BY CUYAHOGA COUNTY TREASURER JIM ROKAKIS AND STATE SENATOR TOM PATTONE
Abusive lending practices, a severe economic downtown, weak state consumer protection laws and lax enforcement efforts to combat fraud have created the “perfect storm” in the housing market. One of the first and hardest hit communities in the nation was the City of Cleveland. The effects of the housing crisis are no longer just Cleveland’s problem. They now impact suburban and exurban communities once thought to be immune from the city’s problems.
A monumental effort is being made throughout Ohio to provide foreclosure prevention assistance to responsible homeowners at both the county and state levels. The work of Cuyahoga County’s “Don’t Borrow Trouble” foreclosure prevention program has been very successful. One of the first of its kind in the nation, this program has allowed more than 3,500 people to stay in their homes. Additionally, HB 294, which allows for expedited tax foreclosures, has helped vacant and abandoned properties to find their way back to productive use.
The huge number of foreclosures has resulted in an increase in abandoned properties that have devastated our neighborhoods, reduced property values and caused a decay of the real-estate tax base. Exploding foreclosure rates have also caused an increase in crime and a decline in quality of life, forcing many residents to leave their homes. Ironically, others are trapped in their homes, unable to sell because of the neighborhood blight.
Falling home values have resulted in more than 14,000 valuation appeals filed with the Cuyahoga County Board of Revision. A large percentage of these appeals are due to adjacent property abandonment. At this pace, by 2010, the damage to the tax base in Cuyahoga County – and by extension, to the schools and other taxing districts – will be devastating.
Here is an example of the recurring theme in these appeals. The taxpayer-homeowner plays by the rules, pays his taxes on time and has a home valuation of $120,000. Next to his home (or on the same street) are one or more abandoned, vandalized structures. As a result, the taxpayer’s home quite literally has no saleable value. The outcome is a reduction of at least 30 percent of the previous value. In this example, that could mean a reduction of $36,000! Multiply that times 15,000 homes throughout the county, and you can see why it is so urgent that something is done now.
Adding to the problem, rampant speculation and the dumping of thousands of devalued foreclosed properties onto the market has resulted in a large decline in the average sale price homes in Cleveland and Cuyahoga County. Because there are so many real estate transactions of $10,000 or less, an upheaval of enormous consequences is forthcoming if we fail to act decisively.
Recent action taken by the State of Ohio (SB 353), passed at the urging of Cuyahoga County officials, authorizes the creation of county-sponsored Land Reutilization Corporations (LRC) that will enable counties to attack the foregoing problem in a more nimble, strategic and productive way. In other words, in addition to existing prevention and rehabilitation efforts, SB 353 gives Cuyahoga County the tools to reclaim unproductive, blighted land. The immediate purpose of this action will be to arrest the decimation of the tax base, while maintaining a long-term purpose of productive neighborhood rehabilitation.
Based on the model in Genesee County, Michigan, HB 353 enables Cuyahoga County to expand non-profit community improvement corporations to include land reutilization corporations whose major purpose will be land reclamation. By permitting LRCs to receive tax foreclosed properties, properties owned by government-sponsored enterprises such as HUD, or through purchase of post-foreclosure real estate owned properties, the LRC can strategically triage its acquisitions. LRCs can then either responsibly moth-ball properties pending rehabilitation, assemble tracts of land for development, or demolish those structures incapable of rehabilitation. In Cuyahoga County demolition will likely occur on a large scale. Through revisions to the foreclosure sale procedures following tax foreclosure decrees, properties are eligible for direct transfers to the LRC thereby interposing a meaningful alternative to speculation. Another benefit is that private lenders will now have an avenue to transfer substandard properties to a responsible recipient.
It is important to note that private foreclosure procedures by banks and the private sector remain unaffected by the proposed legislation.
Since government funding cannot be assured, LRCs must be able to stand on its own. While there are several potential sources, funding for the LRC primarily will be derived from two revenue streams:
- Penalties and interest from the collection of delinquent taxes; and
- Monies derived from the sale or other transfer of properties the LRC acquires.
Under the new legislation, county treasurers will be authorized to borrow internally from their investment portfolios to make advanced payments of delinquent real estate taxes to the various taxing districts. All penalties derived from such advances, once collected, will inure or, in essence, be “assigned” to the LRC. The interest resulting from the delinquent taxes will be used to offset the cost of borrowing from the portfolio.
As an illustration, consider the following. The Cuyahoga County Treasurer collects real estate taxes in January and July. After the July collection, roughly $65 million to $75 million is delinquent. As these tax delinquencies are collected (typically 85 percent to 90 percent are collected over an 18-month period), the principal tax, plus penalty and interest are turned over to the various taxing districts proportionate to their respective entitlement. SB 353 authorizes the County Treasurer to internally borrow much of the projected delinquent tax revenue from the county’s investment portfolio, and immediately distribute this revenue to the taxing districts according to their distributive share prior to its actual collection. Currently these districts receive delinquent taxes after they are actually collected. The Treasurer is then authorized to place the statutory penalty on the delinquent taxes in an account to benefit the LRC. The statutory interest would be applied to ?the cost of the initial loan for the payment of delinquent taxes to the above mentioned districts.
Internal models prepared by Cuyahoga County Treasurer’s staff show that this will generate approximately $8 million to $9 million annually. Additionally, this annual revenue stream can be used to fund the debt service on any bonds or similar tax anticipation instruments to benefit the LRC. An estimated $40 million to $50 million is needed to make immediate and large-scale impact on the large numbers of vacant properties in the county and even this amount will not tackle everything. At this time the total demolition need in Cleveland alone is estimated to be roughly $100 million. We know that this will not completely solve the problem. It will, however, create an effective tool to combat blight and the decline in property values on a long-term basis.
Through changes to the Revised Code, unredeemed tax foreclosed properties can be transferred directly to the LRC or to land bank cities without lengthy sheriff and auditor sales which simply feed the cycle of unwholesome land speculation. Speculators will no longer be able to “cherry pick” higher equity properties, while leaving behind the negative equity properties to escheat to the state or to passive city land banks. Instead, after the 45-day redemption period, the tax foreclosed properties may be efficiently transferred directly to the LRC. This simple change will allow the LRC to acquire both positive and negative equity properties. Sales of the abandoned positive equity properties will provide revenue to help fund the operations of the LRC. Properties would then be transferred to qualified homeowners and legitimate rehabbers.
This approach has worked in Genessee County, Michigan. The economic impact of Genessee County’s land bank was studied by Michigan State University in 2007. MSU researchers determined that land values in the county have been increased by an estimated $112 million as a result the land bank’s demolition and rehabilitation efforts.
Authorizing LRCs to serve as repositories of numerous properties in need of reclamation, transfer or demolition will be strategic, more efficient, and will compliment the various city land use plans. In areas where larger scale assemblage occurs, these assemblages will be marketed to private redevelopers as incentivized properties so long as developers adhere to redevelopment commitments.
It should be emphasized that the LRC will not preempt existing city land banks. Cities will always have the “right of first refusal” to acquire a tax foreclosed property. The legislation is sensitive to the fact that we do not need another layer of government. The LRC was specially chosen as the preferred vehicle for land reclamation because, other than the adoption of its public purpose by the County Commissioners, it operates very much like a private corporation in every material respect. Being nimble and being able to act similarly to private enterprise is a key feature of a successful land reclamation initiative.
It is impossible to determine how long it will take the real estate market to recover. LRCs will position us to control our own destiny when the situation does improve. We should not allow chance or the speculative environment that created the current crisis to control future development. NEO
Cuyahoga County’s LRC will be operational in mid-to-late April 2009.
