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Local Land Banks Fight Urban Decay

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Temp_house.jpg

As the mortgage crisis worsens and foreclosures grow, many cities now are facing the mounting challenge of cleaning up abandoned properties. They are looking for ways to fight back. Civic leaders are trying to gain control from lenders and speculators who abandoned their “investments,” leaving neighborhoods littered with vacant homes, marked by boarded-up windows and overgrown yards, and empty lots filled with trash.

One tool they’re developing : Land banks.

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Debt-150x150_4779.jpg

Illustration by: Matt Mahurin

Since 2002, for example, the Genesee County Land Bank in Flint, Mich., has taken title to more than 6,300 properties; torn down more than 800 blighted structures; rehabbed 90 affordable rentals and 80 single family homes, and given 500 side yards away to the homeowners next door. These homeowners get a bigger yard; the neighborhood gets rid of an eyesore. Flint’s land bank has even redeveloped an abandoned downtown department store.

A handful of other cities and counties has established land banks as well. More are considering it as foreclosures increase, and as some lenders are trying to donate to communities hundreds of foreclosed properties that are so poorly maintained they’re not worth keeping.

In Cleveland, Cuyahoga County Treasurer Jim Rokakis is pushing to create a land bank in the next few months. Land banks give local governments an entity to wheel and deal with lenders—they take off the lenders’ hands properties that are only empty shells, but the land bank can bargain, in return, for higher-value properties. Profits from those properties can then can be used to demolish or rehab the shells. Some 10-15 percent of the properties the Genesee bank acquires each year have significant market value, said Dan Kildee, treasurer of Genesee County and chairman of its land bank.

Last year, the Genesee bank received the Innovations in Government Award (pdf) from Harvard University, which gave its program national recognition.

The land bank isn’t actually a new idea. Federal land banks appeared as early as 1916, when money was scarce in rural areas and farmers needed financing. During the Great Depression, land banks handled farm foreclosures and defaults.

Despite interest in the updated version, land banks haven’t suddenly begun to sprout up. Creating a land bank isn’t simple or quick. It usually requires legislative approval. And many cities and counties have to fight to change the tax foreclosure process, to enable the land banks, instead of speculators, to control those revenues. That’s not always an easy sell.

Kildee, always enthusiastic about the land bank idea, sat down over coffee during a recent visit to Washington from Genesee County. He was eager to explain the thinking behind a land bank and to talk about its potential.

**Q: **Is the idea behind a land bank to allow a community to buy and manage abandoned or foreclosed properties instead of letting them fall into the hands of speculators?

**A: **Exactly. .

**Q: **What about walkaways?

**A: **We’ve acquired some buildings that continue to cycle in and out of the tax system, but were never foreclosed on because of speculators. We thought we could interrupt that process. Instead of waiting, we can go in and get it.

**Q: **How can a land bank move so quickly?

A: It really does require statutory authority. We wrote into the Michigan law a provision that allows me, as the treasurer for any property owned by the land bank, to petition the court for quiet title, which is the process of acquiring a marketable title. And the court, a state court, is obligated under the statute to a grant us a hearing within 90 days of our petition being filed. It’s very fast. The whole process takes maybe at the most 180 days.

Q: How does that compare to taking title without a land bank?

**A: **That can take a long time. The real problem is that each case stands on its own. There’s no precedent. In our case, not only can we go in with a specific statute, but it allows me to go to the court and file a bulk petition on a number of properties. So it’s a mirror image of the significant improvement we made in our tax foreclosure process. That other piece is really important.

Q: Can you explain that piece?

**A: **The reform of the tax collection and tax foreclosure process is absolutely critical. It’s faster, and it’s a different model on a number of different levels. The speed is important. But there really are three fundamental problems with most of the systems around most of the country, that we had with our system, and that we changed.

No. 1 was the time. So it was a 106-year-old process.

The second most significant fix was not using the foreclosure process as a way to engage private investors– all the people who watch infomercials and buy properties on Ebay. We got rid of that. I foreclose as the treasurer and take title as the treasurer, to all the properties that go through tax foreclosure. I don’t advocate using the government’s authority to support speculators. That was another big thing

Q: What was the third problem that you fixed?

**A: **We reengineered the economics of tax foreclosures. This is one of those areas where it’s such an obscure government function that it doesn’t get a lot of attention. But I think a great big spotlight is starting to shine on it. If you don’t pay your taxes you’re going to lose your house. The way that most states handle that process is that in one form or another, they sell their receivables, the tax that is owed to them, They’re selling that right to collect that to private investors. In most states, county treasurers, when they get tired of not being able to collect $15 million in taxes, or five million or whatever the number is, they sell it to a private investor in exchange for some percentage of the collected tax. They sell the government’s right to foreclose on the property. The investors either get the property in some point in time by actually foreclosing on it, or they receive a return on their initial investment. That tax lien is like a security. It delivers to the holder a rate of return, so that if the taxpayer ultimately does pay the tax, they get typically in the range of a 12 to 18 percent annual rate of return. That’s a really nice investment for one of these tax lien speculators.

