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Housing help: the new employee benefit. Employers are increasingly dangling the carrot of housing assistance in front of employee recruits to lure them into high-cost housing areas.


The New Employee Benefit

Employers are increasingly dangling the carrot of housing assistance in front of employee recruits to lure them into high-cost housing areas.

The idea of employers assisting in affordable housing is spreading like a summer fire in Yellowstone, stoked by such enthusiasts as David Schwartz, guru of the American Affordable Housing Institute (AAHI) at Rutgers University, New Brunswick, New Jersey. This growing practice is being fueled by spiraling housing costs, labor shortages and employee recruitment and retention difficulties.

As employers find they cannot fill jobs, or must pay salaries far above the norm; as employees are lured away by enticing offers to places where housing is affordable, or refuse to move because of high housing costs; and as long-distance commutes cut into employee productivity; companies are recognizing the need for action.

Some companies are relocating, some are developing across-the-board housing programs for all employees, and some are launching into the housing business themselves. Meanwhile, local governments are casting around for private partners to compensate for the disappearance of federal housing support.

The need is acute enough to spawn companies such as MPC & Associates, Inc., a Washington, D.C.-based real estate marketing, finance and development firm devoted solely to the relocation problem. MPC & Associates has developed several employer-assisted relocation programs for companies and non-profit institutions, and works closely with lenders in the primary and secondary market. In the most expensive housing markets, such as Boston, San Francisco and New York, companies are either moving out or trying to cope by raising salaries and increasing benefits. Even with higher salaries that often surpass the national average, companies and institutions cannot attract and retain personnel.

R. Robert Linowes, chairman of the District Council of Metropolitan Washington, D.C., says, "[Employer-assisted housing (EAH)] is a growth area. Employers have no place to go to get needed assistance. When forced to import staff, they are faced with the problem of providing housing and have to take steps to make it available."

In other regions, acute labor shortages are not limited to executive personnel. In Boston, Bruce Marks, the housing director for the Hotel Employees and Restaurant Employees International Union Local 26 reports that 98 percent of its 5,000 members cannot afford to purchase a median priced home and 75 percent cannot even afford to rent one. The union recently proposed an amendment to the Taft-Hartley Act that would include the topic of employee's housing within permissive bargaining, along with health and child-care benefits. This bill has recently passed both the House and the Senate and is waiting for President Bush's signature.

Other industries see similar trends. Nurses and hospital personnel say they want to live closer to their jobs in northern Virginia. Teachers report that cannot afford decent housing in Hartford, Connecticut. Resorts have become desperate. Developers in Little Waterville Valley in southern New Hampshire say they had to build 33 three-bedroom condominiums to house its resort personnel while Snowmass, Colorado is developing 150 units of affordable rental housing to ease its problems.

The severity of the current crisis is largely due to housing price increases that have far outpaced salaries. For example, metropolitan New York's housing costs doubled in the five years from 1982 to 1987, while wages rose only 27 percent. The result: an outflow of substantial companies from the New York area including International Paper, J.C. Penney, The Grumman Corporation's 2,300 engineering and research staff, Mobil Oil and Lillian Vernon.

Meanwhile, relocated companies incur considerable physical and psychological costs, to say nothing of lost time and momentum. Mobil Oil found that its employees did not want to live in the New York City area and preferred instead to search for a location that offered affordable housing and a better quality of life. With this impetus firmly grounded, Mobil moved its headquarters from New York to Fairfax County in northern Virginia, a move that will uproot its 1,500 employees.

To combat the problem, many companies have long since developed extensive relocation programs for executives that pay for their moving expenses, provide relief for down payments, buy the employees' previous homes and assist with a variety of other measures. According to the Employee Relocation Council (ERC) in Washington D.C., today these relocation programs amount to a $15 billion industry, and employers pay an average of $37,000 to move an employee. The ERC estimates that 540,000 employer-assisted moves are made each year.

Faced with the choice of a low-cost real estate market like Denver and an expensive one like Boston, however, many executives are saying "no dice" to the offer to move, even with relocation benefits provided. Of those who are reluctant, 81 percent cite high housing costs as the reason, according to ERC. Consequently, companies are faced with escalating recruitment challenges.

Sharon Quigley, account manager for Fleet Mortgage Services in Columbia, South Carolina, sees "unlimited growth potential" in employer-assisted housing. Fleet, (formerly Lomas Corporate Services) developed the Colgate-Palmolive Corporation's program that has generated 300 mortgages in the past three years. Colgate pays the origination fee for home loans up to $187,600 and the origination fee over 1 percent on loans more than $187,600. Typical savings range from $3,000 to $5,000 with no repayment required.

