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If the Eighties were the "Decade of the Condo" for market rate housing, in the late nineties, the subsidized (affordable) condo is making a big impact on the Massachusetts affordable housing scene. There have been at least eight new subsidized condominium developments in the Boston area in the past year, with more surely on the way.
And subsidized condos are not just making a splash in Boston. In Washington, D.C., the two largest national organizations that have traditionally focused on housing cooperatives are also placing some of their attention on condominiums. The National Co-op Bank has recently started marketing products oriented to condominium associations, and the National Association of Housing Cooperatives recently featured an article entitled "The Feasibility of Co-op to Condo Conversion" in its annual Cooperative Housing Journal.
How They Work
Subsidized, or "limited equity" condominiums are in most ways identical to standard, market condominiums. They are a type of real estate ownership established by state statute. In Massachusetts, they are established by chapter 183A of Massachusetts General Laws. A piece of real estate is divided into multiple units, each separately purchasable, through a Master Deed.
The difference in a limited equity condominium is that the owner cannot sell the unit for a market price. Through a deed covenant, a regulatory agreement, a land trust or another mechanism, the owner is permitted to sell his/her unit for a price up to a maximum set by a formula. The formula may be simple, permitting a sale for the initial purchase price plus inflation, or may be complicated. The Just-a-Start condominiums consider capital improvements, payments against principal, and other considerations in their consideration of maximum sales price. In some cases, the limitations exist only for a limited time (40 years in some cases), after which the sales price is regulated only by the market.
The owner of a condominium (including limited equity) owns one of the units established by the Master Deed, and owns a share of all the common property (halls, stairs, basements) as well. The owner may also have exclusive use of some pieces of the development (a porch, for example, or a parking space) that are actually common property.
The condominium association owns nothing it merely operates the development for the benefit of all the owners. Therein lies one difficulty with affordable condominiums. Since the association owns nothing, it has a difficult time borrowing for major repairs. Cooperatives and resident-controlled rentals, on the other hand, own their developments as a corporation, and so the corporation can secure its loans with real estate.
Another benefit of co-ops that is not shared by condos is the ability of residents to choose their neighbors. Resident selection in a condo development is established by the sale of the unit, and that sale is something that neighbors have very little impact on. Some condo developments give a right of first refusal to purchase units to the condo association, but using that right requires that the associations somehow obtain the funds to purchase a unit.
These difficulties, however, in the minds of many developers, are outweighed by important other considerations.
The Advantages of Condos
Just-a-Start Corporation of Cambridge, for example, has recently developed 5 subsidized condominiums, with a total of about 40 units. According to Barbara Shaw of Just-a-Start, there are two primary reasons for developing affordable condominiums. "The first is financial. The subsidy required to develop an affordable rental unit is greater than the subsidy required for a homeownership unit." This is true both during development and during operation. Development subsidy is lower, because owners are able to support more debt through first-time-homebuyer programs. In addition, most subsidized condominiums serve households with higher income than typical in subsidized developments.
"Operating expenses in a homeownership development are also lower", Shaw points out. Maintenance costs are lower because owners maintain their own property, as opposed to requiring landlord intervention. Management costs are lower because homeownership management is easier: collections are easier, since debt, property taxes and often insurance are paid directly to the bank. Maintenance supervision is also easier because there is less maintenance.
Besides the lower costs of developing subsidized condominiums, Shaw reflects Just-a-Starts belief that "its good to have a mix of housing available to people of all incomes." Lower income households are often confined to renting housing, but "we definitely believe that homeownership should be available to people of low income, as well" says Shaw.
Statistics bear this out. According to a study by the Institute of Community Economics, over the course of a lifetime, lower income households typically pay more for housing than middle income households, who stabilize their costs through homeownership. Lower income households not only pay a higher percentage of their income, they actually pay more money for housing that is less attractive, out of budgets that are smaller.
Its not all Gravy
Not that subsidized condominiums are for every developer. No condo, including subsidized condos, can serve the same population as affordable rentals. Obtaining a condo mortgage requires a satisfactory credit history, which is often not possible for very low income households. In addition, not every household is prepared for the responsibilities associated with homeownership. Also there are some additional legal and architectual costs to the creation of a condominium that do not apply in rental developments.
The biggest difficulty, though, according to Shaw, is the ongoing organizational requirements of the condominium association. "It is more difficult to develop, or to live in a small condo project than a single family home or a rental project. The decision making structure requires more time. It is hard for people to bring forth the commitment to do it."
Developers, especially in a small condominium development, must plan on providing (either directly or through a third party), training for the new owners, and some degree of organizing to get the association off to a good start. Training and support for the owners is crucial", says Shaw.
Size of the Project
Size is a critical factor in choosing to develop a limited equity condominium. Like any resident-controlled development, time and energy is required of the residents to effectively operate the development. "You need some dynamic individuals", says Shaw, and you are more likely to get them in a development of a certain size than in a very small development." The floor for condominiums, however, may be a little lower than for other types of resident control, such as cooperatives.
ARCH typically advises against cooperative developments with fewer than 16 units, while condo developments may work well with as few as 8. As in all cases, a great deal depends on the specific owners. The number of decisions and actions required of a condo board, however, are fewer than in a co-op so a condo can get away with slightly less active leadership.
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1999 ARCH. All rights reserved.