Forms of Ownership

This document was prepared by Kay M. Gilbert. For a copy of this document in Microsoft word follow this link: FormsOfOwnership.doc.

Overview

CLTs can create homes on their property in any of several legal forms. The form chosen will vary depending on the residents’ needs and preferences, project goals (financial and otherwise) and applicable subdivision/conversion ordinances. Consider the costs and benefits of each option in terms of your particular circumstances.

Be aware that CLTs may need to do extra work educating potential buyers, funders, lenders and regulators, to overcome resistance and suspicion regarding limited-equity ownership. This is especially true for forms of ownership less traditional than either fee-simple houses or condominiums. A coalition of area CLTs may be a good tool for educating local institutions.

1. Fee-Simple Ownership

Most common with single-family detached houses, but can apply to other kinds of buildings. Owners finance their own purchases, hold the deed to their own home, and control over all aspects of it that aren’t restricted by the ground lease with the CLT. As with other CLT homes, owners buy in at below-market rates, but must also sell at below-market rates, earning equity based on a resale formula. The CLT will likely reserve the right to repurchase the home, or at least the right of first refusal.

benefits

• The most traditional and popular form of ownership for buyers, easiest for the CLT to resell.
• Owners can usually leave their property interests to their heirs.
• Most popular form for lenders as well, who can easily repackage the loans and sell them to Fannie Mae.
• Funders and government agencies are comfortable funding fee-simple homes.
• Owners may feel a more-direct stake in their homes, and maintain them better.
• Minimal red tape to build freestanding homes, maximum flexibility in sizes and layouts.

costs

• Hard to site new houses, especially as infill, because they may require a lot of land and parking.
• Low-density neighborhoods can contribute to sprawl, lessen access to public transit.
• Environmental harm caused by homes with large footprints.
• May be harder to create a feeling of community, or to get economies of scale (e.g. shared laundry facilities,gardens or maintenance tools).

2. Limited-Appreciation Condominium (LAC)

Condominium ownership allows each home unit to be owned separately, while a homeowners’ association owns and controls the land and common property. The unitowner owns everything from her/his interior walls inward. (For example, pipes that run through the walls between two units are common property, but when they pass through the wall of a unit, they become the property of that unitowner.) Owners buy in at below-market rates, but must also sell at below-market rates, earning equity based on a resale formula similar to that used in other types of CLTs.

The CLT can occupy both roles of a traditional condo association, owning the land, and controlling any common property or shared spaces. Alternatively, a separate homeowners’ association can make decisions about common facilities and spaces. In combination with such an association, the CLT can lease each owner a proportional undivided interest in the total parcel. Even with condo ownership of freestanding houses, the owners can have proportional interests in utilities on the land, which the association can manage.

benefits

• Owners can usually leave their property interests to their heirs.
• Some ordinances exempt condos of less than five units from significant regulation. CLTs are conceptuallysimilar to condos, with land ownership separated from building ownership, so CLT condos have a much smaller hurdle to clear in terms of familiarity to buyer, lenders and municipalities.

costs

• If the property is not exempt from local condo ordinances, it can take a great deal of time, effort and expenseto follow the procedures of the state’s Dept. of Real Estate regulations and Subdivision Map Act (or their equivalents), and the city’s housing department.
• Condos may be subject to much stricter requirements than are other kinds of buildings regarding minimum parking, seismic retrofits, unit-separation soundproofing and other expensive code upgrades. A building may not be able to meet these requirements, or only at great expense.
• Lenders may force a CLT to pre-sell all condos in order to get a loan, which may prevent the CLT from taking the time to educate and train potential owners who are otherwise good candidates, but who lack some necessary skills and experience. Conversely, if a CLT has buyers for some, but not all, units, the delay in establishing the condo can cause the ready buyers to go elsewhere.

3. Limited-Equity Housing Cooperative (LEHC)

LEHCs allow the residents to become shareholders of a cooperative that they then control jointly. One share can correspond to one house or other habitable unit, or the shareholders allocate ownership in other ways. Shareholders buy in at below-market rates, but must also sell at below-market rates, earning equity based on a resale formula similar to that used in other types of CLTs. Owners are responsible for the day-to-day building management. The governing board must have some outside directors.

benefits

• Co-ops control who buys in, choosing new owners who agree in advance to follow the co-op’s rules and contribute to its management.
• Owners can usually leave their property interests to their heirs, but an intentional community may want greater restrictions on entry.
• RCNs don’t have to file subdivision maps like a condo or a co-op.
• Shared ownership not limited to dwellings: can share anything from cars to food-production facilities.
• Many jurisdictions exempt LEHCs from condo-conversion ordinances.
• If the LEHC is not exempted outright, it may be exempt if it can get government funding worth at least $100,000 or 10% of equity in the project, whichever is less.