In light of Colgate's progress, Fleet has already developed programs for two other companies and is aggressively marketing the EAH concept. Dwight & Church, the Princeton, New Jersey-based maker of Arm & Hammer products, wanted to stabilize its personnel by encouraging its employees' participation in the community, according to John Langsdorf, community relations and public affairs manager. The benefits, the company thought, would be two-fold, because the program would raise employee morale and anchor the company's strong presence in the community. To encourage its employees to move into high-priced Princeton, Dwight & Church has set up a relocation program with a mixed development of townhomes and condominiums, split 50-50 between the market-based interest rate and the interest rate the employee qualified for. Employees are referred to lenders and must obtain their own mortgages.

Dwight & Church pays half of the down payment and contributes 10 percent of the closing costs. If employees are still employed at the company at the end of five years and plan to buy the home from the company, the purchase price is reduced 15 percent. Average cost to the firm: $20,000.

The company is so pleased with the results, according to Langsdorf, that it is considering broadening the program to acquire additional housing developments for its employees.

Benefits for non-profits

Unlike private firms, organizations such as non-profit universities can't solve their difficulties by picking up stakes. Often, they have to attract personnel to come to decaying inner cities or high-cost areas. Faced with these realities, some universities have placed themselves in the forefront of creative solutions.

The University of Pennsylvania administers the oldest and one of the best-known relocation programs in the country. Eleven years ago, the school's administrators were confronted with deteriorating neighborhoods and an increasing number of personnel who were fleeing to the suburbs. To stimulate employees' interest in living near their work, the university developed a plan with the Philadelphia Savings Fund Society, now Meritor Savings Bank, the thrift parent to Meritor Mortgage Corporation East in Philadelphia.

According to Peter Iacovoni, vice president of operations at Meritor, the university guarantees 100 percent of a no down payment mortgage on property in a defined area surrounding the campus, regardless of price. The borrower is qualified by Meritor the same as it would qualify any other borrower. Borrowers pay closing costs and may sell without restriction. There are no assumption loans permitted under Meritor's program.

Because of the 100 percent financing, Meritor has had to retain these loans until they became seasoned enough to sell in the secondary market. Nonetheless, the lender has been able to offer the loans at attractive interest rates and the program has done wonders for the city, says Iacovoni, adding that he is casting around for similar clients.

Another innovative and extensive relocation program sprang from the University of California-Irvine, stemming from their need to attract a higher quality staff. Despite good salaries and amenities offered by the university, the price of housing in Orange County was prohibitive. Faced with a median home cost of $226,000 in 1984, even the best-paid professors couldn't afford homes. Junior faculty had to settle for sub-standard housing at great distances from their work.

The university was already providing approximately 100 rental units, but the staff showed little interest in rentals. Instead, they wanted to enter the housing market, and take advantage of the benefits of homeownership, such as appreciation. Meanwhile, the university discovered that 50 percent of professors offered jobs at the Irvine campus had refused.

What was the university's solution? It took matters in hand and became a real estate developer. The university created the Irvine Campus Housing Authority (ICHA), a non-profit entity designed to move quickly and with flexibility. Initially, the university leased 81 acres to ICHA for residential development. Because the proposal was experimental, ICHA decided to build in phases the 100 units and to require the builder to provide construction financing as well as the permanent financing.

The winning bidder, J.M. Peters Company, Newport Beach, California took part in a joint venture with Pasadena-based Home Savings of America to construct the first 100-unit phase of a project called University Hills. Negative amortization loans were offered, and in fact, welcomed by the university's economics professors, but were rejected by the rest of the applicants who desired more traditional mortgages.

The units are sold to the staff at 20 to 40 percent below market prices, made possible after the land costs are taken out of the price and employees agree to share a percentage of the appreciation on resales with the university. Homeowners pay a land rent amount based on home size and location and may sell at a determined ceiling to non-university employees only after UC-Irvine employees have refused to buy the home.

Sales have already covered the project loans and built reserves. Twenty-five percent of UC-Irvine faculty live in University Hills, while 44 percent want to live there, according to surveys. Through this system of ground leasing and resale caps, the university controls the prices for subsequent buyers and ensures a supply of affordable housing in the future. Through the creation of this non-profit entity, the university also provided a buffer for itself, an even more important consideration for private enterprises. MPC & Associates developed the relocation program for ICHA and continues to act as the consultant to the project. Because the land was leased and not included in the mortgage, MPC negotiated a special agreement with Fannie Mae to purchase these unusual loans.

The project has been "so fantastically successful," according to MPC's Courtney Caldwell, director of western operations, that the provision for takeout financing was dropped from the builder's requirements in the last phase of the $47 million project. Twenty-five lenders are now standing in line to handle the mortgages, proof that lenders are embracing the program that boasts a default rate of less than 1 percent.

Mortgage lenders working with companies or non-profit institutions should assign a specialist who is familiar with the employer's policies and who can guide mortgage applicants, rather than letting them go through the regular loan process.

