Group Title: Affordable housing issues
Title: Affordable housing issues ; vol. 15 no. 6
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 Material Information
Title: Affordable housing issues ; vol. 15 no. 6
Series Title: Affordable housing issues
Physical Description: Serial
Language: English
Creator: Shimberg Center for Affordable Housing
Publisher: Shimberg Center for Affordable Housing
Place of Publication: Gainesville, Fla.
Publication Date: October 2005
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Bibliographic ID: UF00087009
Volume ID: VID00035
Source Institution: University of Florida
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M.E. Rinker, Sr., School of Building Construction College of Design, Construction & Planning PO Box 115703,
University of Florida, Gainesville, FL 32611-5703 TEL: (352) 273-1192 SUNCOM: 622-7697 FAX: (352) 392-4364

Volume XV, Number 6

October 2005

The August 2005 newsletter presented a discussion of Workforce Housing. This issue of the
newsletter focuses attention on employer-assisted housing. The source of the information
presented is a 228-page book that was published by the Bureau of National Affairs, Inc., of
Washington, D.C., titled, Employer Assisted Housing: A Benefit for the 1990s. The mate-
rial contained in the book was the product of a three-year study of employer-assisted housing
conducted by the American Affordable Housing Institute at Rutgers, the State University of
New Jersey. Although the book is out of print, the discussion of the topic, including a descrip-
tion of various forms of employer-assisted housing in the second chapter, remains relevant and
is summarized here. One of the book's three authors, Daniel Hoffman, may be contacted at
Employer-Assisted Housing and Community Strategies in Philadelphia at 267-408-9848.

Overview of th osin eei

Housing as an employee benefit has received only
sporadic attention by both employers and labor. In
the 1980s, however, a number of employers began to
offer housing assistance as a part of their benefit plan.
Housing assistance as an employee benefit has not
been standardized like the more common health
insurance. Instead companies have customized their

plans to meet their own cash/debt/risk preferences, to
meet the corporate objectives that fostered the plan,
to meet the perceived housing needs of the workers,
and to meet the needs of the community. In general,
companies sought to create a plan that is cost-ef-
fective and has minimum risk while enhancing the
image of the organization both to the employees and
the community.

H 0 S N G

Before proceeding, it is important to understand
contemporary "employer-assisted housing." In their
book, Schwartz et al. describe employer-assisted
housing as the offering of one or more housing ben-
efits to non-management workers.

Unlike the "company towns" of the 19th and 20th
centuries, those employers with currently active
housing benefit programs view them as supportive
not only of corporate objectives but of worker's aspi-
rations and community goals.

Group mortgage origination plans are viewed as
the starting point on which to build a more broadly
based employer-assisted housing program. Group
mortgage origination plans essentially are volume
discount plans in which a mortgage lender agrees to
reduce interest rates, points, and/or application fees
in return for the expectation of increased mortgage
lending activity.

Such a plan requires that the employer take the nec-
essary steps to establish an agreement with a willing
lender. The employer then assumes the familiar role
of informing employees of the availability of the ben-
efit, a role similar to that played for the health insur-
ance benefit. Notice that the group mortgage origina-
tion plan does not require the employer to become a
mortgage lender or processor any more than group
health insurance plans require them to be doctors or
medical specialists.

The cost to the employer of a group mortgage origi-
nation plan can be as low as the cost of establishing
the agreement with the lender and notifying employ-
ees of the plan's availability. In some cases, employ-
ers provide additional subsidies in conjunction with
the lender's assistance. These additional subsidies

are discussed in the following sections. Combining
employer and lender subsidies allows the employer to
leverage its contribution, a unique feature of investing
resources in housing assistance plans.

It is interesting to note that employers that implement
a mortgage origination plan join forces with a mort-
gage lender. This coalition places the employer in
league with an important member of the home build-
ing industry and provides access to other sectors of
the industry. As such, the employer can draw upon
the collective experience and knowledge represented
by the coalition in order to offer novel, cost-effective
plans without becoming a housing-industry expert.

Closing costs, as opposed to down payment, represent
one of the most difficult barriers to home ownership
faced by lower-income families. Under the State
Housing Incentives Partnership (SHIP) program,
closing-cost subsidy is regarded as a desirable action
by many local governments. In the case of employer-
assisted housing plans, closing-cost subsidies can be
layered on top of group mortgage origination plans.

