Taxation of Affordable Housing in Community Land Trusts

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Tyler Mulligan

Tyler Mulligan is a School of Government faculty member focusing on community development, economic development, public-private partnerships for revitalization, and development finance.

Imagine that you own a home, but not the land on which it sits. You’re a tenant on the land, subject to a 99-year ground lease. As a condition of the ground lease, you are permitted to sell your home only to a household earning less than the community’s median wage, and the ground lease sets a maximum sales price to ensure that the home is affordable to that household. Just down the street, similar homes are selling for considerably more than your price restriction allows. That fact doesn’t bother you, because you knew the terms when you bought the place. Even with the price restrictions, you will earn some equity upon resale, and besides, you got a great deal when you bought it.

Now the tax assessor visits. Should your price-restricted home be valued in the same way as the market-rate home down the street, or should the assessor take your price restriction into consideration? That is the question addressed by the General Assembly in S.L. 2009-481.

Before looking at the General Assembly’s response, some background is helpful. The preceding scenario describes the community land trust (CLT) model for affordable housing. Under this model, a nonprofit corporation obtains ownership of a parcel of land and constructs a house on that land. It then leases the land (typically through a very inexpensive 99-year ground lease) and sells the improvements to a household earning less than the area’s median wage. The house price is affordable because land costs are essentially excluded from the price. Sometimes a subordinated lien is recorded on the property to document the implicit subsidy represented by the reduced price to the buyer.

Years later, when the owner attempts to sell the CLT house, the terms of the ground lease will require the owner to sell the house back to the CLT nonprofit corporation or to a qualifying low- or moderate-income household. The sale price, determined by a formula in the ground lease, is designed to provide some equity to the owner without sacrificing affordability for the next buyer. This mechanism preserves the implicit subsidy and allows the CLT house to remain affordable from sale to sale over the years.

The CLT model attempts to balance the opposing goals of maintaining the long-term affordability of CLT homes (by restricting the price at each resale) and building some equity for low- and moderate-income households during their tenure in CLT homes. Interestingly, the model has so far weathered the housing crisis fairly well, despite the fact that CLT homes are generally owned by households with low or moderate incomes. A February 2009 survey by the Lincoln Institute of Land Policy found that CLT homes experienced a significantly lower foreclosure rate in 2008 than market-rate homes.

One nagging problem for CLT homeowners in North Carolina has been valuation for property tax purposes. As North Carolina has grown, home prices have steadily increased. When CLT homes are located in resurgent neighborhoods where home prices are soaring, assessors have been faced with the question of whether to consider CLT price restrictions when assessing the value of CLT homes. The scenario described at the beginning of this post is not uncommon for CLT properties in North Carolina. Arguably, it has been within the discretion of the assessor to determine whether or not to consider the price restrictions when assessing the value of a CLT home (the legal analysis regarding that discretion is a subject that goes well beyond the scope of this post).

To settle the question, the General Assembly enacted S.L. 2009-481, which is effective for tax years beginning on or after July 1, 2010. Under the law, assessors are directed to take price restrictions into account when assessing the value of CLT homes. Furthermore, in calculating the value of CLT property, the implicit subsidy (called a “silent mortgage” in the act) is not added to the price-restricted value of the property.

To qualify as a CLT property under the act, the land must be owned by a 501(c)(3) nonprofit housing development entity. Improvements on the property must be transferred subject to a ground lease of at least 99 years, and the nonprofit agency must retain some interest in the property following any such transfer (usually through the ground lease). The ground lease must include resale restrictions to ensure that the property may be transferred only to qualifying households (those earning the median wage or less) or back to the nonprofit entity.

As this legislation was developed, I was asked to be involved in its drafting and to consult with interested parties. One of the goals was to ensure that the legislation would apply to existing CLT properties in North Carolina (examples of which are seen here and here), while remaining flexible enough to accommodate new CLT models which might emerge in the future. Did the legislation accomplish that goal?


One Response to “Taxation of Affordable Housing in Community Land Trusts”

  1. The house should be valued just as any other building should be valued: at the cost to produce that house today, less accumulated depreciation.

    And the price that its owner should be able to get when he sells it ought to be what the house itself is worth, which will likely be less than it was worth when he bought it, unless he has done a gut rehab or a major addition to the structure itself.

    Houses don’t appreciate. They depreciate, at about 1.5% per year. (A Federal Reserve Board study, May, 2006, arrived at that figure three different ways.) What rises in value is the site on which the house sits.

    The terms of the land lease might share that growth with the tenant. That’s very generous; it might be good policy, since it provides the resident something for a down payment on a future home.

    The assessor ought to be assessing this property just as accurately as it assesses any other property. Value the land first, at what it would sell for on the open market. If it would only sell for a small amount because of a far-below-market lease with many decades yet to run, then value it accordingly. If that lease is close to the end of its term, the value will be much higher, because the future increase in rent is capitalized into its value. If the town chooses to grant the CLT an exemption for the property, that’s fine. But the homeowner ought to be paying on property tax on the same basis that his non-CLT neighbors pay on their houses: on the current depreciated value of the structure.

    It is interesting that when the homeowner goes to sell, his gain is a function of the increase, if any, in the local median household income. People who own both house and land can capture a lot more.

    We ought to be thinking about something resembling the CLT as a solution for local foreclosures: the town can acquire the land, and sell off the homes themselves.

    And if we want to avoid the next boom-bust cycle, we ought to be looking at shifting the property tax off buildings in general, and onto land value. You might look at, which has a lot to say about how to promote economic development through wise taxation and incentives.

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