Fannie Mae Foundation

This article develops an economic analysis of the role of limited - equity cooperatives (LECs) in providing affordable housing. Using a model of the user costs of housing that focuses on housing externalities, it examines methods for overcoming externalities in multiunit rental dwellings. Investment in management can reduce these externalities and thereby improve the quality of the housing environment, but the added cost excludes low-income households from housing with a high level of management. LECs can reduce housing externalities without imposing the dollar costs of management on residents. They do this principally by attempting to attract a favorable resident population and by substituting self-management for traditional hierarchical management. Given these findings, the article makes recommendations regarding the structure of a federally sponsored LEC program and draws implications for affordable housing policies in general. Finally, it calls for further empirical research into the desirable (and undesirable) features of self-managed affordable housing.

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