We Own Our Landlord

Thursday, March 8, 2012

Ownership vs. rentership

In American cities, we celebrate our very high rates of homeownership. After all, to own your home is part of the American Dream. But think of the liveliest, most vital urban neighborhoods -- the ones people clamor to get into -- and you're probably thinking of places with more renters than the norm. Neighborhoods with a resilient healthy glow usually have a mix of renters and owners. What's the magic to this balance?

For the typical homeowner, that house is an asset, a "nest egg," a long-term investment. For the typical renter, it's the staging ground for life's activity, a gateway to valuable happenings. Homeowners want to protect their investments' value in the future, so they take on the tending of yards and school boards. Renters relish mobility, creativity, new small businesses, and generally more risk-taking. They want the place where they live to offer the most value in the present.

A community without stewards may sink into ruin. One without innovation may grow stagnant and bland. Some urban planning theories try to balance these values by mixing housing for renters (think apartment high-rises) with housing for owners (think picket fences). Co-oprification's alternative is to mix renter- and owner-ship, so residents will become each and all renter-owners. This way the balance is "baked in" to the community's financial model, never mind what our houses look like.

The Collective

How does it happen? First we need a place to call home, ideally one small to mid-sized city block. (Why a block? See below.) Second, we create a corporation. Technically it could be a co-op, but an LLC or L3C might work better. What's important is that our community exists, legally, as a unified collective body. Now it can own housing on our behalf, and the collective is born!

To buy houses, the collective needs money, so it sells a special kind of IOU. We'll call them shares, but don't picture shares of stock that you would buy low to sell high. These are shares in the ongoing life of our community. What they pay out is a steady portion of the proceeds from our rent.

Imagine the collective sells $1 million in the form of ten shares, $100,000 each. It uses that money to buy five houses, fix them up, and rent them out. After insurance, taxes, budgeted maintenance, and administrative overhead, imagine now the collective makes $5,000 per month in profit from renting out its five houses. The owner of a $100,000 share owns 10% of those profits: $500 per month or $6,000 per year.

Now imagine that you bought one of those $100,000 shares and then you moved into one of the houses. Rather than take $500 each month in cash from your ownership in the collective, you could just take a $500 break in the rent you pay.

In terms of pure dollars, this starts to look an awful lot like owning your own home. If you've invested the property's full cost, you wind up with monthly payments that just cover ongoing expenses, much less than the rent of someone who's made no investment. The big differences have to do with selling.

Let's imagine you move. You might just hang on to your ownership share and enjoy the monthly payout -- or you might prefer to find someone to sell it to. If it's a steady source of income, chances are someone will be glad to buy it. If thanks to our community the neighborhood has become more attractive, and now the collective's profits have increased, maybe a 10% share will even be worth more to your buyer than the $100,000 you paid for it.

What won't happen is a lot of house "flipping" for quick profit, because renters rarely want their landlords to sell, and these renters own their landlord. What also won't happen is residents needing to move and being stuck until they can sell their property, because these residents are all renters.

Co-oprified self-rule

The collective's general voting body includes all current renters and owners. A "renter" is any resident of a home, or the appointed representative of any business tenant. An "owner" is anyone who owns shares in the collective. Many people, maybe most, will be both renters and owners, but all members vote equally whether owner or renter or both. It is essential that investment be seen as a vote of confidence in the community and a way to build wealth, not as a play for power over other community members.

In effect this produces something similar to the cohousing communities and condominiums that are structured as co-ops or condo associations. Resident households' fortunes are bound together by definition, which is simply realistic. The differences, however, are huge: "renters" are not a separate class in the community from "owners." Also, the bar to some degree of ownership can be much lower, because a share can in theory be of any size. (Practical and legal considerations may very well require a minimum, but it would still probably be more accessible than qualifying for a mortgage.)

Best of all, what one comes to own is a whole place and not just a single home within it.

Why do this?

The value of an urban home derives only in small part from its physical qualities. The main factors are location, location, location. So what makes a location valuable? Mostly it is the decisions and policies of institutional third parties. Local government creates a commercial zone or a transit line; the university builds a new facility; some corporation opens new offices; the state subsidizes a business cluster; or a developer builds new condos. These decisions are largely beyond the control of homeowners, so they are instead left to speculate on what places will be the ones where institutional power makes something good happen.

