Honorable Mayor and Members of the City Council. Submitted by: Jane Micallef, Director, Housing and Community Services

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1 Office of the City Manager To: From: Honorable Mayor and Members of the City Council Phil Kamlarz, City Manager Submitted by: Jane Micallef, Director, Housing and Community Services Subject: Affordable Housing Policy: Limited Equity Housing Cooperatives RECOMMENDATION Provide the City Manager direction on supporting limited equity cooperatives. Staff would return to Council with a more developed plan for any recommended strategy. SUMMARY The loss of the rental housing portion of the City s inclusionary zoning program in the wake of the Palmer/Sixth Street Properties vs. City of Los Angeles decision means that significantly less permanently affordable housing will be produced. The ordinance provisions invalidated by Palmer required that 20 percent of rental units built be affordable. Achieving the same percentage of affordable housing without inclusionary zoning s regulatory powers will be difficult. At the January 26, 2010 meeting, Council members expressed interest in further evaluation of how the City might support new limited equity housing cooperatives. As outlined in this report, the City has mechanisms already in place that could address the primary barriers to developing and operating limited equity housing cooperatives development funding and technical assistance. FISCAL IMPACTS OF RECOMMENDATION Fiscal impacts will depend on the course of action recommended. CURRENT SITUATION AND ITS EFFECTS The primary hurdles to forming new limited equity housing cooperatives are (1) funding development and operations, and (2) technical assist to support the formation and continued operation. The City currently has established mechanisms which can fund both of these activities the Housing Trust Fund and the community agency funding process. However, no proposals for either have been received in recent years. Cooperatives can be operated on a rental or ownership model. Since the current interest in limited equity cooperatives is based on an interest in increasing home ownership opportunities, this analysis focuses solely on ownership cooperatives Milvia Street, Berkeley, CA Tel: (510) TDD: (510) Fax: (510) manager@cityofberkeley.info Website:

2 In the preparation of this report, Housing and Community Services Department staff met with Rick Lewis and Kathy Labriola to solicit their input. Lewis and Labriola, in addition to being long-term Berkeley housing cooperative members, are working to develop new cooperatives and offer related technical assistance services through the Bay Area Community Land Trust. Staff also spoke with Dan Sawislak of Resources for Community Development, a Berkeley-based nonprofit housing organization which has been involved with at least three cooperative or mutual housing projects. Background on Limited Equity Cooperatives In a limited equity housing cooperative (LEHC), members purchase a low cost share of the cooperative which allows them to live in one of the units. The limited equity cooperative model relies on upfront subsidies to make share prices low enough that members can purchase them outright and not need to obtain a loan. Members then sign an occupancy agreement that obligates them to pay monthly carrying costs, which cover a portion of the cooperative s mortgage, operating costs, and reserves. Carrying costs should be adjusted over time to reflect changes in operating costs. LEHC members elect a Board of Directors which is responsible for all aspects of managing the property. Members do not bear any personal liability for the cooperative s mortgage, and may receive the tax benefits of homeownership, although the benefits of tax deductions may be small for low-income members who have limited tax liability. Share prices are set by a formula contained in the co-op's bylaws, subscription agreement and stock certificates. At move-out, members sell their shares, typically for a price set by formula that accounts for any increase in the value of the share and reduction in the cooperative mortgage debt. One common resale formula is combining the original share price with an amount of interest or inflation which is established in the by-laws, typically reflecting the number of years the share has been owned. Limited Equity Cooperative Models and Best Practices NCB Capital Impact (a nonprofit affiliate of the National Cooperative Bank) recently received a substantial grant from the Ford Foundation to perform a study on models and best practices for cooperatives, which will be very informative. This study is expected to be completed by fall of New York City Example: The Urban Homesteading Assistance Board The only public initiative supporting limited equity coops identified so far is the Urban Homesteading Assistance Board (UHAB) in New York City. UHAB began in the 1970 s during a wave of abandonment and foreclosure of buildings in New York City. Abandoned buildings were taken over by homesteaders who then acquired buildings in receivership from the City. UHAB s continued emphasis is on converting rental buildings to coops. Although UHAB is not a public agency, it receives significant public support. Page 2

