State Policies Play a Central Role in the Fight Against Vacant Property

Vacant and abandoned properties seem like a quintessentially local problem. And yet, much of the key policy action in the fight against vacancy is actually at the state level.

State policies on everything from taxation to land bank funding can make the difference between a vacant property and a well-care-for property like this one in Milwaukee, Wisconsin.
State policies on everything from taxation to land bank funding can make the difference between a vacant property and a well-care-for property like this one in Milwaukee, Wisconsin. Photo courtesy of the Center for Community Progress

Vacant and abandoned properties seem like a quintessentially local problem. After all, they tend to be concentrated in specific neighborhoods, and the problems they cause are felt in their immediate vicinity (though they do also affect citywide budgets).

Many of the strategies that mitigate the effects of vacant and abandoned properties are put into effect by local entities as well: land banks, code enforcement, and greening programs, for example, all tend to be operated by local jurisdictions, often in partnership with community groups. So, for that matter, are tax foreclosures and sheriff sales. Local ordinances like vacant-building registries and code changes are common. This makes sense given how high-touch many of these processes are required to be, and how housing markets and building conditions vary from locality to locality.

And yet, much of the key policy action in the fight against vacancy is actually at the state level.

“In almost every state, the laws pertaining to real estate are state laws,” explains Frank Ford, senior policy adviser to the Western Reserve Land Conservancy’s Thriving Communities program in Cleveland, Ohio. This means two things: First, in order to change how they handle vacant real estate, localities often need changes made through state legislation, whether it’s a land bank enabling statute so they can move vacant land back into productive use, property tax reform that makes responsible owners less likely to foreclose but gets properties out of the hands of irresponsible owners before they deteriorate, or the creation of receivership power that allows a third party to step in and fix up a nuisance property.

Second, if states control real estate law, they pre-empt and nullify measures passed locally that they find to be too aggressive, often at the behest of players such as mortgage servicers or tax lien purchasers, who do not have the needs of the local neighborhoods at heart. “It’s important to understand that the state can giveth but also taketh away,” says Joe Schilling, senior research associate at the Urban Institute, in its the Metropolitan Housing and Communities Policy Center.

Ford gives an example of pre-emption at work in Ohio: “There have been a lot of vacant property registration ordinances passed at the municipal level,” he says, but Safeguard, a property maintenance company that works for lenders who own foreclosed property, has been pushing for a statewide registration framework that has much weaker penalties for noncompliance than some of the local ones; it will pre-empt municipalities from continuing to enforce their own stiffer penalties.

Schilling and Ford are also concerned about the influence of mortgage servicers in places like Ohio and Maryland on the passage of fast-track mortgage foreclosure procedures. While shortening the time frame for foreclosing on abandoned property makes sense, if fast-track legislation lacks appropriate protections it could lead to premature foreclosure of an occupied house with an owner who’s going through a temporary hardship, for example. “There’s a cautionary tale when it comes to state legislation,” says Schilling.

The Holy Trinity

Nevertheless, state legislation has also been a force for good in many places. According to Frank Alexander, co-founder and senior adviser of the Center for Community Progress, and Sam Nunn, professor of law at Emory Law School, three major categories of state legislation over the past 10 to 15 years have affected how localities are able to handle vacant property.

The first and most high profile is land banking statutes. Though land banks are formed at the local or regional level, they generally require enabling legislation at the state level that gives a land bank the power to acquire property, wipe away its back taxes and liens, and dispose of it in an intentional manner. The details of this legislation can dramatically affect how effective land banks are. Enabling legislation can limit things like where land banks are formed, how many are formed, whether they are forced to accept properties or able to choose, and what funding and acquisition avenues are available to them. 

Land banks alone, however, are not enough. “There’s no point in dealing with land banking without tying it to tax foreclosure and/or code enforcement,” says Alexander. “Whenever someone calls and wants a land bank statute I say, ‘OK, but why?’ You shouldn’t worry about it until you figure out if [your vacancy problem] is related to bad tax foreclosure or code enforcement [processes]. You need to fix those things first and then line up a land bank.” When those systems are working better, says Alexander, abandoned properties can be moved into beneficial use through a land bank.