This falls short of the ownership ideal. Investment in a place should empower homeowners to full participation in the building of their community's fortunes. In current American practice, homeownership instead creates a kind of consumer schizophrenia: Buyers compete desperately over a scarcity of "good neighborhoods" -- the places where institutional blessings have wrought attractive change -- and then, after sinking their life savings into this gambit, the same buyers become opposed to any further risk-taking. This is not irrational, because as much as institutional forces can giveth value to a place, they can also taketh it away. The next change may or may not raise one's property value, but anyway the driving decisions will be in someone else's hands. Therefore homeowners in a neighborhood that's changed enough to be valuable can't be faulted for wanting it to not change anymore at all.

By contrast, the collective empowers owners, indeed all residents, to participate directly in the decisions that shape their neighborhood as a whole. At the same time, it refocuses the incentives of investment away from concerns over an individual home's value. This could help alleviate a common source of friction amongst homeowners who, ultimately unable to control what matters most to their properties' value -- that is, whether the whole block will be an attractive place -- sometimes fixate, even fight, over superficialities of their and their neighbors' lots, like the length of cut grass or the color of a fence.

It may just make more natural sense to rent a single house on a block than to own one. Viewed as an investment, apart from its utility as a home, a single house can be hard to justify. It's an investment that's hard and expensive to sell, too big to fail, and whose value depends greatly on exogenous environmental factors that the owner can't control.

Serious real estate investors, just like players of the game Monopoly, typically want more than only one home in a community, because it takes more than one house to make a community look good and therefore gain value. Meanwhile those of us living the so-called American Dream, of owning just the house we live in, are left in a bind. It is very difficult, as a traditional homeowner, to promote new uses of neighboring lots that will add value to the block; so by default the incentive is to try to block any new uses at all, which tends to be easier to do, but which ultimately stifles the neighborhood.

Furthermore, because the affairs of non-owner residents and businesses also have a big impact on the health of a block, the relationships between these neighbors and the traditional homeowner can be hindered by the piecemeal ownership model. Imagine a typical block, each lot individually owned, some by owner-residents, some by absentee landlords, and some by commercial landlords. When a new business moves in, it is often a surprise to its new neighbors. After all, the deal was struck with that storefront's owner and maybe also with the city. Neighbors, especially those who own their homes, feel out of the loop, because they are, and this can lead to conflict.

Likewise, when rental residents move in, move out, or have some trouble with the quality of their housing, it is typically just between them and their landlords. Most if not all of their neighbors have no idea what is happening, even though it shapes their community.

Creating a container for dialogue, decision-making, and community wealth dedicated specifically to those who share their immediate environment, renters and owners and businesses, will in all likelihood produce more neighborhood cohesion than is common today. It could be said, co-oprification serves to legally and financially enshrine the ideal, which is also the hard reality, that the fortunes of those who share a place fall and rise together.

Remodels and improvements

Besides investment, the most common rationale for buying a home is to gain the right to renovate. For the typical renter, a minor change like repainting the walls may be forbidden by the landlord; and a major change like installing a new stove could perhaps be welcome by the landlord, but who wants to spend that kind of money improving someone else's property?

Philosophically, this gets down to our culture's anti-renter bias. We tend to think ownership is for grown-ups, and rentership is for transients, who hopefully will outgrow it and become owners. This bias is reflected in rental conventions. Being unable to change even simple things for the sake of personal comfort signals to renters that they are second-class. Knowing that they aren't assured any benefit from money and effort spent on renovation, even if the landlord permitted it, gives renters a disincentive to improve their homes.

Co-oprification is geared toward long-term rentership, so renovations must be accommodated. To this end, we recognize two general types of renovation: remodels and improvements. Remodels are roughly the things a bank would not give a loan to do, like re-painting the walls. Improvements are roughly the things a bank would loan for, like upgrading a kitchen, because they are expected to increase the home's value.

For remodels, the collective has a Remodeling Committee tasked with reviewing and approving requests from residents. When a request is approved, the committee monitors the work both to help out the resident (even simple remodels can be challenging!) and also to ensure the property isn't harmed. The resident pays any costs for materials and labor.

