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Legal Structures for Equitable Housing – Community Housing Law

Legal Structures for Equitable Housing

The shared use, management, and financing of property can be accomplished through a range of different agreements and organizational relationships.  While it’s impossible to describe the full range of legal structures for the reallocation of rights, below are some common configurations that people have been developing, along with descriptions of situations in which they may be used. This page is divided into four subsections, outlined in the table of contents:

Leasing Models

Some people’s relationship with a property may be as renters, and a they must allocate rights among co-tenants and/or between the landlord and tenant.  Although renting generally confers a much smaller bundle of rights than ownership, this bundle can be enlarged by means of a lease that confers a significant number of rights and responsibilities to the tenant.  Here are some common scenarios of how to configure a relationship that is more than just a typical landlord/renter relationship:

Lease + Co-Tenants Agreements

When a group of tenants leases a property, they sometimes enter into a second agreement to govern their intra-tenant relationship, allocating rights and responsibilities among themselves.  This is common in cooperative houses where the tenants are all renters, but where they wish to create a resident-governed community.  Note that in some cases, one tenant may sign the lease and act as a master tenant, entering into separate sublease agreements with sub-tenants.  In some respects, this is administratively easier because the tenant group does not need to involve the landlord in removing or adding parties to the primary lease every time tenants come and go.  Larger tenant groups may also wish to form an entity, such as a cooperative corporation or LLC, to serve as the primary tenant.

Lease + Purchase Option

A lease combined with a purchase option agreement is what many people will refer to as a “lease-to-own” arrangement.  People that seek to establish a longer-term connection with land, but that are not yet able to finance a purchase may enter into an additional agreement with the landlord to allow the tenants the right to exercise an option to purchase the property within a period of time.  The option agreement details the price and terms under which the tenants can purchase the property if they choose to exercise the option.  In exchange for holding the right to purchase, tenants may pay an additional monthly or yearly fee to the landlord.  However, this fee and some portion of rent payments may later be credited toward the purchase price if the tenants choose to exercise the option. To protect the rights of the option holder, it is generally a good idea to record a Memorandum of Option to provide notice to potential buyers that someone holds an option. [8. However note that purchase options can sometimes be construed to trigger the “due on sale” clause of a mortgage. ]

Capital Lease

A capital lease is an agreement that generally confers most rights of ownership and that ultimately ends with the tenant taking title to the property. This is similar to a “Contract of Sale,” whereby a buyer makes payments to a seller over a period of time, and title transfers at the end of the period.  Under some laws and interpretations, a capital lease may be considered a change of ownership when the agreement is made. In the case of a lease that confers a significant number of rights, it may be necessary to record the lease to ensure that rights under the lease remain in place even if there is a change of property ownership.  The owners of a large house in Maryland have used a capital lease to transfer a significant number of rights to a limited liability company owned by a tenant group known as Maitri House.  Through the capital lease, the tenants have agreed to pay off the loan on the property by making payments to owners.  Please see this case study for more information.

Ground Lease

A ground lease is usually a long-term lease (30-99 years) that gives the tenant the right to occupy land and to make improvements, which are generally owned by the tenant.  Land trusts that hold title to property for the purpose of conservation or community development often use a long-term ground lease to give occupants the feeling of ownership.  At the same time, the terms of the ground lease set standards for how the property is used, developed, or transferred.  As with capital leases, ground leases create a significant and long-term relationship with land, and are often recorded.

Triple Net Lease

A triple net lease is a phrase more commonly used in commercial real estate, but is a concept that applies similarly in the residential context.  A triple net lease allocates extra responsibilities to a tenant, including the obligation to pay for property taxes, insurance, utilities, and maintenance costs of the property.  Such a lease generally also confers additional rights to improve the property, use it for flexible purposes, sublet it, and so on. It also generally comes with a longer lease term, which creates more of a sense of ownership by tenants.

Life Lease

A life lease creates a life-long relationship with land usually by giving tenants the right to live on a property for the duration of their lives.  A group of people I know formed an entity to purchase land that they currently use as a vacation spot, and they gave themselves life leases to create a more permanent relationship with the land.

Direct Ownership Models

When property is directly owned by people, there are a variety of agreements that can be used to share the bundle of rights and responsibilities.  Here are some common ways that agreements can reallocate the rights of ownership:

Co-Ownership Agreements with Shared Use

One of the most common agreements is a Tenancy in Common (TIC) Agreement to allocate the property rights and responsibilities among co-owners.  Most commonly, TIC Agreements are for two families jointly purchasing and living on a property with two units (often a house with a cottage or mother-in-law unit).  The default legal presumption with a co-owned property is that owners each own an equal share of the property and that everyone has use of all parts of the property. [9. Tenancies in common are described by Peter M. Carrozzo, in “Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships,” 85 Marquette Law Review 423, 427-428, as follows: “A tenancy in common is an estate held by two or more persons whereby each tenant has several separate interests in the land but an undivided possession of the entire estate. As a result of these several separate interests, and unlike the joint tenancy, there is no right of survivorship between or among tenants in common. When one tenant in common dies, his or her interest is administered as part of his or her estate and will either devise by will or descend by the laws of intestacy. The four unities are not necessary to create a tenancy in common. Tenants may acquire by different conveyances at different times and be in possession of unequal shares. (…) The sole unity required is that of possession.”]  TIC Agreements overcome this presumption by means of a contract delineating which parts of the property each owner may use, what each contributes to the purchase and ongoing costs, what each gets when they sell out, and so on. [10. Note that while tenancies in common require a unity of possession, courts will nevertheless enforce agreements to divide possession, giving each owner the right to exclusive occupancy of certain parts of the property.  See, for example, In re Whiting, 311 BR 539 (Bankr. Court, N.D. Cal. 2004), examining whether a bankruptcy trustee would be bound by a tenancy in common agreement made between co-owners.]Be aware, however, that if title is held as joint tenants (which requires shared possession and equal interests), it’s possible that an agreement dividing interests and possession into separate unequal shares could sever the joint tenancy, causing the title to transform into a tenancy in common, and removing the automatic right of one owner to take title to the other owner’s interest at death.  [11. Joint tenancies are described by Peter M. Carrozzo, in “Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships,” 85 Marquette Law Review 423, 425, as follows: “Inevitably, the existence of a joint tenancy requires determining whether the four unities-time, title, interest and possession-are present. For the four unities to be present, it is necessary for the joint tenants’ interests to accrue at the same moment (unity of time); by the same deed or conveyance (unity of title); each joint tenant must possess an equal undivided share of the entire estate (unity of possession); and their interests must be equal in length and quality (unity of interest). At common law, if one of the four unities was not present, a joint tenancy could not exist. An ineffectual attempt to create a joint tenancy results in the creation of a tenancy in common.”]  This remains a question for further research: what kinds of agreements can joint tenants make with regard to how they share or divide use, responsibilities, financing, or proceeds of a property?   At what point could division of rights result in a severance of the joint tenancy?  If and to the extent that this is somewhat legally uncertain, if people want to divide their interests in and possession of the property and create a right of survivorship for their co-owners, they may not be able to do so with a joint tenancy, but may instead need to use other estate planning tools to control the transfer of interests at death.

