Displacement or Integration

Thursday, March 28, 2013

We new urbanists like to think that inner-city neighborhoods are en vogue due to their inherent virtues, like walkability, density, and transit access. Less gratifying but just as plausible, we should consider how people and corporations invest in urban housing simply because it's profitable.

Equity in a house isn't a very liquid asset, unless you sell the house. So sell our houses we do, increasingly early and often. Buying and selling homes has become a great American pastime, with everyone feeling entitled to sell for more than they bought -- and many of the best prospects to buy low and sell high are in urban neighborhoods. Long marginalized, these neighborhoods are chock-full of undervalued homes, lying there ready to flip like wheels in a slot machine.

But what if those homes aren't empty?

For the conscientious urbanist, there is a problem. Gentrification, which makes urban homes profitable to buy and sell, also wreaks economic havoc on existing communities, sometimes wiping them clear off the map. In DC, entire neighborhoods have disappeared or been displaced to Prince Georges County in a short space of years. It's true some long-time home owners profit by selling as they move, but on the whole their communities have hardly been enriched by the process. Some of the new renters and buyers, able to pay much more for housing than those being displaced, see what is happening with regret, even guilt. But no one feels empowered to stop the tidal wave of money.

Indeed only a larger institution could possibly stand against all that money. Enter collective ownership (see: co-oprification). A home-ownership collective can potentially alleviate the impacts of price spikes and displacement in any combination of the following ways.

1. Slow the rate of home selling

There is intense pressure on any home owner to sell for more than she bought. For a neighborhood, then, the more its houses are bought and sold, the more its prices ratchet up, bringing taxes and rents up with them.

When a collective owner acquires a house, it does so intending to keep that house through generations of successive residents, who can move in and out without selling it. The initial purchase may involve a price increase, and the collective may need to charge higher rent for that house than what its residents previously paid to live there. But from that point on, the collective can hold rent on that house to modest incremental adjustments, protecting it from price spikes for years and decades to come.

Over the long term, having an ownership collective involvemed in a gentrifying neighborhood will most likely keep rent inflation down, thus lending stability to the community.

2. Institute varied pricing

A landlord who owns one house or two will always charge the most rent he can get on the open market. This is only responsible. A collective owning ten homes, however, may choose to set the rents a bit higher on seven so that they can be lower on the other three. Think of it as DIY affordable housing.

Of course it hardly ever benefits an individual landlord to charge less rent than he could for the sake of a more diverse neighborhood. But if the neighborhood collectively chooses diversity as an affirmative value, charging more rent for some homes and less for others is not only possible but may even be a selling point. Neighborhoods undergoing gentrification are notorious for their fleeting vibrancy. For a period of time, the neighborhood's diversity attracts new residents, willing to pay a premium to live in an interesting, multifaceted community. But these new residents eventually smother the very diversity that brought them there.

It is worth noting that the same thing happens with commercial property. A diversity of commercial spaces and rents creates a lively street, building buzz and attracting development, but eventually the development flattens that diversity and the scene loses its luster.

A collective owner can institute more sustainable diversity. It may be difficult at first, but it stands to pay off in time as a vibrant community attracts residents who are willing to pay more for the priviledge -- and it is a priviledge -- of sharing the street with others who pay less.

3. Densify the housing stock

Gentrification happens because demand for housing exceeds supply. An obvious response is to increase the supply, but most often this means removing existing single-family homes to put multifamily buildings in their place. Progressive governments and developers sometimes try to alleviate this dispution by setting aside "affordable" or "market" housing within the new buildings. Theoretically this makes it possible for a family whose house was razed to move into the new building and stay in the neighborhood.

A collective owner, inherently more focused on the neighborhood's welfare over the long term, may also invest in building new housing units, but this doesn't need to mean knocking down existing homes. Single-family houses can have pop-up floors added, or basements finished, to turn them into split-level duplexes. Garages and backyard spaces can be converted to accessory dwelling units ("mother-in-laws"). Creative densification has many forms that can preserve the architectural history and familiarity of a neighborhood, making room for new residents to move in without long-time residents feeling that they are being pushed out. The new housing also creates new revenue sources for the collective owner, which may further facilitating varied pricing.

