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The upside of true shared ownership

4 min read

As Michael Milken discovered, one can rue forever giving a good idea the wrong name, for even if it does not sour the public, the wrong name sends the innovators chasing the wrong direction and solving the wrong problem. What we incorrectly call ‘shared ownership’ is nothing of the sort, and it’s time the affordable housing ecosystem began creating it because doing so will open up new vistas of opportunity.

Shared ownership involves an economic and legal sharing arrangement between two parties, an occupant household and a capital-providing investor who share actual ownership of the home (or flat) in some percentages, via a suitable legal vehicle (e.g. nominee or realty trust, partnership or LLC). Each party pays its proportionate ownership share of the mortgage, and the occupant household pays rent to the capital-providing investor for the portion of the home she doesn’t (yet) own. The occupant householder usually starts by owning a minority (e.g. 25 percent) and has a staircase series of options to buy additional fractional shares for stipulated formula prices, all the way up to 100 percent, when the shared ownership legal entity dissolves.

This mechanism gives the occupant household useful benefits unavailable to renters:

  • Status as an owner from inception.
  • Equity buildup from inception.
  • Controllable optionality over stepping up to becoming the sole owner.
  • The right to improve the property when, how and at what cost she sees fit.
  • The right to decide whether, when, how and how much to refinance or sell the property for.

The upside in true shared ownership is thus divided in ways quite different from other affordability-oriented funding mechanisms, such as:

  • Permanent affordable. Nobody owns any upside; it’s an enduring discount to the successive occupant households.
  • Permanent rental. Nobody owns ownership upside; landlord owns rental/regulated upside.
  • A limited-equity co-operative. Nobody owns the upside: it’s precluded by a private monopsony.

Although the householders are owners for tax purposes, in economic terms they are basically shareholder-renters with a capped rate of return akin to a regulated dividend.

  • Down payment assistance. Capital provider owns no upside; feels generous.
  • Second mortgage financing, even with payment deferral. Occupant owns the upside above a higher (rising) floor. Capital provider feels less generous, possibly ungenerous.

Beyond its direct impact, shared ownership offers indirect benefits to other stakeholders:

  • Aspirational households climb the staircase to homeownership at their own pace, as their incomes and assets rise, without being at risk of runaway market prices.
  • Employers acting as capital providers deploy their balance sheets and low cost of capital to recruit, retain and build loyalty in their rising generation of key workers.
  • Communities permitting or incentivizing it get more dwelling units built faster, in higher density, and with much less NIMBY resistance.
  • Elected officials endorsing it deliver headlines and ribbon-cuttings by mobilizing non-federal and usually non-cash resources (e.g. land and upzoning authority) that show leadership while those in Washington merely fulminate.

There’s also a pro-development twist. Several state supreme courts, including California and Colorado, have ruled unconstitutional local inclusionary zoning (IZ) ordinances that deliver rental have conversely upheld such ordinances if the IZ delivery is for ownership.

In fact, shared ownership’s IZ compatibility has been conclusively demonstrated in Britain, where the national IZ mandate of Section 106 is often fulfilled via shared-ownership homes, and where there is a diverse shared-ownership investment industry led by Sage Housing.

Here in America, shared ownership is a toddler industry featuring mainly Millennial-led/ startup firms funded either with Silicon Valley venture capital or program related investments (PRIs) from new-tycoon philanthropists. These are demand-side focused—money to buy, not incentives to boost supply—and unconnected to municipal-led IZ or workforce housing stimulus programs. This notwithstanding, the strong interest shown by Denver, San Diego, San Francisco, Austin and Honolulu suggests that IZ-based shared ownership is on the verge of moving into municipal experimentation.

The best can be the enemy of the good. In markets where too little housing is being produced, the top priority shouldn’t be the most affordable housing, but the most affordable housing of any stripe. Shared ownership, with its promise of new players, new resources, and most importantly new state and municipality delivery, should absolutely be part of the housing production strategy of every growing supply-inhibited American city.

David A. Smith is founder and CEO of the Affordable Housing Institute, a Boston-based global nonprofit consultancy that works around the world (60 countries so far) accelerating affordable housing impact via program design, entity development and financial product innovations. Write him at [email protected].