AGENDA #10
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
SUBEJCT: Response to Petition from the Community Land Trust in Orange County Concerning the Scarlette Drive Affordable Homeownership Project
DATE: February 14, 2000
The purpose of this memorandum is to respond to a petition received by the Council from the Community Land Trust in Orange County on September 27, 1999 concerning the Scarlette Drive Homeownership Project, (please see Attachment 1), and to outline the terms of a Development Agreement among the Town, Orange Community Housing Corporation and the Community Land Trust in Orange County.
The attached resolution would:
(1) Affirm the Council’s intent to provide funds to the Orange Community Housing Corporation for the Scarlette Drive Homeownership Project, such funds to be provided as a grant for infrastructure improvements to the land; and
(2) Acknowledge the future transfer of the improved land from the Orange Community Housing Corporation to the Community Land Trust in Orange County; and
(3) Authorize a Development Agreement among the Town, the Orange Community Housing Corporation and the Community Land Trust in Orange County governing the development, conveyance and long-term use of the Scarlette Drive property.
The Community Land Trust in Orange County – The Community Land Trust in Orange County is a private 501(c)(3) non-profit membership organization. A volunteer Board of Directors that includes interested members of the community and professionals governs the Land Trust. As homes are developed, the buyers will also have representation on the Board. The goal of the Land Trust is to create long-term affordable housing by owning the land upon which the housing is built. Buyers of Land Trust homes have full rights of privacy and security through a 99-year renewable ground lease that can be transferred to their heirs. The ground lease also includes a resale formula that would restrict the amount of equity a homeowner would receive when their home is sold, and the resale price of a home so that the homes will remain permanently affordable.
BACKGROUND
On January 10, 2000, the Council adopted a resolution establishing restrictive covenants for the Scarlette Drive property. At that time, the Council also authorized the Manager to initiate the transfer of the Scarlette Drive property to the Orange Community Housing Corporation. We reported that we would soon return to the Council with a proposed Development Agreement for the Council’s consideration (please see Attachment 2).
To date, the Town has committed $192,770 of Community Development funds and $20,000 from the Housing Loan Trust Fund to the Orange Community Housing Corporation for the development of this project. In addition to Community Development funds, $124,000 of Federal HOME Program funds administered by the Orange County Department of Housing and Community Development has also been budgeted for this project.
The Land Trust has requested that the Town and the County provide the Community Development and HOME Program funds as a grant to the land trust rather than converting the funds into second mortgages. The Land Trust cites three reasons for their request:
1. Because the townhomes will be part of the Land Trust (through a ground lease agreement), the units will be permanently more affordable than homes subsidized under the Town’s current second mortgage programs.
2. By granting funds to the development, the townhomes can be marketed at a price that will not include the cost of the land.
3. By granting the subsidies to the development and lowering the amount of the first mortgage, the homebuyers will be able to borrow a higher amount of funds from the bank, and if necessary, to borrow closing costs from the banks.
Under the Town’s current system, funds provided to a non-profit organization for the development of affordable housing would be divided equally by the number of housing units to be produced, and structured as a deferred second mortgage to the qualified homebuyer that purchased the home. The Town would receive a Promissory Note and Deed of Trust from the homebuyer for the amount of the second mortgage. The funds would be due and payable to the Town upon sale of the property or if its ownership was transferred. When the funds are received upon sale, the Town has had a source of income for funding future community development projects. The Council has the option of rolling over the funds to a second mortgage for subsequent qualified owners of the same property.
We have discussed the issues of granting funds to the Land Trust with the Orange Community Housing Corporation; the Land Trust and its attorney, Mr. David Rooks; Orange County staff; and John E. Davis, a consultant to the Community Land Trust in Orange County, of Burlington Associates in Burlington, Vermont. According to Mr. Davis, many cities across the Country, including Eugene, Oregon, grant Community Development and HOME Program funds to land trust projects. Please see Attachment 3 for a summary of Mr. Davis’ comments made during a meeting held on November 12, 1999 concerning the request.
Based on our discussions we
recommend that the Town grant funds to the Land Trust. We
believe that an effect of granting funds to the Land Trust is that the homes
would remain permanently more affordable in two ways:
(1)
The resale
formula will restrict the sales price of homes; and
(2)
Homeowners
would not have the option of paying off a second mortgage, as is the case with
the Culbreth Park and Tandler Programs, so homes could not be sold on the open
market.
We note that if the Council approves this proposal, the Town would not
receive funds in the future from the sale of the homes. As homes are resold, the owners would repay
a portion of the equity received from selling their home to the Land Trust
based on a resale formula (a shared appreciation model). The Town’s funds invested in each unit would
not be repaid. We believe that granting
funds to the Land Trust would help achieve the Town’s goal of creating housing
in Chapel Hill that is permanently more affordable. At the same time, we recommend that the Council establish
safeguards to protect the Town’s investment through the terms of a Development
Agreement governing the development, conveyance and long-term use of the
property.
