| Resale Formulas
The resale formula contained in the Ground Lease defines the process for selling a CLT home, how eligible buyers are determined, what share of the equity accumulated may be retained by the seller, and how the resale price is to be established.
There are three main types of resale formulas, each with its strengths and weaknesses, which must be weighed by the individual CLT with consideration to local values and market conditions. The three types are the itemized formula, the appraisal-based formula and the indexed formula.
The itemized formula adjusts the resale price by adding or subtracting specific factors that are thought to increase or decrease the value of the home. These may include certain improvements differentiated from regular maintenance. This approach gives the homeowner equity for the owner's personal investment, although it also requires an assessment to be made of the value of improvements that could be very subjective. Itemized formulas may also include a set inflation factor, e.g. 1 ½% per year.
The appraisal-based formula provides for a certain percentage of market appreciation of the home, not the land, which is determined by market appraisals both at the time of purchase and at the time of resale. This might be difficult to obtain since it may be a complicated process to separate the value of the land from the improvements and there can be inconsistencies between different appraisers. Conversely, this formula is relatively easy to understand and does not require assessments of improvements made, detailed record keeping or any interference with the owner's privacy. It does entail cost for appraisals upon each purchase/resale.
The indexed formula adjusts the resale price according to an index such as the area median household income, Consumer Price Index, or local wage rates. This method is easy to understand and there is a reasonable expectation of gained equity but it does not take into consideration other factors affecting affordability, such as current interest rates, and may not reflect actual affordability in some markets.
A CLT might choose one type of resale formula over the other or a combination of two. It is not unusual for a CLT to identify the primary type of resale formula they will use, but stipulate that they may exercise another type if it would result in a more affordable sales price during times of unusual economic conditions. Establishment of a resale formula that is best aligned with a community’s values and unique circumstances is one of the most critical decisions a CLT needs to make as the ground lease is an enduring and legally-binding document with long term implications for the affordability of the CLT homes.
For an in-depth evaluation and comparison of the different types of resale formulas see:
http://www.burlingtonassociates.com/resources/
archives/resale_formulas/000322.html
This is a wonderful interactive tool for comparing the use of different resale formulas using costs and information specific to one’s own community.
“This general purpose educational tool was designed to help community leaders understand the relative performance of different limited equity resale formulas. So much of what sets one model apart from the other is dependant on the assumptions you make about interest rates, home price inflation and income growth.” by Rick Jacobus
For other resource materials about ground leases and resale formulas, pro & cons of the different types, and key decisions to be addressed in designing a resale formula for a particular setting, see: http://www.burlingtonassociates.com/resources/archives/resale_formulas/000123.html
http://www.burlingtonassociates.com/resources/archives/resale_formulas/index.html
http://www.burlingtonassociates.com/resources/archives/ground_leases/index.html
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