Limited-Equity Cooperatives for Low-Income Households: A Review of Implications

Abstract

This study provides a dialog on the implications of limited-equity cooperatives as a home ownership option for low-income households. Recent changes in several market factors have contributed to an increased interest in such options. Among them are the Tax Reform Act of 1986; federal cutbacks in housing programs, and the potential for lost housing stock through expiration and foreclosure of rental subsidies. Congress, the Presidents Commission on Housing (1982), and the National Housing Task Force (1988), have all encouraged such alternatives. The data indicate that from a cash flow perspective households that are both high-income and high-tax bracket should be owners while low-income households should be renters. Through the use of a hypothetical model, the financial considerations for both owners and renters are examined as well as the household benefits of converting a multifamily dwelling into such a cooperative. The cost differences relate primarily to taxes and the investment assumptions of the cooperative. The prospects of ownership conversion would improve if equal access to capital markets were assured by the government. For cooperative members short-term savings are obtained by a more stable tenant population and by taking on more of the maintenance than would a renter. Long-term benefits are garnered through a marked decrease in finance-related expenditures which roll back member enrollment costs in the long run.

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Marc T. Smith

Marc Smith is an Assistant Professor in the Department of Finance, Insurance, and Real Estate at the University of Florida in Gainesville.