A Commentary: Community Land Trust: It's Time to Back a Proven Winner

Jeff Stone

Is the glass half-empty or half-full? It's the classic question that pits optimism against pessimism. As a community land trust developer of affordable housing, I see it as the quintessential metaphor for capitalism. Pour the contents into a smaller glass, and it is a full glass of water. Pour it into an even smaller glass, and your cup runneth over. Pour the same volume of water into a larger vessel, and it is a drop in the bucket. To someone who thirsts, these comparatives are a moot point. It's a glass of water, plain and simple.

Housing Solutions Inc., in Bloomington, Ind., is the only community land trust developer of affordable housing in the state. Our first home was completed almost 10 years ago. Our 50th will be completed this year.

With unequivocal success as purveyors of truly affordable, custom-built homes, why are we still the only game in Indiana? There are approximately 100 community land trusts nationwide. The concept is a proven winner and dates back to previous centuries. With a charge from the Department of Housing and Urban Development to boost home ownership opportunities for low- and moderate-income families, why are communities slow to take the lead?

A home buyer who takes this opportunity is also providing opportunity for future home buyers. Buying a land trust home is building and buying with a sense of social conscience. The nonprofit developer, together with the home buyer, is building something that is affordable to buy, affordable to own and that will be sold affordably one day to someone who needs a good home at a great price.

As each land trust home and neighborhood is built, an increasing stock of permanently affordable homes is created. For markets where real estate appreciates at breakneck speed, this is a model that is needed. Nonprofit community land trusts are stewards of the land, ensuring affordability over time.

Limited equity and the technicality of not owning the land under one's home are the unconventional hallmarks of land-trust home ownership. They are what are attractive to some and un-American to others.

The classic American dream of home ownership has evolved through the years. In its original form, it was having a piece of land, a place to call your own, free and clear...no one tellin' ya what to do.

The evolving American dream of home ownership represents a free-market mentality. In this dream, home ownership is a way to make gobs of money. Buy low. Sell high. Get the most you can as quickly as pos-sible. For these folks, the land trust glass is half-empty.

For a society where more is better, community land trusts are a niche market. For home buyers who embrace the concept, they are allowed into the game of home ownership through an unconventional theory that is imperceptible in its differences, except for the substantial savings. And they are no longer thirsty.

The acceptance of community land trusts as a viable, marketable alternative requires more than understanding from the consumer. Land trusts only work with governmental cooperation and strong partnerships with local lending institutions. Local governments must support the concept by assisting nonprofits with grant funds or by purchasing or developing areas dedicated for land-trust neighborhoods. And banks have to move off center. Conventional thinking alone is not thinking at all. It's safe. It's easy. But it is not innovative. And innovative thinking is not necessarily risky business.

Fannie Mae urges its lenders to purchase its land trust mortgage product because it means positive growth. And that's good business. Fannie Mae is taking the risk out of conservative underwriting criteria by backing this less conventional purchase model. And how risky is it, anyway? A "normal" mortgage covers the lot and house value. In case of default, the value is, presumably, in the entire package. The loan is collateralized by the house and land. In the land trust model, only the improvement—the home—is financed. There is a lesser value and, therefore, a lesser loan. The collateral is realized. The value of the lot is removed and owned by the nonprofit. It is outside of the mortgage structure. Different? Not really—just smaller.

There are a number of challenges with niche markets. There is NIMBY-ism...the "not in my backyard" cry of adjacent property owners. There is the basic fear of purchasing something that is so different. However, lending institutions that hide behind conventionality as conservatism exacerbate these inherent challenges in the marketplace. There is nothing more or less conservative in a home mortgage for traditional home purchasing than there is in a home mortgage for a land trust home. The collateral model is served in both cases.

Housing Solutions Inc. of Bloomington, Ind., builds houses in a variety of sizes and styles. They currently range in price from $70,00 to $119,000.


What happens if the nonprofit goes out of business? On the one hand, the answer is in protections written into the nonprofit's bylaws. Provisions are in place to ensure that the management and ownership, and therefore the survival of the concept, are passed along either to another nonprofit or, temporarily, to local government. On the other hand, a more flippant response is: What's the difference? The loan is not on the land. The mortgage is on the value of the improvement and is a contract with the home owner. The stewardship of the land is separate and does not enter into foreclosure concerns. The bank's interest is in the improvements only. Foreclosure (a word we all hate to say) would be with the consumer, as with any traditional purchase.

To entice lenders to the table, there is the further incentive of the Community Reinvestment Act (CRA). For doing the morally commendable act of lending to lesser economic demographics, lending institutions receive credit. Do the right thing out of a moral obligation to help your community, and you get more than an inner glow. It's the proverbial win-win situation.

Some small local banks have chosen to place in-house loans for land-trust mortgages in portfolios. It's a way to take small steps, minimizing risk. Some banks will limit these loans to a case-by-case basis. Others will commit to a spate of five or 10 loans. Some will forgive PMI or provide a percentage break. The scenarios are endless.

One of the most significant aspects of partnering with a local nonprofit community land trust is the economic development that it represents. Each home built, bought and sold represents local laborers put to work, local materials purchased, mortgage and insurance products written and sold, an increase in the local tax base, neighborhoods upgraded, real estate values appreciating and lives stabilized. This needed but under-attended market niche is an economic engine itself.

Thin profit margins are unattractive to for-profit developers; therefore, larger and more expensive homes drive market conditions and leave little choice for the working poor. In the hands of nonprofits, land trusts are a vital alternative for viable and eligible home buyers disenfranchised by an inflated, profit-driven housing market.

It has been well-established and documented that home ownership provides a stable environment for families. School-aged children who come from owner-occupied households have a better chance at success. And parents, given the opportunity to better themselves through home ownership, are relieved of some economic uncertainties by controlling more of their finances and their future. The benefits of equity have been well-known and accessible to the well-off, but have been largely kept from folks of more modest means.

Housing Solutions has been breaking the mold for what affordable housing looks like and feels like. By custom building each home, people with a little less are treated with dignity. Full rights and opportunities are available, and the process is as exciting as building your own dream home should be. The old model provided static plans. Buy this or don't.

By providing a real voice, grateful home buyers are vested in the process and even prouder of the choices they have made. By choosing a land trust home, there is the added pride of putting something into place for the future of the community and future generations. For everyone who has a hand in this—providing a glass of water to those who thirst—our cup runneth over.


Keep up with what’s new and noteworthy at the St. Louis Fed. Sign up now to have this free monthly e-newsletter emailed to you.

Subscription Options

Additional Fed Publications

Fed in Print: An index of the economic research conducted by the Fed.


2015 Federal Reserve System
Community Development
Research Conference