3 Since the 1970s, UHAB has worked with residents in more than 1,400 buildings with more than 30,000 units, and now operates two training centers. Prior to forming a coop, all residents must complete five core courses: two financial management courses, building management, and maintenance and repair classes. Once tenants have made it through the core classes, they receive intensive one-on-one technical assistance from UHAB during the three- to five-year period when residents lease their buildings before converting to cooperating ownership. UHAB staff monitor development, negotiate conflicts, attend building meetings, and oversee co-op board elections. UHAB also provides crisis prevention and intervention services for co-ops once established, on issues ranging from water bills to code violations. For buildings that have gotten into trouble, UHAB helps package capital improvement loans and access New York s tax-relief program for co-ops. Established co-ops also have access to other UHAB services, including a group fire and liability insurance program, bulk-purchasing for heating fuel, and bookkeeping services. UHAB now has more than 60 staff members, including attorneys, a training department, and an organizing department, with a nearly $5 million budget. Clearly the scale of UHAB is not applicable to Berkeley, but components of their program s success include: A supply of abandoned or foreclosed buildings acquired at no or low cost; Tenant organizing activities in new cooperative buildings; An intensive training program for new cooperative members; Training and technical assistance for asset management issues; Training and technical assistance for organizational development issues; and Provision of insurance, and purchasing and bookkeeping services. Cooperative Board Best Practices A significant factor which sets cooperatives apart from other types of housing is control by a Board of Directors. The cooperative s Bylaws establish the size of the Board and term length of Board members. A Board s many responsibilities include: 1 Conducting regular meetings and elections; Staying in touch with and representing the residents concerns and interests; Ensuring compliance with any federal, state, or local requirements related to project financing and operations, which includes compliance with Fair Housing law; Financial and legal obligations, such budgeting, collecting monthly carrying charges from residents; and hiring need professional services; 1 Adapted from Northcounty Cooperative Foundation s A Practical Guide for Cooperative Success. Page 3

4 Property management, including hiring and managing any employees, or contracting for professional services; Developing and enforcing policies, rules, and regulations; Terminating (evicting) members who are not fulfilling the terms of their occupancy agreements, such as paying the monthly carrying costs; and Maintaining relationships with the community. Most studies on limited equity coops strongly recommend a training and technical assistance component to ensure these responsibilities are fulfilled. Training and technical assistance are needed both at initial formation of the cooperative, and on an on-going basis. Training and technical assistance needs and opportunities are discussed later in this report. Funding the Creation of New Limited Equity Housing Cooperatives Throughout coastal California, it is difficult to make all types of homeownership affordable to people earning below 80% of Area Median Income ($64,400 for a family of four in ), due to the high cost of housing, the limited sources of subsidy available, and challenges in finding buyers who can qualify for a mortgage and afford upkeep of the property. For example, the major source in affordable rental development Low Income Housing Tax Credits cannot be used for ownership projects, and so substantial local investment is usually required. Historically, the local priority with affordable housing investment has been for households below 60% of median. There are two primary categories of costs associated with housing, the initial acquisition and rehabilitation or development, and on-going operating costs, including the funding of replacement reserves. Development of Cooperatives: Acquisition, Rehabilitation, and New Construction Development costs of limited equity housing cooperatives are similar to the development costs of similar types of rental housing, whether created by new construction or acquisition and rehabilitation. As with rental housing, subsidies are needed to make the costs affordable for low income households. There is no one source of funding for LEHCs except for NCB which funds primarily market rate cooperatives. Labriola and Lewis cited the unwillingness of most mortgage lenders to loan on limited equity cooperatives as a barrier to their creation. All of the traditional sources of funding for the development of LEHCs are also the sources used for affordable rental developments and so LEHCs face significant competition for limited funds. Potential sources for LEHCs include: 2 Page 4

