Yesterday’s article on the Grande Village affordable housing component had an interesting side discussion on an equity cap. There was some concern that someone could purchase a home at the affordable rate and then flip it in a year at market value.
However, as the result of past problems with affordable housing being converted into market rate housing, the city has enacted restrictions that allow such units to remain “affordable” in perpetuity.
Current restrictions are:
- All owners must occupy the unit as their primary residence for the entire period of ownership, unless granted a temporary exemption by the City.
- The appreciation of the unit is restricted to a maximum of 3.75%, compounded annually and prorated daily.
- The unit will have a Right of First Refusal recorded to the unit that allows the City of Davis or its designee to have first opportunity to purchase the unit upon its resale.
There is nothing unusual about the Grande arrangement. For instance, a previous development, the Villages at Willow Creek, has four affordable ownership units.
The staff report from 2015 notes, “Required affordable units shall remain affordable in perpetuity. This requirement shall be established in a city-drafted deed restriction and deed of trust recorded to each property, subject to review and approval by the City Manager’s Office and City Attorney. Required affordable low-moderate income units shall remain affordable over time and continue to ensure affordable housing opportunities for income eligible households.”
The requirements include:
- Owner-Occupancy Requirement, in accordance with Section 18.04 of Davis Municipal Code.
- A Right of First Refusal that allows the City of Davis the opportunity to either purchase the unit upon resale or present a buyer for the unit within 60 days of a notice from the seller indicating their intent to sell, closing escrow on the unit within 90 days of notice or as agreed upon by buyer and seller.
- Resale Restriction/Appreciation Cap on the price of the affordable unit, restricting the appreciation of the unit to 3.75% (3% based on the average increase in Yolo County Area Median Income plus 0.75% as a maintenance credit for upkeep of the unit.) This restriction shall be compounded annually and prorated daily when calculating the resale price for the unit.
- Resale Report requirement that all future owners of the affordable unit clear the City of Davis resale report prior to the close of escrow in future sales of the unit, in all circumstances where the unit is not exempt from the city’s resale inspection. No findings in the city’s resale report shall be transferred to the subsequent buyer of the unit.
According to information from the city, the annual appreciation caps range from 3.75 percent to 5.5 percent, depending on the unit. There is nothing unusual about the Grande property in terms of appreciation caps.
One reader suggested that “enforcement is questionable at best, and the remedies, if caught, are nearly non-existent.” That is something that warrants looking into.
Are these requirements perfect? Perhaps not. As the language above indicates, the appreciation rate is based in part on the average increase in Yolo County Area Median Income (which is slower than the cost of housing), plus a small component for maintenance credit for upkeep of the unit.
This seems a reasonable effort to thread the needle between a zero equity affordable home – which would seem to lead to a de facto depreciation of home value and thus equity – and the complete disaster of 20 years or so ago.
A 2009 article by the Vanguard noted that that the “original requirements of the affordable housing ownership was that one could purchase a home at the affordable rate, hold onto it for two years, and then sell it at market value. The result was a huge number of units that went from affordable to market rate.”
We quoted from an August 2002 Davis Enterprise article which noted, “The issues arose when Harrington presented at the July 24 council meeting Enterprise advertisements for four Wildhorse homes built two years ago as affordable houses and being sold at market value. He was concerned about the ability of affordable home owners being able to profit from sales after just two years of occupancy.
“Cochran said today that the four homes originally sold for $140,000 to $143,000. They were listed in the July 12 Enterprise advertisements at prices ranging from $299,000 to $325,000.
“Katherine Hess, planning and redevelopment administrator, reported to the council at its Aug. 1 meeting that the two-year occupancy requirement was the only restriction on the homes, so the owners were not violating any city policies. Cochran said today, though, that one of the home owners is moving out before the two-year mark, but that it is a legitimate exemption issued by the city.”
As then-Councilmember Harrington said at the time, “From my perspective, given what I’ve seen from my review of the city’s affordable housing program over the last two and half years… We might as well not have one for the purchase of affordable homes because what’s happening is tremendous city subsidy has been put into helping a few people buy homes which they later make a killing off of.”
The current solution, while not perfect, attempts to prevent excesses.
It seems like there are four alternatives: (1) A small “a” affordable housing program, which creates affordability due to very small size of the home; (2) A big “A” limited equity affordable housing program; (3) No affordable housing; and (4) Affordable housing by growth.
We can certainly debate the best approach here.
—David M. Greenwald reporting