Learning from Baltimore’s Vacants to Value: Part II

In my first post on this theme, I wrote about the thinking behind Baltimore’s highly successful effort to get private developers and property owners to rehabilitate vacant properties and put them back to use. As I noted, the key element in the strategy is creating a predictable pipeline of vacant properties that developers can get hold of at affordable prices, with clean marketable title. The big question is how – how does Baltimore (or any city) create such a pipeline?

Baltimore uses a unique, powerful tool, a receivership statute that is different in important ways from such statutes in other states. While the receivership statute goes back to the 1990s, when Vacants to Value was initiated in 2010, the city significantly ratcheted up their use of the tool. As I’ll get to, even though Baltimore’s particular tool may be unique, many cities may be able to craft similar strategies using the tools that they have, based on the laws in their state. But Baltimore’s receivership statute is only part of what is a three-step regulatory process:

STEP I: When the City learns that a property is vacant and neglected, which can be either because an inspector spotted it, or a resident called in, the City issues a Vacant Building Notice (VBN). When a vacant building violation notice is issued, the owner is required to clean and secure the building and to maintain the building in a clean and secure state at all times, until the building is either rehabilitated or demolished. The VBN lets the owner know that the City has him or her on their radar. As a result, some owners rehab their properties when they get the notice, without waiting for the City to come down on them any further.

STEP 2: If the owner does not rehab the property, in areas where the City believes (based on a combination of hard data and judgment) that properties have enough value that a developer might rehab them, the City issues a citation ordering the owner to put the property back into use, or face a $900 fine. Some owners, who haven’t done anything up to this point, now rehab their properties. That leaves a vexing question about what happens in other areas where the values may be too low, which I look at in the next post.

STEP 3: If the owner still does not rehab the property, the City then files for receivership. The owner gets one more shot, by coming to court and committing to rehab the property, usually subject to conditions, like a bond, to make sure it happens. If not, a receiver is appointed. In most states, the City must ask the court to appoint a receiver to rehab the property, which does not affect the actual ownership of the property. Depending on the state law, the ownership may change after the property is rehabbed, or the property may go back to the original owner. Either way, the receiver doesn’t have title.

This is where it gets interesting. In Baltimore, the court appoints a receiver, not to rehab the property but to sell the property to a developer who will rehab the property. A nonprofit entity called One House at a Time (OHAAT) acts as the receiver, and takes control of the property. When they have 25-40 properties, which is about every month or so, they hold an auction. Anybody can bid, as long as they meet reasonable, non-onerous standards of financial capacity and experience, and are in good standing with the City in terms of taxes and codes on any other building they own. The minimum bid is $5,000. Once sale to a developer has been approved by the court, the developer gets full title to the property, free and clear of liens.

 
Since 2010, Baltimore has moved close to 2,000 vacant, abandoned properties back to use through this mechanism. Why is it so much more effective than other receivership programs? First and foremost, the person responsible for rehabbing the property owns the property. She’s on the hook. Unlike a conventional receiver, she can’t go back to the court, tell the judge, “I can’t make the numbers work,” and walk away. She also has more motivation. A successful receiver elsewhere, best case, is made whole. Period. A successful buyer through receivership in Baltimore has whatever upside she can get. Unlike other receivership programs, there’s no uncertainty about what happens at the end of the receivership, whether title transfers at all, and to whom. Lenders prefer to lend to an entity that has title, over one that is just standing, as it were, in the owner’s shoes. Moreover, since it’s an open bid process, nobody has to decide who’s the best receiver. There are lots of different contractors and developers in the picture, all looking for properties. Finally, the ultimate price – starting at the minimum bid – is based on a developer’s reasonable assessment of what she can get for the property, either through sales or in rental cash flow at the end of the day.

Basically, what it comes down to is an implementation model that follows the underlying logic of the Vacants to Value program; namely, that relies on the market to determine what can be done, rather than substituting the judgment of the city, or any other non-market player for the market’s judgment.

There are other ways a city can take property and convey it to a developer, including tax foreclosure, and in some states, spot blight eminent domain. They are useful tools, and in some cities have been used effectively. Some New Jersey cities have found that the state’s spot blight statute, which includes a clear way of setting fair market value, works well. But every time a property has to go into city ownership before it can come out the other side, that adds potential delay and complexity, and if the property is seen as desirable, potential political conflict. A big advantage of the Baltimore system is that city government never touches the property – the property moves smoothly from the former (neglectful) owner to a new owner, with OHAAT as the intermediary.

It is not super-fast. It can easily take 18 months to 2 years from the point when the City issues the VBN until the property is in the hands of the new owner. We found that this time frame was dictated by the need to move systematically through the notice and citation process, a process largely governed by the need to ensure that the owner receives due process at every step, and could not be significantly, if at all, reduced. As a result, it took a while after the City stepped up the process before the pipeline was up and running; now, though, properties are moving through it at a steady pace.

No other city has a receivership statute like Baltimore’s. But cities elsewhere have other tools, such as spot blight, as I mentioned, and other forms of receivership or conservatorship. Detroit and Wayne County get title to properties through the nuisance abatement process, while New York State has a law that allows municipalities to get title to abandoned properties through a court process (Sec. 19A of the Real Properties Actions and Proceedings Law). The key, though, is to use whatever tools one has to create a pipeline of properties, not a series of scattered, one-shot, actions.

In my next (and last) post on this subject, I look at the limitations of this strategy.