Co-Ownership Agreements without Shared Use

To financially support friends or family in purchasing properties, sometimes people become co-owners of a property and act primarily as passive investors.  For example, it is common for the non-resident to make the down-payment and have the resident make regular mortgage payments.  Often, the parties agree that the non-resident investor will receive a share of the appreciated value when they cash out.  In such an equity-sharing arrangement, a TIC Agreement would lay out the differing rights and responsibilities of residents and non-residents, and usually provides for an exit plan for the non-resident, including a plan for the possibility of property depreciation.

Ownership + Lease

Many property owners seek to bring in housemates/co-tenants in the spirit of building community and reducing costs, and many intentional communities are structured in this way: one person owns the property and enters into leases with people that will share property with her.  Generally, the terms of the lease will give the tenant the power to make certain decisions together with the owner, such as the decision to accept or reject new tenants.

Ownership + Co-Owner Purchase Option

Many property owners are in a particularly difficult place right now – their property may be “under water,” they have difficulty making payments, and there is no chance of a refinance.  The due-on-sale clause of mortgage loans makes it difficult to enter into a shared ownership arrangement to relieve the financial burden, so one solution we can help people with is creating a purchase option agreement for tenants. [12. Note, however, that a purchase option agreement could potentially be construed as a transfer to trigger the due on sale clause. ] If the tenant takes over some or all of the monthly mortgage payments, those payments will be credited to the tenant when they later exercise the option to buy in as a co-owner.  To compensate the tenant for buying into a property that is under water, the agreement could even provide that the tenant will take a larger share of ownership for a smaller financial contribution.

Ownership + Affordability Deed Restriction

Cities and nonprofit housing developers often sell affordable housing units subject to a deed restriction, which requires that the owner of the property re-sell the property at an affordable rate to an individual or family meeting a specified definition of low-income.  Deed restrictions generally must designate a person or entity, like a city or nonprofit, to enforce the restriction.

Ownership + Easement

Easements can be a very useful tool in re-allocating land rights and promoting shared use and shared management.  An easement gives an easement-holder the right to use someone else’s property in a certain way, or to prevent a certain type of use.  Here are four examples:

  1. Easements for Shared Spaces: Any existing suburban neighborhood, for example, could become a cohousing community by building or designating a building to be used as a common house by multiple neighbors, and by granting each neighbor an easement to access the common house.  The Temescal Creek cohousing community in Oakland did this.  Easements could also be used for the sharing of grey water systems, for example.  If one neighbor successfully builds a certified grey water recycling wetland in her yard, she could grant and record an easement to her adjacent neighbors to pipe grey wastewater into the wetland, and to use recycled water in irrigating their gardens.
  2. Easement for Public Spaces:  Easements can be used to preserve the public’s access to open space, trails, beach access, and so on.  Through a common law doctrine of dedication or related statutory framework, owners of land may dedicate land or a right-of-way to public use, or may, in some cases, be forced to do so through an implied doctrine of dedication, on principles similar to that of a prescriptive easement. [13. Richard E. Llewellyn, II, “The Common Law Doctrine of Implied Dedication and Its Effect on the California Coastline Property Owner: Gion v. City of Santa Cruz,” 4 Loy. L.A. L. Rev. 438 (1971).]
  3. Easements for Conservation: Conservation easements give the easement holder the right to prevent a property from being developed, mined, or used in a way that destroys the ecosystem or open space.  Conservation easements can be crafted in a variety of ways, since there are many ways to define what conservation looks like for different properties.  Usually conservation easements are held and enforced by conservation land trusts.  Property owners typically sell easements to trusts or donate them, which may entitle the owner to an income tax deduction or credit.
  4. Affordability Easements:  In the same way that conservation easements preserve natural ecosystems, it is conceivable to create an easement that preserves the affordability of land.  An “affordability easement” could be donated or sold to a nonprofit community land trust that would step in during a sale to ensure that the property is sold at a price determined by a formula set in the easement.  It is possible that such an “easement” would simply be treated like and called a “deed restriction.”  However, I like the idea of characterizing it as an easement similar to a conservation easement; if people could get income tax deductions and property tax deductions for the donation of an affordability easement on their property, many more people might voluntarily remove their home from the speculative market in this way.  Typical mortgage lenders might object to such an easement encumbering the property, but it seems feasible that smaller local banks could be persuaded to lend if they feel sufficiently protected under the arrangement.

Ownership + Lien 

Liens are essentially agreements that create an interest in property that secures the payment of loans or the performance of other obligations.  Mortgages and Deeds of Trust documents should be drafted down-to-earth and plain-English , which can be used when an individual or entity lends money to support the purchase or improvement of a property.  Instead of using legalese-filled deeds of trust that large banks hand to us, we will preferably prepare much more thoughtful documents that people understand and are enforceable, and which will thereby encourage community members to put their money into local real estate loans.

  1. Affordability Liens: Liens could be used to preserve the affordability of properties.  Such a lien could require that if the property is sold, a percentage of the appreciated value will be paid to a nonprofit organization that holds the lien, and the funds could be used to subsidize purchases by other low-income homebuyers.  This is similar to the concept of a shared-appreciation mortgage, where the lenders agree to a lower interest rate or waive the down-payment, in exchange for a share of the appreciated value when the property is sold.

Ownership + License 

Generally, when you stay in a hotel, camp on someone’s property, or use private land for recreational purposes, your right to use the land is considered a license, not a lease (since a lease usually gives exclusive possession to the lessee) or an easement (which is long-term or permanent).  Property owners can defray ownership costs by granting licenses for short term use of their homes or land.  This has even become a common practice with the help of websites like AirBNB, which connect travelers and hosts to enable “couch-surfing” for money.  The host is essentially granting a license to the guest.  As this practice grows and becomes a substantial “peer-to-peer” alternative to hotels, clear license agreements for short term property uses will become essential.  Licenses can also be used to grant short-term use of commercial spaces, such as for “pop-up” stores.

Ownership + Possibility of Reverter

Another way to control how a property is used is to grant ownership to a person or entity, but to require that title be returned to the original grantor if the land is used or not used in a certain way.  For example, Raines could execute a deed and gift property “to Such and Such Homeowners Association, as long as the property is used as a common house and recreational facility for the Association members until the year 2030.” [14. Note the use of a possibility of reverter may require inquiry into the applicability of the “rules against perpetuities,” which will not be explained here, since it was, after all, everyone’s favorite subject in law school.]  This clause would require that ownership of the property be returned to Raines in the event that the HOA ceases to provide the property as a common house.  This prevents the HOA from simply selling the property and using the proceeds for other purposes. [15. Note that courts might consider such a possibility of reverter to be an unreasonable restraint on alienation, discussed later in this chapter.  However, courts are more likely to uphold such a restraint when property is gifted, perhaps under a recognition that you get what you pay for!]

