Monday Morning Thoughts: Why the Appreciation Cap on Grande Village Affordables?

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:

  1. Owner-Occupancy Requirement, in accordance with Section 18.04 of Davis Municipal Code.
  2. 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.
  3. 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.
  4. 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

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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10 thoughts on “Monday Morning Thoughts: Why the Appreciation Cap on Grande Village Affordables?”

  1. Don Shor

    On the previous thread I noted that a 3.75% cap yields $100,000 increase in equity in five years on the purchase of a $500,000 home.

    This was sent to me by email:

    The permitted 3.75% annual increase. in value quoted is correct (more below) as is your estimated ~$100,000 increase in five years. What some commenters appear to overlook is the allowed value increase is calculated on the total cost of the home, but as an investment it would be calculated on the amount the new homeowner must “invest” to acquire the property. Without getting into the weeds, a standard 20% down would also be ~$100,000, so a five-year equity gain of $100,000 would be a 100% return on the initial investment. The weeds include however much the initial investment is increased due to closing costs; whatever (small) equity buildup there is over five years; and maintenance (likely nothing in a new home). Given the mortgage interest tax deduction, the homeowner is essentially renting a nice new home for about market rate while enjoying a 100% five year return on his/her investment.

    Note that the recent apartment survey found that rents had increased by 5% locally (again). Basically, if someone wins the lottery, thanks to being a district employee, they are being handed a mortgage interest deduction, their housing costs are locked in for several years, they get a huge return on their initial investment, and then they can cash out that equity and go buy something bigger.

    There are all kinds of special interest groups that seem to get consideration for mitigating the impact of the very tight housing market in Davis. Big Affordable Housing projects get built. The university takes care of their own. Now the district rewards employees. These are all forms of housing discrimination.

    1. Keith O

      Don Shor and whoever sent him that email have it exactly right.  Nice return on investment if you’re in the selected group because of your employment using public land that belongs to all of us.

      And that’s with a 20% down payment.  What if one only put down 10% and paid some PMI?  Now you’re looking at a 200% increase on equity in 5 years.

      Sweet deal if you work for DJUSD.

      1. Howard P

        Your math is too simplistic… PMI is a “sunk cost”… you have to deduct PMI payments from any “net gain”… likewise, you and Don appear to over-estimate the “value” of the mortgage interest deduction… depends on your tax bracket, but at most you could get ~ 20% tax reduction (Fed and State, assuming a 15% Fed ‘marginal rate’).  So, 80% of the mortgage interest you pay is also a ‘sunk cost’… again, affects ‘net gain’…

        That said, I see no justification for ‘ear-marking’ “affordable”, SF properties to any class of employees… just ain’t right…

        The focus for affordable housing needs to be MF units.

        We seem to have moved from home ownership being a “goal” (which doesn’t always make financial sense, until you own it ‘free and clear’) to being considered an ‘inalienable right’… it isn’t.

        Paid PMI for ~ one year… got out of that BS as soon as I could. A rip-off… had I paid the same amount as additional principal, would have been way ahead of the game…

        1. David Greenwald Post author

          The focus of affordable housing is primarily MF units. I think the projects that I saw there is like a total of 95 for sale affordable units.

        2. Howard P

          Keith… yes, but no… a homeowner pays much more (in early years) than rent for a similar property… plus all maintenance, and needs to figure a”sinking fund” for roof repairs/replacement, garbage disposal/dishwasher, HVAC equipment, carpets/flooring, etc.

          At the end of the day, renters can be much better off financially, than if they were HO’s… we chose to be HO’s… other family members rented their entire lives… both models can work for a given individual… it depends…

          Last I checked, a few years back, ~45% of all folks in Davis rent…. MF or SF… 55% “own”… ownership has risks that renting doesn’t… if you bought in Davis at the wrong time, you may have been “underwater” later (negative equity)… not much of that risk in renting… if you buy at the right time, you can literally be “golden”… if and when you (or your estate) sell… until then, your equity is a paper thing… not ‘real’ in the here and now.

          Each of us needs to do the math for our own circumstances… have been satisfied with the choices we made.

          Rent payments are no more a ‘sunk cost’ than what a HO pays.  Do the math. Honestly, not posturing…

          What is “wrong” in preferential housing, based on employment, is the fact that it is needlessly discriminatory, in the bad sense of that term.  And gives more ammo to those who believe all public employees are ‘feeding at the trough’…

          Now, let’s look at this… if a DJUSD employee gets a “discount” on the FMV of a residence, is that not “compensation”?  Should that not be taxed as ‘implied compensation’?  Should that not be considered as part of the total comp for all DJUSD employees?  Should we, as taxpayers be subsidizing some (nowhere near all) DJUSD folk via parcel taxes?  Remember, ‘winnings’ from the Lottery is taxable income!

          [yeah, stirring the pot a bit…]

           

        3. David Greenwald

          Again I think the biggest crisis facing DJUSD is the lack of teachers and a big part of that is the relatively low salary with a high cost of living.  I’ll go as far as to say this is an emerging crisis in education because we don’t pay teachers enough for them to afford housing in a lot of locations.

    2. Mark West

      “There are all kinds of special interest groups that seem to get consideration for mitigating the impact of the very tight housing market in Davis. Big Affordable Housing projects get built. The university takes care of their own. Now the district rewards employees. These are all forms of housing discrimination.”

      In addition to it being discriminatory, the attempts at artificially mitigating the impact of the very tight housing market is another example of how we choose ‘feel good’ responses to our challenges instead of actually addressing the real problem.  The solution to our very tight housing market is to build more housing. The solution to housing affordability problem is to build more high-density apartments, townhouses, and condominiums.  What we are doing is nothing but a band-aid to make some ‘feel good.’

  2. Howard P

    David… have you had a chance to, and/or are you inclined to ask Lovenberg (who I believe was on the Board @ the Grande approvals), or Poppenga (who clearly was not) or the other trustees as to their take on this?

    It is what it is, but am wondering what their policy take(s) are… DJUSD has previously shown an interest in doing the same thing (selling to developers) with the property they exacted (with the City conceding ‘tradeoffs’ so they could do so) on the Wildhorse 9 Ac site on Moore (aka Nugget Field)…

    Have seen no sign they are currently actively pursuing that transaction, but it has been “out there”…

    From a planning/needs perspective that site screams MF (adjacent uses, transit proximity), and at 12-15 units per acre (or more? [pun unintended])…. well, am sure you own a calculator…

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