Tax foreclosure systems often remained unchanged from end of the 19th century to the end of the 20th, says Alexander. None complied with evolving notions of due process. None delivered a clear, insurable title at the end of the process. When foreclosed properties were sold, the minimum price was often the amount of taxes owed, which in weak markets made them underwater financially from the get-go and they attracted no buyers. The process could take as long as four to nine years, which often would allow an abandoned building to deteriorate past the point of recovery. Some states don’t even do foreclosures themselves, but merely sell tax liens to investors.

Figuring out what parts of the tax foreclosure system are not working is a state-by-state process. Michigan completely rewrote its law in 1999, repealing its previous system. Georgia in 1996 set up an alternate system that counties can opt into. In 2017, the Center for Community Progress (CCP) produced an analysis of West Virginia’s tax system and made recommendations for improvements, from seemingly small changes such as improving notice requirements to major changes, like no longer selling liens to investors.

Once the property tax system has its incentives aligned and procedures moving smoothly, tax reform can then connect the process to a land banking system, for example by giving land banks preferential access to foreclosed properties and the ability to make the minimum bid at an auction without paying the tax bill.

Code systems too can benefit from state-level intervention. “Most code enforcement doesn’t provide an effect remedy,” says Alexander, “especially for buildings that are not occupied, and not occupiable. . . . Even if you have the most recent version, a model code, . . . criminal citations for an abandoned building doesn’t get you anywhere.” Common types of owners of abandoned buildings, he notes, might be an individual who has a one-fifth interest inherited from his grandmother, or a defunct shell corporation; citations are not likely to go anywhere against them. “Even if you have a civil remedy and you get a judgment,” he adds, “it stands behind taxes and mortgages [in priority]. Enforceability of a code lien judgment is pretty worthless. I get your moral outrage, but you’re not accomplishing anything.”

There are, however, ways states can adjust the laws to get around this—they can allow municipalities to bring lawsuits against the properties themselves, known as “in rem” suits, rather than against the owners. The goal of in rem proceedings, which are not very common but are successfully used in many places, is generally not to get a judgment paid, but to get control of the property. State law can also allow municipalities to attach a code lien to the tax bill in an in rem proceeding, which does make it more likely to be paid, whether by the original owner or an auction purchaser. Or, if touching the tax system is not politically feasible, as was in the case in Mobile, Alabama, states can allow a municipality to create a civil code lien that has priority ahead of everything except the taxes, and to make minimum auction bids include those liens. Since property taxes (and market values) are very low in Alabama, this does not tend to put properties underwater and they are still appealing to potential purchasers.

States can also enable receivership—in which a court-appointed third party steps in and makes repairs. Receivership gives localities a tool to address nuisance vacant properties when code enforcement can’t. Steve Barlow, lawyer, founder, and president of Neighborhood Preservation Institute (NPI) in Memphis, Tennessee, has used this tool since Tennessee first passed a receivership law, the Neighborhood Preservation Act (NPA), in 2007. Barlow’s experience with the NPA is a good example of how proactive local stakeholders can use state legislative changes to help them do their work better.

“We were reacting to an overstressed, under-resourced, inefficient code enforcement operation,” explains Barlow. “There was not a consistent application of property maintenance standards across the city. There’s no way they could keep up with even all the abandoned properties.” Barlow and his team began bringing receivership lawsuits against abandoned property owners in Memphis as a way to force a change. By 2010 they were filing hundreds of cases at once. By 2017 they had figured out how to file cases on behalf of the city, working in partnership.

