City studies land trust as housing option

As a part of its affordable housing initiative, the City of Austin is studying the possibility of using a Community Land Trust (CLT) as a mechanism to help low-income families both buy and keep homes in neighborhoods in the city.

A report by the Neighborhood Housing and Community Development Department and the Austin Housing Finance Agency, done at the City Council’s request, examines the feasibility of using a land trust in Austin, and outlines the various forms in which it is being used in other states.

Paul Hilgers, director of NHCD, said the report is a first step in the CLT process.

“This is a project that we hope can give some homeowners a sense of community about where they live,” he said. “We have an obligation to provide a way to keep homeowners from being priced out of the city, and we see this as an opportunity to accomplish that.”

According to the report, a CLT functions to preserve public investment and to recycle and protect home affordability. The CLT is an entity, typically a non-profit organization that buys and retains ownership of property, and sells the improvements—essentially a house or other dwelling—to a homeowner. The homeowner owns the house, but the CLT, through a lease arrangement, continues to own the property.

The way the property is kept affordable, Hilgers said, is to place resale restrictions on the structure so that the owner, upon the sale of the home, is bound by a formula that provides them with a “fair” return but not a “market” return on their investment.

“There are many different models of a land trust we are looking at, and so we have the opportunity to do this in any of several ways,” he said. “One of the keys to making it work is to have an organization, a non-profit or whatever, that can enforce code restrictions and covenants. That’s a big part of what makes this work.”

Hilgers said the trust is feasible under Texas law, and provides a relatively risk-free way for the city to invest in affordable housing and an opportunity to preserve that investment indefinitely.

“An investment in a land trust does not just benefit the first buyer, but every buyer after that,” he said. “This is another step in the housing continuum…the first step in home ownership, with the next step being full market home ownership.”

Austin State Rep. Eddie Rodriguez sponsored a bill that won passage during the 2005 regular legislative session to set up statewide guidelines for CLTs. House Bill 525 sets up the structure for how such entities will operate and how their property taxes will be handled.

The trust succeeds by serving as a buffer against the rising market prices of land, Hilgers said. Though land values have been rising in Austin, they still lag behind the huge increases seen in areas such as California or the Northeastern states, he said.

The report lists some of the main advantages of using the CLT model for affordable housing as: having the authority to serve as a steward of scarce public land resources; providing an additional rung on the housing ladder for low-income families; providing additional security for low-income homeowners by intervening to cure defaults on taxes or mortgages; supporting development without displacing those already living in a neighborhood; and being adaptable to a variety of types of development.

The report also lists some of drawbacks of a CLT as: the cultural perception of subsidized housing because the homeowner does not own the land; the limitations on its ability to create wealth for the owner; the perception that it is competing with other non-profit housing providers; the perception that it is hurting for-profit developers of lower cost homes. Some believe, inaccurately, that such a trust can be used to avoid property taxes.

Hilgers said a number of people in the community, including the Community Land Trust Steering Committee, an ad hoc group under the leadership of the Austin Community Development Corporation, would be looking at the report. After listening to public comments the committee is expected to make recommendations on how to implement a CLT in Austin.

“It’s one of the tools we have to keep Austin Austin,” Hilgers said. “It’s another way to help the city address its housing issues in a creative and cost-efficient way.”

Economist predicts modest local real estate growth

Modest population and job growth in Austin is going to mean modest gains in the retail, apartment and office market and few gains in the industrial market, the chief economist for the Texas A&M Real Estate Center told the Real Estate Council of Austin Wednesday.

Mark Dotzour provided an overview of the Austin-area real estate market, as well as the pressures on outside investment. Dotzour’s assumptions were based on the prediction that the Austin Metro area will grow by 2.4 percent over the next 12 months, adding 16,400 jobs and 34,000 people, up to 1.4 million residents, in 2006.

The real estate market, like any other investment market, is dominated by the “scorched earth policy,” Dotzour said. Greedy investors turn their attention to a particular sector of the market and suck it dry, especially given the low and lagging rate of return on the stock market.