In northwestern Massachusetts, Williams College embarked on a 70-lot project for staff who want to build their own homes, hoping to create a permanent supply of housing by providing the land and letting subsequent purchasers assume the notes on the original terms.

Fannie Mae retained MPC & Associates to work with them on various other pilot projects; among them is a consortium in Hartford, Connecticut consisting of the Connecticut Mutual Life Insurance Company, several hospitals and a university. After discovering that teachers, firefighters and other essential personnel cannot afford to live near their work, Connecticut Mutual and other non-profits have banded together to create affordable housing.

The Hartford project consists of some 200 townhomes and apartments and is structured as a land lease deal to a non-profit partnership that will develop and build the homes, then sell the mortgages to Fannie Mae.

According to Julie Gould, director of low- and moderate-income housing at Fannie Mae, "The project is unique," because it is based on a public/private partnership that doesn't tap public dollars.

"The issue of people being able to work in the areas they live is a pressing need," says Gould, adding that while Fannie Mae is starting with low- and moderate-income housing, it eventually plans to target a broader populace. She expects the Hartford demonstration project to be ready sometime in 1990 and hopes it will provide a model that can be duplicated elsewhere.

Meeting society's needs

Where tax-exempt or tax-credit financing is used, employers are unable to reserve units solely for their own employees, but these programs add to the stock of affordable housing in an area.

In pricey Montgomery County, Maryland, for example, companies had no trouble persuading highly-paid executives to live there, but ran into obstacles with low- to moderate-income employees. According to a 1989 Urban Land Institute report, the median price of new homes was a steep $190,000, leaving a minimal amount of affordable housing for blue-collar workers who earned an average of $20,000 a year. Local firms found themselves unable to recruit workers and were forced to cope with an increasing number of unfilled jobs.

In 1988, the Housing Opportunities Commission (HOC), Montgomery County's aggressive public housing and financing agency, put together an investment partnership with $3.2 million in seed money from Giant Food, Sovran Bank and Maryland National Bank. HOC actively promotes the housing to these participants' employees, although it cannot reserve housing expressly for them because low-income housing tax credits were used.

Similarly, community housing partnerships in San Francisco have produced 3,043 units in five years with 40 percent below-market home prices. The Boston Housing Partnership rehabilitates apartments and is now building affordable permanent housing.

Reacting to a 67 percent cut in the federal housing assistance budget since 1980, many municipalities have found themselves turning to private funding sources. According to the Department of Housing and Urban Development (HUD), total construction of subsidized housing units (including rehabs) fell to 104,000 in 1988 down from HUD's reported 245,000 in new subsidized housing units alone in 1977. Mortgage lenders are beginning to assess the needs of certain pockets of communities, and share in devising solutions.

Imaginative companies are making unusual marriages, venturing into unique enterprises and providing solutions such as public/private partnerships, self-liquidating down payment arrangements, and property-appreciation sharing that create more housing. While mortgage lenders have an opportunity to develop programs of all kinds, the caveat remains: there are no blanket solutions and lenders must be open to designing individual packages that address specific needs.

MPC's Executive Vice President Shari Cohn believes that there are many options for mortgage lenders. One is to become a part of a corporation's resource center -- a one-stop shop for all phases of employee orientation and relocation. Another is to become the employing institution's partner, providing the variety of mortgage loans that traditional "soft" assistance programs can use.

EAH moves forward

Daniel Hoffman, research director at AAHI, believes EAH is the wave of the future. He says that 100 employees have inquired about a $23.9 million New Jersey housing finance plan where the state will fund 100 percent of the down payment and closing costs on a mortgage if the employer guarantees between 10 and 20 percent of the loan for a five-year period. He predicts that there will be a rash of similar projects in other states next year.

Hoffman points also that employers who calculate the cost of recruiting, training and retaining employees versus paying the down payment on a home can plainly see the advantages of EAH. He compares the value of EAH to a benefit such as group health insurance, which has trasitory value, while an employee-assisted mortgage, if correctly structured, can provide opportunities for future investment if the employee leaves.

From the mortgage lenders perspective, MPC's Cohn suggests that while lenders assume some risk in this creative arena due to the nonconforming nature of the programs, the breadth of mortgage volume and referrals are a justified attraction.

Housing affordability is a problem that businesses must cope with in order to counter rising salaries, recruit and retain desirable employees and create a stable work force. EAH promises to be a hot area for development in the 1990s, and mortgage lenders should explore possibilities for participating in this trend.

The greatest potential for growth is found in broad universal assistance programs such as the one at UC-Irvine. In this way, mortgage lenders can get in on the ground floor starting from the development stage right through to permanent financing.

Jane Moss Snow is a Washington, D.C.-based freelance writer who frequently covers housing and finance issues.
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Author:Snow, Jane Moss
Publication:Mortgage Banking
Date:May 1, 1990
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