You asked us to describe programs that rehabilitate blighted properties for sale to first-time homebuyers.

SUMMARY

Cities have tried different strategies to rehabilitate properties for sale to first-time homebuyers. This memo discusses (1) select programs that target blocks with many vacant lots and abandoned buildings and (2) some factors that limit the impact of housing rehabilitation programs.

Philadelphia and Ogden, Utah implemented geographically targeted programs. The former used federal homeownership development funds to construct and rehabilitate 300 new units in Lower North Philadelphia. It reduced the building density, which changed the neighborhood's physical character. Ogden built a mixed ownership and rental project on the site of a demolished school. The project fostered a sense of ownership and community by creating a resident's association and requiring owners and renters to take homeownership courses.

Boston and Chicago's programs operate citywide. Boston runs programs that help homebuyers and developers acquire and rehabilitate blighted properties. It also trains and counsels new homebuyers in obtaining mortgages and avoiding foreclosure. Chicago offers private developers several incentives, including price breaks for city-owned vacant lots, reduced permit fees, and low-interest construction loans. It also helps people buying these new homes make down payments and cover closing costs.

Cook County and Baltimore run programs to acquire and rehabilitate abandoned, tax delinquent properties. The amount of taxes owed on these properties usually discourages developers from acquiring them. Cook County's tax reactivation program transfers these properties without the tax liability to pre-selected developers. Baltimore tried to auction tax-foreclosed properties to homebuyers, but had few takers. Instead, it hired a private firm to rehabilitate and sell the properties to homebuyers. The city also provided financial assistance to the buyers.

New York City markets clusters of vacant and abandoned city-owned properties to local property management companies to rehabilitate and manage. The city found that this approach makes an immediate impact on the neighborhood and allows the companies to gain more experience managing large properties.

Some programs rehabilitate property and help the occupants become homeowners. Chicago's Lawndale Christian Development Corporation rehabilitates and rents units to low- and moderate-income families until they qualify for mortgages to purchase the units. Nonprofit organizations in Hartford have developed a permanent supply of low- and moderate-income housing by rehabilitating properties for organized groups of low- and moderate-income residents who share ownership and management rights and responsibilities.

GEOGRAPHICALLY TARGETED PROGRAMS

Philadelphia's Ceil B. Moore Homeownership Project

In 1998, Philadelphia saw the concentration of vacant lots and buildings in the Lower North Philadelphia neighborhood as a chance to reduce the density and change its physical character. It created almost 300 new and rehabilitated homeownership units in the neighborhood, whose population dropped from 13,000 in 1960 to 3,700 in 1990.

The city took advantage of the federal Homeownership Zone Program, under which the U.S. Department of Housing and Urban Development (HUD) provides funds for creating homeowners in severely blighted areas. The program allows cities to develop low density, mixed income housing.

The project mixed rehabilitated old row houses with newly constructed units at half the previous density. The homes sold for $41,000 and $46,000. To attract people at different income levels, HUD allowed the city to sell up to 20% of the units to people earning up to 120% of the area median income (Planning, March 1998).

Ogden, Utah's Lorin Farr Subdivision

This city's in-fill zoning ordinance allowed developers to build 24 new homes and apartments on a vacant 4.5-acre site in a formerly blighted neighborhood near the downtown. The developer built the units on smaller lots and with narrower streets. The higher density allowed him to include a neighborhood park and a landscape buffer along a major thoroughfare (Journal of Housing, March, April 1995).

A limited liability company developed the $2.2 million project with funds from different sources. The city's redevelopment agency paid $400,000 to acquire and improve the site; a local bank provided a $1.8 million construction loan; and the state's housing finance agency provided bridge financing. The bank recouped part of the money by taking a federal low-income housing tax credit. The redevelopment agency also provided $2,000 down payment loans.

The owner-occupied homes sold for an average $72,000, which was affordable to families earning between $16,000 and $30,000 annually. The apartments rented for $397 a month, which was affordable to people earning between $11,000 and $21,000 annually. Renters can buy their units after the 15-year period for complying with the federal tax credit expires.

Despite the mix of homeownership and rental units, the developer tried to develop a homeownership culture among all of the residents. He pre qualified renters based on the same work history and income and credit criteria banks use to underwrite home mortgage loans. Owners and renters also had to take Utah State University courses in home maintenance, financial management, and getting along with neighbors. The developer also created the Lorin Farr Homeowner Association to involve the residents in managing the subdivision.

COMPREHENSIVE CITY WIDE PROGRAMS

Boston

Boston runs several programs to rehabilitate abandoned or severely blighted properties for homeownership. Some help homebuyers acquire the properties; others help nonprofit developers rehabilitate buildings for sale to owner-occupants (http://www.ci.boston.ma.us/dnd).

The Residential Development Program provides grants to people who purchase abandoned city-owned properties. The grants cover the gap between the rehabilitation cost and the maximum amount that the homebuyer can borrow or the property's appraised value. The HomeWorks Program provides grants for rehabilitating these properties. The grants cover half the rehabilitation costs, up to $5,000. These programs, along with several others anticipate rehabilitating 915 units by June 2001.

The 1-4 Family Housing Program provides grants to eight community development corporations that rehabilitate abandoned or severely deteriorated properties for homeownership in targeted areas. The Homeownership Development Program provides loans to for- and nonprofit developers to construct new homes or rehabilitate existing ones for first-time low- and moderate-income homebuyers. It expects to rehabilitate 167 units by June 2001.

