Providence: Building a Community Land Trust in Two Neighborhoods

Background

With the eleventh highest foreclosure rate in the country, Rhode Island is, according to one economist “ground zero” for the nation’s housing bust. Much of the problem is concentrated in the capital city of Providence, which is home to six out of every 10 foreclosures.

A primary reason why owners have lost their homes to foreclosure is the state’s affordable housing shortage. Throughout Rhode Island, the cost of housing grew exponentially in the first half of the decade as a result of low interest rates, easy credit, and access to financing that appeared affordable. Even middle-income families cannot afford available homes, and a disproportionate number of Rhode Islanders turned to sub-prime loans to enter the housing market. The foreclosure challenge entered a second phase due to resetting of variable interest rate mortgages. And a third, even more devastating phase, has set in as mortgage holders lose their jobs. As of April 2009, Rhode Island had the fourth highest statewide unemployment rate.

To address the foreclosure challenge and ensure long-term affordable housing, the Rhode Island Community Housing Land Trust (CHLT-RI), a state-wide association of eight nonprofit community development corporations (CDCs), is working with two community development organizations in Providence to acquire foreclosed properties, rehabilitate them and sell them to low-income homeowners using a Community Land Trust model.

The Land Trust Model Explained

Under a Community Land Trust model, the trust acquires a property and resells the house to an owner who will occupy the land. But the trust retains ownership of the land so that it will always benefit the community. The cost to the buyer for a single-family house without title to the underlying land is about 25 percent less than full market value. The owners of the house lease the land for 99 years or more and can pass it down to family members. If the homeowners do re-sell it, the land lease requires that the home be sold either back to CHLT-RI or to another lower-income household for an affordable price. The homeowner receives a percentage of the equity that goes with the house but the remainder stays with the land, allowing the property to be affordable to homeowners for years to come.

The benefit to the homeowner of buying a home under this shared equity model is a lower price and a much lower risk of future foreclosure because the trust is co-owner and can take action to ensure the property does not become vulnerable. The benefit to the community is permanently affordable housing that will allow for mixed income neighborhoods even as market values rise. All buyers of a CHLT-RI house are required to complete a 12-hour home buyer training course prior to purchase.

Implementing the Foreclosed Property Recapture Program

In July 2008 the CHLT-RI developed a partnership with two nonprofit housing organizations with decades of experience working to revitalize Providence’s distressed neighborhoods: West Elmwood Housing Development Corporation (West Elmwood) and Olneyville Housing Corporation (OHC). The partnership received funding from Living Cities to pilot a foreclosure strategy emphasizing the land trust model land trust model that would create permanently affordable housing in these communities. United Way of Rhode Island also invested $50,000 in the effort.

The partnership will target 10 neighborhoods that make up approximately one half of the city. West Elmwood and Olneyville Housing are each responsible for the acquisition and rehabilitation of properties in one half of the project area. CHLT-RI will steward the properties and hold the land lease at the time of resale. During the interim CHLT-RI will be working in a supporting role on the overall administration of the program and will also help with the paperwork and documentation needed for the acquisition and rehabilitation stages, but will not serve as the lead during these early stages.

Two of the ten neighborhoods targeted, Olneyville and West Elmwood, are low-income communities hard-hit by foreclosures. In Olneyville, the lowest income neighborhood in the city, one in five houses has been advertised for foreclosure auction — the highest rate of any neighborhood, according to The Providence Plan. Like the rest of the state, in both Olneyville and West Elmwood, home values were skyrocketing earlier in the decade. Between 2002 and 2005, homes appreciated 300 percent. Speculation became a big issue in the two neighborhoods. Absentee landlords purchased a substantial and very visible percentage of available properties. Properties often were flipped five or six times in the three-year period, each time making a profit for their new owners. By 2005, prices had gotten way ahead of actual property values. For instance, a multi-family property might be sold for $100,000 a unit, yet in reality, each unit could only bring in $75,000 in rent over the course of the investment. As a result, many investors were left with upside-down loans and unable to make payments. Speculators are again returning to the neighborhood, this time buying up the foreclosure properties in the best condition and holding on to them until property values rise again.

Many families are impacted by these trends. Duplexes and triplexes make up most of the housing stock in these neighborhoods. Some homeowners who took out home equity loans or ARMs on their primary residence now cannot pay the monthly mortgage payments. Some owners decided to try their hand at real estate investment, buying an adjacent house in the duplex or triplex, often purchasing the added property with the equity from their home with plans to find a tenant. At a time when it seemed property values could only rise, this appeared to be a good investment decision, but some of these owners have ended up losing their own houses as well as the investment properties.

Choosing the Community Land Trust Model

The Community Land Trust Model offers these two neighborhoods many advantages. Sharon Conard-Wells, Executive Director of West Elmwood Development Corporation, said that her organization became interested in the Community Land Trust model to protect the investments they had already made in the neighborhood. By placing the properties under the stewardship of the land trust, West Elmwood can guarantee that homeowners with the ability to maintain them will occupy them. Furthermore, the next time property prices skyrocket, homes affordable to low- and moderate-income households will still exist in the neighborhood.

