359 June 12, 1984 PUBLIC HOUSING FROM TENANTS TO HOMEOWNERS INTRODUCTION Publi c housing projects in the United States have come to epitomize urban blight. While this view is exaggerated it is nevertheless true that public housing represents one of the great ironies of federal intervention 1930s, the assumption was that the projects would help ameliorate social problems in the cities by stabilizing communities and the housing stock When the program began in the The reverse has been true.

Yet there is evidence in this country and abroad, that certain inner city housing experiments can have positive results.

They all have one thing in common--ownership is homesteading, where abandoned properties can be bought for a dollar, or the discounted sale of public housing to tenants (in Britain), the effect is the same. When residents acquire a n equity stake in the future of their building, and hence their neighborhood, they gain incentives to change their behavior from destructive to constructive and to urge their neighbors to do likewise the threat of increased land values and displacement, e q uity allows a resident to rise with the tide--not drown in it But, some would argue, the low income of public housing tenants precludes their becoming homeowners this apparent barrier is to recognize that support for homeowner ship is entrenched in the ta x codes. Thanks to the mortgage interest deduction, middle- and upper-income Americans have power ful tax incentives to become homeowners. This is no accident.

The explicit purpose of the deduction is to help Americans pur chase homes. Yet the low-income tenant, who pays little or no income tax, has no such incentive--so he must pay a far higher after-tax price than higher-income citizens buying exactly the same property Whether the program And instead of economic improvement bringing with it The solution to 2 Congress and the Administration should recognize this in equity and establish a "Right to Buy homeownership program in the. inner cities, based on the sale of public housing buildings at a substantial discount, to associatiohs of occupying tenants. The Reagan Administration should establish an experimental pro gram immediately using existing law It should also seek legis- lation to permit tenant associations to apply directly to the Secretary of Housing and Urban Development HUD) for permission to purchase buildings from their local Public Housing Authority PHA the PHA to provide the tenant group with a mortgage looked its political advantages A similar plan i n Britain enabled Conservative Margaret Thatcher to make considerable inroads among traditionally Labor-voting public housing tenants in her landslide 1983 reelection the election that The legislation should also allow the Secretary to require Proponents o f such a program would be blind if they over The New York Times noted after As political experts and party strategists sift through the results of Labor's crushing defeat more and more are identifying the Ilhomeowner mentality of voters as a crucial deve1 opment.l An inner city homeownership plan would extend the idea of owning a home to low-income Americans.

It would help stabilize the'value of public rental sto'ck near tenant-owned units, and would plant the seeds of improvement in the nation's most deso late neighborhoods enterprise zone approach to inner city development. Like the zone proposal, which seeks to unlock the entrepreneurial spirit the Right to Buy program would draw on the strengths of residents to tackle the problems of their own community It would be a logical companion to the THE BRITISH RIGHT TO BUY PROGRAlvI During the last five years, over 500,000 dwellings (out of a total public housing stock of approximately 7 million units) have been sold to public housing tenants in Britain under t h e "Right to Buy" scheme the Thatcher government as central to its objective of reviving neighborhoods and encouraging se1.f-improvement housing tenants to purchase their units at a discount on the market value of up to 60 percent, based on the length of t e nancy Widening homeownership in this way is seen by Stated simply, Britain's Right to Buy program allows public 0 1 "In Housing Policy, It Seems the Tories Had a Winner The New York Times June 22, 1983. 'I 3 1 Eliqibility A tenant obtains the right to buy if he or she has been a public housing tenant for at least two years2 and the unit is the principal' home. The tenant can purchase the unit jointly with up to three other family members, provided they have been living in the same unit for at least three m onths.

Discount If the tenant has lived in public housing for three years the unit can be bought at the market value less 33 percent. The discount increases by 1 percent for each additional year as a tenant, up to a maximum 60 percent discount after 30 yea rs as a tenant.3 The period counting toward the discount need not have been spent in the same unit, or even within the jurisdiction of the same housing authority. The valuation, upon which the dis counted price is based, is calculated by the housing autho rity.

