastructure investments or any major rezoning decisions should take place without the adoption of a CLB.
One can see the potential of such a creative and dynamic transfer of ownership. True, there is much more detailed work to be done. But the consequences of Turnbull’s insights are much more than a vision. They are another dramatic illustration of how, by seeing the world differently, we can align our economies with the resilience imperative.
MICHAEL LEWIS is editor of i4, Executive Director of the Canadian Centre for Community Renewal, a founding member of the Canadian CED Network, and lead investigator for the BC-Alberta Social Economy Research Alliance (BALTA). Contact him at [email protected]
PAT CONATY is a research fellow at the New Economics Foundation, London, England, a BALTA collaborator, and most recently, a research associate with Co-operatives UK. Contact him at [email protected] "The Co-operative Land Bank: A Solution in Search of a Home" was written by Michael Lewis with assistance from Dr. Shann Turnbull
The authors thank DAVID RODGERS, Executive Director of CDS Co-operatives (U.K.) and President of the Housing Sector of the International Co-operative Alliance for his assistance in the preparation of "The Best of Three Worlds".
These texts are excerpted from The Resilience Imperative: Co-operative Transitions to a Steady-State Economy, by Michael Lewis and Pat Conaty (New Society Books, 2012). It explains how we can power down our economies to a more local and sustain-able level and thereby meet the challenges of climate change and rising energy prices.
The texts were originally serialised in i4. i4 is an ejournal about Inspiring, Innovating, Inciting, and Inventing ways of life and work that permit humanity and the planet to thrive in this century of unprecedented challenges. i4 is a publication of the Canadian Centre for Community Renewal. They were originally formatted for publication by Don McNair.
“Affordability Locked In”, “The Best of Three Worlds” and "The Co-Operative Land Bank" were sponsored by two research partnerships: by the BC-Alberta Social Economy Research Alliance (BALTA) as part of the i4 special series “Housing We Can Afford”; and by the Canadian Social Economy Research Partnerships (CSERP), to celebrate its 6-year contribution (2005-11) to our understanding of the importance of Canada’s social economy to the resolution of fundamental social and economic issues. Lead image by Matthias Kümpel