But there were frustrations that would require amendments to the NPA. For example, the court-appointed receiver’s duty was to make a structure fully habitable. And receivers could only be nonprofits certified by the court. Asking nonprofits to put upfront all the resources to take a property that had been empty for years up to full habitability is a big ask. Although they would get paid the money they had spent plus a 10 percent fee at the property’s sale (or in the unlikely event the owner paid off the repair lien and redeemed the property), nonprofits were scared to spend tens to hundreds of thousands given uncertainty about the auction results. The receivership law was ambiguous about under what circumstances the purchaser of a property that had been in receivership could get clear title, meaning title insurance was hard for purchasers to get and receivers were unsure about whether properties would sell so they could recoup their investment. All this meant, says Barlow, that “we were not getting a pool of people who were signing up to be a receiver.” Without sufficient receivers on hand to move the process along, “we had 30 to 50 cases stuck in the mud, eligible for appointment of a receiver, seemed like they would be good rehabs­­­­—owner was gone or willing to sign—and yet we weren’t able to make real that threat in any consistent manner.”

With CCP’s help, Barlow and NPI crafted a total rewrite of the Neighborhood Preservation Act. The new bill shifted receivership actions from a suit against a person to in rem cases against the address, which resulted in a clearer title. It changed the obligation of the receiver to merely stabilization, after which properties would be auctioned to prequalified bidders. It allowed receivers to be any entity the court approves. The NPA rewrite, with some amendments to the state’s land bank legislation as well, passed earlier this year.

In New York, a law intended to address the problem of “zombie properties” went into effect at the end of 2016. Zombie properties are those that have been abandoned by homeowners facing foreclosure, but not yet taken possession of by lenders. The New York law requires that lenders take steps to identify whether properties they have mortgages on are abandoned, and if they are, makes the lenders responsible for property upkeep even before a foreclosure is completed. Municipalities can request state enforcement of the law, complete with fines.

Frank Ford thinks there could be many other adjustments to state law that would help prevent bad actors (or well-intentioned but incompetent actors, who can be just as damaging) from getting hold of properties and causing or perpetuating vacancy. States could, for example, give county clerks the authority to refuse to record deeds for someone who has unpaid property taxes, suggests Ford. “Right now they have their hands tied, even if they know this is someone who will engage in fraud.” He also suggests that out-of-state purchasers at sheriff auctions be required to register with the state’s secretary of state so at least local officials know who actually owns their property and can reach them if needed. Reining in land contracts, which often result in households losing their homes, would also help, he suggests.

Fighting Vacant Property: Beyond Legislation

States can play roles beyond legislation as well. West Virginia’s Abandoned Properties Coalition (APC), a statewide group consisting of local stakeholders who are trying to tackle this problem, is looking into potential changes to administrative procedures that would only require agreement of the agency involved. The state has a large number of empty schools, for example, that are often quickly sold off to purchasers who don’t have a solid plan or capacity to complete a project. The coalition thinks the state’s problem with vacant school buildings could be reduced if the state agency that approves new school construction funding would make that funding contingent on a reasonable reuse plan for decommissioned buildings.

States can also build local capacity to address vacancy. The New York attorney general’s office, for example, decided to direct a chunk of its bank settlement dollars toward the state’s nascent land banks and other programs that help localities deal with the effects of widespread foreclosures. One of the things the office funded was the Cities RISE grant program, administered by Enterprise Community Partners and the Local Initiatives Support Corporation, better known as LISC, which helped 16 cities purchase code enforcement software and direct some resources toward using that software to better coordinate their code enforcement activities.

“It brings together the municipalities’ often balkanized sources of data from code activity to fire to police actions, all the different data in various datasets, and overlays them to publicly available data, [like the census],” says Elizabeth Zeldin, director of Enterprise’s New York office. “This begins to give them the abilities and opportunity to really better understand patterns in their code issues and their code activities and helps us more strategically address them.”

Political Will and Coalition Building

Getting changes enacted at the state level is not always easy, of course. States that have a big urban-rural divide may need to find smaller places that are struggling with vacancy to join with urban centers as allies. Conservative rural legislators in Tennessee were quite upset with elected officials from Memphis who had removed Confederate statues, says Steve Barlow, so “most things out of Memphis in 2018 were DOA” in the state legislature. Therefore, even though the idea to rewrite the Neighborhood Preservation Act was mostly coming from Memphis, advocates convened a group across the state, and partnered with other localities seeking some changes to the land bank statute that could be folded into the same bill. That way, he says, “When we sent our team, it was not Memphis asking. It was Oak Ridge, Jackson, Nashville. It has a Jackson senator sponsoring it. It wasn’t a Memphis-only bill. That was the only way to go.”

