Keeping Housing Affordable

Keeping Housing Affordable

Ken DeLeon and Michael RepkaAugust 9, 2013
Palo Alto Daily Post

 

Potential buyers looking to purchase a home in the Silicon Valley know that it is a very hot market with exceptionally high prices. In an attempt to combat this phenomenon, many local communities, including Palo Alto and Menlo Park, have taken steps to provide below market rate housing units to local residents.

Although the programs vary from town to town, a developer that builds five or more residential units in Palo Alto is generally required to offer at least 15% of those units for sale below market value. The initial sale price is set by the city and is usually far below what the same unit would have sold for if it were unrestricted. 

The general objective of this program is to keep a certain number of housing units affordable for low and moderate-income individuals. This enables some people to purchase property in an area they would not be able to afford otherwise. In order to further these goals, the city places restrictions on the owner’s ability to sell or rent these BMR properties.  Several of these restrictions are discussed below.

Participation Limits

The most notable restriction on participating in the BMR program is the participant’s income —based on the number of people in the household -- must be below a certain level. Again, using Palo Alto as an example, the income limits for a family of four seeking to purchase a unit priced at over $150,000 is currently $105,000 per year. In certain circumstances, this income limit may be increased to $126,000 for a family of four.

In addition to the income limitations, there are also limitations on the value of the potential purchaser’s total assets. This limitation is generally 50% of the sale price of the home when the applicant is under 62 years of age, and 200% of the sale price of the home when the applicant is over 62 years of age.

BMR Waiting List

If an applicant qualifies for the BMR program, the first step is to put his or her name on a waiting list. The city will generally update this list once a year in May or June. Each year, the applicant is required to pay a nominal renewal fee and submit an updated application. Once a unit becomes available, the city will contact applicants on the waiting list and work their way down the list until they find an applicant that elects to move forward in purchasing the unit.

Owner Occupancy

Given the stated goal of the BMR program— making housing more affordable for low and moderate income individuals— BMR units generally may not be rented or leased out to other individuals without permission. While this does limit flexibility for the owner, it is consistent with the overarching goal of keeping housing affordable for owner occupants.

Resale and Appreciation of BMR Properties

The main goal of the BMR program would be thwarted if the buyer were able to turn around and sell the home at fair market value. Therefore, virtually all BMR programs impose significant limitations on the owner’s ability to sell. Most notably, most programs require BMR units to be sold to other purchasers in the BMR program. The resale price is established via a formula that significantly restricts the appreciation potential of BMR properties compared to unrestricted properties.

Administrative Challenges

While the programs’ goals are laudable, there is always the possibility of administrative mistakes that can prove quite costly.  Menlo Park recently concluded lengthy litigation related to one particular BMR unit. In this case, the occupants of the BMR unit borrowed money pledging that the unit had collateral as if it were worth as much as the units that did not have BMR restrictions. When the owners defaulted on the loans, the lenders had took action to foreclose. Unfortunately, the restrictions that would have precluded the home owner from borrowing such large amounts against the property were not properly recorded.   

Menlo Park ultimately reached a settlement whereby it reacquired ownership of the property for $400,000 despite the fact that the property’s value, based on the BMR restrictions, was less than $300,000. While this was a very expensive undertaking for the City, the City deemed it necessary to keep the unit as a BMR property.

For homeowners that qualify, the BMR program may provide an excellent opportunity to purchase property at a reasonable price. Many local realtors will be able to provide additional information about the program and get you the information necessary to get your name on the waiting list if you are interested in purchasing one of these properties.

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