Ownership + Agreement for Common Management and Improvement

Even when neighbors share little or no property, they may still benefit from forming or joining an entity that is charged with making certain rules about how properties are used and that engages in neighborhood improvement projects.  This is essentially what a homeowners’ association (HOA) does.  Most HOAs are put into place when a neighborhood is built.  Even in the absence of an HOA, homeowners may still agree, after the fact, to form an HOA and legally bind their property and future owners of their property to take part.A somewhat more likely scenario is for neighbors to form a neighborhood association that residents may opt in and out of at will.  The association could provide certain benefits to members (such as buy-in to a neighborhood solar array or assistance with preservation of historical home features), and members may, in exchange, agree to engage or not engage in certain activities.  For example, neighbors may agree to refrain from using chemical fertilizers or from creating excessive smoke or other emissions, in order to care for the neighborhood air, water, and soil quality.If a city or state provided the legal means to do so, a neighborhood could also take initiative and vote to impose a tax on property owners, the proceeds of which would go to form and operate a “Community Benefit District” or a “Residential Improvement District” that engages in projects to enhance and improve the community. [16. A few legal writers have called for the creation of a legal framework allowing a certain number of neighbors (perhaps 2/3rd) within an area to vote to bring the neighborhood under the governance of such an association.  See Nelson, Robert H. “New Community Associations for Established Neighborhoods” Review of Policy Research, Volume 23, Number 6 (2006). See also, Liebmann, G. W. “Devolution of power to community and block associations.” The Urban Lawyer 25, 335, 382–383 (1993).]  This is a model similar to the much more common Business Improvement Districts, which are created when a certain percentage of businesses owners in a neighborhood vote to create such an entity. [17. See “Business Improvement Districts and Proposition 218: After Silicon Valley Taxpayers Association v. Santa Clara County Open Space Authority,” by Rebecca J. Olson & Lacey Keys, The Public Law Journal www.calbar.ca.gov/publiclaw, Vol.31.No. 4, Fall, 2008.  See also Pennsylvania Neighborhood Improvement District (NID) Act of 2000, P.L. 949, No. 130, Section 5.]

Ownership + Co-Ownership + Agreement for Common Management

In the case of a community where neighbors own their own units or homes and also share ownership of common spaces, the legal arrangement will be much like a condominium or planned unit development (PUD).  A large number of cohousing communities use such a legal arrangement: each neighbor is deeded ownership of parcel or unit, and granted a share of ownership of common areas.  Conditions, Covenants, and Restrictions (CC&Rs) are recorded along with each deed, requiring that owners of units be members of a community association that manages the commonly owned spaces.  Note that, in some cases, ownership of the common areas is actually deeded to the community association, rather than jointly owned by residents.

Ownership + Community-Supported Reverse Mortgages

While I do not know of an example of communities or individuals creating their own reverse mortgage programs, I believe that such an arrangement could be beneficial in many ways.  For example, a cohousing condo community could make regular payments to support elderly residents in exchange for a reverse mortgage. When the resident passes on, the community would receive the money back (plus interest, if they choose) from the sale proceeds of the condo unit. Such an arrangement could also give the community a purchase option or right of first refusal to buy the unit by simply paying the remaining balance of the condo value.  This could be a win for both the resident, who is financially supported to age in her home, and for the community, which could earn interest income, or, at the very least, can regain ownership and control over the unit.

Ownership Through an Entity

All of the scenarios in the above section involved people that own property directly.  However, in many cases, people will find it beneficial to form an entity to own property, particularly if it involves a large number of people or a large property.  The reasons for forming an entity to own and manage land may include:

  • Most entities limit the liability of individuals for property-related debts; this is especially important to individuals if there is a large loan on the property, or if there is a large number of people involved.
  • Ownership by an entity prevents title from transferring when people come and go; transfer of title is not only inconvenient, but it could also have implications for financing, property tax, and transfer taxes.
  • Entities usually have bylaws or operating agreements that create clear governance structures and procedures.
  • The formation of an entity imposes certain limitations on how it may operate and for what purposes, which can play an important role in preserving the founders’ vision for a property.
  • Forming an entity may attract other sources of financing for a property, such as individual investors that are more comfortable lending to a clearly structured entity governed by state law than to a group of individuals.
  • Ownership by an entity can provide a way to control who may rent or buy into the community.
  • Ownership by an entity can provide a structure for low income or affordable housing by limiting the ways in which the entity’s owners can extract equity from the property.

Here are some common arrangements by which individuals create an entity to own property:

