IHT Affordability Covenants Explained
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 IHT’s invested subsidy and ensure that over time the properties stay affordable to year-round working households on Mount Desert Island. However, we also want our clients as homeowners to earn some return on their investment in the property when they sell it. To ensure this we have established the following:
IHT holds a Right of First Refusal to purchase the property at the Maximum Resale Price (MRP). If IHT declines to exercise its Right of First Refusal, then the homeowner may sell the property to another IHT-qualified applicant at or below the MRP.
The MRP is a formula that links the increase in value of the property to the change in median household wages over the period of time that the selling homeowner 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. For instance, a $150,000 original purchase price would be increased to $180,000. In addition, any improvements over and above normal maintenance, as approved by IHT, would see an appreciation 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.
The figure derived through the calculations described above is then balanced against a Maximum Affordable Cost (MAC). The MAC is a yardstick used to ensure that the property is not “improved” or does not appreciate out of affordability. The MAC is determined by multiplying the prevailing median household income at the time of resale by 1.6 (160%) and then multiplying that figure by 2.5. (Lenders often use 2.5 times a potential buyer’s annual household income as a multiplier to estimate how much a borrower could qualify to borrow to buy a residential property.) 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 multiplied by 1.6, giving us $99,200; then that number would be multiplied by 2.5 for a MAC of $248,000. 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 #2, 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.
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.
Does the Maximum Resale Price formula work? Yes. In seven re-sales since 2011, all have sold at or below the Maximum Resale Price as calculated in the formula described above.