For improvements, the collective has an Improvements Committee. This committee is more proactive and more hands-on than Remodeling. In addition to hearing requests from residents, Improvements looks for opportunities to make the community's property more livable and attractive overall. When it comes time to do the work, the committee directs the collective itself to sell new ownership shares for the budgeted cost, and then directly purchases materials and contracts labor. When the improvements are complete, rent is raised on the improved home or homes to reflect their increased value. This way residents pay for improvements only so long as they directly benefit from them.

If a resident wants to put in his own money -- perhaps to help ensure that a desired improvement can happen -- s/he can offer to buy the necessary ownership shares. A resident could also just as well buy shares to improve someone else's home. The investment and the enjoyment of improved housing are essentially independent matters under the collective model.

This doesn't give individual residents as much autonomous control over renovations as a conventional homeowner has. On the other hand, it doesn't saddle them with as much responsibility either. It aims for a healthy balance. It will be very interesting to see over time whether the collective makes fewer of the mistakes endemic to conventional homeowners -- over-improvement in the case of resident-owners, and inadequate maintenance in the case of absentee landlords.

How is this different from traditional housing co-ops?

A few innovations distinguish this model from the traditional housing co-operatives that appeared in American cities largely in the middle twentieth century. Most broadly, the guiding attitude is one of reinforcing the strengths inherent to the existing urban fabric, rather than building utopia in a brave new bubble.

Specifically, co-oprification favors the retrofit of existing structures over new construction, because it is easier to acquire housing by purchase than by construction, which in turn favors architectural variety and perhaps also diversity of residents. (Why not build new construction with a lot of variety? Because it's very expensive.) By distinguishing ownership from residency, and by permitting ownership to varying extents of investment, co-oprification accommodates a more real-world diversity of residents' ability and desire to own real estate, thereby integrating diverse classes and life stages. Co-oprification also integrates commercial with residential uses, under a common ownership and governance structure, which addresses more holistically the mixed-use nature of a real urban community.

There is also an important legal distinction. Because residents of a co-oprified community are renters by definition, they are protected by tenancy laws, completely irrespective of the size of their ownership stake (if they are owners at all) and of politics within the community. This matters because sometimes the legal protections due to the share-owner of a traditional co-op are murky or weak. They may protect a household's investment but not its residency. Under the collective model, investment is protected by the collective's bylaws and possibly by securities laws, but residency -- the difference between a mere investment and a home -- is protected by tenancy laws, which in urban juridisctions typically offer strong, well-defined protection.

Potential benefits to the community

Most significant gains in urban neighborhood value come via gentrification. As Neil Smith and others have documented, gentrification is driven largely by institutional investments intended to be fairly short-term. That is, when institutions invest in neighborhoods, they are looking for a spike in value -- buy low, create buzz, then sell high -- which almost always means disruptive change for the community. Co-oprification creates an institutional owner with much less of an incentive to see the community go through this cataclysm. A collective of owner-renters will likely favor more incremental, moderate evolution of the neighborhood, and will almost certainly be more sensitive to the particular needs of residents.

Likewise, co-oprification offers residents the strength of numbers. Once co-oprified, the block can speak with one loud voice when government or outside corporate plans should be seen to threaten the community's welfare. In a typical "blighted" or "transitional" neighborhood, with many small stakeholders lacking a common organization or pooled resources, it is much easier for big players to divide and conquer. This is why gentrification is often so contentious. Co-oprification is, by design, less of a blood sport, more moderate and equitable in its distribution of gains.

Furthermore, having a single owner in the collective landlord makes it possible for residents to organize common amenities that are difficult without common ownership and governance. For example, micro-grid electrical generation and pooling has been attempted in multi-owner settings, but not with much success. Mostly it is carried off by single owners such as universities or government, for whom implementation is much easier. Co-oprification has the promise to bring many innovations -- micro-gridding, greywater management, community gardens, commons houses a la cohousing -- within reach of communities that could not attain them easily or perhaps at all under the usual parceled-out ownership model.

Potential benefits to individuals

Similarly, if a community wishes to preserve or create a certain amount of rent-controlled affordable housing, the collective landlord provides a very straightforward vehicle for doing so. And if a household in the community should fall upon hard times, it is easier (and more likely) for the collective landlord to make accommodations to prevent the loss of that household than it is for non-co-oprified communities to save their neighbors from foreclosure.