5 General Funds HOME can be used for homeownership programs for households under 80% of area median income. CDBG funds can be used for site acquisition and for downpayment assistance to homebuyers Section 8 for mortgage payments made by the homebuyers instead of rental assistance Federal Home Loan Bank Affordable Housing Program Publicly owned property (either donated or subject to a ground lease) Low Income Housing Tax Credits, a major source of affordable rental housing funding, cannot be used in limited equity housing cooperatives unless they are operated as rentals for the first 15 years. Whether a development planned to convert would be competitive for LIHTCs in California would depend on the project. In the 1960s and 1970s, HUD offered mortgage insurance programs for limited equity cooperatives that are no longer available. Operating Costs After the initial development costs, on-going operation of limited equity cooperatives may require a subsidy. The monthly carrying charges paid by residents are intended to cover both mortgage debt and the development s operating costs, including insurance, building maintenance, utilities for common areas, accounting and replacement reserves for such things as flooring, plumbing, electrical systems, heating and ventilation systems, and roofs. While larger cooperatives of 25 to 30 units may be able to hire property management to complete these functions with Board oversight, smaller cooperatives are generally unable to afford the cost of professional property management, and residents will need to fill most functions. The history of many LEHCs has shown that low-income homeowners may be unable to pay carrying costs increased to a level sufficient maintain the building in good condition over the long term, or support debt to rehabilitate the property if needed. In some buildings, appropriately sized carrying costs can result in the homeowner paying more than 30% of their income. This creates a tension for residents who must choose between approving increased carrying costs to maintain the property in good condition and maintaining long-term affordability. Projects with lower income households (50% to 80% of median) may face deferred maintenance problems unless they receive ongoing or recurring public subsidies for operations. Deferred maintenance and unfunded rehabilitation needs are not unusual in older limited equity housing coops. For example, a study in Washington DC of limited equity housing coops formed over a 25 year period found that while 25% were in excellent condition, based on finances, reserves, building physical condition, and Board Page 5

6 participation, 54% were currently stable but had long-term concerns related to carrying charges, required repairs, vacancies, reserve levels, and/or delinquencies and 21% were in poor condition based on vacancies, immediate foreclosure risk, and/or ineffective boards. A total of 42% were in need of significant/major repairs. Building Capacity to Develop New Housing Cooperatives Limited Equity Cooperatives have been an allowable housing type in the City s Housing Trust Fund, but none have been proposed in recent years. While the limited sources of funding outlined above are a significant factor, so too is the lack of organizational capacity for developing limited equity coops, which requires part community organizing and part real estate development. Berkeley s nonprofit developers are focused on rental housing development, while other organizations may have an interest in community organizing but no real estate expertise. Therefore, in addition to the capital and operating funding described above, starting up new limited equity cooperatives in Berkeley is likely to require City support for organizational capacity for start up. The UHAB in New York City, profiled earlier in this report, provides extensive training and consulting for the formation of new LEHCs. The Bay Area Community Land Trust, an organization which has Rick Lewis and Kathy Labriola on the Board, offers this type of training. Their introductory workshops include meeting skills, house rules, and conflict resolutions. For established cooperatives, they offer maintenance planning and budgeting, coop finance, coop legal documents, marketing and member selection, coop operations, and officer trainings. These offerings illustrate the range of skills building needed. In addition organizational development capacity, developing a new cooperative also requires a considerable amount of real estate expertise. Most low income households are unlikely to have this kind of expertise without the provision of significant amount of technical assistance from groups experienced in LEHCs. The Berkeley-based nonprofit developer Resources for Community Development (RCD) provided real estate and financing services in its early years for the formation of the Ninth Street Coop and University Avenue Coop. Dan Sawislak of RCD reported that having a group of tenants which is well-organized, understands cooperative ownership, and is motivated to take ownership of their building is the most feasible way to form a new cooperative. In the case of Crossroads Village, the tenants had organized to address concerns with an owner who ended up in foreclosure and eventually starting working with RCD. Still, RCD owned the building for a number of years before eventually transferring it to the tenants. Based on this success, RCD acquired another building with the hope of creating tenant-controlled housing. Although the tenants were relatively organized and very capable, they ultimately concluded that they preferred to stay renters in an affordable building, rather than take on the extra responsibilities of resident ownership. From Sawislak s Page 6

