Enabling Employees
to Own Rather than Rent Homes through a Time-Shared Co-op Housing Method [1]
Som Karamchetty, PhD [2]
15 May 2017
Abstract:
Currently Indian ministers, MPs, MLAs, and other government
officials and employees occupy spacious homes on rental from the government. In
most cases, these homes are situated on significant land, while the country is
under pressure for land. After working for government for thirty to forty years
and owing to the fact that they live in rental homes throughout their career,
government employees have no equity built in homes. When they retire, they move
into flats that are much smaller than the homes in which they lived. A method
is suggested to address these problems. Through a Public Private Partnership,
government can provide its land for private companies to develop multistoried
homes, which may be owned by government employees on a timeshared co-op basis.
The result from this method will be that a) government does not have to invest
in homes for employees, b) private real estate developers get a good return on
their investment, and c) employees build equity through home ownership and will
save for a home by the time they retire. This paper explains the method.
Goal: To enable government employees to own equity in their homes instead of merely paying rent during their employment.
Concept: By developing a method operated by a Public Private Partnership, it is possible to enable employees to own homes.
Current Situation: Currently, governments and some private companies provide homes for employees and on a rental basis. In this traditional method, employees rent homes in campuses owned by the employer (either the government or a private company). The positive aspect is that the employees get accommodation. In many cases, such accommodation is also subsidized by the employer. But this method has drawbacks as described below.
Problems:
a) After some thirty to forty years of working for the government or company and paying rent, employees accrue no equity at all in the home. After retirement they have to walk out and look for a home to buy or rent.
b) The government or the employing company finances for the building and maintenance of the homes for the employees, which is an unnecessary financial and operational burden on them. In the case of the government, the investment funds come from tax payer funds and it is an unneeded burden on the taxpayers. In the case of private businesses, such investment in housing is not the main business of the company and it would have been better for them to utilize such finances on their core business areas.
In the following sections, we will focus on Government housing only. But, the situation and problems are equally applicable to private businesses that provide such housing to employees.
Other Observations:
a) Employees are allotted houses that are highly subsidized. In case of higher level officials, bungalows with considerable land are allotted. It is generally observed that upon retirement, such officials cannot afford such bungalows and actually buy or rent much smaller apartments with a little or no private yards.
b) Government is forced to procure a larger acreage of land to accommodate the main project as well as lavish or spacious housing for the employees.
c) Government has to invest funds for the housing in addition to the main project.
d) Government has to have staff not only to run the main project but also to manage and operate the housing complex or campus.
e) Since the employees do not own the home, the care received by the homes is insubstantial. Thus the homes deteriorate faster than those occupied by owners. The property receives less (tender loving) care as it is managed by neither owners nor renters but by a third party, namely the managers.
Examples:
Here are a few examples of government organizations that provide such housing.
·
Parliament and Legislative Assemblies
·
Government Departments (Administration, PWD,
Electricity Departments, Irrigation Department, etc.)
·
Justices and Courts
·
Educational Institutions (IIT, IISc,
Universities, Polytechnics)
·
Research Laboratories
·
Police
·
Military
·
Railways
·
Hospitals
Key Parameters:
As we attempt to address this problem, it is important to identify some key parameters in this problem.
·
Ownership vs rental
·
Mortgage payment vs rent
·
Private finance vs public finance
·
Owner management of O&M vs administrators
·
Affordable homes vs traditional habit
·
Owning a specific home versus co-op homes
·
Ownership on a (modified form of) time-share
basis
Approach to a Solution:
The approach to the solution is explained here.
Government should get out of ownership of the homes and the management of operation and maintenance (O&M) of the campus.
Private companies should be in the financing of the home building and campus development.
Employees own homes on a mortgage basis. (Explained below under Key Mechanisms.)
Real estate management companies should be recruited by home owners to manage maintenance functions.
Key Issues:
Several key issues are to be recognized in this context.
·
Employees are not likely to be employed for the
full thirty or forty years of their careers in one location and with one
employer. This is especially a characteristic of modern employment.