In the industrial sector, the 18 percent vacancy rate in Austin’s research and development submarket is at a three-year low, but that low is not enough to drive new construction or higher rents. One-third of the space available is flex space, most of it available for larger tenants. Subdividing is not economically feasible in most cases, given the low rent on most properties, Dotzour said.

Low rents also are driving off new construction, while concessions have all but disappeared, Dotzour said. The market, driven by high-tech suppliers, still is filled with volatile short-term leases with termination options.

In the R&D submarket, Dotzour’s prediction is 290,000 square feet will be absorbed this year in Austin, with no new projects. Occupancy is predicted to hover around 80.2 percent, a slight increase, with rents up by about 7 percent.

On general industrial space, Dotzour predicts 660,000 square feet of absorption, with no new projections. Occupancy will be up to 88.2 percent, with rents rising by 10 percent.

In the retail sector, employment is relatively flat, while rising in leisure industries such as restaurants and hotels. At this point, most of the major pieces are in place for Austin retail development, with retailers fighting it out over share of the Austin market.

The general trend in retail is the “get in, get out” attitude, Dotzour said. There’s less emphasis on the shopping experience and more expansion of power centers.

“People want a variety of products in one location,” Dotzour said. “Shoppers say, ‘Sell me something so I can go home.’”

Locally, tenants are shifting out of older centers, which are being filled with service or medical tenants, as well as city and county government. Development is expected to be intense along the toll roads, with new projects temporarily shifting activity to the north. Austinites spend an estimated $15,500 per year on retail. Dotzour joked that means, “Austinites are doing everything they can to keep the national economy afloat.”

Dotzour predicts retail sales, given the population increase, will gain by $525 million. Absorption is predicted at 1.7 million square feet over the next year, with another 2.5 million completed in new construction. That pegs a slight decline in occupancy to 91.6 percent, with an average rental rate of $17.59 per square foot, which tracks last year.

In the multi-family sector, Austin is one of the few major cities in Texas where vacancy rates continue to decline. Incentives and perks are gone in the market, Dotzour said. Rentals still lag behind replacement costs, which would mean developers have few reasons to put new projects on the ground, but plenty of projects (designed but not built) remain in the pipeline.

Currently, 18 percent of Austinites live in apartments with 5 or more units, with an average household size of 2. Dotzour pegs the natural vacancy rate – the rate at which construction begins to percolate – at somewhere between 6.9 percent and 7.3 percent. Any higher vacancy rate and rental rates tend to flatten out.

Dotzour predicts 3,060 units will be absorbed in the market this year, with 2,300 units slated for completion. Occupancy is up to 93.7 percent, with an average rental rate in the Austin market up to 84 cents per square foot, a two-cent gain.

In the office market sector, where London’s office market is $199 per square foot and Manhattan’s is $86, Austin’s $19 per square foot looks like a great deal, Dotzour said.

Employment trends show growth in the professional and business services sector – everyone wants to be a mortgage broker, Dotzour joked – with slight increases in the telecommunications business sector. Government job growth – but local and state – continue a steady upward climb, Dotzour said.

Given the low return on other sectors of investment, Austin has seen record sales prices on office properties. Locally, subleases finally have dried up in the market. Tenants are migrating to higher-quality properties with lower rents. Slow increases in rental rates are happening in Class A, but not Class B and C, office space. Too often, flex space in the industrial market can be converted to Class B office space, Dotzour said.

The natural vacancy rate in Austin – that point at which new activity happens – is between 12.2 percent to 14.9 percent. At an occupancy rate of 87 percent, rent is not likely to increase and new construction is not likely to occur.

Dotzour’s predictions for the next 12 months are a net absorption of 656,000 square feet, with no new projects. He pegged the occupancy rate at 85 percent, and rental rates that should rise 50 cents over the next year, to 19.78 per square foot.

Dotzour’s presentation is online at the RECA website at http://www.recaonline.com/events/EconForecastsDotzour/2005/8-10-05%20RECA.pdf.

©2005 In Fact News, Inc. All rights reserved.

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