The closing costs that may be the focus of an em-
ployer's closing-cost subsidy program may include:
points, title insurance, title searches, or engineering

The American Affordable Housing Institute's survey
of employed, renter households found that 60 percent
of those interested in purchasing a home thought that
they would be unable to do so because they could not
afford the down payment. This barrier represents an
opportunity for employer assistance in the form of
mortgage guarantees, mortgage insurance, or direct
down payment assistance. All of these forms of em-

ployer-assisted housing serve the purpose of reduc-
ing risk to the mortgage lender and, once again,
can be layered on top of a group mortgage origina-
tion plan.

Employers that choose to offer a mortgage guaran-
tee incur a financial liability but have no direct cash
outlay. The company's balance sheet may show the
guarantee as a "contingent liability." However, since
the mortgage default rates are about 2 percent and
since there is evidence that the default and foreclo-
sure rate for lower-income families is even lower; the
likelihood of the company having to face the liability
is quite small. Another comforting fact is that the
value of a property usually is sufficient to satisfy the

If the mortgage guarantee program is structured to
be in effect only as long as the employee remains
with the company, the problems and costs associated
with employee turnover are reduced. In terms of the
company's "bottom line," reduced turnover lowers
costs for recruitment, training, and other hiring costs.

Conventional private mortgage insurance costs from
50 to 100 basis points. It is this down payment
cost that group mortgage insurance addresses. The
advantage to the employer is that the contingent li-
ability incurred in a guarantee program is transferred
from the employer to the private mortgage insurance

Employers can provide this housing assistance in
several ways including a grant, a loan, or a forgiv-
able loan.

One form of down payment assistance is a third-party
second mortgage. In this arrangement the employer
enters into an agreement with the lender to provide
payroll deductions for payment of the first or second
mortgage. This agreement and others encourage the
lender to offer second mortgage loans at or near first-
mortgage rates. If the second mortgage brings the
loan-to-home-value ratio down to 80 percent, the first
mortgage becomes readily marketable by the lender
without mortgage insurance. It is worth noting that
an employer organizing this form of down payment
assistance may do so without funding the down pay-
ment; the benefit may, in fact, be costless.

A second form of down payment assistance is the
forgivable down payment loan. The 1990 American
Affordable Housing Institute survey found that 29
percent of responding employers reported that it cost
$1,000 to $3,000 to recruit and train entry-level em-
ployees; and, 38 percent indicated a similar amount
for training alone. These and other similar data on
the cost of hiring have caused some employers to
give serious attention to reducing employee turnover
rates. Although not all turnovers are undesirable,
most is. Further, not all turnovers are related to hous-
ing. However, since homeownership represents an
aspiration of most families, an employer that assists
families in fulfilling their aspirations would seem to
have a distinct competitive advantage in recruiting
and training employees. By offering down payment
loans that are forgiven at a rate that is less than the
annual cost of recruiting and training, employers can
create a program that cuts costs, reduces turnover,
and helps employees meet their housing objectives.

Public or private mortgage bonds can be purchased
by employers at negotiated, below-market rates.
Proceeds from the sale of these bonds can be loaned
to employees for first or second mortgage purposes.
The rates applied to these loans would reflect the
below-market rate being paid by the bond. Although
the return to the company may be relatively low
when compared to other investment opportunities,
the rate considered in combination with the savings
gained by facilitating recruitment and reducing turn-
over may make the return more acceptable. Since
other employee benefit plans have a zero return, even
a low return is significantly better.

An employer may invest, lend, or issue a grant for
housing. At the most expansive level, an employer
can participate as an equity investor in the produc-
tion of rental housing and hold a limited partnership
in a project. Since corporations remain exempt from
passive-loss tax limitations, equity investment can
make sound investment sense.

A lower level of involvement in the development
of rental housing can be in the form of contribu-
tions toward development. This approach may be in
cooperation with a non-profit developer making the
transaction a charitable contribution. In the case of
a charitable contribution, there can be no preference
shown to the employer's employees when renting
the completed units. If this preferential treatment is
desired, the employer could make a corporate (non-
charitable) donation to a developer, without the long-
term return relationship of an investor. In return, the
developer would be expected to reserve units and
reduce the rent for the employees of the participating

Finally, an employer can lend money to a developer
at below-market rates or on a delayed or flexible
payback basis. Groups of smaller employers, who
individually lack large cash resources, can join forces
to pursue this option. Interest in this type of arrange-
ment comes when the units are to be produced in
close proximity to the participating employers and
the development is seen as facilitating neighborhood
revitalization or enhancing security.