·
As employees get promoted and as they move to
higher positions with better salaries, they may want to move to larger sized
homes.
·
As family size increases, employees may want to
move to a larger sized home and at a later stage in life, as employees become
empty nesters, they may want to downsize.
·
Some employees may move to private industry from
government or vice versa. [3]
·
Some employees may not wish to own homes or may
not be able to own homes.
·
Other situations as they arise.
Key Mechanisms:
At this point we introduce a couple of concepts.
a) Timesharing of homes is a key mechanism that addresses the key issues pointed out above.
In general, a timeshare is a vacation property with shared ownership. A management company handles the construction and sells shares, which entitle buyers to spend a specified amount of time (usually one week per year) at the property. [1]
We need to realize that it need not apply to vacation homes only. The key point in time-sharing is that several people (and entities) own a property. It need not apply to a specific home but can be extended to a property in a complex with several properties or to a home in any one of the complexes owned by a cooperative group of owners.
b) When you buy into a co-op, you become a shareholder in a corporation that owns the property. As a shareholder, you are entitled to exclusive use of a housing unit in the property. [2]
c) Now, by combining the concepts of timeshare and co-op, we get very interesting and beneficial features described below.
An employee can own shares in a co-op and be allotted a home as if it belonged to him at the location where he is employed. The co-op can be regional or national in character. Then, if the employee moves to another location through transfer or change of job from one government agency to another, or even to a private company, the employee can be allotted a unit in the new location.
When an employee wishes to upgrade or downgrade the accommodation he/she likes to live in, he/she can upgrade or downgrade his/her ownership level in the co-op (subject to availability of desired home units).
Value of housing units at each location would differ. This should be treated in a manner similar to selling a home at one place and buying another home in a different location. The adjustment may be carried out in the owner’s equity and new mortgage payments.
Ultimately, when the employee retires he/she can seek a housing unit in a retirement co-op or cash.
All the housing units in the co-op are maintained by a real estate management company with the co-op owners at a location overseeing the local mangers.
The Government may own some units for employees (who do not want to own housing units) and others visiting the local organizations for short or long periods of time.
There should be provisions for buying out some housing units and for renting some units.
It is possible that the government may restrict who may live in certain locations for special reasons of their own.
It is possible that some units may become unoccupied and such an eventuality may be accounted for in the scheme.
Just as in any co-op of timeshared unit complex, there will be home owners associations that make rules of conduct. In the case of the instant scheme, there should be national rules of conduct and additional local rules. In general, such rules will be not much different from what the government imposes on employee renters currently.
The government continues to own the land. It may charge a reasonable fee as a lease fee or it may waive such fee as an incentive to employees to join the scheme. Since land is a major cost in real estate in most locations (especially cities and towns), if government (lease) charges are small, employees can find mortgage costs reasonable.
It is a good idea to explore other potential issues and address them as the scheme is put together.
Main Thrust:
Government should seriously and sincerely consider a Public Private Partnership (PPP) to develop a new method of housing employees as described above. It should invite private real estate developers and investors to consider such program(s).
Currently, government has significant quantities of land used in various government housing complexes and campuses. By inviting the private developers to build multistoried buildings, on the PPP model, instead of single story bungalows and homes, a greater number of homes can be built and save land. Depending on the local circumstances, such land can either be used to expand government facilities, or be released for private companies (on sale or lease).
In new government projects, government will need to acquire less land than is otherwise needed with the suggested model.
