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Tuesday10/20/1511:15 – 12:45

Julie BrunnerOPAL CLT

DESIGNING & EVALUATING RESALE

FORMULAS

Agenda1. Basis for allocating

appreciation

2. Resale formula goals

3. Definitions

4. Types of formulas

INTRODUCTION TO RESALE FORMULAS

EQUITY & APPRECIATION

Equity = Value Less Debt Initially = down payment Increases as debt is retired Increases as value increases

Appreciation = Escalating Value

Homeowner investment in property

Community investment/factors

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Limits appreciation for subsidized HOStrive to allocate

appreciation “fairly”Homeowner investment =

homeownerPublic investment = public

Protect public investmentCreates stock of

affordable HO

RESALE RESTRICTED HOMEOWNERSHIP

BALANCE OF INTERESTS

Community

Individual

RESALE FORMULA GOALS

Permanent affordability

Fair return

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RESALE FORMULA CONSIDERATIONS

What is a “fair” return?

What is the condition of the housing stock?

Nothing’s perfectly fair!

OPERATIONAL GOALS IN A FORMULA

Ease of administration

Minimize disputes

Property taxes

On-going updates

FUNDER GOALS

Wealth creation

Recapture & reinvest

Guaranteed affordability

Compliance

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How affordable was the initial pricing?

Less affordable conservative formula

More affordable more generous

Ease of administration!

MORE CONSIDERATIONS…

Fixed Rate Formulas

Index FormulasCPIAMI

Appraisal Based Formulas

Hybrids + Capital Improvement Credits

RESALE FORMULA OPTIONS

FIXED RATE FORMULA

Base price + multiplier

Multiplier = fixed %

Can be designed to

increase with time

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FIXED RATE FORMULA: ASSUMPTIONS

$250,000 = Cost to develop$100,000 = Subsidy available$150,000 = Original Affordable Price (Base Price)Affordable to a HH of 4 @ 61% AMI

Down payment = Closing costs

$250,000 = Initial appraised value

FIXED RATE FORMULA: EXAMPLE

Base PriceX Fixed % Compounded Annually

= Formula Price

FIXED RATE FORMULA: EXAMPLE

$150,000 (Base price)X 1.5% Compounded Annually= $174,081 (Formula Price)

Affordable to 59% AMI- $9,000 (Closing costs to sell)- $122,013 (Payoff)

$43,068 (Cash to seller)

=150000*(1+0.015)^10

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FIXED RATE FORMULA: ADVANTAGES

Easy to understand/ administer

Calculate at any time

Steady increase in value

Controls affordability

FIXED RATE FORMULA: DISADVANTAGES

No distinction of HO/community investment

Same rate of return/time

Unrelated to market or inflation

Base Price + multiplier

Multiplier = % increase of

index

Commonly used indices

•AMI•CPI•Cap?

INDEXED FORMULAS

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INDEXED FORMULAS: ASSUMPTIONS

$250,000 = Cost to develop$100,000 = Subsidy available$150,000 = Original Affordable Price (Base Price)Affordable to a HH of 4 @ 61% AMI

Down payment = Closing costs$250,000 = Initial appraised value

INDEXED FORMULAS: EXAMPLE

Base Price

X 1 + % Change Index over time

= Formula Price

INDEXED FORMULAS: EXAMPLE

$150,000 (Base price)X 1.22 (22% increase in AMI)= $183,000 Formula Price

Affordable to 61% AMI- $9,000 (Closing costs to sell)- $122,013 (Payoff)

$51,987 (Cash to seller)

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INDEXED FORMULAS: ADVANTAGES

Allows continuous monitoring of price

Can be tied to AMI

Easy to understand

Easy to use

INDEXED FORMULAS: DISADVANTAGES

Ignores earned equity (improvements)

Possible greater than market-rate increases

Index may not reflect target incomes

APPRAISAL BASED FORMULA

Simple Compound Shared Equity Formulas

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SIMPLE APPRAISAL BASED FORMULA

Appraisals at purchase and resaleIncrease = % of increase in appraised value% increase smaller than compound

SIMPLE APPRAISAL BASED FORMULA

Appraisals at purchase and resaleIncrease = % of increase in appraised value% increase smaller than compound

APPRAISAL BASED FORMULA: ASSUMPTIONS

$250,000 = Cost to develop$100,000 = Subsidy available$150,000 = Original Affordable Price (or Base Price)Affordable to a HH of 4 @ 61% AMI

Down payment = Closing costs$250,000 = Initial appraised value

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SIMPLE APPRAISAL BASED FORMULA: EXAMPLE

Base Price

+ 25% (Change in value)

= Formula Price

SIMPLE APPRAISAL BASED FORMULA: EXAMPLE

$400,000 (Current appraisal)$250,000 (Original appraisal)$150,000 (Difference in appraisal)

X25%$37,500 (Appreciation)

+$150,000 (Base price)$187,500 Formula Price

Affordable to 62% AMI- $9,000 (Closing costs to sell)-$122,013 (Payoff)$56,487 (Cash to Seller)

SIMPLE APPRAISAL BASED FORMULA: ADVANTAGES

Easily explained

Easily administered

Disputes unlikely

Sharing of gainsIndividualCommunity

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SIMPLE APPRAISAL BASED FORMULA: DISADVANTAGES

Based on market value

What do you do with

your 75%

APPRAISALS!

Must have appraisal to

calculate

Multiple index formulas

Hybrid index formulas

The Lesser of…

VARIATIONS

When does it make sense?Age/condition of housing

stockRelationship to resale

formula?Appraisal based formulasConservative formula +

capital creditsDon’t forget Ease of

Administration!

CAPITAL IMPROVEMENTS

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NO right answer!

Simplicity WINS!

Sometimes needed.

Thoughtful process

New buyers only

AMENDING YOUR FORMULA

INDEXED OR APPRAISAL BASED?

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

OPAL BCLT

1.9%

6.0%

2.7%

3.3% 3.3%

2.5%

Resale Formula Comparison 1999-2005

Orcas Island Wa - Burlington Vermont

AMI

AMI

CPI

CPI

25% Appraisal

25% A

ppraisal

INDEXED OR APPRAISAL BASED?

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WHICH FORMULA? – HOT MARKET

$125,000

$140,000

$155,000

$170,000

$185,000

$200,000

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

Resale Formula Comparison

AppraisalBased (25%)

Index Based(AMI)

Fixed Rate(1.5%)

Year

$125,000

$150,000

$175,000

$200,000

$225,000

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

Resale Formula Comparison

Appraisal Based(25%)

Index Based(AMI)

Fixed Rate(1.5%)

Year

WHICH FORMULA? – MIXED MARKET

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

Appraisal Based(25%)

Index Based (AMI)

Fixed Rate (1.5%)

WHICH FORMULA? – WEAK MARKET

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Cornerstone Partnership Resale Formula Video Series(Goolge: Resale Formula Video Series)

Burlington Associates Resale Formula Calculatorhttp://www.burlingtonassociates.com/home-slides/resale-formula-comparison-tool

National CLT Network Technical Manual – Resale Formulashttp://cltnetwork.org/wp-content/uploads/2014/07/12-Resale-Formula-Design.pdf

RESOURCES

THANKS!