Community Land Trusts: An Untapped Resource for Lenders
Two parallel crises are impacting the 2021 housing market environment: the COVID-19 pandemic and a severe affordable housing shortage. In fact, the pandemic has exacerbated the supply shortage of affordable housing units, particularly in the metro coastal areas. There are approximately 3.8 million additional units needed in order to close the affordable housing gap, according to Freddie Mac Chief Economist Sam Khater. This highlights the need for lenders and other housing professionals to embrace alternative, less traditional paths to homeownership.
With the high prices of residential real estate, long waitlists exist for low- to moderate-income borrowers who are eager for the chance to buy lower-than-market value properties through shared equity housing programs – particularly community land trusts (CLTs).
Shared Equity Programs—How They Work
Shared equity programs are typically managed by public or nonprofit organizations, including CLTs, and use a self-sustaining model for lasting affordability. The shared equity program provider acquires homes by leveraging state, federal and philanthropic dollars set aside for affordable housing. In return for purchasing a home at an affordable cost, homeowners agree to certain restrictions such as limitations on conveyances of the property or returns on resale. In effect, homeowners “share” some of the proceeds from resale to pay the opportunity forward to the next low- to moderate-income homebuyer.
Community Land Trusts (CLTs)
As a form of shared equity housing, CLTs are nonprofit organizations that help create permanent housing affordability. The CLT model typically works like this:
- The CLT acquires properties with the intent of listing the homes for sale at below market value to prospective low- to moderate-income homebuyers.
- The homebuyers purchase the home from the CLT, while leasing the land itself under the home through a long-term ground lease (often 99-year).
- While living in the home, homeowners pay a fee—which is to help cover some of the costs of stewardship—to the CLT in exchange for purchasing the home at a below market rate.
- Upon resale, the homeowners agree to sell the home at a restricted price in order to keep the property affordable for the next homebuyers.
Seen as a pathway to traditional homeownership, CLTs allow families to get into homeownership as an equity-building alternative to renting.
CLTs create stable opportunities for low- to moderate-income families, allowing them to begin building equity while strengthening their financial security in the process.
CLTs In Practice
There are about 20 CLTs within Florida’s 67 counties. While the number is expected to grow, the Florida Housing Coalition (FHC)—a nonprofit organization that has provided technical assistance and training for CLTs for over 20 years—points out that there’s more work to build on the successes. “While there are a lot of CLTs in different parts of the state, there are still many communities not touched by them,” Ashon Nesbitt, chief programs officer and technical advisor at the FHC, said. “It’s our goal to see a CLT in every community in Florida.”
Key to Success: Partnering with Local and State Government
The success of CLTs is strongly connected by relationships with local government. “In the history of CLT success, most of them were heavily supported by their local government to get started, and still have very close relationships even though they are independent non-profits now,” Nesbitt said.
Jaimie Ross, president and CEO of the FHC, noted that a major enticing element for the local government is that the CLT takes on a bulk of the administrative burden that comes with the CLT model. The CLT manages processes like determining income eligibility, handling inclusionary zoning ordinances and keeping a pipeline of prospective low- to moderate-income homebuyers.
Close connections with state housing agencies, the sources of CLT financing in Florida, are key to growing the CLT model and permanent affordability throughout the state, she added. This partnership ensures subsidy sources match well with the CLT model, like Florida’s Surplus Lands Law that funnels publicly owned land into affordable housing programs. Educating key decisionmakers, such as elected officials and mortgage lenders, is key to seeing an increase in affordable housing from the CLT model.
Next Steps: Bringing Lenders into the Conversation
Getting buy-in from the local government is a first step, but the CLT model wouldn’t have the same impact in the affordable housing space without lenders’ awareness of shared equity programs.
Ross explained that to encourage the use of the CLT model broadly, the housing ecosystem needs to work on financial literacy, credit awareness and homebuyer education to help future homebuyers on the path toward homeownership.
“We need to look more closely at…homebuyer education and where the point of entry is for giving meaningful education about CLTs as an alternative to renting,” she said. “Working with lenders who have financial literacy and homebuyer readiness programs is going to be an important focus for us.”
“Lenders usually work with real estate professionals to help build their referral base, yet, developing a relationship with a CLT program provider is an untapped resource,” said Dennis Smith, Freddie Mac Single-Family affordable housing manager. It is critical for lenders to leverage financial literacy and homebuying readiness programs with emphasis on shared-equity programs. Such programs can help potential homebuyers better understand if they’re ready for homeownership. In cases where the homebuyer doesn’t qualify for a market rate home, those lenders with relationships with CLT program providers can introduce them to the CLT model.
“That shows that as a lender, I have interest in you as an individual and I’m going to invest in every customer I encounter, not just those that are ready to buy a market rate home,” Smith said.
To support and bolster partnerships between CLTs and lenders, Freddie Mac has expanded mortgage offerings to allow CLTs and lenders increased access to credit for families with low- to moderate-incomes. Leveraging CLTs to address the affordable housing challenges helps homeowners build wealth and creates long-term sustainable affordable housing.