7 perspective, this illustrates the potential risk in trying to apply this model to an existing building without tenants initiating it. It may be possible to fund the capacity building activities from the community services funding allocation of the Community Development Block Grant or General Funds during the next competitive funding allocation round in FY2012. This activity has not previously been proposed during competitive community agency funding rounds. FY 2011 will be the second year of contracts from the last competitive funding process, so funding this activity from CDBG at present would require de-funding another organization. Another alternative would be to fund this activity using General Fund. However, for FY 2012, there are no new General Funds available so a Council decision to fund this new activity would result in a decrease to currently funded activities. Supporting Capacity for Ongoing Operation of Housing Cooperatives According to a 1994 report from the University of California s Center for Cooperatives, successful self-managed cooperatives generally have a long-term relationship with a coop consultant who provides technical assistance to key staff members and the board of directors. The training and assistance may be on an annual basis or as needed, and it frequently covers topics such as the coop s legal documents, administrative policies, and financial management systems. Likewise, a 1989 paper from the California Policy Seminar identified annual training infrastructure and materials as essential to cooperative success. Coop members are responsible for all of the management activities and operations of their developments, but may not have the necessary training or expertise in facility maintenance, financial operations, or fair housing. Common pitfalls to the successful operation of a coop include ineffective property management, lack of member approval for carrying cost levels that adequately fund maintenance and reserves, and lack of compliance with fair housing law. In addition, over time, organizational problems can develop that discourage resident participation in coop leadership. Some cooperatives combine housing cooperative and community land trust models as a way to avoid some of these pitfalls. A Community Land Trust model usually includes multiple housing developments, sometimes but not necessarily cooperatives. The Board of a Community Land Trust then includes elected representatives from the various member developments, as well as public interest or community representatives who do not live in a Land Trust property. However, the same pitfalls may arise for the members of the Land Trust unless they have the necessary expertise in facility maintenance, financial operations and long term asset management. To ensure continuing effective operations, Rick Lewis and Kathy Labriola of the Bay Area Community Land Trust recommend limited equity coops have an ongoing source of outside support to help identify and resolve operational issues. At times, it may be Page 7

8 necessary to undertake what they call a social audit to uncover how well the coop is functioning as an organization and to address issues that prevent optimal functioning. Options for Supporting Limited Equity Housing Cooperatives (A) Options with Existing Resources: 1. DEVELOPMENT: Continue to provide Housing Trust Fund financing for rehabilitation and replacement needs of established cooperatives. In the current Housing Trust Fund round, applications from University Avenue (UA) Cooperatives and the Savo Island Cooperative are being considered. City staff have also met with Oregon Park Cooperative residents regarding their rehabilitation needs. 2. CAPACITY BUILDING: Technical assistance services for people or groups who would like to start a new cooperative is an activity that could be funded through the City s competitive community agency funding. Technical assistance could be provided by a contracted consultant or consultants. This strategy depends on the existence of groups interested in using technical assistance. Lewis and Labriola were provided with information on applying through the City s competitive community agency funding process for FY 2012 to provide this service. However, as previously noted, there are no new General Funds available so a Council decision to fund this new activity would result in a decrease to currently funded activities. (B) Options for Diverting Existing Resources to New Priorities: 1. DEVELOPMENT: Dedicate a portion of Housing Trust Fund financing for the formation of limited equity housing cooperatives. Although LEHCs are an allowable project type in the Housing Trust Fund guidelines, none have been proposed for years. Setting aside HTF funds for limited equity housing cooperatives, instead of rental housing, in the next funding round may encourage new LEHC proposals. However, the City has already received Housing Trust Fund proposals in excess of funds currently available. 2. CAPACITY BUILDING: Funding an organization to start new cooperatives in Berkeley. Perhaps a nonprofit developer or other community agency would agree to take this on. This organization could provide outreach to tenants in rental buildings which are being offered for sale and work to organize tenants and develop financing. Since no local organization has a recent track record of forming new limited equity housing coops, it is difficult to predict where interest and capacity could be found. 3. ON-GOING OPERATIONS: Sponsorship of a citywide coop conference or collaboration to promote links between existing coops. Lewis and Labriola suggested one option would be sponsoring the California Center for Cooperative Development s annual Nuts and Bolts conference to take place in Berkeley. Page 8

