Policy Perspectives on Infrastructure MIT School of Architecture and Planning Policy recommendations convened by the MIT Norman B. Leventhal Center for Advanced Urbanism August 2021
Nonprofit Cooperative Housing for All: Investing in at-cost operation and resident control The federal government can expand housing options for a wide swath of Americans by running a demonstration program to test the demand for, and efficacy of direct and indirect federal investment; fiscal incentives; and model regulations to promote nonprofit (limited-equity) cooperative housing. By Susanne Schindler
Summary
U.S. housing policy is caught between two contradictory goals: the goal of building wealth through appreciation and ensuring that housing remains affordable. Fiscal and social policies have long framed homeownership as a primary vehicle for individual and intergenerational wealth building; the goal of appreciation, however, runs counter to the goal of promoting affordability in housing. Traditional “affordable” (income- and price-restricted) rental housing, in contrast, is limited to certain income groups and specifically precludes not only wealth building, but individual control over one’s living environment, a prime benefit of homeownership. The aim of these recommendations is to promote a form of housing that furthers certain benefits of homeownership, namely stability and control, while pursuing the goal of long-term affordability: limitedequity or nonprofit cooperatives. Rather than prioritizing wealth building through housing, nonprofit cooperative housing prioritizes resident control, stability, and affordability. The recommendations would promote and expand existing HUD programs (e.g., Section 213: Mortgage Insurance for Cooperative Housing, possibly Home Investment Partnership Program (HOME)), and build on the broad enthusiasm for decommodified forms of land tenure, including community land trusts, or CLTs. The need for a new model of housing is urgent: market-rate housing prices in many coastal regions continue to soar beyond middle-income and even above, affordable housing production does not meet demand, and the political will to regulate housing prices is slim. Nonprofit cooperative housing provides a third way between unregulated market-rate housing and price- and income-restricted affordable housing, for all Americans, regardless of income.
Scope of Problem and Current Approaches
Nonprofit cooperative housing, also known as limited-equity coops, is a model that has existed in various parts of the United States since the early twentieth century. Nonprofit cooperatives are a legal framework of joint ownership among residents in housing. Residents become members and co-owners of the cooperative when they purchase a share. They pay a monthly fee (also called rent or carrying charges) for the use of an apartment. This fee is calculated to cover capital and operating costs. The “cost rent” generates no profit, and requires no direct subsidy. Residents can sell their share at the original price (or adjusted for inflation or other indicators), thereby keeping the housing affordable for others, in perpetuity. The return on investment is indirect: the dividend is paid in the form of low housing costs. These models have generally been connected with limits on income: cooperatives have been seen as a way to promote lower-income homeownership. Despite its 100-year plus history in the United States, the model has never gained widespread or sustained political support. One reason is that past projects have often required repeated public financing to stay affordable, due in part to lack oversight regarding reserve funds. Alternately, cooperatives located in areas with rising real estate values like New York City often “opt out” of income- and price-restrictions once state funding has been paid back (which is allowed in the programs’ set up). Limiting access by income has also led to some problematic situations. For example, in the cooperatives funded through the Low-Income Housing Tax Credit (LIHTC), promoted by the City of Boston since the 1990s, residents have to move out of their apartments if their income exceeds certain limits. Another reason that the model has not grown in the US is a lack of organizational or institutional support which would assure the necessary know-how for taking on the development and management of properties. While labor unions played this role in 1950s New York, today neither unions nor other institutions with an interest in long-term, safe investments that also serve their constituents, like pension funds, are doing so. Finally, banks continue to be hesitant to lend to cooperatives, a more complicated ownership structure than that provided by condominiums. The model being proposed thus does away with limits on income to further nonprofit housing—or housing operated “at cost”, requiring neither subsidies nor generating a profit—for all. Households with low incomes unable to cover equity or fees would be able to contribute labor (time) and access
2
rental subsidies. The goal is stable housing in resident control, operated at cost in perpetuity, avoiding the dilemma of having to choose between, or being locked out of both, market-rate and income- and price-restricted housing.
Recommendations
The federal government should support the development of nonprofit cooperatives or conversion of rental properties to nonprofit cooperatives through a demonstration program to test direct (grants) and indirect (mortgage insurance) forms of investment; model regulations; and tax incentives to institutional actors. This housing is permanently affordable because it is managed at cost, but is not considered subsidized and hence is not subject to income restrictions. Doing so is realistic and sustainable, builds on experience in the US, while drawing on that of a range of countries including Brazil, Sweden, Switzerland, and Uruguay (see References below). It connects to a growing movement promoting alternative stewardship of land and dwellings, including Community Land Trusts (CLT). Recommendation 1: A demonstration program to test direct and indirect federal investment.
