United States: Community Land Trusts 101

 Spurred by strong community support for permanent affordability, interest in community land trusts ("CLTs") has been growing at a rapid pace. This Stroock Special Bulletin provides an overview of what community land trusts are, what kinds of projects they are best suited for, why they appeal to affordable housing advocates, the role the for-profit developer can play in providing housing stock for the CLT, and specific challenges (and possible solutions) for the future.

What is a Community Land Trust?

Although the term community land trust is specifically defined in the Housing and Community Development Act of 1992,1 a simple explanation is that a community land trust is a not-for-profit entity that owns land on which improvements are built, and leases that land to the owner of the improvements. Similar to free-market legal arrangements such as leasehold condominiums – a legal structure that is utilized frequently to permit not-for-profit unit owners favorable real property tax treatment – a CLT exists to ensure favorable affordability terms, in perpetuity, along with other benefits, such as built-in oversight or stewardship for the owners of improvements that sit on CLT-owned land.

The traditional community land trust has a unique tripartite board structure comprised of 1/3 tenants and/or owners of improvements on CLT-owned land; 1/3 community members at large (especially members with special skills or expertise to bring to the CLT) who are interested in the neighborhood where the CLT leases land; and 1/3 public representatives, such as city council members and representatives from housing agencies.

The typical community land trust requires that the owner of any improvements on CLT-owned property enter into a 99-year ground lease with the CLT, which lease includes various restrictions to ensure that the improvements are used on a long-term basis as affordable housing. Although the ground lease generally is an unrecorded document that would not show up in the property records, a memorandum of lease and a restrictive declaration would be recorded, thereby putting the world on notice of the restrictions. The CLT model is thought to minimize speculation and maintain control of valuable assets within the community, while providing much-needed stewardship and oversight to the owners of the improvements.

What Types of Projects Are Suitable for a Community Land Trust?

In New York City, community land trusts are well-suited for a variety of affordable homeownership projects, such as single-family homes and housing cooperatives. Although affordable homeownership is not as popular as it once was in New York City – mostly due to the short-term nature of affordability restrictions (sometimes as short as 5 to 10 years) – some have suggested that the CLT would be an ideal way to regulate equity appreciation, would help ensure that housing stock remains affordable for the long term, and would provide built-in stewardship and oversight that is oftentimes lacking in other affordable homeownership models. Because of the many benefits of the CLT model, many affordable housing advocates believe it should be included more broadly as a part of affordable housing projects.

What Role Can For-Profit Developers Play in Community Land Trusts?

Although community land trusts in New York City will almost always be formed as not-for-profit housing development fund companies under the Private Housing Finance Law, for-profit developers can play a role that benefits them as well as helping provide affordable housing. Programs such as mandatory and voluntary inclusionary housing and 421-a require developers to set aside a certain percentage of their project units as affordable housing.

If a for-profit developer doesn't want to be in the business of owning restricted units for the long haul, they could transfer them to a community land trust, thereby minimizing many of the long-term obligations that they otherwise would have as owners of the units. For example, if a developer were to transfer certain improvements to a CLT, the CLT could either rent those units, or form a housing cooperative and sell homes to income-eligible buyers. In such a case, the developer is likely to provide some form of reserve funds for the long-term maintenance and operation of the units. In many cases, this may be more attractive to the developer than managing housing units that are outside of their core business.

What Challenges Do CLTs Face and What are Some Possible Solutions?

In New York City, a fundamental issue facing CLTs is that because the land under any improvement must be owned by the CLT in perpetuity, and because leasehold condominiums are greatly restricted in New York City, outside of certain specified areas, there are limited opportunities to create condominiums for homeownership projects on CLT-owned land. Moreover, although CLTs generally issue a 99-year lease to owners of improvements, the restrictions imposed by the ground lease and restrictive declaration are permanent.

At present, there are no perfect tools to ensure that both the land owned by the CLT and the improvements thereon, will benefit from appropriate real property tax exemptions that will accommodate the permanent restrictions applicable to such housing. In most cases, real estate tax exemptions are only available for up to 40 years, thereby leaving these permanently affordable projects without the full benefits they need for the long haul.

What's Next?

With the New York Attorney General having set aside $30 million to be used for community land trusts (and land banks), and the New York City Department of Housing Preservation and Development having issued a request for expressions of interest on community land trusts earlier this year, the CLT model is all but certain to play a significant role in housing development in New York. Stroock is providing leadership and guidance, working with various not-for-profits who are forming CLTs, and partnering with the New York City Bar Housing and Urban Development Committee and various not-for-profits to craft legislative proposals, such as a real property tax law exemption for both CLT-owned land and the owners of the improvements thereon.

Footnotes

1. The definition of Community Land Trust is available at 42 U.S.C. § 12773 (as amended through December 31, 1998), available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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