Ownership by a Private Entity + Proprietary Leases

People seeking to develop their own housing opportunities often form LLCs, regular corporations, or cooperative corporations to purchase residential properties.  Usually, some or all of the members or shareholders of the entity are given the right to live on the property.  Unlike direct ownership of land, membership in an entity that owns land usually does not [18. However, I would be interested to know whether a landowning entity has ever been “disregarded” to create a presumption that members have a right to possession.] come with a presumption that the members have a right to occupy the land; otherwise Disney shareholders could claim a right to live in the Magic Kingdom.  Each member’s right to occupy the property needs to be specified by the entity.  This can sometimes be done by means of the entity’s operating agreement, [19. Many people in this situation would prefer not to think of themselves as “tenants,” and may also want to avoid the application of landlord/tenant law.  Note, however, that granting possession by means of an operating agreement, rather than a lease, probably still makes the resident a “tenant,” since the interest they hold is a leasehold interest.  For cases that have examined this issue, see Susskind v. 1136 Tenants Corp., 43 Misc. 2d 588 (NY City Civil Court 1964); Suarez v. Rivercross, 107 Misc. 2d 135 (NY Appellate Term 1st Dept. 1981); Matter of State Tax Comm. v. Shor, 84 Misc. 2d 161 (NY Sup. Ct. 1975); Hauptman v. 222 E 80 ST CORP, 100 Misc. 2d 153 (NY City Civil Court 1979); Frisch v. Bellmarc Mgt., 190 AD 2d 383 (NY Appellate Div., 1st Dept. 1993); Prosnitz v. Augustus, 175 Misc. 2d 582 (NY City Civil Court 1998); Ostrovsky v. Cartier Apartments Owners Corp., 247 AD 2d 598 (NY Appellate Div., 2nd Dept. 1998).] but this is more often accomplished by means of a separate lease document, often referred to as a “proprietary lease” or “occupancy agreement.”Entities that give their members/shareholders a right to live on the property may meet one or more legal definitions of “housing cooperative” or “stock cooperative.” [20. Note that the use of the word “cooperative” here does not necessarily imply or require that a cooperative corporation be the entity of choice, nor that the entity operate “on a cooperative basis” under Subchapter T of the Internal Revenue Code, nor that the cooperative be managed democratically, nor that the cooperative follow the Rochedale Principles for cooperatives.  The moral to the story is: the word “cooperative” has way too many meanings, and it’s no wonder that it’s hard to get a straight answer about what a cooperative is.]  This is our legal system’s way of recognizing that ownership of housing through an entity can, for many practical purposes, be made to look and feel a good deal like direct ownership, similar to condos.  People seeking to start an entity must decide whether it is beneficial to be classified as a cooperative and how to shape their organization and agreements to fall within or outside the definition.Being a cooperative has certain tax benefits.  Communities that meet the IRS definition of “cooperative housing corporation” [21. Internal Revenue Code Section 216(b) Definitions.  For purposes of this section – (1) Cooperative housing corporation The term ”cooperative housing corporation” means a corporation – (A) having one and only one class of stock outstanding, (B) each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such corporation, (C) no stockholder of which is entitled (either conditionally or unconditionally) to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation, and (D) meeting 1 or more of the following requirements for the taxable year in which the taxes and interest described in subsection (a) are paid or incurred: (i) 80 percent or more of the corporation’s gross income for such taxable year is derived from tenant-stockholders. (ii) At all times during such taxable year, 80 percent or more of the total square footage of the corporation’s property is used or available for use by the tenant-stockholders for residential purposes or purposes ancillary to such residential use. (iii) 90 percent or more of the expenditures of the corporation paid or incurred during such taxable year are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-stockholders] provide tenant-shareholders the opportunity to use many of the same tax deductions and credits that a typical homeowner would have, under the recognition that this is simply an alternative means to homeownership.   The IRS’s definition requires that all members/shareholders be entitled to occupy a dwelling on the property, and that 90 percent of the property be put to residential use or purposes ancillary to residential use.  [22. For a case interpreting the IRS definition of “tenant-stockholder” under IRC Section 216, see United States v. Evans, 375 F. 2d 730 (9th Cir. 1967), finding that a tenant’s membership a nonprofit corporation and life lease to a portion of the nonprofit’s property did not constitute “stock” under the IRS definition.]At the state level, the definition of cooperative has other purposes – usually to determine whether the community will be subject to the same regulations as a subdivision and common interest community.  For many resident-developed communities, this treatment is not ideal, since it presents burdensome legal hurdles and administrative hassles.  Meeting California’s definition of “stock cooperative” [23. Cal Civil Code 1351(m) “’Stock cooperative’ means a development in which a corporation is formed or availed of, primarily for the purpose of holding title to, either in fee simple or for a term of years, improved real property, and all or substantially all of the shareholders of the corporation receive a right of exclusive occupancy in a portion of the real property, title to which is held by the corporation. The owners’ interest in the corporation, whether evidenced by a share of stock, a certificate of membership, or otherwise, shall be deemed to be an interest in a common interest development and a real estate development for purposes of subdivision (f) of Section 25100 of the Corporations Code.”] requires that substantially all members/shareholders be entitled to live at the property. This allows for one or possibly more non-resident owners; but any significant number of non-resident owners will, therefore, bring the community outside the definition of “stock cooperative,” which some people actually prefer, if they want to avoid jumping through legal hoops normally applied to subdivisions.

Ownership by a Public Benefit Nonprofit + Leases

Nonprofit public benefit corporations [24. The actual name of the corporation type actually varies from state to state, but most states classify nonprofit corporations roughly in this manner: some are for public benefit and some are for the mutual benefit of members.] are the entities most often used to hold residential properties when the goal is to create some form of affordable housing, supportive housing, religious community, or housing for a group with distinct housing needs, such as students.  Being a nonprofit public benefit corporation comes with a key restraint: the profits and the assets of the corporation cannot be distributed to private individuals.  This is a critical control that removes individual incentives to buy, sell, develop, or extract resources from the land for profit-making purposes. Widespread ownership of land by public benefit nonprofit corporations could, therefore, significantly change the dynamics of the land market and reduce incentives to exploit or speculate on land.When most people use the phrase “land trust,” they are usually not referring to the type of trust that has a trustee and beneficiary; the phrase most often refers to a nonprofit public benefit corporation that owns land and/or easements, usually for the purpose of preserving ecosystems, agricultural land, or affordable housing in the long term.  Not all nonprofits that own land necessarily think of or refer to themselves as “trusts.” For example, many of the housing “cooperatives” occupied by University of California, Berkeley students are actually owned by the umbrella nonprofit, the Berkeley Student Cooperative.  Note that in most, but not all cases, a nonprofit public benefit corporation will likely seek tax exemption under Section 501(c)(3) or Section 501(c)(4) of the Internal Revenue Code.

Ownership by a Mutual Benefit Nonprofit + Proprietary Leases

For housing that does not necessarily serve a special charitable class of individuals or purpose, a mutual benefit nonprofit form is sometimes used to hold title to property.  Mutual benefit nonprofits provide a good, service, or benefit to a group of members, and homeowners associations generally form as mutual benefit corporations.  The ownership of land at Earthaven Ecovillage in North Carolina is by a mutual benefit type of nonprofit.  Mutual benefit nonprofit corporations are subject to an important constraint, which is that they may not distribute profits to individuals during the life of the organization; this prevents the corporation’s land from being developed or mined to serve profit-making goals of individuals.  At the same time, mutual benefit corporations are generally allowed to distribute assets to individuals upon dissolution, which means that profit-making goals are not completely prevented from driving the decisions of such an organization.

Ownership by a Trust

Owning land through a trust essentially means designating a trustee that will hold title to and manage land for the benefit or use of one or more beneficiaries.  The manner in which the property is to be used will be designated by the written instrument that creates the trust and usually directed by the beneficiaries.  Note that this is different from the “land trusts” described in section b.  Many people use trusts as estate planning tools, to reduce taxes, to protect from property-related liability, and/or to hide ownership of a property.  Except where estate planning has been involved, in my work as an attorney for shared housing communities, I have yet to find a situation where I thought that it would be ideal to use a trust, over an LLC or other entity, to hold title to land.  This remains an open question in my mind, and worth further research.

 Combinations of Entity Ownership and Direct Ownership

Ownership by Entity + Ground Lease + Individually-Owned Improvements

Community land trusts typically operate under this model: The nonprofit trust holds title to a piece of land and grants two things to each resident household: 1) a very long term lease (known as a “ground lease”) to occupy the land, and 2) ownership of certain improvements on that land (usually a housing unit).  This model gives residents the feel of ownership, while the land trust’s ownership of the underlying land gives the trust the power to set limitations on the use and transfer of the property.  In particular, the terms of the ground lease generally limit the residents’ ability to sell their unit at market rate, thereby preserving the affordability of the unit and creating what is usually called “limited equity housing.”  Limited equity housing models use a variety of formulas to determine what kind of return a resident may get when he/she sells the unit.  The formula is typically the purchase price multiplied by the change in the consumer price index or the change in area median income, plus the value of any improvements added by the resident.

Ownership of Units + Ownership of an Entity that Owns Common Areas

Many condominium communities grant individual owners an undivided interest in the common areas and grant management to a condo-owners association.  However, other condo communities actually give common area title and management to a condo-owners’ association.  The practical differences between the two methods are very few.  However, conceivably, the latter method of allocating ownership does more to protect individual owners from liability resulting from injuries in common areas.   Particularly in communities that make their common areas frequently open to the public or visitors, this arrangement may be ideal.

