Ground Leasing Without Tears

Editor’s note: There are two major legal mechanisms out there for making a privately owned housing unit permanently affordable: (1) a stewarding organization can keep ownership of the land and rent it to the owner of the building on it through a ground lease that includes resale rules, or (2) a deed covenant can be placed on the property spelling out resale price restrictions. Ground leases have been the traditional model for community land trusts, while deed covenants have been the usual approach for inclusionary housing programs. Lately, however, it seems like there’s a rising chorus calling for all permanently affordable programs to just use deed covenants. In this essay, John Davis argues forcefully that permanently affordable housing advocates should be wary of that trend.

Ground Leasing Without Tears

Doing homeownership with a ground lease is “just too hard,” goes the tiresome refrain. It is “so much easier” using a deed covenant to ensure the lasting affordability of resale-restricted, owner-occupied homes that private donations, public subsidies, or public powers have made possible.

There are community development corporations that embrace long-term affordability for the very first time, but choose deed covenants because they are “less complicated” than ground leases and homes are “easier to sell” if land accompanies the deal. There are cities that enact inclusionary zoning and then attach covenants on the affordably priced homes extracted from private developers because a “self-enforcing” restriction is believed to impose fewer administrative burdens on municipal staff. There are even some community land trusts that have reluctantly abandoned ground leasing in favor of covenants because public funders “don’t understand ground leases” or private lenders “won’t finance them,” the former preferring the kind of liens they have always used and the latter preferring any mechanism that allows them to seize both building and land if a mortgage goes bad.

These local nonprofits and municipalities have been joined by a chorus of national organizations that sing the praises of permanent affordability as a preferred policy in deeply subsidized homeownership programs, but preach the practical and moral equivalency of deed covenants and ground leases. From their perspective, “it doesn’t really matter” which contractual mechanism is used, as long as subsidies are retained and affordability is preserved.

So many tears over ground leasing. So many voices raised in agreement that the same objectives can be achieved just as effectively—and much more easily—through deed covenants. But is that actually true? Do they really achieve the same things? And is easier necessarily a good thing? The equivalency crowd certainly thinks so. I do not.

All this whining about ground leases puts me in mind of a couple of scenes from one of my favorite baseball movies, “A League of Their Own.” Near the film’s end, Dottie Hinson, the team’s star catcher tries tearfully to explain to her crusty manager, Jimmy Dugan, why she is leaving the team:

Jimmy Dugan: “I’m in no position to tell anyone how to live. But sneaking out like this, quitting, you’ll regret it for the rest of your life. Baseball is what gets inside you. It’s what lights you up, you can’t deny that.”

Dottie Hinson: “It just got too hard.”

Jimmy Dugan: “It’s supposed to be hard. If it wasn’t hard, everyone would do it.”

His late-inning impatience with Dottie’s lament doesn’t come as much of a surprise to the movie’s viewers, because he has previously signaled how he is likely to react to anyone complaining about the game’s demands. In an earlier scene, he is amazed to see that his foul-mouthed criticism of a bone-headed play has caused one of his female players to break down in wounded sobs. Peering incredulously at his weeping player, he sputters in exasperation, “There’s no crying in baseball!”

Seeing so many of my colleagues, whose talents and values I admire, shedding copious tears over the difficulties of developing and marketing resale-restricted homes on leased land threatens to bring out my inner-Dugan. I struggle to tamp down an uncharitable urge to growl in disbelief, “There’s no crying in affordable housing!” Of course ground leasing is hard. It’s supposed to be hard. If it wasn’t hard, everyone would do it. The market does easy. Government does easy. Why should we?

In Praise of Difficulty
In the past, programs using ground leases nearly always required more of a homeowner and demanded more of a steward—over a longer period of time—than programs using deed covenants. But that’s been changing; the latter have been catching up. No longer can comparisons of the two mechanisms be based primarily on the content of the contracts or the commitment to stewardship.

I’m willing to stipulate, therefore, that deed covenants and ground leases can be crafted to contain the same terms and conditions. Resale-restricted homes managed under either mechanism can be overseen by the same stewardship regime. Homeownership programs using either mechanism can be made to perform in similar ways.

That still doesn’t mean that deed covenants are “just as good” as ground leases. I have worked with both for a very long time, observing their performance at the hands of numerous nonprofit organizations and public agencies. Both mechanisms represent a marked improvement over the days when nearly every homeownership assistance program allowed heavily subsidized homes to shed their hard-won affordability at first resale.