Frank Shea of Olneyville Housing Corporation has an even longer term view: he sees the current economic downturn as just another part of the cycle, so he wants to buy as many properties that are harming the surrounding neighborhood as he can while property values are once again at a level at which a CDC can purchase them. To acquire and rehabilitate a home costs $100,000 on average, based on Shea’s experience. Shea wants to use the land trust to protect this investment and these properties’ affordability so Olneyville and the other neighborhoods he is working in will be healthy, mixed-income neighborhoods for decades to come. Shea says it is an interesting experience explaining to a potential buyer exactly how a community land trust works and the advantages and disadvantages to the buyer. Most are very positive because they understand this as an opportunity for their family that they would not have in the private market; they also see that when they leave, this will be an opportunity for another family. Of course, there is a real temptation for people to hear the advantages and not the disadvantages of this shared-equity program, so Shea is very careful to explain exactly what will happen and to review each document thoroughly with the buyer. “With property values lowering, it is more challenging to find people to buy into the community land trust because the lower prices are not as great an incentive,” he says.

Demolition is not a real option in Providence because much of the city has been zoned for single family dwellings and the city’s zoning ordinance prohibits the building of duplexes or triplexes on a lot where a building of comparable size was demolished in an area zoned for single family housing. Since the early 1970’s, Rhode Island has enforced a zoning provision that prohibits non-conforming development, which states that if a building is demolished, the new housing must conform to the zoning designation for the previous property at the time of reconstruction. As a result, when a house is demolished in Providence, it is often necessary that one parcel be combined with an adjacent parcel to ensure sufficient square footage to meet modern setback requirements. Building a single-family house after demolishing a multi-family building will not allow the CDC’s to recapture much of the subsidy they invested, and will only provide affordable housing for a single household. In addition, often a single family home does not fit within a neighborhood of duplexes and triplexes and will disturb the neighborhood fabric and look out of place. West Elmwood is exploring the possibility of demolishing houses and using the vacant lots for off-street parking. In the West Elmwood neighborhood, there are a large number of multi-family properties, and on-street parking overnight is prohibited in Providence. West Elmwood is considering whether it makes sense to create new parking alternatives for tenants and owners and is exploring how those parking lots would be maintained.

Both West Elmwood and Olneyville have dealt with abandonment before. Applying lessons learned from decades of community revitalization work, The Olneyville Housing Corporation is strategically acquiring properties with the most significant negative impact on the surrounding neighborhood – for instance, a house across from a school, key corner locations, or nuisance properties – and have the potential to significantly improve the neighborhood. Olneyville is aggressively acquiring these properties, 20 units in 12 properties to date, and storing them in the State Land Bank. Once the properties have been rehabilitated, Olneyville Housing Corporation plans to rent them out until a sales market exists.

CHLT-RI’s two partners in this pilot program are both members of the Housing Network of RI, a state-wide association of 22 nonprofit community development corporations.

Challenges

Finding enough funding to implement the program at a meaningful scale is the primary challenge, but the partners are looking into various financing sources. West Elmwood and Olneyville Housing hope to acquire federal Neighborhood Stabilization Funds to fund rehabilitation. The State NSP dollars were placed in a state-wide land bank organization established by Rhode Island Housing, Rhode Island’s Housing Finance Agency, on behalf of the Rhode Island Housing Resources Commission and the State Housing and Community Development Office. Providence manages its own NSP funds. West Elmwood and Olneyville will each submit applications for NSP money to Providence and the Rhode Island Housing to help finance the rehabilitation of the properties.

West Elmwood had purchased a series of properties intended for affordable housing just before the rise in property values, so they were able to move forward even when prices became prohibitive. Currently, they have a line of credit with LISC that provides $900,000 for acquisitions, and they want to aggressively buy foreclosed homes on streets where they have already made significant investments. However, Sharon Conard-Wells reports, they have been unable to compete against the speculators and have had little or no success buying REO properties. Conard-Wells estimates the average cost for rehabilitation at between $50,000 to $60,000 on targeted foreclosed properties with an acquisition price of between $30,000 and $40,000. As they begin purchases, they will refine these estimates.

CHLT has been coordinating efforts with the city, Rhode Island Housing, the State, and a number of local area foundations (including the United Way and the Rhode Island Foundation), as well as LISC and Living Cities. The City of Providence is also fundraising to gain sufficient resources to attack the foreclosure recovery at scale. The City of Providence received $9.6 million of Neighborhood Stabilization Program money – more than half of the funds designated for Rhode Island cities and towns. In addition, the City plans to use HOME program funds where caps on per-unit investment have been raised by 20 percent, from to $50,000 to $60,000. Furthermore, the City will utilize Lead Hazard Reduction Program funding and Closing Cost Assistance for new homeowners of foreclosed homes in the form of a no interest soft second mortgage for renovation of the foreclosed house. The City of Providence is also proposing a $10 million HUD 108 loan. The proposed activities to be financed with the HUD 108 will include:

1. 10 percent down payment loans and rehab loans to homeowners that are 10 percent forgivable, with no payments due until resale of the property;
2. Rehab loans to developers to rehabilitate formerly foreclosed vacant houses for resale to homebuyers, with no payment due until the house is sold;
3. Strategic property acquisition; and
4. Selective demolition of houses “beyond salvation.”

Conclusion

Community developers in Providence view the foreclosure crisis as an opportunity to create permanently affordable housing and to move properties from investor ownership to homeowners. Acquiring properties in bulk and placing them in a community land trust is a difficult task that the Community Housing Land Trust and its partners are diligently engaging in. Often they feel like they are building the plane while flying it, but they have a clear goal, experienced partners, and, unfortunately, an extensive supply of foreclosed properties at their disposal. It is their hope to transform a sufficient percentage of properties into permanently affordable housing to create mixed-income neighborhoods for generations into the future.