One of the biggest downsides to conventional home ownership is that it hampers mobility. Some economists have gone so far as to cite Americans' high rates of home ownership as a competitive disadvantage for the US versus industrial economies where workers can move more easily. Certainly for the individual household there can be grave and difficult trade-offs between mobility and home ownership. Under co-oprification, by contrast, owners don't have to sell when they move (nor move when they sell), so ownership hardly creates any obstacle to mobility at all.

Co-oprification also makes it financially easier to become an owner, and it offers much greater flexibility for community members to choose how much they are invested in real estate at any given time. The co-op bonds system allows ownership stake to be assumed in varying degrees, not all or nothing, so a household can "trade up," increasing its investment in successive cycles. And because it can do so without needing to physically move, the community as a whole may also benefit from happy residents staying put.

Another challenge of traditional home ownership is that home maintenance is difficult, often requiring expert knowledge and advance planning that isn't accessible to all homeowners. Consequently, the quality with which individual homes are maintained tends to vary quite a bit, which is bad for communities; and the home repair industry sometimes takes advantage of its un-savvy or desperate clients, which is bad for owners. Furthermore, in traditional home rental scenarios, the renters tend to under-estimate the value of money and effort spent on home improvement, and owners often over-estimate it, which can lead to all sorts of disappointments and even conflict. The collective landlord alleviates all of these difficulties, by creating a kind of super homeowner, likely to approach property maintenance with professionalism and collective wisdom, and almost certain to spread the wealth of home upkeep more evenly across the block than the conventional model does.

Questions

Is there any room for sweat equity in this model? Or is it just as well to allow the co-op to hire residents as possible to do needed work?

Should a system be devised for allowing a resident owner to take her dividends in the form of a rent reduction? Would such a rent reduction be taxable as income?

How big should a co-op bond be? $1,000? $5,000? $10,000? And when should it roll over? After 4 years? 5 years? 7?

Because everyone rents and is governed by tenancy laws, what fair and legal process does the collective landlord use to evaluate and decide rental applications, evictions, etc.? By voting (a la the Ravenna Kibbutz)?

What in this model can substitute for the typical home equity loan? Could co-op bonds be cashed out before they "mature" at a penalty, as with savings bonds, provided the co-op had the cash? Could a resident take out a loan from the co-op? Could a resident venture?

What process and parameters should govern the setting, and periodic adjustment, of rents? Should it be entrusted to co-op membership voting, to an elected or hired executive, or to a formula based on local market indicators such as government-assessed property value? What would best protect residents as renters while at the same time side-stepping greed and community stagnation from too-low rents?

Should or shouldn't co-op membership include an expectation of meeting participation and/or volunteerism?

How would co-op bond dividends be taxed? As capital gains?

More generally, do what we're calling "co-op bonds" fall under an existing definition within securities law, or are they a novel form of debt? (This could matter enormously when it comes to structuring and selling the co-op bond contracts. A novel IOU may be more flexible but also un-secured for the owner. Traditional stocks and bonds might not fit exactly with the overall financial model of co-oprification, but existing law does offer their purchasers many protections.)

What bylaws would best allow for residents to make and/or request specific alterations to the properties where they live? Are there existing successful models we can follow for balancing the community's interest in protecting its property's value with the resident's interest in having the most suitable home to live in?

In all likelihood, day-to-day administration of the collective landlord will be carried out by a board of directors, who may in turn hire professional staff, depending on the community's size. Is it preferable for board members to be owners, or trusted third parties? (Presumably board membership will rotate on a schedule and be voted upon by the co-op's full membership in either case.)

What formulas exist that we could incorporate into the collective landlord's calculations to set appropriate rents, rainy day savings, and co-op bond dividends?

How much demand (if any) for co-op bonds does the community need to maintain in order to run smoothly? Is a waitlist necessary? Is ongoing marketing?

Should the terms of share ownership obligate the Collective Landlord to spend a certain amount of money on marketing to facilitate the sale of a share when its owner wants to sell?

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Comments

JOEL – Thank You for continuing your devotion to the dreams you were developing with Ravenna Kibbutz – We all look forward to your wonderful future progress, and your first book. – “Granddad” Lonnie.

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