IHT Affordability Covenants
Island Housing Trust utilizes affordability covenants that are agreed to by the client in exchange for the subsidy invested in the residential properties purchased or constructed by its clients. These covenants protect that invested subsidy and ensure that over time the properties stay affordable to working households on Mount Desert Island. However, we also want our clients as homeowners to earn some return on their investment in the property if they should sell it. To ensure this, we do the following:
1. We hold a Right of First Refusal that requires the homeowner at the time of resale to first offer to sell the property to IHT at the Maximum Resale Price (MRP). If IHT declines to exercise its right of first refusal, then the homeowner may resell the property to another IHT-qualified applicant at or below the MRP.
2. The MRP is a formula that links the increase in value of the property to the change in median wages over the period of time that the selling party owns the property. For example, if median household wages for the State of Maine as determined by the U.S. Department of Housing and Urban Development’s Income Limits increases by 20% over the period of the seller’s ownership, the base purchase price of the property is marked up by that amount. Thus, a $150,000 original purchase price would be increased to $180,000. On top of that, we would similarly mark up any improvements over and above normal maintenance, for the period of time the improvements were put in place until time of resale. For example, if a homeowner invested $10,000 in improvements over a period of time in which median household income rose 10%, then that $10,000 would be marked up to $11,000 and added to the total resale price. In this combined example, the calculated maximum resale price would be $180,000 plus $11,000, or $191,000.
3. The figure derived through the calculations in number two above is then balanced against something we call the Maximum Affordable Cost (MAC). The MAC, which is a yardstick that is used to ensure that the property is not “improved” out of affordability, is arrived at by multiplying the prevailing median household income at the time of resale by 1.6 (160%) and then multiplying that figure by 2.5. For example, if the prevailing median household income for a family of four or fewer at time of resale is $62,000, that number would be first multiplied by 1.6 to give us $99,200, and then that number would be multiplied by 2.5 to give us $248,000. (2.5 times a potential buyer’s annual household income is a multiplier that lenders often employ to estimate how much a borrower could qualify to borrow to buy a residential property.) If the MAC is higher than the number derived from the calculation in 2 above, than the calculation in 2 is the Maximum Resale Price. If the MAC is lower than the calculation in number two, then the MAC is the Maximum Resale Price. In the example cited here (and in many cases), the Maximum Resale Price would be the calculation utilized.
4. The Maximum Resale Price is not the price the property is to be sold for, but the maximum amount that it can be offered for. The seller can sell the property for less than the Maximum Resale Price, but not more.
5. Does the Maximum Resale Price formula work? Yes. In four re-sales since 2011, all have sold at or below the Maximum Resale Price as calculated in the formula described in number 2 above.