Reader BF comes in with a timely question that arrives in the wake of this investigation we ran earlier this week regarding the resale of what were supposed to be affordable homes. Here’s BF:

I do not have a full understanding of it, but I know that State law does allow for a jurisdiction to recoup part of its investment in affordable housing by taking a share of the profit that comes from the housing being sold. Do you happen to know if the City ever uses that or just relies upon what appears to be a rather odd deed restriction that seems to require people to sell their houses at less than market value?

Mr. BF is on the right track.

As we showed in the special report, agencies are supposed to place a legal restriction on affordable homes declaring that any new buyer must qualify income-wise for affordable housing. They can also ensure that the home resale for what is considered an “affordable” price.

But there are two other ways that local governments and redevelopment agencies can, as BF said, “recoup” their initial investments in affordable housing. And the city does use both in selected projects, I’m told.

The first way is called shared equity. Here’s how it works: the government helps a resident buy a home. When it’s resold, the agency recoups its initial investment, plus a share of the equity the home had gained.

The share that the government gets gradually diminishes the longer the homeowner waits to sell. After 15 years, the government’s share of the equity gradually fades away.

Let’s say the government put in $100,000 and the homeowner put in $200,000 on a $300,000 home. If the house is sold after only one year, the government gets 85 percent of the equity. So if it sold for $400,000, both sides would get their initial investments back and then split the $100,000 profit accordingly. In this case, the government would get $85,000 and the homeowner $15,000.

The government equity would then go into a fund to create more affordable housing.

Let’s say the home sold after 14 years. Then the government’s share of the equity would only be 7 percent. Click here for the 15-year equity breakdown from an actual affordable housing deed restriction.

The second way it can be done is called shared appreciation. It’s essentially the same concept, except the profits on the sale are always broken down by the ratio of the government’s contribution. If the government subsidized half the house, covering $150,000 of a $300,000 home, it then would receive half of the profits of a sale.

Please keep the questions coming. You guys have me busy.


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