Study: Property tax can thwart affordable housing

HUDSON—A study just released by Columbia County Habitat for Humanity (Habitat) demonstrates that state and local property tax structures and practices impose barriers to the creation and continued home ownership of affordable housing in the county.

The study was conducted for Habitat by Hudson Valley Pattern for Progress. According to Habitat CEO Al Bellenchia, the impetus for the study was two-fold: rising home values and therefore property taxes have made Habitat housing unaffordable to many of the very families for whom Habitat creates housing; and prevailing property tax structures impede Habitat’s ability to increase the number and types of affordable homes it builds at a time when affordable home ownership is urgently needed in the county.

Habitat specializes in building safe, decent and affordable housing for working families. In its 29 years here, Habitat has built or rehabilitated 25 homes in Ancramdale, Chatham, Copake, Hudson, New Lebanon and Valatie. As it nears its 30th anniversary, Habitat has reshaped its vision, focusing on greater impact; exploring new and more cost-effective ways to build; working with municipalities to identify possible sites for small, multiple unit housing appropriate to local character; and shaping local land use policy and practices to facilitate affordable home ownership.

The new study, “A Case for the Fair Taxation of Subsidized and Affordable Owner-Occupied Housing in New York State,” explores several ways in which state and local property tax structures could support subsidized owner-occupied affordable housing.

The two most common models for such housing are offered by Habitat and by Community Land Trusts (CLTs). Both have the benefit of allowing lower-income families access to home ownership which, historically, is the most important vehicle for the creation of family wealth in this country, since the equity in homes typically increases over time. Home-ownership is also crucial to housing stability and has other community and personal benefits.

In Columbia County, Habitat homes are financed by a combination of a traditional bank mortgage and a subsidy, similar to a second mortgage, from Habitat. The subsidy is necessary for the reasons that to qualify for a Habitat home, a family must “only” earn between 30%-80% of the Area Median Income (AMI). In other words, they would be unable to purchase a home without assistance. A conventional mortgage lender will only loan that family a limited amount which would be less than 28% of the family’s income.

In order for that family to afford a Habitat home at its appraised fair market value (typically around $250,000), the family would need a conventional mortgage and a subsidy (often upwards of $100,000) from Habitat to make the purchase.

In exchange for the subsidy, the owner agrees to two terms that are designed to assure that the home remains affordable for a period of time: first, for 10 years Habitat retains a right of first refusal to acquire the home in the event of a sale; and, second, also for a period of time, appreciation in the value of the home realized in a sale is shared between the homeowner and Habitat.

In the CLT model, the non-profit land trust retains ownership of the land, leasing it to the homeowner while selling the home itself. The cost is lower because the owner is acquiring only the home, and not the land. Like Habitat, the CLT assures the future affordability of the home by limiting the resale price, with the owner receiving some appreciation but less than the full market share.

How do property taxes affect these models? New York property taxes are high, as they are a primary source for funding education and a host of other services. According to the Habitat study, in the four locations that were studied—Ancram, Chatham, Greenport and Hudson—a family earning 100% of AMI would only qualify for a conventional $250,000 mortgage in Greenport. A family in that town earning 30-80% of AMI (Habitat’s target homeowners) would need a substantial subsidy to afford a home there. The result is that to subsidize home ownership Habitat must fund very significant loans to its families. In turn, the size of these subsidies diminishes Habitat’s ability to grow its program and to have greater impact on the affordability crisis in the county.

The same is true for CLTs. Currently, Hudson is exploring the creation of a CLT, and other area communities, like Albany, have recently created them.

What are the possible solutions? The study reviews a number of them.

First, the report suggests that unless subsidized homes like Habitat’s are correctly valued the Habitat homeowner might not realize the full value of the Habitat home in a sale because the homeowner must share the appreciation in value with Habitat, assessors typically value such property as if it were free of restrictions. A higher value translates to a higher property tax.

The practice is seemingly contrary to conventional appraisal standards, which reflect transfer restrictions by reducing value, and to the state’s assessment guidelines, which would require an assessor to determine value by using recent sales of similar properties , that is, ones that are burdened by similar restrictions. A more realistic assessment approach would reduce the tax burden on such properties.

Second, as is the case in some 30 other states, New York could adopt a “circuit breaker” for lower-income homeowners. Circuit breakers limit the amount of property tax a homeowner owes depending on the family’s income. (In some states, circuit breakers also apply to tenant-occupied   units​, in recognition that rents indirectly cover the tax costs of landlords).

New York has already recognized this type of strategy by offering tax credits to low-income seniors and the disabled. Similarly, the STAR credit program (granted to owner-occupied primary residences with a maximum household income of $500,000) in effect subsidizes lower income homeowners.

Exemptions that lower property taxes are also offered in New York as a matter of social policy to assist certain users—notably the agricultural exemption that promotes farming, and full or partial exemptions for first-time homeowners, non-profits and veterans.

The majority of other states offer one or more tax-oriented routes to encouraging affordable home-ownership. Habitat’s study offers insight into potential strategies that can be advanced locally and at the state level to lessen the property tax barriers that exist in New York.

The entire 41-page is available online at the Columbia County Habitat for Humanity website.

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