Sometimes regions of the state that don’t see the need for a land bank or are suspicious of them are OK with passing a law that allows them to be created only in specific locations, says Alexander. So land bank enabling statutes, receivership powers, or other added powers are sometimes introduced first for one or two places and then expanded as other places see how it works and realize it might actually benefit them as well.

Alexander adds that to build political support for any of these anti-vacancy measures, advocates shouldn’t start by focusing on the technical things. Start, he suggests, with education about the harms of vacant properties. “Make sure neighborhoods, public schools, and elected officials understand what it’s costing them to do nothing,” he says. “Then we go to the step of figuring out which broken system is the bigger problem, is it tax or code. Then we’re beginning to gauge political winds—will it be a specific city, a narrow surgical intervention to start, or broader? It’s not unusual for it to take two or three years for a comprehensive reform measure to get through the system.”

In West Virginia, the statewide Abandoned Properties Coalition is made up of technical assistance providers, staff from county and municipal governments, and engaged community members. The coalition’s breadth allows identification of statewide policy agenda items that will have a big effect, and provides a basis for statewide support. “It’s almost as if we treat West Virginia as if it was a whole city like Cleveland, or Pittsburgh, or Detroit, because we only have a population of around 3 million. So really, we are like a single metropolitan area spread out across the state,” says Shae Strait, project manager for the West Virginia University BAD Buildings program, and an adviser to the APC. “We’re not having these discussions only at the neighborhood level, we’re having them across multiple municipalities or counties and regions. People are coming together across the state to work together.” The coalition has built trust and cooperation among members with projects such as securing a grant to hire one code enforcement professional for a series of small towns along the Ohio River, none of which could have afforded one on its own without competing with its neighbors for limited funds. This lays a good foundation for coordinated statewide action.

The Center for Community Progress published a report in 2017 on ways West Virginia could reform its property tax system to better address vacant properties, and the APC is ready to try to move those suggestions forward—a couple at a time. APC members voted on where to start, says Taylor Bennett, policy coordinator at the West Virginia Community Development Hub, who manages the APC. Of the dozens of recommendations in the report, the group selected the vetting of tax lien purchasers and the creation of a “stabilization fee” added to tax lien sales that could fund revitalization efforts across the state. “The idea,” says Bennett, is that “as we start to see some success with those policy solutions that we would build on that and continue pushing for more of the recommendations that were outlined in the CCP report.”

Bennett sounds optimistic, but in many states with heavily Republican legislatures, battles are being picked very selectively. “My impression is that whenever we run into ‘Oh that’s going to require state law’ in a room of 20 to 30 people having a dialogue, the response is ‘Oh damn. That’s going to be hard,’” says Ford. “They look at it with trepidation. We find ourselves looking for what we can do other than go to the legislature.” Though, he adds, “at least that leads people to think creatively about what they can do locally on their own.”

Ohio has had some legislative successes, including the authorization to create land banks and set aside a dedicated source of funding for them. Those were successful, says Ford, because the people who led those efforts, Cuyahoga County treasurer Jim Rokakis and CEO of the Cuyahoga Land Bank Gus Frangos, made a point of working hard to find Republican sponsors. “You don’t get anything passed in Ohio with a Democratic sponsor,” says Ford. (Frangos is, apparently to many colleagues’ surprise, himself a Republican.)

The good news is, says Barlow, there isn’t a natural “pro vacancy and abandonment” constituency. “Occupied substandard housing yes, that has a lobby, but not abandoned properties.”

The important take-away is that those hard-to-turn-around vacant properties in your community are not just a function of the local market. There could be many state-level policies keeping them in limbo—and many state-level solutions that could help recover them.

 

This article appears in the Fall 2018 edition of Shelterforce magazine. Subscribe here.

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