HOME Homebuyer Program – Resale vs. Recapture

NCDA Winter Meeting 1/23/08

Newton Background

    Newton: Pop. 83,800; 31,857 Total Units High Housing Cost City in High Housing Cost Area   $750,000 Median SFH Newton; $350,000 in Boston Area  11 times- 80% AMI; 5 times-80% AMI In Consortium: $327,000 average TDC per unit State has 10% goal for affordable housing Newton at 7.7% (796 units to go)

WestMetro Consortium

 Newton is Lead City in 12 member HOME (“WestMetro”) Consortium  Members range from:  Framingham - $349,900 Median  Waltham - $400,500  Brookline - $1,037,500

Barriers to Affordable Housing

 Cost of land  Pretty much built out  Cost of existing housing  Zoning is overly restrictive  Home Rule  Difficult to change  NIMBY

Newton’s Housing Goals & Programs

 Permanently protect units for affordable housing  Provide funds for new affordable housing  Provide funds for acquisition & rehabilitation  Provide funds for ownership programs  Support developers (esp. non-profits) negotiate regulatory process

Affordable Housing Development in Newton (& Massachusetts)

  Virtually all multi-family developments with affordable units have deed restrictions from other programs (often in perpetuity)     Comprehensive Permits (20-25% of units affordable) Inclusionary Zoning (15% affordable) Other sources of funding – state, federal & local Resale price typically set based on changes in AMI (provides fair return while limiting price w/out additional subsidy) For homebuyers, large amounts of assistance are required to allow them to buy a home (Consortium $50,000-$125,000 Cost Buydown)

HOME Program Choices: Resale

 Most of Newton’s Homebuyer Assistance and Developer Assistance Programs use resale restrictions   Advantages:    Protects units for the long-term Cash from recapture erodes over time More compatible with other state/local programs that already have resale requirements  State has standardized documents to cover HOME requirements (MassDocs) Disadvantages:  Repayment required if affordability period not met  Massachusets Universal Deed Rider – Survives foreclosure

Newton’s Resale Basics

 HOME Resale requirement Newton’s Program :      Home must be affordable to a reasonable range of low income buyers Priced for 70% AMI New buyer must be low-income – Less than 80% AMI New buyer must occupy house as principal residence – deed restriction in Original buyer must receive a “fair return” – by change in AMI Resale price set Remaining resale restrictions apply to new buyer – restriction in deed

HOME Program Choices: Recapture

 Recapture (used in WestMetro Consortium’s ADDI Program and individual member’s DPA programs)   Advantages:    Simpler Easier to explain If no net proceeds, no repayment issues Disadvantages (& why not used in other programs):   Where resale price is restricted; may decrease or eliminate fair return on investment (if used for other than downpayment assistance) Difficult to use when providing assistance to developer to develop and sell unit below market as direct subsidy to homebuyer

WestMetro Consortium: Recapture

 Recapture    ADDI   $10,000 Max. - Usually Recapture with Consortium collecting first out of net proceeds If have a DPA program – ADDI consistent with Program Brookline   Recapture – Buildings < 20 Units – Shared Appreciation Consortium collecting first Resale – Buildings =>20 units Waltham  Recapture - Consortium collecting first

Recapture Issue: Assistance to Developer – But Direct Subsidy to Homebuyer

 HOME Rules allow recapture when there is a direct subsidy to the Homebuyer, defined as:  Financial Assistance that reduces purchase price for homebuyer below market or otherwise subsidizes the homebuyer, including:  Downpayment loan  Closing cost assistance  Purchase financing  Assistance to developer to develop and sell below market

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Certification Course Example – Direct Subsidy to Homebuyer

$60,000 CHDO HOME development assistance to  Of this, $10,000 market left in deal to write sale price below $10,000 HOME downpayment assistance to homebuyer Total direct subsidy: $20,000 Total Development Subsidy: $50,000 Affordability period: 10 years

Recapture Issue: Assistance to Developer – But Direct Subsidy to Homebuyer

 HOME investment subject to recapture (M.L. Franke):  Based on the amount of HOME assistance that enabled the homebuyer to buy the dwelling:  Including any HOME assistance that reduced the purchase price from fair market value to an affordable price,  Excluding amount between the cost of producing the unit and the market value of the property (i.e., the development subsidy – not subject to recapture), if cost exceeds market value.

Assistance to Developer – Direct Subsidy to Homebuyer

 MLF: Any HOME funds that enabled a developer to discount the effective price to the buyer below fair market value (or development cost, if lower) must be captured in the homebuyer subsidy note/mortgage.  Otherwise you are writing off HOME dollars that helped the buyer

Real Life Example – Direct Subsidy to Homebuyer

  St. Aidan’s – Brookline  TDC/Unit    Est. Market Value/Unit Affordable Price/Unit  Diff. Market – Affordable HOME Assistance/unit mortgage full $165,000?) - $470,000 - $400,000 - $177,000 - $223,000 - $165,000 (Have to If using recapture, buyer on the hook for $165,000 of $177,000 purchase price

Real Life Example – Direct Subsidy to Homebuyer – Issues

 Buyer on the hook for $165,000 of $177,000 purchase price  Likely to have difficulty getting primary financing  HOME recapture is in conflict with other subsidies’ required resale price. Would require substantial additional HOME subsidy to continue affordability 

Strong Incentive: Recapture protects PJ in case project goes under – Like to figure out how to make it work

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HUD: Provide Additional Guidance

Recapture vs. Resale

 WestMetro Consortium uses both  Choice depends on goals of program and local housing situation:  Protect Units – Resale  Simpler Program, Potential Cash back, and Protection from Repayment Liability - Recapture