October 14, 2014; Next City Cleveland

NextCity features a story by Anna Clark about a Cleveland-based neighborhood development organization adopting a “rent equity” plan for their tenants. This is one of a series of social innovations designed to rebalance the landlord-tenant relationship in an effort to stabilize rental housing. Promoting household stability is critical if rental housing is to become the “new normal” in the U.S. housing market, competing on an equal footing with homeownership.

According to the story, Northeast Shores Development Corporation (NSDC) has licensed the “renter equity” program from a Cincinnati-based nonprofit developer called Cornerstone Corporation for Shared Equity (CCSE). NSDC explains that it adopted the renter equity model because its mission is to promote homeownership. At a time when many households are blocked from purchase by a past foreclosure, new stringent credit requirements, or a need for geographic mobility, a rental model that rewards tenants for their social investment in the property could be a nice compromise.

Here’s how renter equity works:

Residents fulfill commitments in their lease agreement: work assignments on the property, making timely rent payments, following house rules and participating in tenant meetings. In return, they earn financial credits that they can exchange for cash after five years. The fund is replenished by savings owed to low turnover and high occupancy rates. Renters can earn up to $10,000 over 10 years.

Renter equity seems to offer four advantages over older models that try to blend ownership and rental.

  1. There’s no price of admission. Unlike rent-to-own, land contract, or traditional housing cooperatives, “renter equity” does not require a lump sum payment at the beginning of the relationship.
  2. The period to “vest” in the equity savings plan is comparable to the average time that a homeowner starts building equity. Equity in a land contract could be as short as five years or could take longer, depending on the payment schedule. Equity in rent-to-own often doesn’t begin until the property is transferred.
  3. Renter equity converts “social investments” to cash value. This feature makes it easy for low-income (cash poor) residents to create an “ownership” interest.
  4. Renter equity does not require tenant to make a balloon payment after a fixed term in order to convert he/his interest in the property into conventional ownership.

Still, Ms. Clark leaves some questions unanswered. Like many property owners, NSDC and CCSE like to refer to their customers as “residents,” which is a much broader term than “tenant.” In Ohio, a tenant is very specifically a person who entitled to exclusive use of the premises subject to a rental agreement and governed by the Ohio Landlord Tenant Law (ORC 5321). Are “renter equity” residents still tenants? Under the Ohio Landlord Tenant Law, a landlord may not shift a landlord duty (e.g., doing common area maintenance) to a tenant by a rental agreement. One can imagine that compliance with maintenance duties under “renter equity” must therefore be strictly voluntary. Another issue for tenants could be whether they risk the loss of earned equity if the owner terminates the rental agreement before the five-year vesting period is up. This potential concern is not addressed in either the NextCity article or the websites of CCSE or NSCD. Finally the duty/opportunity to earn equity points under “renter equity” could be a barrier for persons with disabilities. Are landlords/owners ready to provide “reasonable accommodations” for persons with disabilities so that they have comparable opportunities to earn equity points?

Here’s another question that’s not addressed in the article. What exactly is CCSE selling to NSDC? The NextCity article describes the business relationship as a licensing agreement, but what does that mean? “Renter Equity” is a trademarked term used by CCSE to describe their program, but it is not clear from the article or from either organization’s website what, besides the use of the term “Renter Equity,” is conveyed with NSDC’s license.

Later, the NextCity article seems to misstate the role of Renting Partnerships (RP) in describing the deal between CCSE and NSDC. Margery Spinney, director of RP conceived and implemented the rental equity plan at Cornerstone. A change in the board of CCSE in 2012 led Ms. Spinney and CCSE property manager Carol Smith to leave the organization and found RP, a nonprofit housing development organization which is not affiliated with CCSE. After Ms. Spinney’s departure, CCSE trademarked the term “Renter Equity.” As a result, Ms. Spinney now describes her focus as “participatory management,” and the credit system as an “equity exchange.” To Ms. Spinney, that’s more than a difference in terminology. She believes the financial inducement of equity points is not the primary goal of her model.

Carol and I founded Renting Partnerships so that we could pass on the practices and procedures of participatory management that we felt were ignored with changes made in the Cornerstone organization. I developed the credit system as a way to fairly determine or distribute shares in the financial fund generated by financial value added by committed residents. In my opinion, the credit system has been mistaken as a payment for behaviors that management wants to incentivize. I believe that management must change its own behaviors so that residents are making a vital contribution, or the project essentially defaults to rental housing with a financial twist. The benefit to residents of being empowered to create an environment in which people live and work together for the benefit of the whole community is lost.

Ms. Spinney continues to proselytize for her vision of participatory management. She will appear as a presenter at National Conference of Community Land Trusts in Lexington, Kentucky this week seeking to spread the word.—Spencer Wells