Sunday, January 31, 2010

Co-Housing, Part 9: Matters of Affordability

A few moments of skepticism in hypothetical discussions of issues like the viability of co-housing schemes must arise. Let me relate a story that may address questions pertaining to the financial realities of one such ownership paradigm. Visualize 10 friends in a college dorm, enjoying one another’s company during their senior year at the university; call them Annette, Tommy, Darlene, Cheryl, Bobby, Doreen, Cubby, Karen, Lonnie and Sharon. They have different majors, and new jobs with a range of starting incomes, but on the average their salaries will be $30,500 a year. Karen is graduating in environmental engineering, and believes the group, with their significant others in a newly-proposed 10-unit community, can realize some economies in living costs in a co-housing arrangement. So, why end a good group dynamic, runs the conversation. Doreen, a real estate agent, finds a 44 thousand square foot infill parcel in central Phoenix that is zoned for multi-family development sufficient to build 10, 2-story container housing units in a community. Bobby, a construction management major, gets some bids from his internship mentors who estimate that using 40-foot long ISO containers, fabricated from boxes arranged three wide and 2 high, the residential builder can install the infrastructure for the common amenities and build 10-1,920 square foot dwellings for an average of $60,000 each. Encouraged, the friends meet and devise a charter for their community and regulations for living in community, and charge Doreen with getting a deal made for the acre + parcel for an affordable price. They also engage a surveyor to draw a boundary survey and identify easements in gross (personal to each pending dweller) for 10 building sites and non-exclusive easements for access across the tract to parking and the common amenities like the community garden and bicycle-parking shed.

Doreen negotiates a price for the parcel for $360,000; in a down market, the owner is willing to accept $60,000 down in return for a promise to take a second position, carry-back lien against the tract for the $300,000, interest only for two years. Annette uses her considerable persuasion learned from her broadcast journalism studies to coax a $600 thousand development loan from a construction lender at 5% interest under a first lien. Cubby, a paralegal, drafts a land trust under which the construction lender is the first beneficiary and the seller is the second beneficiary. The seller deeds the tract to the Trustee, the community’s elected president, concurrently with the 10 unit owners-to-be delivering the land trust’s trust agreement to the construction lender and seller. The roughly 20 incoming dwellers scrape together from their parents and their student loans to cover the $60 thousand down payment, close the loan and sign away their lives through personal guarantees. (Or, do they?) Anyway, the off and on-site infrastructure takes about 3 months to complete, and the containers, fabricated off-premises while the infrastructure is underway, are delivered within 10 days of the final inspection certificate for the site work and connected to the conduits and water and sewer piping and the solar-powered central generating unit that produces enough wattage to power the exterior building and parking lot/driveway lights within 48 hours after the units have been delivered. The dwellers have moved in, fewer than 120 days after the closing of the sale for the tract.

Cheryl, the accounting graduate, is appointed as the CFO of the community. She calculates the following expenses of the community:

$45,000 in annual interest cost/12 =

$3,750 interest expense monthly

Water, sewer, cable, internet, gas and electricity =

$3,250 utilities expense monthly

Liability coverage for common-use amenities =

$ 500 insurance premiums monthly.

Reserves for repair and maintenance =

$ 250 segregated account monthly

Real property taxes on property =

$ 750 impounded monthly

The total expense estimate for the community is $8,500 monthly. In addition, Cheryl advises the group to set aside $500 per month as a hedge against the need for additional contributions to the Trustee to cover a shortfall in unanticipated costs, such as escalating property taxes or a major breakdown in some system like the solar “power-grid.” The total expense on a per-dwelling unit basis is $900 monthly, or $10,800 per year. The ten classmates must spend 35.4% of their annual earnings ($30,500, on average) on housing and associated dwelling costs in the community for the first year of their joint occupancy.

This surely is not an ideal percentage of gross income to expend for housing, but given their probable tax brackets, if these mortgages are fixed as to interest rates, this is affordable, even if the unit owners’ significant others cannot make any contribution toward the community expenses. If the costs increase for the community, they should not grossly outstrip the increases in the dwellers’ annual compensation, unless rampant inflation in recurring expense categories outstrip gains in salary. Maintenance costs for the individual dwelling units should remain static, given the fundamental material – steel - from which the container housing is made.

Now, if your container housing unit has a “shelf-life” longer than your likely life span, one obvious advantage is that you will only be obligated to purchase your shelter once, with one loan, hopefully featuring affordable payments in better and worse economic conditions. Of course, the container dweller has the election to “upgrade” or “downsize,” depending on her needs or wants. Therefore let’s address this: Who will finance a dwelling built, indestructibly, out of steel? It’s likely lots of lenders will be attracted to the idea of not having to worry about relying on recovery of insurance proceeds to recoup their loan costs! One fundamental issue to lenders is where to file a security instrument, if the container units will be transient. A solution is to amend the loan documents to say that a failure to inform the lender promptly after the dwelling leaves the state of domicile at the date of the loan funding is a default that entitles the lender to commence foreclosure proceedings in any state in which evidence of property ownership by the borrower can be found. The most sensible approach, however, would be to require the management of a co-housing community to transmit a written notice to the lender of the location of the unit as a prerequisite to the relocating unit owner’s commencing occupancy within the community. Another solution to the lender anxiety over the transience of a container dwelling unit would be to have a central filing registry for mortgages and titles to such housing types, like the FAA maintains for aircraft or the Coast Guard, for seaworthy boats. These changes in procedure for financers are not insurmountably complicated; there have been personal property lenders in the manufactured housing field making loans against these types of semi-mobile improvements for decades. They’ll figure out how to adapt in due course, if they see a lending opportunity that guarantees reasonable returns on their investments.


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