Bulletin #7
July 16, 2005
We are beginning to get questions about why a commission is
needed. Why can’t this be done without government involvement and use of
public funds? Why can’t we just do it with private money?
Let us begin by looking at the cost of building a 1500 sq
ft, 3 bedroom, 2 bath
home. The best estimates that we have gotten from local builders are $100
to $125 per sq ft bringing the cost of the house alone to a range of $150,000
to $187,500. For all practical purposes, the cost of land plus
improvements will cost an additional $100,000.
Our best case total cost for this house is therefore
$250,000 to $287,500. If we attempted to simply purchase housing for
perpetual affordability in the open market, we would be looking at median
housing prices of above $400,000. Clearly
out of the range of any moderate income family.
A moderate income family of four is defined to have an
income in the range of $48,080 to $57,095, only partially covering the income range
for most of our skilled infrastructure workers. For example, salaries for
certified teachers are $30,023 to $56,588 and starting salaries for a Sheriff’s
Deputy are between $40,000 and $50,000. Our fire departments are
presently unable to hire paramedics for less than $45,000.
Assuming a 30% debt to income ratio and a 6% fixed rate 30
year mortgage, these potential homeowners can only afford a home in the range
of roughly $183,000 to $225,000. This is clearly well below our best
effort to build an affordable home.
(Note: We are well aware that today’s FHA mortgages
extend up to $290,000 and provide rates of 5.5%. We have selected 6% as a
benchmark in anticipation of rates that are likely to exist once the Housing
Bank is operational. There are also a variety of variable rate mortgages,
interest only mortgages and even negative amortization mortgages.
In today’s climate of increasing interest rates, we take the
conservative position that these introduce too much risk for the homeowner and
also for our investors in alternative financing approaches. We don’t want
the homeowner to fail!)
Augmenting conventional mortgages with mezzanine funding
(described in our last bulletin) or perpetual shared equity (more on that
later), the best that we can do is $220,000 to $270,000. This begins to
cover the cost of the home and land for moderate income families, at today’s
land and construction prices. In
At this point we would love to be proved wrong, but we have
concluded that moderate income families cannot afford to purchase a home in
The only solution that we have found that works for moderate
income families is the Land Trust approach. This approach, used by all
our Community Land Trust organizations, acquires the land, retains ownership of
that land, and charges a very low lease fee to the homeowner (typically $1 for
a very long term lease). By removing the cost of the land, we can reduce
the cost of the house to a level well within the affordability range for
moderate income, especially if we couple a standard fixed interest mortgage
with mezzanine or other creative approaches to financing.
While there are a few cases where land has been donated, our
current affordable housing programs rely almost exclusively on government
grants of various types that exclude moderate income (and higher income)
families.
The inescapable conclusion is that public money is essential
to acquire useable land and to
provide incentives to non-profit organizations and private builders to create
affordable housing for moderate income families.
Where should that money come from and how should it be
administered?
Other communities, faced with this problem, have used a
variety of approaches, often in combination to raise public money. These
include various impact fees, excise taxes, sales taxes and property
taxes.
Based on the surveys that we have done of infrastructure
workers, we anticipate a need for 60 to 80 homes over the next 5 years.
Assuming a land trust approach, relatively modest increases in land costs,
favorable zoning alternatives, and creative financing, this translates to a
need for $1.2 million to $1.6 million per year, likely increasing to $1.8
million to $2.3 million by year five.
This is clearly well beyond what can be raised by impact
fees, which are of doubtful legality in
The best solution, in our view, is a real estate excise tax,
levied on the purchaser of homes. There is some justification for this
approach since it is levied on the new purchasers that are creating the
inflated housing prices in the first place, namely by steadily increasing
demand for property.
In today’s market, a 0.5% excise tax would raise $1.5
million per year and would increase roughly at the same rate as the increase in
property prices.
If the excise tax is the best (and perhaps the only viable
source of public funds), then what is the best way to administer it?
We have carefully examined the alphabet soup of approaches
that other communities have taken. There are four factors that led us to
select a county commission as the best approach.
First and foremost, while it represents the county
government, it is the least bureaucratic approach that we have found. It
will consist of seven commissioners who are not county employees, but citizens
who will volunteer their time and expertise to administer the Housing
Bank. Their responsibility is to be an enabler, to set policy, to build
project teams, to solicit proposals, to provide “capstone” funding to make
projects possible, to monitor progress, and to report back on progress to the
community. They will be assisted by an Executive Director who will be the
only paid staff member.
Second, a county commission can accept tax deductible
donations of money or land.
Third, a county commission can issue tax exempt bonds that
will comprise an important source of low interest money that is essential to
our finance strategy.
Fourth, in
We believe that this organization will be able to draw upon
the expertise of our citizens to move quickly and efficiently to solve our
housing problem. The revenue that they receive from the excise tax will
give them the practical financial leverage needed to bring teams together and
will multiply these funds many times over.
Signed,
Sandy Bishop,
As always, our most recent
publications are posted at our website http://orcasresearch.org/ and you
can contact us at any time at Losleben@rockisland.com or Garrison@rockisland.com
Tax deductable donations to help support the Housing
Project and to help pay for materials and supplies are gratefully accepted
through Navigating Our Future, Housing Project, PO Box 298, Deer Harbor, WA
98243. This is a totally volunteer effort, so your help is appreciated.