Q: Do they operate then like debt collectors?

**A: **Yes. If they decide to foreclose, the speculator has a personal financial interest in you losing your property, if it has value. If it doesn’t have value, and it’s just part of the market basket of properties for which they’ve acquired the liens, they may walk away.

**Q: **How did you get control of tax lien sales?

**A: **To get to what we did—which I think is a really important principle for any kind of reform—we took that investor opportunity, the tax lien investor opportunity, and we rewrote it. We decided we’re going to continue to have that principle applied, except we’re going to be the investor.

Instead of selling tax liens every year, I go to Wall Street and I borrow all the money equal to the amount of uncollected tax, for every government in my county. I buy the receivables. Last year I borrowed about $45 million, paid all the local governments and then I had full control of the tax liens.

Q: It’s like you’re a super speculator.

A: Right. So then we collect the tax, as it’s paid, and we also collect that rather high rate of interest, which for us in the first year of delinquency is about 16 percent, and in the second year it’s 18 percent. So if you think about the economics of this, I go to Wall Street and I borrow $45 million at 4 percent. So a big chunk of that spread is the money I use to operate the land bank authority.

So there’s a double bottom line we’re able to achieve. We achieve profitability, because we’re now the smartest and luckiest tax lien buyers. Our other bottom line, probably more significantly, is that we have different aspirations for the reuse of these properties.

Q: How does all this connect to the mortgage meltdown?

**A: **The mortgage foreclosures include a lot of these lower value properties that often were the subject of predatory structures on the loans. You’ve got that problem, which is not likely to deliver the property to reuse, and then you’ve got private investors who are fully within their rights, meaning a lender, they’re fully within their rights to walk away. Legally. There isn’t any law that says you have to hold this property forever. The only thing they’re really subject to is any contractual arrangement they have or the enforcement of the local building codes, as such. That then begs the question: Now we’re going to have all this new abandonment. How do we create a mechanism to manage that inventory, to deal with a problem that tries to prevent foreclosure but recognizes that in some cases, getting that property in our control, letting everybody off the hook, letting everybody walk away, might be the best thing we can do, because we give the community a chance to determine its own destiny?

Q: Have you been getting a lot of outside interest in land banks due to the crisis?

**A: **Yes. We concluded fairly early in our process that what we’re doing was significant and replicable. We got so many calls we created the Genesee Institute in response to the need. And the Institute is now one of the partner organizations that comprise the National Vacant Properties Campaign.

**Q: **But couldn’t the private market handle all this instead?

**A: **That’s really the fundamental question when any state is trying to deal with this in any form. That’s the pushback. Our Institute is doing a lot of work in New Orleans, and the question comes up, “Why not shotgun these properties out, take the chance the private sector will do something with them, and get out of the way” The way we characterize our work is to be very responsive to the for-profit market, but not be neutral on the kind of market we’re trying to engage. There isn’t thissort of single marketplace for property. There’s all different types of investment for real estate. What we want to make sure is that the type of investor we are attracting is an investor who wants to utilize the properties.

**Q: **What about house flippers and speculators? Don’t they have some useful role in taking foreclosed properties off lenders’ rolls?

**A: **The fact that those properties are privately owned does exactly what good? It does no one any good. It’s not like if you sell them to a private investor in Oklahoma they’ll take them and drive them on a flatbed truck to Oklahoma. They’re still sitting there in Cleveland. A lot of people who buy foreclosed properties buy the infomercial tapes, they saw the pictures on TV and on DVDs and they sell them on this idea that there’s a way to get property for very little money and make money on it right away. The issue is that there are those instances where someone does get a property and does very well. It’s that very small percentage that we get now, and we sell them, and that goes not to some guy sitting on a beach making an infomercial, It goes toward cleaning up other properties.

The age of digital information was really the first wave of speculators. The tax lien system until then was kind of a quaint, folksy little cottage industry. It has evolved into this really I think not so great speculator opportunity for institutional speculators and out of town speculators. Now this is the second wave.

Q: Who do you have on your side?

A: is really an important partner for us. We deal with residential properties, as well as commercial and industrial sites. Blight is a contagious disease. It infects everything.

Q: With so many foreclosed properties, what about the possibility of a national landbank?

A: The National Vacant Properties Campaign has purposely adopted from a policy reform standpoint a state by state approach. Certainly, there’s not really a strong policy imperative in the current administration toward urban solutions. But so much of this really is the domain of state policy anyway. In a lot of our work we try to support individual communities seeking help, but simultaneously work to support state policy reform. Virtually everywhere we go, the biggest hurdle is the reform of the tax foreclosure system.

**Q: **Fixing the tax system isn’t simple.

A: It takes a long time to figure out how these things work in the first place. I’ve held elective office for 31 years and I’m still trying to figure it out.

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