The Financial Institutions Recovery, Reform, and
Enforcement Act (FIRREA) of 1989 made construc-
tion financing increasingly difficult for developers
to obtain. FIRREA imposes a 15-percent-of-assets
limit on lenders for any one project as opposed to
the previous standard of 100 percent. The result is
that developers of large projects must piece together
construction financing from multiple sources, raising
transaction costs of already expensive financing. Al-
though developers face an increasingly difficult time
in raising short-term financing, large corporations
continue to borrow at, or near, prime rates.

This situation creates an ideal situation for corpora-
tions to assist in housing production. The corporation
can borrow at favorable rates on behalf of develop-
ers who need short-term construction-loan financing
or by guaranteeing all or a portion of a construction
loan. The guarantee represents a credit enhancement
that allows the developer to borrow at more favorable
rates. At the conclusion of the development, the proj-
ect secures permanent financing and the employer is
repaid or the employer's guarantee is ended.

If the development process goes smoothly, this ar-
rangement has no direct cost or impact on the cash-
flow of the corporation. The risk comes from proj-
ects that never complete development or that are built
only after great difficulty.

An option for the employer to reduce the risk of
development after completion is the purchase guaran-
tee. For example, an employer can agree to purchase
some number of units in a development if those units
are not otherwise purchased by a given date. Such a
guarantee places the employer in a position to extract
substantial sales-price discounts for its employees.
The lender's risk of delayed payment of the construc-
tion loan is reduced; the developer's risk of having to
carry property for an indefinite period is eliminated.

If the project sells out before the developer can call
upon the employer's guarantee, there is no cost to the

Employers may own surplus land or obsolete build-
ings that could be developed for employee housing.
The site can be sold at discount, leased, or donated to
a developer. In return, employees would be expected
to receive occupancy priority and sales-price or
rent concessions. The developer may be for-profit
or non-profit or may be public development enti-
ties. Prospective condominium associations formed
by employees interested in living in the project also
represent prospective developers.

There are a variety of ways for the employer to
prevent loss of for-sale housing to the open market.
One option is for the company to retain the right of
first refusal to buy the property. Another approach is
to place a lien on the unit equivalent to the difference
between the discounted price and the market value.
This lien need not be repaid if the unit is resold at a
discounted price to another employee of the firm.

There is a shortage of rental housing in many mar-
kets. Changes in the federal tax code, investors' un-
willingness to own property on a long-term basis, and
difficulties in obtaining financing have been blamed
for these shortages. This situation creates an oppor-
tunity for employers to play a key role that is neither
excessively risky nor costly.

As master leaseholders, employers can provide
housing opportunities for moderate- and low-income
employees while addressing important business,
recruitment, retention, and neighborhood security
issues. The master lease is an agreement that a given
number of units will be rented by the master lease
holder the employer. The master lease holder need
not become involved in the ownership or manage-
ment of the property. Rather, the master lease simply
requires the master lessee to pay rent on a unit if it is
not being paid by a sub lessee (the employer).

Master lease agreements aid prospective developers
in securing financing for new construction. Existing
building owners also may have reasons for entering
into master lease agreements. Buildings with a sig-
nificant vacancy rate or owners who want to rehabili-
tate or refinance property may find that a master lease
agreement improves cash flow, marketability, and
lender security.

Employee Stock Option Plans (ESOPs) offer a means
for an employee-owned firm to create an ESOP-fi-
nanced housing benefit program.

Unionized firms were given the authority to expand
trust-fund benefit programs by an April 1990 amend-
ment to the Taft-Hartley Act. The amendment per-
mits employers to contribute to a tax-exempt housing
trust managed jointly be a board representing labor
and management.

Employer-assisted housing plans are making their
appearance alongside health insurance and similar
conventional employee benefit programs. These
housing-related plans are relatively new; they have
not yet become standardized. Rather, employers are
structuring plans to meet their special combination of
cash, debt, and risk.

Affordable Housing ISSUES is prepared bi-monthly by the Shimberg Center for Affordable Housing for the purpose
of discussing contemporary issues facing affordable housing providers. Reproduction of this newsletter is both permitted and
encouraged. Comments or questions regarding the content are welcome and should be addressed to Robert C. Stroh, Director.

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