Footnotes:

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Legal Structures for Equitable Housing

The shared use, management, and financing of property can be accomplished through a range of different agreements and organizational relationships.  While it’s impossible to describe the full range of legal structures for the reallocation of rights, below are some common configurations that people have been developing, along with descriptions of situations in which they may be used. This page is divided into four subsections, outlined in the table of contents:

Leasing Models

Some people’s relationship with a property may be as renters, and a they must allocate rights among co-tenants and/or between the landlord and tenant.  Although renting generally confers a much smaller bundle of rights than ownership, this bundle can be enlarged by means of a lease that confers a significant number of rights and responsibilities to the tenant.  Here are some common scenarios of how to configure a relationship that is more than just a typical landlord/renter relationship:

Lease + Co-Tenants Agreements

When a group of tenants leases a property, they sometimes enter into a second agreement to govern their intra-tenant relationship, allocating rights and responsibilities among themselves.  This is common in cooperative houses where the tenants are all renters, but where they wish to create a resident-governed community.  Note that in some cases, one tenant may sign the lease and act as a master tenant, entering into separate sublease agreements with sub-tenants.  In some respects, this is administratively easier because the tenant group does not need to involve the landlord in removing or adding parties to the primary lease every time tenants come and go.  Larger tenant groups may also wish to form an entity, such as a cooperative corporation or LLC, to serve as the primary tenant.

Lease + Purchase Option

A lease combined with a purchase option agreement is what many people will refer to as a “lease-to-own” arrangement.  People that seek to establish a longer-term connection with land, but that are not yet able to finance a purchase may enter into an additional agreement with the landlord to allow the tenants the right to exercise an option to purchase the property within a period of time.  The option agreement details the price and terms under which the tenants can purchase the property if they choose to exercise the option.  In exchange for holding the right to purchase, tenants may pay an additional monthly or yearly fee to the landlord.  However, this fee and some portion of rent payments may later be credited toward the purchase price if the tenants choose to exercise the option. To protect the rights of the option holder, it is generally a good idea to record a Memorandum of Option to provide notice to potential buyers that someone holds an option. [8. However note that purchase options can sometimes be construed to trigger the “due on sale” clause of a mortgage. ]

Capital Lease

A capital lease is an agreement that generally confers most rights of ownership and that ultimately ends with the tenant taking title to the property. This is similar to a “Contract of Sale,” whereby a buyer makes payments to a seller over a period of time, and title transfers at the end of the period.  Under some laws and interpretations, a capital lease may be considered a change of ownership when the agreement is made. In the case of a lease that confers a significant number of rights, it may be necessary to record the lease to ensure that rights under the lease remain in place even if there is a change of property ownership.  The owners of a large house in Maryland have used a capital lease to transfer a significant number of rights to a limited liability company owned by a tenant group known as Maitri House.  Through the capital lease, the tenants have agreed to pay off the loan on the property by making payments to owners.  Please see this case study for more information.

Ground Lease

A ground lease is usually a long-term lease (30-99 years) that gives the tenant the right to occupy land and to make improvements, which are generally owned by the tenant.  Land trusts that hold title to property for the purpose of conservation or community development often use a long-term ground lease to give occupants the feeling of ownership.  At the same time, the terms of the ground lease set standards for how the property is used, developed, or transferred.  As with capital leases, ground leases create a significant and long-term relationship with land, and are often recorded.

Triple Net Lease

A triple net lease is a phrase more commonly used in commercial real estate, but is a concept that applies similarly in the residential context.  A triple net lease allocates extra responsibilities to a tenant, including the obligation to pay for property taxes, insurance, utilities, and maintenance costs of the property.  Such a lease generally also confers additional rights to improve the property, use it for flexible purposes, sublet it, and so on. It also generally comes with a longer lease term, which creates more of a sense of ownership by tenants.

Life Lease

A life lease creates a life-long relationship with land usually by giving tenants the right to live on a property for the duration of their lives.  A group of people I know formed an entity to purchase land that they currently use as a vacation spot, and they gave themselves life leases to create a more permanent relationship with the land.

Direct Ownership Models

When property is directly owned by people, there are a variety of agreements that can be used to share the bundle of rights and responsibilities.  Here are some common ways that agreements can reallocate the rights of ownership:

Co-Ownership Agreements with Shared Use

One of the most common agreements is a Tenancy in Common (TIC) Agreement to allocate the property rights and responsibilities among co-owners.  Most commonly, TIC Agreements are for two families jointly purchasing and living on a property with two units (often a house with a cottage or mother-in-law unit).  The default legal presumption with a co-owned property is that owners each own an equal share of the property and that everyone has use of all parts of the property. [9. Tenancies in common are described by Peter M. Carrozzo, in “Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships,” 85 Marquette Law Review 423, 427-428, as follows: “A tenancy in common is an estate held by two or more persons whereby each tenant has several separate interests in the land but an undivided possession of the entire estate. As a result of these several separate interests, and unlike the joint tenancy, there is no right of survivorship between or among tenants in common. When one tenant in common dies, his or her interest is administered as part of his or her estate and will either devise by will or descend by the laws of intestacy. The four unities are not necessary to create a tenancy in common. Tenants may acquire by different conveyances at different times and be in possession of unequal shares. (…) The sole unity required is that of possession.”]  TIC Agreements overcome this presumption by means of a contract delineating which parts of the property each owner may use, what each contributes to the purchase and ongoing costs, what each gets when they sell out, and so on. [10. Note that while tenancies in common require a unity of possession, courts will nevertheless enforce agreements to divide possession, giving each owner the right to exclusive occupancy of certain parts of the property.  See, for example, In re Whiting, 311 BR 539 (Bankr. Court, N.D. Cal. 2004), examining whether a bankruptcy trustee would be bound by a tenancy in common agreement made between co-owners.]Be aware, however, that if title is held as joint tenants (which requires shared possession and equal interests), it’s possible that an agreement dividing interests and possession into separate unequal shares could sever the joint tenancy, causing the title to transform into a tenancy in common, and removing the automatic right of one owner to take title to the other owner’s interest at death.  [11. Joint tenancies are described by Peter M. Carrozzo, in “Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships,” 85 Marquette Law Review 423, 425, as follows: “Inevitably, the existence of a joint tenancy requires determining whether the four unities-time, title, interest and possession-are present. For the four unities to be present, it is necessary for the joint tenants’ interests to accrue at the same moment (unity of time); by the same deed or conveyance (unity of title); each joint tenant must possess an equal undivided share of the entire estate (unity of possession); and their interests must be equal in length and quality (unity of interest). At common law, if one of the four unities was not present, a joint tenancy could not exist. An ineffectual attempt to create a joint tenancy results in the creation of a tenancy in common.”]  This remains a question for further research: what kinds of agreements can joint tenants make with regard to how they share or divide use, responsibilities, financing, or proceeds of a property?   At what point could division of rights result in a severance of the joint tenancy?  If and to the extent that this is somewhat legally uncertain, if people want to divide their interests in and possession of the property and create a right of survivorship for their co-owners, they may not be able to do so with a joint tenancy, but may instead need to use other estate planning tools to control the transfer of interests at death.