If the tenant disagrees with that valuation, he can appeal to the District Valuer, an independent official whose decision is legally binding on both parties 3) Finance The purchaser has three options in raising the money to pay for the house a) The t enant can obtain a mortgage from a savings and loan association. Approximately half of all public housing sales are financed in this way. b) The tenant has the legal right to a mortgage from the local housing authority 2% times the annual income of the pu r chaser, plus 1 times the annual income of any other family members assisting in the pur chase lower Basically the loan amount is limited to For purchasers over 60 years of age,,the multiple is c The tenant may buy the unit in stages. After buying at least . 50 percent of the unit, with the usual discount according to length of tenancy, he can obtain full ownership by purchasing increments of 12% percent. The tenant continues to pay rent on the portion still owned by the housing authority housing tenant-buyer can deduct mortgage interest payments from. taxable .income. The trouble has been that, if the low-income purchaser pays little or no income tax, the mortgage deduction is Like the purchaser of privately built housing, the public Decreased from three year s in legislation passed in 1983.

Prior to the 1983 legislation, the maximum discount was 50 percent after 20 years 4 practically worthless. Since April 1983, however, a low-income buyer in Britain has been able to utilize the Mortgage Interest Relief at So urce Program. Under this, he can obtain a cash subsidy equal to the tax relief to which he is entitled (at the 30 percent lowest bracket), less the amount he can actually deduct from his tax bill--in effect a refundable mortgage deduc tion 4) Value Recapt ure A tenant-buyer cannot buy his unit one day with a 60 percent discount, sell it the next at the full market rate, and walk away with the difference initial purchase 100 percent of the discount must be repaid.

This repayment requirement falls by 20 perce nt each year until after five years, the unit can be resold without the repayment o any portion of the discount If the unit is sold within one year of the ANALYSIS OF THE BRITISH EXPERIENCE The British program of public housing sales has been highly popul a r and had profound effects on many neighborhoods As the program's proponents expected, signs of home improvement activity close attention to maintenance, and resident involvement in neighborhood issues have become evident in communities where tenants are b uying. The reason for this is simple, says Con servative Councilwoman Hazel Weiberg ownership gives them a greater stake in the community.114 Distribution of Housinq and Sales Approximately one-third of all housing in Britain is publicly owned rental acco m modation. This is above the average for Western Europe, and far above the 1.5 percent in the U.S. In addition the mean income of families in British public housing is not far below that of owner-occupying families, and it is a shade higher than families i n private rental units. One reason for this is that local housing authorities cannot evict tenants whose incomes rise above the initial threshold for their unit. Moreover, the right of tenancy in a public housing unit in Britain can be passed on to an heir who has lived with the tenant public housing structures also differ from those found in Ameri can cities. While there are many examples of blighted high-rise properties, more typical is the well-built duplex or four-unit walk-up in a reasonably stable nei g hborhood British The sales of British public housing reflect these character istics. Data for 1982, for instance, indicate that the average 4 New Law Transforms Britain Into a Nation of Homeowners," Wall Street Journal, September 14, 1983. 5 income of ten a nt purchasers was only 16 percent lower than that of all first-time house buyers in Britain, and 96 percent of public units sold were town houses, duplexes, or detached houses only 4 percent were apartments). Nevertheless, sales were more common among low e r-income public housing tenants than is usual for first time buyers. Forty-seven percent of public housing purchasers earned less than 10,000 a year (34 percent for all first-time buyers), and 14 percent earned less than $7,000 (9 percent generally).s Not surprisingly, in view of the discount based on length of tenancy, the average age of the tenant-buyer 43 years) was significantly above the average for first-time buyers (31).

Multi-Unit Buildinqs The data indicate that the bulk of public housing sales in Britain have constituted purchases of fairly desirable types of housing to tenants who would not be classified as very poor.

American policymakers should not assume that the typical Right to Buy sale involves a welfare mother buying her high-rise apartment.

Indeed, it is the high-rise apartment that has been the most difficult for local authorities to sell to tenants. British officials are quick to point out, however, that a high proportion of Britain's multifamily urban public housing was built after th e Second World War with poor material and designs. Inadequate durability and structural problems make these units very unattrac- tive for purchase, even at low prices. Would-be buyers in such buildings are inclined to remain on the waiting list for a more desirable property (using the waiting time toward a larger dis count mechanisms such as tenant management or cooperative ownership.

