Hardest Hit Funds demolition policy change on track to become a boon for distressed communities
July 1, 2014
This article was originally published in the Summer 2014 issue of Breaking Ground, our quarterly newsletter. To receive Breaking Ground in your inbox, please join our email list.
For an update on the latest round of Hardest Hit Fund allocations in April, 2016, click here.
In February 2010, President Obama unveiled the Hardest Hit Fund, a United States Treasury program to use Troubled Asset Relief Program (TARP) repayments to provide targeted aid to families in states hit hard by the economic and housing market downturn. In total, the Treasury provided $7.6 billion in assistance to 18 states and the District of Columbia, selected on the basis of either high unemployment or steep home price declines. The program was designed to help people at risk of foreclosure with measures such as mortgage payment assistance, principal reduction, or support transitioning into more affordable homes.
By the end of 2011, however, public officials in a number of the states that had received HHF money – most notably Michigan and Ohio – were concerned that they were facing perhaps an even more urgent problem.
Thousands of houses were being abandoned in those states’ cities, pushing down the value of neighboring properties, destabilizing neighborhoods, and indirectly exacerbating the very problem that HHF was trying to deal with: houses going into foreclosure and families losing their homes. Jim Rokakis, Executive Director of the Thriving Communities Institute in Cleveland and former Cuyahoga County Treasurer; and Dan Kildee, then Executive Director of the Center for Community Progress and now Member of Congress for Michigan’s 5th District (and former Genesee County Treasurer), along with others, began to explore ways to raise more funding for demolitions in hard-hit cities like Cleveland, Flint or Detroit.
“We had to make the case for internalizing the externalities of blight and vacancy,” said Kildee. “We had to prove to Treasury that abolishing vacant structures that will not be repurposed will reduce foreclosure from abandonment and that this is, in fact, primary prevention of foreclosures.”
These advocates found a responsive ear at the Treasury Department, where key officials like Don Graves and David Dworkin had deep roots in those same cities. During 2012, in parallel with efforts to promote federal legislation – which proved unsuccessful – Treasury staff began to explore whether it might be possible to authorize demolition of derelict properties under the legal constraints of the TARP legislation.
Their efforts were supported by a growing body of research showing not only that abandoned properties have a significant, measurable effect on property values, but that demolition of those properties, under appropriate circumstances, can help reverse the damage. This research was critical in enabling the Treasury Department to demonstrate that demolition could have an impact on foreclosures.
By spring 2013, the Treasury Department was ready to make the change. Treasury staff had been in ongoing contact with officials in Michigan and Ohio, and the Michigan State Housing Development Authority started the ball rolling in April by making a formal request to the Treasury to use $100 million of the state’s HHF money for demolition. Treasury moved quickly, and the request was approved in late May. Ohio followed suit soon thereafter, receiving approval to spend $60 million of its HHF money for demolition. Since then, Treasury has approved similar requests from Indiana ($75 million) and Illinois ($30 million).
The Michigan State Housing Development Authority decided to allocate all of its demolition funds to five particularly hard-hit cities – Detroit, Flint, Pontiac, Grand Rapids and Saginaw. Each city was then required to submit a plan showing how their demolition strategy would strengthen their communities and reduce the risk of foreclosures, and the program was officially launched in September 2013.
Ohio officials decided to implement the program using the state’s network of county land bank authorities. They invited proposals from land banks through a competitive process that required each applicant to submit a plan, showing how demolition would be targeted as “part of a larger, comprehensive strategy to stabilize home values and prevent foreclosure.” Proposals for an initial funding round of $50 million were invited in January 2014, allocations announced by the end of February, and funding agreements executed at the end of March. A second round of $10 million will take place this summer. Indiana exannounced its first funding awards in late May 2014, while Illinois’ program is just getting under way.
The rapid development and ramp-up of this program reflects not only the general sense of urgency that people in Michigan, Ohio and elsewhere feel about the impact of derelict properties, but also the requirements of the HHF program, under which all money given to the states must be spent by the end of 2017. That is three and a half years away, but closer than it may seem. One of the conditions set by Treasury to make the blight elimination program conform to the TARP legislation is that the entity doing the demolition must own the property before they knock it down. While this is not a problem for land banks like the Genesee County Land Bank Authority which already has a large inventory of vacant properties, land banks that need to start acquiring properties from scratch will need all the time they can get.
The program is just getting off the ground – the first properties in Michigan are being demolished, while Ohio’s land banks are not far behind. To date, implementation of the program has brought successes but also challenges. Some land banks have found the program structure, under which they do not receive up-front funds, but instead are reimbursed by the state as demolitions take place, to be a challenge, as it required them to secure additional financing. In Flint, Genesee County agreed to provide short-term debt financing for the program, while in Detroit, the land bank was able to negotiate a $6 million revolving line of credit.
There are still some question marks to be sorted out. The requirement that a lien be placed on each property for the demolition cost is still being fine-tuned, including the question of whether the liens can be released when an end user is found for the property within the three-year lien period; the level of historic preservation review for properties in historic districts also needs clarification.
Overall, though, the program seems on track to become a major boon for distressed communities. A particularly valuable feature of the program is that allowable costs include site greening – so that the vacant lot is a community asset rather than a potential nuisance itself – and site maintenance for three years; as Jim Rokakis says, this “has gotten a conversation started about beautification and green reuse options.”
In Detroit, the scale of the program has spurred a level of interagency cooperation that did not previously exist, leading in turn to greater efficiency in the demolition process, as well as stronger demolition and environmental standards. In Ohio, the Lucas County Land Bank is partnering with the city of Toledo to do the demolitions in-house, which they estimate will reduce costs by around 20%. The Land Bank also plans to use part of the administrative money that comes with the program to conduct a parcel condition survey to help better target future blight elimination efforts.
Demolition alone is not the solution to urban blight or foreclosure, but it can make a major contribution to combating blight. The way in which the Treasury Department adapted the Hardest Hit program to this need, the ways Michigan, Ohio, Indiana and Illinois have taken advantage of the opportunity to create thoughtful state-level programs to fund demolition, and the ways in which land banks and other entities in those states have designed and implemented their programs shows that public agencies can respond creatively – and speedily – to address a need.
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