Co-Ownership Agreements without Shared Use

To financially support friends or family in purchasing properties, sometimes people become co-owners of a property and act primarily as passive investors.  For example, it is common for the non-resident to make the down-payment and have the resident make regular mortgage payments.  Often, the parties agree that the non-resident investor will receive a share of the appreciated value when they cash out.  In such an equity-sharing arrangement, a TIC Agreement would lay out the differing rights and responsibilities of residents and non-residents, and usually provides for an exit plan for the non-resident, including a plan for the possibility of property depreciation.

Ownership + Lease

Many property owners seek to bring in housemates/co-tenants in the spirit of building community and reducing costs, and many intentional communities are structured in this way: one person owns the property and enters into leases with people that will share property with her.  Generally, the terms of the lease will give the tenant the power to make certain decisions together with the owner, such as the decision to accept or reject new tenants.

Ownership + Co-Owner Purchase Option

Many property owners are in a particularly difficult place right now – their property may be “under water,” they have difficulty making payments, and there is no chance of a refinance.  The due-on-sale clause of mortgage loans makes it difficult to enter into a shared ownership arrangement to relieve the financial burden, so one solution we can help people with is creating a purchase option agreement for tenants. [12. Note, however, that a purchase option agreement could potentially be construed as a transfer to trigger the due on sale clause. ] If the tenant takes over some or all of the monthly mortgage payments, those payments will be credited to the tenant when they later exercise the option to buy in as a co-owner.  To compensate the tenant for buying into a property that is under water, the agreement could even provide that the tenant will take a larger share of ownership for a smaller financial contribution.

Ownership + Affordability Deed Restriction

Cities and nonprofit housing developers often sell affordable housing units subject to a deed restriction, which requires that the owner of the property re-sell the property at an affordable rate to an individual or family meeting a specified definition of low-income.  Deed restrictions generally must designate a person or entity, like a city or nonprofit, to enforce the restriction.

Ownership + Easement

Easements can be a very useful tool in re-allocating land rights and promoting shared use and shared management.  An easement gives an easement-holder the right to use someone else’s property in a certain way, or to prevent a certain type of use.  Here are four examples:

  1. Easements for Shared Spaces: Any existing suburban neighborhood, for example, could become a cohousing community by building or designating a building to be used as a common house by multiple neighbors, and by granting each neighbor an easement to access the common house.  The Temescal Creek cohousing community in Oakland did this.  Easements could also be used for the sharing of grey water systems, for example.  If one neighbor successfully builds a certified grey water recycling wetland in her yard, she could grant and record an easement to her adjacent neighbors to pipe grey wastewater into the wetland, and to use recycled water in irrigating their gardens.
  2. Easement for Public Spaces:  Easements can be used to preserve the public’s access to open space, trails, beach access, and so on.  Through a common law doctrine of dedication or related statutory framework, owners of land may dedicate land or a right-of-way to public use, or may, in some cases, be forced to do so through an implied doctrine of dedication, on principles similar to that of a prescriptive easement. [13. Richard E. Llewellyn, II, “The Common Law Doctrine of Implied Dedication and Its Effect on the California Coastline Property Owner: Gion v. City of Santa Cruz,” 4 Loy. L.A. L. Rev. 438 (1971).]
  3. Easements for Conservation: Conservation easements give the easement holder the right to prevent a property from being developed, mined, or used in a way that destroys the ecosystem or open space.  Conservation easements can be crafted in a variety of ways, since there are many ways to define what conservation looks like for different properties.  Usually conservation easements are held and enforced by conservation land trusts.  Property owners typically sell easements to trusts or donate them, which may entitle the owner to an income tax deduction or credit.
  4. Affordability Easements:  In the same way that conservation easements preserve natural ecosystems, it is conceivable to create an easement that preserves the affordability of land.  An “affordability easement” could be donated or sold to a nonprofit community land trust that would step in during a sale to ensure that the property is sold at a price determined by a formula set in the easement.  It is possible that such an “easement” would simply be treated like and called a “deed restriction.”  However, I like the idea of characterizing it as an easement similar to a conservation easement; if people could get income tax deductions and property tax deductions for the donation of an affordability easement on their property, many more people might voluntarily remove their home from the speculative market in this way.  Typical mortgage lenders might object to such an easement encumbering the property, but it seems feasible that smaller local banks could be persuaded to lend if they feel sufficiently protected under the arrangement.

Ownership + Lien 

Liens are essentially agreements that create an interest in property that secures the payment of loans or the performance of other obligations.  Mortgages and Deeds of Trust documents should be drafted down-to-earth and plain-English , which can be used when an individual or entity lends money to support the purchase or improvement of a property.  Instead of using legalese-filled deeds of trust that large banks hand to us, we will preferably prepare much more thoughtful documents that people understand and are enforceable, and which will thereby encourage community members to put their money into local real estate loans.

  1. Affordability Liens: Liens could be used to preserve the affordability of properties.  Such a lien could require that if the property is sold, a percentage of the appreciated value will be paid to a nonprofit organization that holds the lien, and the funds could be used to subsidize purchases by other low-income homebuyers.  This is similar to the concept of a shared-appreciation mortgage, where the lenders agree to a lower interest rate or waive the down-payment, in exchange for a share of the appreciated value when the property is sold.

Ownership + License 

Generally, when you stay in a hotel, camp on someone’s property, or use private land for recreational purposes, your right to use the land is considered a license, not a lease (since a lease usually gives exclusive possession to the lessee) or an easement (which is long-term or permanent).  Property owners can defray ownership costs by granting licenses for short term use of their homes or land.  This has even become a common practice with the help of websites like AirBNB, which connect travelers and hosts to enable “couch-surfing” for money.  The host is essentially granting a license to the guest.  As this practice grows and becomes a substantial “peer-to-peer” alternative to hotels, clear license agreements for short term property uses will become essential.  Licenses can also be used to grant short-term use of commercial spaces, such as for “pop-up” stores.

Ownership + Possibility of Reverter

Another way to control how a property is used is to grant ownership to a person or entity, but to require that title be returned to the original grantor if the land is used or not used in a certain way.  For example, Raines could execute a deed and gift property “to Such and Such Homeowners Association, as long as the property is used as a common house and recreational facility for the Association members until the year 2030.” [14. Note the use of a possibility of reverter may require inquiry into the applicability of the “rules against perpetuities,” which will not be explained here, since it was, after all, everyone’s favorite subject in law school.]  This clause would require that ownership of the property be returned to Raines in the event that the HOA ceases to provide the property as a common house.  This prevents the HOA from simply selling the property and using the proceeds for other purposes. [15. Note that courts might consider such a possibility of reverter to be an unreasonable restraint on alienation, discussed later in this chapter.  However, courts are more likely to uphold such a restraint when property is gifted, perhaps under a recognition that you get what you pay for!]