Compared to what used to happen, deed covenants are quite good. Ground leases are better. They are in a league of their own. They are harder to do, but they have legal, operational, economic, political, and moral advantages that cannot be beat. The extra effort is worth it.

Durable enforcement. In many states, the strongest argument for the superiority of ground leasing is that this mechanism is better able to withstand legal challenge. Without delving into arcane doctrines like the rule against perpetuity or the rule against unreasonable restraint on alienation, suffice it to say that long-lasting restrictions on the use and resale of privately owned homes are generally considered more defensible and enforceable when the contract imposing those restrictions has an end date, however remote, and when the party imposing those restrictions has a proximate interest in the restricted homes. Ground leasing receives a passing grade on these tests, while perpetual covenants that “run with the land” do not, except in a handful of states where long-lasting “affordability covenants” are sanctioned by statute. Even in those states, however, the judicial path to correcting violations of covenants can be murky, while the enforcement of leases is both clear and certain.

Effective stewardship. The stewardship regimes for deed covenants and ground leases can look virtually the same, but that doesn’t mean they will actually perform the same. Stewards that own the land beneath resale-restricted housing are more likely to know when their homeowners have problems. They are more likely to act to keep those problems from becoming worse. They are more likely to prevail in negotiations with private lenders to prevent the loss of lands and buildings when intervention fails. These are major league advantages that give programs using ground leases an operational edge over programs that use deed covenants instead.

Equitable development. There are economic benefits from ground leasing that are less available to households, organizations, and communities when deed covenants are the mechanism of choice. The price that a low-income homebuyer must pay for a home on leased land is likely to be lower than for a comparable home with land included in the deal. The equity that low-income homeowners have in their homes is more likely to be protected against loss when a nonprofit steward owns the underlying land. A nonprofit organization that is both the owner and lessor of land has access to a stream of revenue and has assets on its balance sheet that an organization using deed covenants does not. An organization owning land throughout a neighborhood, leasing it out for a variety of residential, commercial, agricultural, and recreational purposes, has an influence that extends beyond its own holdings. It can bend the arc of a community’s development toward justice, mitigating market pressures that tend to displace lower-income people and helping to ensure that the benefits and burdens of public investment are more equitably shared.

Community empowerment. Ground leasing forces a nonprofit steward to take account of its beneficiaries and neighbors in ways that deed covenants do not, often to the point of including them in governing the organization or in building a broad-based constituency to better defend the interests of its leaseholders. That is not say that all nonprofits doing ground leasing are doing a great job of homeowner engagement and community organizing, nor that all nonprofits using deed covenants are doing a poor job. It is to say that ground leasing introduces a different political dynamic, tugging a nonprofit organization toward sharing, building, and wielding power on behalf of the people it houses and the community it serves.

Ethical ownership. For hundreds of years and in dozens of countries, people have been creating planned communities, constructing affordable housing, and founding productive enterprises on leased land. Communal forms of land tenure have been preferred not because they are necessarily the most expedient way to get things done, but because they have been widely considered the most ethical way to do them. This moral justification for ground leasing has three overlapping strands. The first asserts it is wrong to turn land and other natural re-sources into private property. The second asserts it is wrong to own more land than one personally needs. The third asserts it is wrong to allow gains in the value of land created by an entire community to be captured by a fortunate few. Ground leasing has long been seen as the virtuous answer to all three.

The False Equivalency of Deed Covenants and Ground Leases
These are bold claims for the superiority of ground leasing, without much argument or evidence to back them up. I don’t really expect a brief blog to be convincing. The best I can hope for is simply to prick the complacency of the equivalency crowd and perhaps to give pause to a few practitioners who may be tempted to decide too quickly that covenants are the right way to go because they are “easier.”

First of all, that may not be true. If the use and resale of owner-occupied homes are restricted to the same degree and if oversight of these restrictions is conducted with the same diligence, the administrative burden imposed by deed covenants or ground leases should be practically the same. Practitioners who are drawn to covenants out of a starry-eyed supposition that fewer demands are going to be placed on their organizations are taking their stewardship responsibilities far too lightly.