9 There are at least 226 coop units in 10 projects. This activity would need to be coordinated with the existing coops, and would need to be funded from General Funds. This could potentially be funded through the competitive community agency funding process, or another activity could be de-funded to support this activity. (C) Options with New Staffing Resources (General Funds): The following activities to support limited equity housing cooperatives would require new staffing, which would need to be supported by General Funds. Because the City is currently facing significant budget gaps, providing this staffing and support would require de-funding another activity in order to make the necessary funds available. 1. DEVELOPMENT: Encourage private lenders to make loans to limited equity housing cooperatives. Labriola and Lewis identified lack of private financing as a current barrier to new cooperatives and suggested this as a possible City strategy. The HCS Department could hire additional staff to contact leadership at local banks to discuss their cooperative lending practices. Because of the level of bank consolidation today, most banks are following underwriting guidelines established at the national level. Therefore, the influence of City staff is likely to be limited. 2. DEVELOPMENT: Modify the Housing Trust Fund guidelines to encourage submission of limited equity housing cooperative proposals. This would require a full review by the Housing Advisory Commission and staff. Policy changes might include: a. Decreasing the housing affordability requirements to make limited equity housing cooperatives feasible. Current guidelines specify that 40% of units need to be affordable at or below 60% of area median income, and 20% must be affordable to households with incomes below 30% of median. It is probably not feasible to reach 30% of median with a limited equity coop so increasing the income limit could encourage applications, but would also result in serving a higher income population than the HTF has in the past. b. Decreasing the developer experience requirements. These requirements were increased in the last round of HTF guideline revisions to help ensure awarded funds would be used efficiently and effectively. Since there is not an experienced local developer of LEHCs, this may create a barrier. 3. CAPACITY BUILDING: Creating a staff position dedicated to forming cooperatives. This approach is not recommended since starting a new cooperative requires functions like property acquisition and development project sponsorship that the City does not typically fill. 4. ON-GOING OPERATIONS: Support training and technical assistance capacity to work with the City s 10 existing and any new coops. Dedicated City staff or contracted consultants would need to undertake outreach to coops to encourage them to use these services. A person or organization in this capacity could also Page 9

10 work on organizing existing cooperatives to work together to share information and expertise, as well as promote the creation of new cooperatives. BACKGROUND At the January 26 th Council meeting, staff identified several alternatives to responding to Palmer/Sixth Street Properties vs. City of Los Angeles, a recent court decision which found that inclusionary zoning programs that apply affordability requirements to rental housing violate the Costa-Hawkins Act, and reported back on a previous Council request for information on the City s Regional Housing Needs Assessment, history of the City s inclusionary zoning program, Berkeley incomes, and limited equity cooperatives. At that meeting, Council directed staff to investigate what the City could do to support limited equity housing cooperatives, including: Evaluation of limited equity cooperative models and best practices. Investigation of what sources, if any, other than General Fund are available to finance the development or acquisition of new housing cooperatives, and how much General Fund will likely be required. Evaluation of staffing capacity to identify who might organize, develop, and support the on-going operations of new limited equity cooperatives, including the question of whether a new organization would be required. Establishment of capacity to offer training and technical assistance on an annual basis into the future. Revision of the Housing and Community Services Department s work plan to accommodate the activities listed above. RATIONALE FOR RECOMMENDATION More policy guidance is needed from Council before staff can proceed with developing responses to Palmer/Sixth Street Properties vs. City of Los Angeles. ALTERNATIVE ACTIONS CONSIDERED None. CONTACT PERSON Amy Davidson, Senior Management Analyst, Housing and Community Services, Page 10