Ownership + Agreement for Common Management and Improvement

Even when neighbors share little or no property, they may still benefit from forming or joining an entity that is charged with making certain rules about how properties are used and that engages in neighborhood improvement projects.  This is essentially what a homeowners’ association (HOA) does.  Most HOAs are put into place when a neighborhood is built.  Even in the absence of an HOA, homeowners may still agree, after the fact, to form an HOA and legally bind their property and future owners of their property to take part.A somewhat more likely scenario is for neighbors to form a neighborhood association that residents may opt in and out of at will.  The association could provide certain benefits to members (such as buy-in to a neighborhood solar array or assistance with preservation of historical home features), and members may, in exchange, agree to engage or not engage in certain activities.  For example, neighbors may agree to refrain from using chemical fertilizers or from creating excessive smoke or other emissions, in order to care for the neighborhood air, water, and soil quality.If a city or state provided the legal means to do so, a neighborhood could also take initiative and vote to impose a tax on property owners, the proceeds of which would go to form and operate a “Community Benefit District” or a “Residential Improvement District” that engages in projects to enhance and improve the community. [16. A few legal writers have called for the creation of a legal framework allowing a certain number of neighbors (perhaps 2/3rd) within an area to vote to bring the neighborhood under the governance of such an association.  See Nelson, Robert H. “New Community Associations for Established Neighborhoods” Review of Policy Research, Volume 23, Number 6 (2006). See also, Liebmann, G. W. “Devolution of power to community and block associations.” The Urban Lawyer 25, 335, 382–383 (1993).]  This is a model similar to the much more common Business Improvement Districts, which are created when a certain percentage of businesses owners in a neighborhood vote to create such an entity. [17. See “Business Improvement Districts and Proposition 218: After Silicon Valley Taxpayers Association v. Santa Clara County Open Space Authority,” by Rebecca J. Olson & Lacey Keys, The Public Law Journal www.calbar.ca.gov/publiclaw, Vol.31.No. 4, Fall, 2008.  See also Pennsylvania Neighborhood Improvement District (NID) Act of 2000, P.L. 949, No. 130, Section 5.]

Ownership + Co-Ownership + Agreement for Common Management

In the case of a community where neighbors own their own units or homes and also share ownership of common spaces, the legal arrangement will be much like a condominium or planned unit development (PUD).  A large number of cohousing communities use such a legal arrangement: each neighbor is deeded ownership of parcel or unit, and granted a share of ownership of common areas.  Conditions, Covenants, and Restrictions (CC&Rs) are recorded along with each deed, requiring that owners of units be members of a community association that manages the commonly owned spaces.  Note that, in some cases, ownership of the common areas is actually deeded to the community association, rather than jointly owned by residents.

Ownership + Community-Supported Reverse Mortgages

While I do not know of an example of communities or individuals creating their own reverse mortgage programs, I believe that such an arrangement could be beneficial in many ways.  For example, a cohousing condo community could make regular payments to support elderly residents in exchange for a reverse mortgage. When the resident passes on, the community would receive the money back (plus interest, if they choose) from the sale proceeds of the condo unit. Such an arrangement could also give the community a purchase option or right of first refusal to buy the unit by simply paying the remaining balance of the condo value.  This could be a win for both the resident, who is financially supported to age in her home, and for the community, which could earn interest income, or, at the very least, can regain ownership and control over the unit.

Ownership Through an Entity

All of the scenarios in the above section involved people that own property directly.  However, in many cases, people will find it beneficial to form an entity to own property, particularly if it involves a large number of people or a large property.  The reasons for forming an entity to own and manage land may include:

  • Most entities limit the liability of individuals for property-related debts; this is especially important to individuals if there is a large loan on the property, or if there is a large number of people involved.
  • Ownership by an entity prevents title from transferring when people come and go; transfer of title is not only inconvenient, but it could also have implications for financing, property tax, and transfer taxes.
  • Entities usually have bylaws or operating agreements that create clear governance structures and procedures.
  • The formation of an entity imposes certain limitations on how it may operate and for what purposes, which can play an important role in preserving the founders’ vision for a property.
  • Forming an entity may attract other sources of financing for a property, such as individual investors that are more comfortable lending to a clearly structured entity governed by state law than to a group of individuals.
  • Ownership by an entity can provide a way to control who may rent or buy into the community.
  • Ownership by an entity can provide a structure for low income or affordable housing by limiting the ways in which the entity’s owners can extract equity from the property.

Here are some common arrangements by which individuals create an entity to own property:

Ownership by a Private Entity + Proprietary Leases

People seeking to develop their own housing opportunities often form LLCs, regular corporations, or cooperative corporations to purchase residential properties.  Usually, some or all of the members or shareholders of the entity are given the right to live on the property.  Unlike direct ownership of land, membership in an entity that owns land usually does not [18. However, I would be interested to know whether a landowning entity has ever been “disregarded” to create a presumption that members have a right to possession.] come with a presumption that the members have a right to occupy the land; otherwise Disney shareholders could claim a right to live in the Magic Kingdom.  Each member’s right to occupy the property needs to be specified by the entity.  This can sometimes be done by means of the entity’s operating agreement, [19. Many people in this situation would prefer not to think of themselves as “tenants,” and may also want to avoid the application of landlord/tenant law.  Note, however, that granting possession by means of an operating agreement, rather than a lease, probably still makes the resident a “tenant,” since the interest they hold is a leasehold interest.  For cases that have examined this issue, see Susskind v. 1136 Tenants Corp., 43 Misc. 2d 588 (NY City Civil Court 1964); Suarez v. Rivercross, 107 Misc. 2d 135 (NY Appellate Term 1st Dept. 1981); Matter of State Tax Comm. v. Shor, 84 Misc. 2d 161 (NY Sup. Ct. 1975); Hauptman v. 222 E 80 ST CORP, 100 Misc. 2d 153 (NY City Civil Court 1979); Frisch v. Bellmarc Mgt., 190 AD 2d 383 (NY Appellate Div., 1st Dept. 1993); Prosnitz v. Augustus, 175 Misc. 2d 582 (NY City Civil Court 1998); Ostrovsky v. Cartier Apartments Owners Corp., 247 AD 2d 598 (NY Appellate Div., 2nd Dept. 1998).] but this is more often accomplished by means of a separate lease document, often referred to as a “proprietary lease” or “occupancy agreement.”Entities that give their members/shareholders a right to live on the property may meet one or more legal definitions of “housing cooperative” or “stock cooperative.” [20. Note that the use of the word “cooperative” here does not necessarily imply or require that a cooperative corporation be the entity of choice, nor that the entity operate “on a cooperative basis” under Subchapter T of the Internal Revenue Code, nor that the cooperative be managed democratically, nor that the cooperative follow the Rochedale Principles for cooperatives.  The moral to the story is: the word “cooperative” has way too many meanings, and it’s no wonder that it’s hard to get a straight answer about what a cooperative is.]  This is our legal system’s way of recognizing that ownership of housing through an entity can, for many practical purposes, be made to look and feel a good deal like direct ownership, similar to condos.  People seeking to start an entity must decide whether it is beneficial to be classified as a cooperative and how to shape their organization and agreements to fall within or outside the definition.Being a cooperative has certain tax benefits.  Communities that meet the IRS definition of “cooperative housing corporation” [21. Internal Revenue Code Section 216(b) Definitions.  For purposes of this section – (1) Cooperative housing corporation The term ”cooperative housing corporation” means a corporation – (A) having one and only one class of stock outstanding, (B) each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such corporation, (C) no stockholder of which is entitled (either conditionally or unconditionally) to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation, and (D) meeting 1 or more of the following requirements for the taxable year in which the taxes and interest described in subsection (a) are paid or incurred: (i) 80 percent or more of the corporation’s gross income for such taxable year is derived from tenant-stockholders. (ii) At all times during such taxable year, 80 percent or more of the total square footage of the corporation’s property is used or available for use by the tenant-stockholders for residential purposes or purposes ancillary to such residential use. (iii) 90 percent or more of the expenditures of the corporation paid or incurred during such taxable year are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-stockholders] provide tenant-shareholders the opportunity to use many of the same tax deductions and credits that a typical homeowner would have, under the recognition that this is simply an alternative means to homeownership.   The IRS’s definition requires that all members/shareholders be entitled to occupy a dwelling on the property, and that 90 percent of the property be put to residential use or purposes ancillary to residential use.  [22. For a case interpreting the IRS definition of “tenant-stockholder” under IRC Section 216, see United States v. Evans, 375 F. 2d 730 (9th Cir. 1967), finding that a tenant’s membership a nonprofit corporation and life lease to a portion of the nonprofit’s property did not constitute “stock” under the IRS definition.]At the state level, the definition of cooperative has other purposes – usually to determine whether the community will be subject to the same regulations as a subdivision and common interest community.  For many resident-developed communities, this treatment is not ideal, since it presents burdensome legal hurdles and administrative hassles.  Meeting California’s definition of “stock cooperative” [23. Cal Civil Code 1351(m) “’Stock cooperative’ means a development in which a corporation is formed or availed of, primarily for the purpose of holding title to, either in fee simple or for a term of years, improved real property, and all or substantially all of the shareholders of the corporation receive a right of exclusive occupancy in a portion of the real property, title to which is held by the corporation. The owners’ interest in the corporation, whether evidenced by a share of stock, a certificate of membership, or otherwise, shall be deemed to be an interest in a common interest development and a real estate development for purposes of subdivision (f) of Section 25100 of the Corporations Code.”] requires that substantially all members/shareholders be entitled to live at the property. This allows for one or possibly more non-resident owners; but any significant number of non-resident owners will, therefore, bring the community outside the definition of “stock cooperative,” which some people actually prefer, if they want to avoid jumping through legal hoops normally applied to subdivisions.

Ownership by a Public Benefit Nonprofit + Leases

Nonprofit public benefit corporations [24. The actual name of the corporation type actually varies from state to state, but most states classify nonprofit corporations roughly in this manner: some are for public benefit and some are for the mutual benefit of members.] are the entities most often used to hold residential properties when the goal is to create some form of affordable housing, supportive housing, religious community, or housing for a group with distinct housing needs, such as students.  Being a nonprofit public benefit corporation comes with a key restraint: the profits and the assets of the corporation cannot be distributed to private individuals.  This is a critical control that removes individual incentives to buy, sell, develop, or extract resources from the land for profit-making purposes. Widespread ownership of land by public benefit nonprofit corporations could, therefore, significantly change the dynamics of the land market and reduce incentives to exploit or speculate on land.When most people use the phrase “land trust,” they are usually not referring to the type of trust that has a trustee and beneficiary; the phrase most often refers to a nonprofit public benefit corporation that owns land and/or easements, usually for the purpose of preserving ecosystems, agricultural land, or affordable housing in the long term.  Not all nonprofits that own land necessarily think of or refer to themselves as “trusts.” For example, many of the housing “cooperatives” occupied by University of California, Berkeley students are actually owned by the umbrella nonprofit, the Berkeley Student Cooperative.  Note that in most, but not all cases, a nonprofit public benefit corporation will likely seek tax exemption under Section 501(c)(3) or Section 501(c)(4) of the Internal Revenue Code.

Ownership by a Mutual Benefit Nonprofit + Proprietary Leases

For housing that does not necessarily serve a special charitable class of individuals or purpose, a mutual benefit nonprofit form is sometimes used to hold title to property.  Mutual benefit nonprofits provide a good, service, or benefit to a group of members, and homeowners associations generally form as mutual benefit corporations.  The ownership of land at Earthaven Ecovillage in North Carolina is by a mutual benefit type of nonprofit.  Mutual benefit nonprofit corporations are subject to an important constraint, which is that they may not distribute profits to individuals during the life of the organization; this prevents the corporation’s land from being developed or mined to serve profit-making goals of individuals.  At the same time, mutual benefit corporations are generally allowed to distribute assets to individuals upon dissolution, which means that profit-making goals are not completely prevented from driving the decisions of such an organization.

Ownership by a Trust

Owning land through a trust essentially means designating a trustee that will hold title to and manage land for the benefit or use of one or more beneficiaries.  The manner in which the property is to be used will be designated by the written instrument that creates the trust and usually directed by the beneficiaries.  Note that this is different from the “land trusts” described in section b.  Many people use trusts as estate planning tools, to reduce taxes, to protect from property-related liability, and/or to hide ownership of a property.  Except where estate planning has been involved, in my work as an attorney for shared housing communities, I have yet to find a situation where I thought that it would be ideal to use a trust, over an LLC or other entity, to hold title to land.  This remains an open question in my mind, and worth further research.

 Combinations of Entity Ownership and Direct Ownership

Ownership by Entity + Ground Lease + Individually-Owned Improvements

Community land trusts typically operate under this model: The nonprofit trust holds title to a piece of land and grants two things to each resident household: 1) a very long term lease (known as a “ground lease”) to occupy the land, and 2) ownership of certain improvements on that land (usually a housing unit).  This model gives residents the feel of ownership, while the land trust’s ownership of the underlying land gives the trust the power to set limitations on the use and transfer of the property.  In particular, the terms of the ground lease generally limit the residents’ ability to sell their unit at market rate, thereby preserving the affordability of the unit and creating what is usually called “limited equity housing.”  Limited equity housing models use a variety of formulas to determine what kind of return a resident may get when he/she sells the unit.  The formula is typically the purchase price multiplied by the change in the consumer price index or the change in area median income, plus the value of any improvements added by the resident.

Ownership of Units + Ownership of an Entity that Owns Common Areas

Many condominium communities grant individual owners an undivided interest in the common areas and grant management to a condo-owners association.  However, other condo communities actually give common area title and management to a condo-owners’ association.  The practical differences between the two methods are very few.  However, conceivably, the latter method of allocating ownership does more to protect individual owners from liability resulting from injuries in common areas.   Particularly in communities that make their common areas frequently open to the public or visitors, this arrangement may be ideal.

Footnotes:

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