So why don't big developers do this? It is a question of how they make profit. A collective owner is tied to the neighborhood for the long run, so it may be advantageous to spare that neighborhood the shock of everything changing overnight. The local social fabric torn apart by price spikes isn't necessary to sell condos, but it is a foundation for longer-term prosperity. Moreover, incremental additions to housing capacity, with the incremental neighborhood and revenue improvements they bring, have a small return on investment over five years or less but a potentially great return over decades. A collective owner will be invested in the neighborhood for decades; an absentee developer will not.

4. Incorporate current residents

An existing owner may also receive an offer from an ownership collective that she would never get from a developer: to sell her home not for money but for an ownership stake in the collective. In effect, she remains invested in her housing, albeit more indirectly. This may have advantages, especially for elderly homeowners whose houses are larger than they need -- perhaps even larger than they can manage -- but who simply can't bear to leave the neighborhood. A house absorbed into collective ownership now has a whole community's resources dedicated to keeping the place well cared-for.

The collective is unlikely to knock the house down, but quite likely to try, for example, converting the garage into a new, smaller house. So an empty-nest homeowner may get the option of moving to a more manageable space practically on the same spot. And with her ownership stake's dividends and a lower-rent house, she may wind up paying less per month than she would have owed in taxes and upkeep on the larger house if she had simply stayed put.

5. Invest in diversity

There is financial strength in being in it for the long term, especially when those all around you aren't. If an ownership collective stops its houses from being bought and sold, but the rest of the neighborhood's houses keep turning over, the collective is liable to find itself sitting pretty after a decade or two. Its cost of ownership will have increased only incrementally, whereas the cost of ownership all around will have risen faster.

Therefore, as discussed above (#1), a collective's housing will tend to become increasingly affordable as time goes on. This is great for future residents, but how can today's residents be protected?

Money can be borrowed against the revenue potential of future rents. If rents are skyrocketing everywhere, yet the ownership collective sets its own rents to increase just a little bit faster than its costs, it will probably end up with lower rents after a decade or two than those in the broader market. But at the same time, that incremental extra profit from future residents can be used to borrow extra cash today. This cash can be used to help preserve affordability during the transition to collective ownership. In this way the future can repay the present for laying the foundation of sustainable economic diversity.

And boost it all with tax deductibility

There are many reasons why an ownership collective might want an associated charity -- a tax-exempt 501(c)(3) or 501(c)(4) nonprofit -- either one of its own creation or an existing local organization. Working in partnership, the collective and the nonprofit can facilitate housing affordability at lower overall cost for the community as a whole. Various approaches are possible.

The nonprofit may perform renovations of the collective's properties, either to add new housing units (per #3 above) or to fix up rundown units the collective has acquired at a low price. The nonprofit could maintain a fund for subsidizing the rent of lower-income residents, as a way to achieve varied pricing (per #2 above). The nonprofit might also contribute to ongoing administrative and maintenance needs pertaining to lower-income residents, their homes, and commons facilities they share with the community at large.

The advantage in having a nonprofit perform these functions is that the income necessary to pay for them would be tax-free. Every dollar the collective spends on maintenance or improvement of its property is a dollar it had to pay taxes on. By contrast, the nonprofit can take income and spend it without this cost, as long as it is being put toward some form of public good. Housing affordability is a well-established public good, and even if the nonprofit has other missions to perform on the community's behalf, affordable housing alone may be sufficient to win tax-exempt status.

There are several ways a nonprofit in this context could receive income. Higher-income community members may make charitable donations, which would be deductible from their personal taxes. The ownership collective itself may make an annual donation, which would be deductible from its taxes. Public and private grants may be available to nonprofits providing housing affordability to low-income residents. And the nonprofit could rent out housing units from the collective itself. If the collective charges the nonprofit a reduced rate for housing, this lowers the collective's tax burden by lowering its income, and the nonprofit can then re-rent the housing tax-free, putting the tax savings toward property maintenance and administration.

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