Tenant management is almost unknown in Britain, and cooperative ownership is rare. Consequently, say British officials, ten ants have a strong resistance to the only forms of purchase and organi zation that are practical for low-income people in multifamily buildings. Even when'a tenant buys his home in a 4-unit walk-up the local authority usually retains the responsibility fo r the common areas and general maintenance (with a service fee rather than have the owners accept this responsibility So A second key factor is the unfamiliarity of the British with Lessons of the British Model Despite such differences between the U.K. and U.S. situa tions, the British program contains important lessons for a workable approach on this side of the Atlantic powerful stimulus and a means of favoring the most stable tenants.

The first is that a discount based on length of tenancy is a Assuming one pound 1.40 6 Initial fears that the discounts would provoke anger among working class buyers of private homes (who enjoy no such discount) proved groundless lished tenants to become even firmer anchors in the community is an important ingredient of th e British program rapid resale--which would undermine the otherwise stabilizing features of the program. On the other hand, the prospect of capital gain is important to a purchaser In neighborhoods where market prices are not rising, or'even falling, the s l iding scale recapture provision in Britain allows for a potential capital gain within a reasonably short time The third lesson is that an American version of the British plan would have to overcome the problem of selling apartments to low-income tenants. G iven the familiarity of Americans with cooperative ownership, this should present fewer problems than it has in Britain. Nevertheless, the high concentration of low income people in American public housing would require more creative financing arrangement s than are typical in Britain The discount'strategy has enabled many long estab A second lesson is that the resale value recapture mechanism It discourages A PROGRAM FOR THE UNITED STATES Since 1949, Congress has targeted the public housing program increas ingly toward lower-income and welfare families, rather than those with modest incomes. Unlike Britain, therefore, the family income of a typical American public housing tenant is well below the national median--posing problems for any sales policy.

Legisla tion does give a Public Housing Authority (PHA) in the United States the power to sell a "low income project to its lower income tenants The s.ale price is usually based on the portion of the original development cost still outstanding--not the current ma rket value So discounted sales are permissible in the U.S.

This and other legislation have led to a number of home ownership programs for low-income tenants. The Turnkey I11 program, begun in 1968 and terminated in 1973, used the PHA framework to develop h ousing projects for sale, on a lease-pur chase basis, to groups of public housing tenants with sufficient incomes to permit a sale without continued operating subsidies.

The price was based on the total original development costs, and if the buyer were to resell the unit within five years of receiv ing full title, the PHA was entitled to recapture the capital gain according to a sliding scale.

A requirement for success was the ability of the buyer to undertake basic maintenance and to accept the financial and other obligations of ownership.

Similar problems arose with the Section 235 Homeownership Program, another major federal initiative to encourage low-income homeowner ship through the sale of new or extensively rehabilitated units. The income problem was compounded in the case of Section 7 235 by the low (3 percent) down payment requirement--which could be in the form of "sweat equity that is, provided in the form of o n-site work rather than cash). This meant that the loan-to value ratio could easily come to exceed 100 percent in an'unstable neighborhood--encouraging others to abandon their properties at the first need for substantial maintenance outlays.

The most exten sive and perhaps most interesting low-income ownership program, however, has been the Indian Mutual Help Ownership Opportunity Program,,which constitutes 61 percent of HUD assistance in Indian areas. Families or tribes must make a down payment contributio n of at least $1,500 toward each unit, in the form of cash, land, or work. The resident can acquire title to the unit, generally after 25 years, through a lease-purchase plan that allows equity to be built up gradually. The program has been very popular an d effective, covering Over 30,000 units.

Mutual housing associations MHAs as a homeownership vehicle for public housing tenants, have attracted considerable attention in recent years. Proposals are now being formulated in Patterson, New Jersey, for example , which would use the model to transfer 242 public housing units into tenant ownership. The title of the building first would be transfered to a mutual housing association made up of residents affiliated to a city-wide MHA with a board of directors drawn f rom city officials and local organizations. This city-wide MHA could enlist support and provide technical assistance for would-be buyers, thereby improving the chances of successful ownership by individuals, who would be able to purchase title from the MH A This MHA would be THE PRINCIPLES OF A NEW OWNERSHIP INITIATIVE Drawing on British and American experience in encouraging ownership among low-income tenants, principles for a successful homeownership program for public housing tenants emerge. Among them 1 ) Discounts and Equity It is clear from the problems associated with Section 235 and in contrast, the success of the British approach, that buyers must feel they have sufficient stake in their homes to justify expenditures on maintenance. Discounting the p r ice (giving the prospect of a substantial capital gain) would provide that stake indirectly but effectively Current law permits HUD to sell to a resident tenant at a discount with the federal government paying off part or all of the existing capital debt. Similarly, units can be modernized without the tenant-buyer being required to pay the cost of modernization I a token down payment does not. a 2) A Subsidy to Buyers that this constitutes an unfair valuable subsidy to the buyer.