I am willing admit, on the other hand, that ground leasing usually is harder to do and, in some communities, may be impossible to do. State laws, market conditions, or the intransigence of private lenders or public funders can make deed covenants a necessity, even when a nonprofit organization might prefer to use ground leases. Practitioners who choose covenants out of a clear-eyed assessment of what can and cannot be done to provide affordable homes for people in need cannot be faulted for allowing mission to trump mechanism.

Too often, however, ground leasing is called impossible when it is merely difficult. Anything that runs against the grain of entrenched ideologies and dominant interests usually is. Ground leasing does that in a major way. It calls into question popular conceptions of homeownership and private property. It demands a rethinking of protocols that public officials have followed by rote for too many years when funding and regulating affordable housing. It challenges the prerogatives of speculators, realtors, and bankers in ways that covenants do not. Of course, ground leasing is hard.

It is also better, especially when used by a nonprofit organization to preserve the affordability, quality, and security of owner-occupied housing (and maybe other buildings and land uses) on behalf of a place-based community of the disadvantaged and dispossessed. Enforcement is more durable. Stewardship is more effective. Development is more equitable. Empowerment is more probable. Ownership is more ethical.

To my mind, that is how the game of affordable housing and community development ought to be played. But it’s not a game for the faint of heart. Ground leasing demands a toughness and tenacity that deed covenants do not. It requires extra effort and greater skill. It is harder to do. So what? Playing at a higher level is supposed to be hard. That’s what it means to be a pro. You hunker down, suck it up, and keep your eye on the ball, making excellence look easy, day after day. Spitting optional. No tears allowed.

John Emmeus Davis
John Emmeus Davis is a partner and co-founder of Burlington Associates in Community Development, a national consulting cooperative specializing in the development of policies and programs promoting permanently affordable, owner-occupied housing. He was the housing director for Burlington, Vermont, in the mayoral administrations of Bernie Sanders and Peter Clavelle. Davis has taught housing policy and neighborhood planning at Tufts University, New Hampshire College, the University of Vermont, and the Massachusetts Institute of Technology.

4 COMMENTS

  1. Well said, John! Financing for CLT homebuyers has become particularly onerous since FHA has no approved ground lease rider for low income homebuyers, the way Fannie Mae did. The robust CLT movement in Florida has had to start over by engaging lenders willing to portfolio loans. The message about the importance of community land trusts, so eloquently set forth in your article, needs to be understood and acted upon by HUD and other public finance agencies so that the hard work being done at the local level can be made a little less difficult.

  2. John, your insights at the confluence of experience, expertise and culture (Jimmy Dugan!) remain unmatched. Without disputing your argument, I would ask if you and readers are seeing what I have begun to see emerge for limited-equity cooperatives: Asset management businesses that provide ongoing stewardship services under contract with resident owners. More than property management, a value proposition is being articulated to hitch owner-like management capacity to valuable shared-equity assets. It strikes me that the tenants and others with long-term financial interests (eg public and private lenders with long term debt) may well have a shared interest here. And there is plenty of industry capacity in the LIHTC world of asset management to tap. My question is will it be sustainable without the actual equity/ownership position of land ownership?

    In any case, keep writing John!!!

  3. Great article John! A based-loaded home run!

    Adding my 2 cents – Trying to make things easy and painless is part of the American preoccupation – somehow we think that if our ideas are clever enough – we can simply throw money at any problem and it will be magically solved without having to ever think about it again. Similar to the concept of “throwing away the trash.” Just exactly where is “away?”

    Case in point – traditional affordable homeownership approaches measure “success” each time a new house is sold. HUD measures success the same way. A truer measure of success is how well the homeowner does… and if being a homeowner enhance the family’s success in life or not. Successful, productive lives are all about hard work, day after day. The best community development is the same.

  4. Practitioners who choose one legal mechanism over another make the decision after weighing a variety of complex factors. The Network’s goal is to help make sure that these decisions are made with the best possible information including the pros and cons of both choices, that practitioners have the tools and resources they need to execute the strongest possible legal mechanism and steward the resulting homes, and that the result is consistent with their program goals and desired outcomes. We are eager to further the conversation on this question and to learn from one another’s experience at our national conference< http://cltnetwork.org/2014-national-clt-conference-cleveland/> April 27-30 in Cleveland. Join us for an open discussion, “Ensuring Affordability: Deed Restrictions and Ground Leases”.

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