HUD should test following recommendations through a demonstration program implemented in selected, diverse regions in the US, evaluating results for demand and effectivity of nonprofit cooperative housing. In this demonstration program, HUD would test: •
• •
•
providing grants to qualified cooperative development groups. This direct investment will allow cooperatives to purchase land for new construction, or an existing property to be converted to a cooperative, and/or to assemble the necessary equity to take out a loan. (In Zurich, Switzerland, government also contributes to cooperative development by purchasing shares. This has the benefit of automatically ensuring governmental oversight.); insuring loans provided by banks, building on and expanding the HUD Section 213 program. Cooperatives would borrow at conventional rates form conventional banks, HUD would insure against default; providing payments to municipalities to encourage them to channel tax-foreclosed properties at no or nominal cost to nonprofit cooperative development, possibly as part of CLTs, rather than selling this land back to the market. The federal payments would make up for foregone property taxes, which municipalities rely on for revenue; paying for the services of technical assistance institutes assisting cooperative development to guide cooperative development, provide oversight, and ensure compliance with laws and regulations.
Recommendation 2: HUD should develop model legislation for state and municipal authorities to adopt. Such model legislation should include: Of primary importance: • a definition of at-cost operation of housing. The formula should take into account capital investment and operation costs and be periodically adjusted due to interest rates and other factors to calculate maximum fees (rent) to be charged. Cooperatives receiving any kind of public support (land, grant, loan insurance) would have to adhere to this model. (Model: Switzerland’s model of “cost rent.”); • a regulatory framework compelling banks to lend up to 94 percent of development cost to cooperatives with only 6 percent equity in return for the federal government insuring those loans (Model: Zurich, Switzerland, has been developing cooperative housing under a version of this model since 1924.); • a regulatory (and financial) framework that sets up technical assistance institutes, comprised of financial experts, lawyers, social workers, and architects, to contract with, guide, and advise any cooperative group receiving public support (land, grants, or loans). (See Brazil’s and Uruguay’s Institutos de Asistencia Técnica.). Of secondary importance: • a regulatory (and financial) framework that allows cooperatives for households to both contribute savings (equity) and contribute labor in lieu of savings (sweat equity). (Models: In the US, for fee-
3
•
simple ownership: Habitat for Humanity; elsewhere, for cooperatives, Uruguay and Brazil); a legal (and financial) framework that facilitates the conversion of existing rental housing to nonprofit cooperative housing. This could be modeled on existing tenants’ opportunity to purchase programs, which give sitting tenants the right of first refusal when a property goes up for sale. Federal funding to support such conversions could be tied to adherence to at-cost operation and contracting with technical assistance institutes, as outlined above. (Models: Washington, D.C.’s and NYC’s programs from the 1970s or Bill S. 801currently being debated in Massachusetts).
Recommendation 3: Congress (in consultation with FDIC, OCC and Federal Reserve) should develop tax incentives and/or requirements for institutional players (e.g., banks, pension funds, labor unions, religious organizations, universities and colleges) to support nonprofit cooperative development through direct investment or loans, their real estate assets, or other forms of sponsorship. Incentives and/or requirements could also be promoted under existing law, for instance the Community Reinvestment Act (CRA).
Additional Links
Duyne Barenstein, Jennifer and Michael Pfister. “The Professionalization of a Social Movement: Housing Cooperatives in Uruguay,” Built Environment vol. 45 no. 3 (August 2019), 382-397. Ganapati, Sukumar. “Enabling Housing Cooperatives: Policy Lessons from Sweden, India and the United States.” International Journal of Urban and Regional Research vol. 34 no. 2 (2010), 365-380. Huron, Amanda. Carving Out the Commons: Tenant Organizing and Housing Cooperatives in Washington, D.C. (Minneapolis: University of Minnesota Press: 2018). Kockelkorn, Anne and Susanne Schindler. “Housing and the Agency of Nonspeculation.” Cooperative Conditions: A Primer on Architecture, Finance and Regulation, ETH Zurich, May 2021. Schindler, Susanne. “Housing Beyond and Within the Market,” Part 1: Cooperative Housing and the Racial Wealth Gap; Part 2: Cooperative Conditions in Zurich; and Part 3: Cooperatives in Boston, Platform, March 29, April 5, April 12, 2021. Tanaka, Adam. “Co-op City: How New York Made Large-Scale Affordable Housing Work.” Bloomberg CityLab, January 3, 2019.
About the Author Susanne Schindler PhD Visiting Lecturer, MIT Department of Architecture schindls@mit.edu
About policy perspectives on infrastructure
Policy perspectives present responses from faculty in MIT’s School of Architecture and Planning to the American Jobs Plan. The effort was convened by the MIT Norman B. Leventhal Center for Advanced Urbanism. MIT School of Architecture and Planning sap.mit.edu At the MIT School of Architecture and Planning (SA+P), we believe that humanity’s toughest problems occupy the same ground as their solutions: the space between people and their environment. This is our territory. From the day MIT opened its doors and introduced Course 4 as the nation’s first academic program in architecture, our faculty, students, and alumni have explored the human landscape to discover—and deliver—better futures.
4
MIT Norman B. Leventhal Center for Advanced Urbanism lcau.mit.edu Urban environments constitute one of the most complex societal challenges of today’s world. The LCAU seeks to drive collaborative, interdisciplinary research focused on the design and planning of large-scale, complex, future metropolitan environments, to advance urban scholarship and practice that makes cities more equitable, sustainable, and resilient by design.