These critics overlook the mortgage deduction available to middle and upper-income buyers--which is of little value to low income buyers. If the purpose of Treasury assistance is to help home buyers, then a price discount on public housing would be a ra tional and equitable device to 'help low-income buyers. Depending on the discount chosen and the tax savings (if any) usable by purchase, a case could also be made--again on equity grounds--for some interest relief for low-income buyers It would be reason able for the interest payab le on PHA-provided mortgages to be reduced by an amount at least equal to the lowest marginal federal tax rate 3) Netting for Other Subsidies to other groups already included in the cost of public housing.

American Enterprise Institute scholar John Weicher notes that studies suggest that new public housing units cost about 25 percent more than comparable private housing. The major reasons for this are the high tax revenue costs associated with tax-exempt financing often used in such projects (a subsidy to h igher-income investors) and high construction costs due to the application of the Davis-Bacon Act (a subsidy to construction workers).6 There seems little justice in forcing low-income homebuyers to cover the caDital cost of a subsidv to Americans earnina well above Some critics of discounted sales to low-income buyers charge Subsidy calculations should also be adjusted for the subsidies the'ir 'Income. The cash basii for any calculation-of purchase price, therefore, should net out such subsidies 4) Develo p inq Homeowner Attitudes A major problem associated with low-income buyers, even if financing can be.arranged, is that they often lack the maintenance and accounting skills needed for homeownership. On the other hand, some remarkable successes have been ac h ieved with tenant management associations as vehicles to encourage sound maintenance techniques--especially when cash incentives were utilized. As head of Newark's public housing in the 1970s, for instance, Tom Massaro sought to cut costs by inviting tena nts to take over many responsibilities. For every dollar this saved the city, the tenants were allowed a portion to finance community activities.

The result: vandalism and utility costs plummeted and tenants acquired useful maintenance skills..

Another tenant management association in Kenilworth Courts Washington, D.C., has achieved dramatic cost reductions by training John- C. Weicher, Housing (Washington, D.C tute, 1980 p. 59.

American Enterprise Insti9 its own tenants in management and maintenance skil ls. A pre liminary study by the American Enterprise Institute's Neighbor hood Revitalization Project found that within.one year of the 1982 turnover to tenant management, administrative costs were cut by 63 percent, and maintenance (the major outlay) by 2 6 percent In addition, rental income was increased significantly, thanks to improved collection and reduced vacancy rates, such that the project began to run a healthy operating surplus.

Success as a tenant management asssociation could be a sensible prere quisite to apply to a group of public housing tenants wishing to purchase as a cooperative. An alternative requirement would be the creation of a private Mutual Housing Association, as that suggested in Patterson, New Jersey, to provide management assista n ce and training to achieve operating cost reductions. The.tenants would be members of this associa tion, which could foster cooperative or any other suitable form of tenant ownership. Another equity-building approach would be for the tenants to enter into a lease-purchase agreement operating subsidy would then be capped, and savings achieved by the tenants would be accumulated as equity shares until the full purchase could be accomplished, whereupon title would be trans ferred The The savings achievable th r ough tenant management is critical both to the success of any ownership plan and to the number .of tenants that could hope to utilize it. Most studies of the potential for ownership among public housing tenants suggest that it is very small. But these cal c ulations ignore the substantial reductions in cost that can be achieved--if tenants have an incentive--and thus grossly underestimate the possibilities of ownership A PUBLIC HOUSING HOMEOWNERSHIP PROGRAM The Administration, utilizing existing law and with the agreement and cooperation of communities and PHAs, should experi ment with a homeowner program for public housing tenants.

