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SIDEBAR: How Cities Handle Property Liens « The Washington Independent

With foreclosures looming and the mortgage crisis showing no signs of easing, cities and towns are scrambling, in different ways, to deal with the problem of unpaid tax liens and foreclosed homes.

Some are trying to buy back their liens from private firms, tired of being stuck with vacant land. Others are wrangling with speculators. Some still want to sell them off. The clash is likely to continue, since out-of-town investors and private tax lien collection firms often have different goals for the properties than the cities do.

“They’re trying to take this debt that is tied to local governments and to make money off of it,” said Joseph Schilling, a professor at Virginia Tech’s school of Planning and Urban Affairs.“Our system allows for this trading of property like stocks and bonds, but there are real impacts to the community and to the neighborhood. The primary purpose of these firms is not to consider the community impact, as to who will be the next owner, who will live in the property, and what kind of neighborhood it will be.”

Here’s a typical dilemma: A city sells off a tax lien to a private firm on a house worth $25,000. The owners walk away, rather than paying. The property deteriorates, and the city has to tear it down, with its ownership in question. That leaves an empty lot left, worth about $3,000, but with tax liens and a demolition lien. The city or a redevelopment group tries to buy the lot for redevelopment, but the out-of-town firm won’t accept less than $30,000 or so — to cover the liens and other costs.

Remember, the city sold the lien to this firm, at maybe 10 cents on the dollar, for the privilege of being stuck in this position. The lot just sits, and the blight grows.

“One thing that’s always true is that they don’t budge,” said Rick Belloli, executive director of Pittsburgh’s South Side Local Development Co., which recently spent $100,000 more than it planned to buy a property from a tax lien speculator. “It’s truly an impediment to redevelopment.”

In one city neighborhood, a small lot necessary for development of an affordable housing project worth about $9,000 carried $45,000 worth of liens, putting it out of reach for the nonprofit that needed it.

In Toledo, Lucas County Treasurer Wade Kapszukiewicz vowed to collect unpaid taxes and hired Xspand, the firm founded by former New Jersey Governor James Florio, three years ago. He has no complaints about Xspand in particular, and said the company did its job. But he now calls tax-lien sales to private firms “a thing of the past” and said he’s pushing to emulate the Flint land bank model,

“It’s dawned on me that this is no longer cutting edge,” he told Governing Magazine recently.

In Buffalo, a state agency acquired the city’s liens in 2003 and tried to securitize them, by pooling them and selling to investors. But it didn’t work, because the 18 percent return on paper that delinquent tax liens are supposed to provide didn’t materialize; too many properties were either too far gone or too overpriced for the liens to be redeemed. Neighbors complained the empty houses and lots sitting in limbo attracted drug dealers, blight, and trash. Last year, the state stepped in and returned the liens to the city

In Pittsburgh, the city also faces a complicated problem. Last year, the city bought back liens it sold a decade ago to a company called Capital Asset Research Corp. “We all thought,

‘Here come the floodgates of new development,”’ said Steve Shivak, executive director of the Pittsburgh Community Reinvestment Group.

Not so fast.

The county also sold liens on the same properties, but to a different firm called GLS Capital Inc. and was sued by the firm, which complained the properties were in worse shape than expected. The county says is trying to buy some liens back, but for now the the titles aren’t free and clear, as expected. “Neighborhood groups are ready to redevelop $80,000 in properties,” Shivak said, “but we can’t move on them.”

Even cities that aren’t losing population are having problems. Paterson N.J. – for reasons that still aren’t clear – sold off its liens a few years ago at a discount, when property values were on the upswing. Speculators quickly gobbled up the land and they, not the city, are profiting. Organizations that used to buy up land at tax liens sales are frozen out.

“For most of us in affordable housing, free or cheap land from the municipality is less and less likely,” said Barbara Dunn, executive director of Paterson’s Habitat for Humanity. “The land is a hot commodity and private developers bought it all through the tax lien process.”

Despite these controversies, communities continue to sell their liens to private firms, including Erie County, where Buffalo is located, and more are considering it.

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