2. Subsidy Retention in New Affordable Housing October 24, 2008 Hampton, New Hampshire October 24, 2008 Hampton, New Hampshire Benjamin D. Frost, Esq., AICP Director of Public Affairs New Hampshire Housing Benjamin D. Frost, Esq., AICP Director of Public Affairs New Hampshire Housing

3. Subsidy Retention in New Affordable Housing 3 Municipal Desire: Create Opportunity for Affordable Home Ownership Use incentives to create units having a lower purchase price (RSA 674:21) Match the long term effects of incentives with the term of affordability Incent the creation of units having a lower purchase price Don’t allow “cheap” units Don’t allow instant equity Impose long term affordability restrictions Use incentives to create units having a lower purchase price (RSA 674:21) Match the long term effects of incentives with the term of affordability Incent the creation of units having a lower purchase price Don’t allow “cheap” units Don’t allow instant equity Impose long term affordability restrictions

4. Subsidy Retention in New Affordable Housing 4 Developer’s Desire: Maximize Profit and Minimize Risk Produce units to sell at a profit Maximize margin per unit  Reduce Cost per Unit Maximize the number of units Minimize restrictions on sale Have a predictable permitting and development process Produce units to sell at a profit Maximize margin per unit  Reduce Cost per Unit Maximize the number of units Minimize restrictions on sale Have a predictable permitting and development process

5. Subsidy Retention in New Affordable Housing 5 Assurance of Continued Affordability Binding Commitment Maximum Resale Value Maximum Rent Increase Documentation of Restrictions  Planning Board Records  Registry of Deeds Binding Commitment Maximum Resale Value Maximum Rent Increase Documentation of Restrictions  Planning Board Records  Registry of Deeds

6. Subsidy Retention in New Affordable Housing 6 High Low Degree of Municipal/3 rd Party Control of Property Buyer’s Rights Administrative Burden Duration of Affordability Potential Wealth Building in Unit Fee Simple Public Housing Choosing a Term of Affordability Conventional Lender Participation First Buyer Only“Permanent”“Long Term” Subsidy Retention Model Land Trust Model

7. Subsidy Retention in New Affordable Housing 7 Affordability Retention Model: Basic Principles Long-term affordability  Initial sale—80% area median income (AMI) Subsequent sales—up to 120% (market based) Fairness to all  Municipality / Developer / Buyer Little impact on conventional financing No decrease in local tax revenues Ease of administration Suitable for use with inclusionary zoning ordinances Long-term affordability  Initial sale—80% area median income (AMI) Subsequent sales—up to 120% (market based) Fairness to all  Municipality / Developer / Buyer Little impact on conventional financing No decrease in local tax revenues Ease of administration Suitable for use with inclusionary zoning ordinances

8. Subsidy Retention in New Affordable Housing 8 Incentives: Inclusionary Zoning  Density bonus and others The Regulatory Crux: Developer must receive something of value, which in turn allows the purchase price to be lower—a quid pro quo Subsidy: There must be a measurable subsidy to future buyers that can stay with the property and be passed to the next buyer Converting the incentive to the subsidy is the municipality’s role Incentives: Inclusionary Zoning  Density bonus and others The Regulatory Crux: Developer must receive something of value, which in turn allows the purchase price to be lower—a quid pro quo Subsidy: There must be a measurable subsidy to future buyers that can stay with the property and be passed to the next buyer Converting the incentive to the subsidy is the municipality’s role Converting Incentives to Subsidies

9. Subsidy Retention in New Affordable Housing 9 Model Municipal Ordinance Inclusionary zoning provides a density bonus in exchange for some affordable units Base value of all units must be similar in construction, appearance, and value to others Affordable units must be sold at less than base value (creating the subsidy) Lien: When affordable units are sold, a lien to the municipality is recorded (value of subsidy accrues to municipality)  Lien value = FMV – affordable sale price Restrictive covenant is filed, controlling future sale price and limiting future buyer’s income Inclusionary zoning provides a density bonus in exchange for some affordable units Base value of all units must be similar in construction, appearance, and value to others Affordable units must be sold at less than base value (creating the subsidy) Lien: When affordable units are sold, a lien to the municipality is recorded (value of subsidy accrues to municipality)  Lien value = FMV – affordable sale price Restrictive covenant is filed, controlling future sale price and limiting future buyer’s income