President should make it clear that the objective is not to raise income but to promote ownership in poor communities. Special b uildings,for the elderly or the handicapped should be excluded from the program, so that the number of such units available for rent would not be reduced The In addition, Congress should enact a !'Public Tenants Right to Buy Program." The measure should g i ve groups of tenants the right to be included in the homeownership program, even if the local PHA opposes ownership. Such a group of tenants would apply directly to the Secretary of HUD. If eligible, according to the criteria below, HUD would set in motio n the ownership process and the PHA would be required to provide the resident association with a mortgage according to HUD rules. Legislation should also be enacted to expand the housing voucher program so that tenants 10 unable to buy a share of a co-op,. or other ownership vehicle such as lease-purchase, could continue as renters.

Eligibility The program would center generally on purchases by success ful tenant management associations. As the tenant management associations or mutual housing associations im proved tenant skills and reduced operating costs, savings to the PHA would be placed into an escrow account toward the purchase price, or as the equity element of a lease-purchase agreement. The purchase process would begin when this transitional arrangem ent reduced running costs sufficiently'for the tenants to have a reasonable chance of meeting the costs of ownership.

To be eligible for membership in the purchasing organizations tenant-buyers should have been good tenants in the specific building for at least one year and good public housing tenants for at least three years. This would help assure stable buyers of good character. Tenants unable to meet this criterion would not be permitted to purchase.

Discount and Resale An eligible association, comprised of eligible tenants would be allowed to purchase the building at 30 percent of the assessed market value. If a co-o p member were to sell his share within the one year, his portion of the entire 70 percent discount would be repayable to the PHA. This repayable portion would fall by 10 percent annual segments (of the initial market price) until, after seven years the me m ber would be free to keep all resale proceeds. The prospect of gain should be sufficient to establish the notion of equity and so offset the lack of a down payment No down payment would be required F inanc ina Eligible tenant management associations accep t ed into the program would have the right to a mortgage from the PHA under the legislation proposed. Since the PHA would be the owner of the building,in.the first place, this would involve no transfer of cash, only the replacement of rent payments to the P H A with mortgage payments. The interest rate on the mortgage would be adjusted to reflect the marginal tax benefits available to typical first-time homebuyers. I Tenant associations could purchase outright or purchase ac cording to a shared-equity plan. Wi t h either method of purchase, the housing authority would continue to operate the units occupied by tenants refusing or ineligible to join the ownership associa tions. Existing tenants, in other words, would not be evicted. Eligible tenants could, however, buy into the purchase plan at any time. If some of the tenants continued to remain renters supported by the government, that portion of the building would 11 I be considered a set of units owned by the PHA--thus the PHA.would not.be a shareholder in the c o operative. However, maintenance services to these units could be provided by the tenant ownership association under contract. An alternative might be for the federal government to guarantee to the'association owning the building that vouchers would be pro v ided to meet the costs of units still occupied by tenants could, in effect, buy a portion of the unit (minimum 50 percent and continue to pay rent to the PHA on the remainder. The asso ciation could add to its ownership in increments, as finances permitte d . Payment could be made in-kind (such as maintenance work) to obtain additional ownership shares. An alternative approach would be a lease-purchase arrangement, where tenants could build up equity credits, but would not take title until they could finance the'entire sale price of the building Under a shared-equity arrangement, the tenant association Resale The part-owner could sell his.unit in the normal way, subject to the provisions regarding discount repayment, but he would have to return the original c o st of the rented portion of his unit to the PHA. Alternatively, he could.sel1 his share to an eligible buyer willing-to take on his shared equity responsibilities. The tenant would have the right to a mortgage from the PHA, with a limit based on income an d a below-market interest rate, offsetting the reduced tax relief available to low-income tenants CONCLUSION The program .suggested is not a proposal to sell off public housing to developers or suburban homesteaders. It is a device to provide ownership opp o rtunities for existing tenants of public housing projects If successful, it could transform some of the most troublesome communities in the nation's urban areas. It draws on the known successes of tenant management associations and that powerful ingredien t of commitment to neighborhood ownership. Turning public housing tenants into homeowners in this way would utilize the strengths and ownership dreams of residents themselves to help overcome the debilitating problem of America's inner cities.

Stuart M. Butler Director of Domestic Policy Studies