costs

• LEHCs are most likely to succeed if they start with a community of people with common goals, already committed to living together and governing themselves. People just looking for inexpensive housing may not want to make and enforce—or follow—a co-op’s rules, or share the work.
• If an existing community wants to form a LEHC, in most cases a minimum percentage of residents must opt in. This could be a simple majority or more, depending on state and local law.
• To avoid charges of discrimination, the LEHC must make its selection criteria for new owners very clear and carefully worded, and very transparently followed.
• Co-ops often have more maintenance problems that condos, whose owners will generally do more work to maintain their property values.
• Co-ops can be hard to finance in this part of the country, where they aren’t common. Since owners can veto potential buyers, current owners can have a hard time selling their shares. Lenders prefer fee-simple homes or condos, because the borrower is free to resell and pay off the loan.
• LEHCs can be even harder to finance, especially where lenders are not familiar or comfortable with limited-equity ownership. These are not loans that a lender can easily repackage and sell to Fannie Mae, so not all lenders will make the extra effort. Municipalities that fund or approve affordable housing may not welcome projects that limit homeowner equity. LEHCs may encounter buyer resistance unless CLTs makes an effort to educate potential buyers about this form of ownership.
• California LEHCs are not exempt from property taxes, except in two cases:

1. the LEHC is part of a regulatory agreement with a government agency (i.e. a municipal housing department). The agency enforces the agreement, and the LEHC answers to the agency; or
2. the LEHC choose to rent some units to non-owners; the rented units are exempt.

4. Limited-Liability Company (LLC)

The residents form and control a company that owns the homes, with each resident a part owner. Like a corporation, individual residents have some protection of their personal assets.

benefits

• Can be most inexpensive housing for buyers, especially if they can use sweat-equity credits. The LLC could fund most of the buy-in, paid back through an amount added to the monthly rent.
• Easy to create: only need one resident to buy in, but then that person would own the whole building.
• If a project fails, the CLT can close the LLC without endangering other properties.
• Broader than just residences: residents can own, e.g., a micro-venture into which each puts sweat equity, and which generates income that supports the residents and/or the property.
• Usually eligible for a property-tax exemption for low-income units.
• If a nonprofit owns a large enough percentage (i.e. ≥ 95%) of the LLC, the nonprofit status passes through to the LLC, and the nonprofit is eligible for grants to support operations.

costs

• LLCs don’t create ownership or build equity, creating resistance among funder, lenders and government agencies. The LLC can partly overcome this is for the LLC to create equity equivalents. Examples:

1. set aside part of the rent in trust for each resident monthly, and lend that money to the nonprofit at 4% interest for operating costs;
2. a micro-venture can produce income that residents get back, with interest, periodically or on selling.

• Residents can use these accumulated funds for a down payment in the future. However, renters don’t improve their better credit rating, or have access to tax benefits, as do owners in other kinds of CLTs.
• May have to file a subdivision map, with the attendant red tape, costs and delays.

5. Resident-Controlled Nonprofit (RCN)

The residents form a nonprofit that owns and controls the buildings, just as the CLT owns and controls the land. Each resident would have a small membership interest and pay a fee about equal to a security deposit. Residents elect the nonprofit’s governing board.

benefits

• RCNs are easy to create, and don’t trigger subdivision issues, as would a condo.
• Residents can have accumulated interest paid to them periodically, or saved until they sell.
• RCNs can accommodate a broader economic range of residents.
• Whomever sells a building to the RCN gets a great tax advantage: the building may have appreciated greatly, and the owner may be facing huge capital gains if selling to a regular buyer. The RCN can make a below-market offer, because the owner can write off of the difference between the market and sales price, in addition to saving on capital gains.

costs

• RCN residents must agree on a mission or vision statement, and on how the land will further that mission.
• RCNs don’t create ownership or build equity, which can lead to great resistance from funder, lenders and government agencies. However, RCN can create equity equivalents (see LLCs, above).

6. Tenancy in Common (TIC)

Tenants-in-common share an undivided interest in a property. The presumption is that all tenants share equal interests, but that need not be the case. TICs distribute both property costs and profits proportional to each tenant’s fraction of ownership. Tenants-in-common may sell, mortgage or give their interest in the property without permission from the co-owners.

benefits

• Owners can usually leave their property interests to their heirs.
• Potential buyers may like the flexibility: even if resale is restricted by the CLT’s the right of first refusal, they can still resell their shares whenever they want.

costs

• Any one tenant can force a sale of the property to recover her/his individual interest. Co-tenants or the CLT must be ready to buy that interest, or risk either bringing in an inappropriate buyer or having to sell the property to pay the leaving tenant’s accumulated capital.
• Many lenders here won’t finance TICs. In northern California, Bank of Marin now funds joint TIC loans based on the credit of all the co-owners.