Benefits:
The method benefits the participants in the following manner.
a) Employees become “home owners” right from the beginning. After thirty to forty years of employment, they may own a home unit fully. They may transfer such ownership to a retirement area or sell it and move to a location of interest with the cash in hand. They may also bequeath their homes to their descendants or to private charities.
b) As home owners, employees can get tax advantages, which are not available to them as renters.
c) Just as the government currently deducts the house rent from the employees’ monthly earnings they can deduct the mortgage payments (principal, interest, taxes, insurance, and maintenance fees) and pass them on to the Developers.
d) Government benefits from getting out of financing, owning, and managing homes, which is really not a government function. This method would reduce the burden of financing such home development from the government and hence from the taxpayers.
e) Real estate developers get a large slice of housing development and management business. As stated earlier, by enticing private industrial businesses also to join this model program, that slice of business becomes even greater.
f) Currently, real estate developers find it difficult to get land for their housing development projects. With this method, there is a ready source of government owned land available for such a project.
g) The developers are assured of a market as well as a guarantee of mortgage amount collection on a timely basis.
h) By converting the older housing complexes to the newer suggested complexes, smart communities can be readily developed. Valuable land will be released for other beneficial uses.
i) The scale of development will provide benefits of economies of scale. Projects can also be completed on a fast pace. It does not mean that local architectural features and design requirements are ignored.
j) As stated in an earlier section, the model can be transferred to the private sector housing. And, by gaining such experience and expertise, the Developers can transition the model to export markets and benefit the other developing countries and themselves.
Market:
Currently the Central and State governments own considerable home complexes with significant real estate and that assures a significant market.
Initially, the focus can be on the Central government housing in Delhi as the NITI Aayog and the Minister Gadkari have suggested taller buildings as opposed to bungalows. [3, 4] If the ministers and MP’s lead the way, other government officials and employees will follow suit and the taxpayer is highly likely to appreciate their gesture. It also allows these ministers and officials to build equity as they work in Delhi and carry the proceeds with them when they retire and return home.
Indian Railways can be the next target for the model. The Railway minister, Shri Prabhu has been talking about better uses for Railway land and the Railways have millions of employees and provide a variety of housing for them. [5] By reducing land usage for housing complexes for employees and by allowing private developers to build office, and other housing complexes adjacent to rail stations, Indian Railways can spur significant developments in rural towns and villages owing to such rail connectivity.
Business Plan:
The next step is the development of a Business Plan to evaluate technical feasibility, economic viability, and acceptability of the concept and method by all the parties that needed to support and participate in the venture.
Promoting the Concept:
In order to promote the concept, we have to estimate and quantify the benefits to the beneficiaries – Government, Employees, Developers, and Investors.
Government should be convinced how much land they would save and the operation and maintenance cost savings they would gain from the implementation of the scheme to various levels. It allows the government to manage its business and not become a real estate management company.
Estimates should show employees their mortgage deductions as opposed to the rents they generally pay and the equity they build in their homes and the appreciation of their housing unit values over time.
Estimates of return on investment (ROI) and management profits show the gains that investors and developers would get from the scheme. The cash flow is guaranteed as the government (as the paymaster) deducts payments and remits them to the management company.
This concept can be applicable to industrial townships also; private businesses can invest their money in their specific businesses. With experience in such a scheme, developers can expand their market to international arena and gain from a global market.
Recommendation:
Real estate development companies and investors, Indian Government, and employee unions should seriously consider, evaluate, and embrace this concept and ask for the implementation of the program to realize the benefits described.
References and Bibliography:
[1] https://en.wikipedia.org/wiki/Timeshare
[2] http://www.investopedia.com/articles/pf/08/housingco-op.asp?lgl=lg-mt
[3] http://economictimes.indiatimes.com/wealth/personal-finance-news/go-in-for-taller-building-in-urban-areas-panagariya/articleshow/58397714.cms
[4] http://economictimes.indiatimes.com/news/politics-and-nation/why-not-house-mantris-in-flats-instead-of-bungalows/articleshow/58275429.cms
[5] http://www.thehindu.com/news/national/indian-railways-mull-new-policy-on-station-development-says-suresh-prabhu/article7289291.ece?homepage=true
[1]
Definitions for Time-shared home units and Co-op home units are available in
references. We use them with a slight modification.
[2] The
writer is a Technical Consultant and lives in Potomac, Maryland, USA,
[3] By
extending the concept to private industrial companies and Retiree groups, flexibility
to accommodate the expected mobility of the next generation workforce can be
achieved.
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