On January 10, 2000, the Council authorized the transfer of the Scarlette Drive property to the Orange Community Housing Corporation subject to deed restrictions requiring the property be used for the purposes of developing an affordable homeownership land trust project. The Council also authorized the Manager to incorporate restrictive covenants governing the use of the property into an Agreement among the Town, Orange Community Housing Corporation and the Community Land Trust in Orange County. Ultimately the property will be conveyed to the Land Trust after development. The Development Agreement between the Town and the Land Trust would govern the long-term use of the property.
We recommend including the following concepts in a Development Agreement:
1. In the event that the Community Land Trust dissolves, the ownership of the Scarlette Drive property would revert to the Town.
Staff Comment: We recommend including this provision in the agreement so that if the Land Trust no longer exists, the Town could continue to use the property for affordable housing purposes.
2. If a house were re-sold to a household earning more than 80% of the area median income, the Land Trust would be required to repay the Town’s funds for that house unless the Council specifically approved the sale.
Staff Comment: A goal of the Land Trust would be to sell homes to families earning less than 80% of the area median income. If a Land Trust home were sold to an unqualified household, the Land Trust would be responsible for repaying a portion of the Town’s funds. In the case of Scarlette Drive, we recommend that we require the Land Trust to repay 1/14 of the Town’s funds plus a proportionate share of any appreciation.
We note that it is unlikely that homes would be sold to families earning more than 80% of the area median income. One scenario where this could occur, as Mr. Davis indicates in Attachment 3, would be if interest rates and housing prices increased at an excessive rate while the County’s median income levels remained stagnant. If this were to occur, rather than sell the homes to families earning more than 80% of the median, the Land Trust could request additional subsidy from the Town or another resource so the home could be sold to a family earning less than 80% of the median.
3. If a homeowner defaults on their mortgage with a bank and the Land Trust fails to exercise its rights to prevent a foreclosure, the Town would have the right to purchase the property.
Staff Comment: We recommend that we require the Land Trust to notify the Town if a homeowner were in default. If the Land Trust were not able to cure a default, the Town would have the right to step in and cure the default. If the Town exercised this right, we could identify a qualified buyer to purchase the property. If a house were sold on the open market with the Town’s Agreement the Land Trust would have to repay the Town’s funds.
4. The Agreement will require that the Land Trust assume the responsibilities of the
Homeowners
Association in the event the homeowners fail to maintain the property.
Staff Comment: We understand that in a townhouse development, a homeowners association that includes all of the residents is formed to monitor the use, maintenance and upkeep of individual properties and to maintain the common areas. We recommend that we include in the Development Agreement that the Land Trust would be responsible for the maintenance of the property if the homeowners association did not fulfill its obligation.
5. The Land Trust will maintain a waiting list of pre-qualified homebuyers so buyers would be readily available when a home comes on the market.
Staff Comment: We
believe that it is important for the Land Trust to maintain a list of
pre-qualified homebuyers.
That the Council adopt the attached resolution to:
(1) Affirm the Council’s intent to provide funds to the Orange Community Housing Corporation for the Scarlette Drive Homeownership Project, such funds to be provided as a grant for infrastructure improvements to the land; and
(2) Acknowledge the future transfer of the improved land from the Orange Community Housing Corporation to the Community Land Trust in Orange County; and
(3) Authorize a Development Agreement among the Town, the Orange Community Housing Corporation and the Community Land Trust in Orange County governing the development, conveyance and long-term use of the Scarlette Drive property.
1. Petition from the Community Land Trust in Orange County (p. 7)
2. January 10, 2000 Memorandum to the Mayor and Town Council (begin new page 1)
3. November 12, 1999 Comments from John E. Davis, Burlington Associates, Consultant to the Community Land Trust in Orange County (p. 26)
A RESOLUTION CONCERNING
COMMUNITY DEVELOPMENT BLOCK GRANT FUNDS FOR THE SCARLETTE DRIVE HOMEOWNERSHIP
PROJECT AND AUTHORIZING THE MANAGER TO EXECUTE A DEVELOPMENT AGREEMENT (2000-02-14/R-9 )
WHEREAS, on October 26, 1998 the Council received a final report with recommendations from the Land Trust Implementation Task Force and created the Land Trust Steering Committee; and
WHEREAS, the Community Land Trust in Orange County has been officially incorporated and received 501 (c )(3) tax exempt status; and
WHEREAS, the Community Land Trust in Orange County has requested that the Town provide improved land on Scarlette Drive to the Community Land Trust in Orange County; and
WHEREAS, the Council has budgeted $192,000 of Community Development Block Grant Funds to the Orange Community Housing Corporation to develop the Scarlette Drive property;
NOW, THEREFORE, BE IT RESOLVED that the Council of the Town of Chapel Hill affirms the Council’s intent to provide Community Development Block Grant funds to the Orange Community Housing Corporation for the Scarlette Drive Homeownership Project, such funds to be provided as a grant for infrastructure improvements to the land, and acknowledges the future transfer of the improved land from the Orange Community Housing Corporation to the Community Land Trust in Orange County.