10. Subsidy Retention in New Affordable Housing 10 Fair Market Value Limited Selling Price Subsidy Initial Sale 1 st Re-Sale HOUSING COST Sales Under the Subsidy Retention Model Appreciation Admin Fee Seller’s Equity Downpayment 1 st Mortgage 2 nd Mortgage + CPI Paid Principal and Downpayment 2 nd Mortgage Based on Income

11. Subsidy Retention in New Affordable Housing 11 1 st Re-Sale Subsidy Fair Market Value HOUSING COST 2 nd Re-Sale Subsidy Downpayment 1 st Mortgage 2 nd Mortgage Paid Principal and Downpayment Appreciation Admin Fee Seller’s Equity 2 nd Mortgage + CPI Limited Selling Price Based on Subsidy Sales Under the Subsidy Retention Model

12. Subsidy Retention in New Affordable Housing 12 Appraised Value of Unit = $152,400 Targeted Sales Price = - $132,000 Initial Subsidy with the Property = $20,400 Initial 2 nd Mortgage Example: Year 2000

13. Subsidy Retention in New Affordable Housing 13 First Re-sale Target Income (Initial 5 Years) Beginning of:20012002200320042005 Appreciation Rate (prior Year) 13%17%13%10%3% Re-Sale Price $151,200$179,846$205,390$227,489$234,314 Required Income $49,459$57,054$61,891$68,600$69,937 Buyer’s Income Cap (Percent of Median) 86%97%94%101%103%  Subsidy increased by $2,560 to $22,960  If the income cap exceeds 120%, the lien can be paid off (recaptured) and the funds can be reinvested in another affordable housing project.

14. Subsidy Retention in New Affordable Housing 14 FormulaNotesExample Initial Purchase Price (2002)Affordable to 80% AMI ~ $45,840 $140,000 (includes $7,000 downpayment) Initial Appraised Value (2002)$215,000 Initial Municipal Lien (2002)($215,000 - $140,000) = $75,000 Current Appraised Value (2007)$280,000 Current Municipal Lien (2007)CPI-Shelter Boston increased 17.04% from 2002 to 2007 $75,000 + 17.04% = $88,000 Current Market Price (2007)Affordable at 93% AMI ~ $66,000 ($280,000 - $88,000) = $192,000 Administrative Fee to Municipality 2% of Sale Price$192,000 x 2% = $4,000 Seller’s Potential EquityIncludes initial 5% downpayment $192,000 - $4,000 - $140,000 + $7,000 = $55,000 Subsidy-Based Formula

15. Subsidy Retention in New Affordable Housing 15 Income Testing Calculations of Price and Income Caps Verification of Home Buyer Training Municipally Required Buyer Priorities Procurement of Appraisals Second Mortgage Issuance Participation at Closings Subordination Requests Pay-offs, foreclosures Reporting Income Testing Calculations of Price and Income Caps Verification of Home Buyer Training Municipally Required Buyer Priorities Procurement of Appraisals Second Mortgage Issuance Participation at Closings Subordination Requests Pay-offs, foreclosures Reporting Administrative Tasks Most occur at the time of property transfer

16. Subsidy Retention in New Affordable Housing 16 Considerations Most municipalities don’t want to administer the long term covenants or qualify buyers Other local or regional entities may lack the capacity, credibility, longevity, or desire to administer the requirements The model is suitable for use with an inclusionary zoning ordinance If local or regional entities are not available to administer the re-sales, New Hampshire Housing will do it (if you adopt our model unamended!) Most municipalities don’t want to administer the long term covenants or qualify buyers Other local or regional entities may lack the capacity, credibility, longevity, or desire to administer the requirements The model is suitable for use with an inclusionary zoning ordinance If local or regional entities are not available to administer the re-sales, New Hampshire Housing will do it (if you adopt our model unamended!)

17. Subsidy Retention in New Affordable Housing 17 Resources Workforce Housing Council www.workforcehousingnh.com Documents tab "Housing Affordability” Workforce Housing Council www.workforcehousingnh.com Documents tab "Housing Affordability”

18. Subsidy Retention in New Affordable Housing 18 Finis Ben Frost (603) 310-9361 bfrost@nhhfa.org Finis Ben Frost (603) 310-9361 bfrost@nhhfa.org