BE IT FURTHER RESOLVED, that the Council authorizes the Manager to develop and execute a Development Agreement governing the development, conveyance and long-term operation of the Scarlette Drive property among the Town of Chapel Hill, the Orange Community Housing Corporation and the Community Land Trust in Orange County to include the following terms:
·
Terms of
Resolution 2000-01-10/R-24 and Resolution 2000-01-10/R-25.
·
If the Land
Trust ceases to exist, ownership of the land would revert to the Town.
·
If the Land
Trust homes were sold to a family earning more than 80% of the area median
income, the Land Trust would be required to repay the Town’s funds, unless the
Council specifically approved the sale.
A mechanism for determining the value of the subsidy would need to be
determined.
·
If a homeowner
is in default, the Town will have the right to step in and either cure the
default or purchase the home.
·
The Land Trust
Board would be required to assume the responsibilities of the Scarlette Drive
Homeowners Association if problems occur with maintenance of the property.
· The Land Trust will maintain a waiting list of pre-qualified homebuyers so that when a home is available, there will be a family ready to purchase the home.
This the 14th day of February, 2000.
ATTACHMENT 3
Comments from
John Davis
(Consultant to the Community Land Trust in Orange County)
We have discussed the issue of granting funds to the land trust with John E. Davis, a national consultant to the Community Land Trust in Orange County, whose services are being provided free-of-charge to CLTOC through a technical assistance contract with HUD. According to Mr. Davis, many cities across the country, including Eugene, Oregon, Burlington, Vermont, and others, grant Community Development and HOME Program funds to community land trust projects in this manner. We asked Mr. Davis three key questions about this request:
(1) To describe the benefits to structuring funds in this way?
(2) Under what circumstances could additional funds be needed for a previously subsidized land trust home?
(3) How would the Town’s funds be protected?
Mr. Davis offered the following responses.
1. Benefits to granting funds to the project.
· Grant funds would be a financial asset to the Land Trust. In the eyes of other funders, the Land Trust would be given more credibility if the funds were identified as a grant rather than a loan.
· The Land Trust’s ability to market the homes is enhanced when the advertised price is reduced by the amount of the public subsidy that is granted the project. In the case of the Scarlette Drive Townhomes, the units could be marketed at the true cost to the buyer of $85,000, rather than the developer’s cost of $115,000.
· The units would become permanently affordable and would most likely not require additional subsidy from the Town.
2. Circumstances when an additional subsidy might be needed for a previously subsidized CLT home.
Mr. Davis explained that the scenarios where an additional subsidy might be required are unlikely situations and worst-case scenarios.
· If both interest rates and housing prices increase at an excessive rate, while the county’s median income levels remain stagnant, an additional subsidy could be needed for future low-income homebuyers.
· If the homeowner excessively damages the home and, despite such destruction, the home’s appraised value continues rapidly to rise, additional funds might be needed to renovate the home so it could be resold. (This assumes that CLTOC would exercise its option to re-purchase the home. If the property has been completely “trashed,” the community land trust could decide not to exercise its option. In Mr. Davis’s recollection, such a scenario has occurred only once in the past twenty years, where a CLT homeowner took no pride in becoming a homeowner and destroyed her own home to the point where the local CLT simply allowed it to return to the market.)
· A homeowner might apply in the future for a maintenance or home improvement loan through the HOME Comprehensive Rehabilitation program or the Town’s neighborhood revitalization program.
· If a Land Trust home has been re-purchased by CLTOC and another low-income homebuyer has not been immediately found, the Land Trust might need funds from the Town or from another source to make monthly payments on the home until a buyer is identified. (Note, however, that most community land trusts do not choose to exercise their option to re-purchase a CLT home until there is a ready buyer for that home.)
3.
How the Town and
County’s funds would be protected.
During our discussion with Mr. Davis, Town and County staff explored possible mechanisms to ensure the Town and County’s funds would be protected:
· If the Land Trust ceased to exist, ownership of the land would revert to the Town. All ground leases with CLTOC’s homeowners would remain in effect, protecting both the public subsidy and the homeowner’s security.
· If Land Trust homes were sold (or re-sold) to households earning more than 80% of the area median income, the Town would have a contractual right to demand repayment of the Town’s funds. (A mechanism for determining the discounted value of the subsidy would need to be determined.)
· If a homeowner were to default on the primary mortgage, risking seizure of the home (and the Town’s subsidy) by a private lender , and if the Land Trust were unable or unwilling to act to prevent foreclosure, the Town would have a contractual right to step in and either cure the default or to purchase the home from the bank after foreclosure.
· The Land Trust Board would have a contractual right to take over the Scarlette Drive Homeowners Association’s responsibilities if problems occurred with maintenance of the structural improvements located on CLTOC’s land.
· The Land Trust will work towards having access to a capital reserve for emergency situations.
· The Land Trust will maintain a waiting list of pre-qualified homebuyers so that when a home is available, there will be a low-income family ready to purchase the home.