The city also provides technical assistance to homeowners and homebuyers. The Boston HOME Center and the Neighborhood HOME Center provide one-stop information about the city's homeownership programs. The assistance includes courses and seminars on homeownership and avoiding foreclosure.

Chicago

In the mid-1990s, Chicago took advantage of low mortgage interest rates and a growing demand for single-family homes by stimulating the redevelopment of vacant sites and abandoned buildings. Under the New Homes for Chicago Program, the city offers developers a package that includes reduced prices for vacant lots, reduced permit fees, and low cost construction loans. Since 1990, the city has lent over $10 million for constructing over 500 homes throughout the city. (http://www.ci.chi.il.us/Housing/HomebuyerPrograms/NewHomes.html)

The city issued $50 million in federal tax-exempt bonds to help low- and moderate-income homebuyers make down payments and cover closing costs on these new homes. Homebuyers qualify based on sale price and income limits, which are higher in certain neighborhoods in order to attract moderate-income families. The city also helps first-time homebuyers and those buying homes in targeted areas access a federal income tax credit equal to 20% of their annual mortgage interest payments. (Credits reduce the amount of taxes a person actually pays; deductions reduce the amount of taxable income).

PROGRAMS TARGETING TAX DELINQUENT PROPERTIES

Cook County Tax Reactivation Program in Chicago

Cook County uses its tax collection powers to redevelop blighted properties for homeownership. Most municipalities and counties foreclose on tax delinquent properties and recoup the taxes when the properties are sold. Some sell the properties at public auction, but those that are severely blighted attract few buyers. The renovation cost plus the back taxes often exceed the rehabilitated properties' market value.

Cook County's Tax Reactivation Program addresses this problem by eliminating the tax liability. (The county assesses and collects property taxes for the municipalities). Under the program, the City of Chicago can make a non-cash bid on behalf of a pre selected developer for a tax delinquent property he intends to develop for low-and moderate-income housing. If the county accepts the bid, the developer receives the property without having to pay the taxes (Development Without Displacement, Chicago Rehab Network, June 1995 http://www.uic.edu/).

Baltimore's Asset Property Disposition Program

In 1993, Baltimore hoped to boost homeownership by auctioning tax-foreclosed properties to potential owner-occupants. But mostly private investors turned out for the auctions, suggesting that the rehabilitation work and cost was beyond most homebuyers' means. The city then hired the Atlanta-based Asset Property Disposition firm to rehabilitate and sell the properties to homebuyers. The firm renovated about 130 units citywide for costs ranging from $17,400 to $23,690.

The city provided financial assistance to the homebuyers. It allowed them to deduct the renovation costs from their property taxes and provided a second mortgage if the property was worth less than the total renovation cost. The city also provided gap financing if the purchase price exceeded the appraised value. Buyers had to commit themselves to residing in the property for at least five years and provide references and financial information. They did not have to repay the loans if they agreed to live in the houses for at least 10 years. Low-income buyers qualified for grants for down payments and closing costs ("Sold! To the Bidder in the Back-An Affordable House," Planning, July 1994).

New York City's Entrepreneurs Program

New York City markets clusters of vacant and occupied city-owned buildings to neighborhood-based property managers to rehabilitate and manage. Unlike rehabilitating individual properties scattered around the city, treating clusters produces an immediate, visible impact on the neighborhood. The approach also strengthens "local real estate capacity in addition to ensuring quality management and maintenance for the buildings" (http://www.ci.nyc.ny.us/html/hpd/html/neighborhood/building-blocks.html).

The city sells the buildings to the New York City Housing Partnership, which selects the property managers (i.e., the entrepreneurs) and transfers the buildings to them after they have been rehabilitated. The entrepreneurs also rely on local nonprofit organizations to support and train the buildings' tenants. Funding comes from public and private sources, including private investors eligible for federal low-income housing tax credits. The rules governing the credits allowed the entrepreneurs to rent some of the units to higher income people.

REHABILITATION PLUS PROGRAMS

Chicago Lease-Purchase Homeownership Programs

Chicago's Lawndale Christian Development Corporation acquires and rehabilitates houses and leases them to low-income families at affordable rents. The families get the first option to buy the home after a specified period. In the meantime, they put money aside toward a down payment and building a credit history that would qualify them for a mortgage. "This strategy allows families who would otherwise be unable to afford or qualify for a mortgage to become homeowners and stay in the area.

"It also helps local residents remain in the community since the residents of the area would be given the first option to apply for the arrangement" (Development with Displacement, Chicago Rehabilitation Network).

Limited Equity Cooperatives and Mutual Housing Associations

Limited equity cooperatives and mutual housing associations are organizations in which residents collectively own and manage housing, including rehabilitated apartment buildings. Both organizations aim to develop and preserve housing for low- and moderate-income people. The collaborative nature of these organizations also fosters a sense of community, which may not be present in privately owned apartment buildings.

The organizations operate under different ownership forms. The residents of a limited equity cooperative own their units, but the cooperative restricts the units' sales price or the amount of profit members can make from sales. The residents of a mutual housing association have lifetime use of their units, but do not own them. Instead, they collectively own all of the units as members of the association. The residents pay a one-time fee to join the association, and share management duties. The fees are usually affordable to low- and moderate-income people.

The Hartford-based One/Chane developed a 14-unit cooperative on Westland Street in 1989, with each resident contributing 300 hours of labor in lieu of down payments. The residents were also required to participate in property management training. The project received $1.3 million in funding from two banks, a utility, and two nonprofit organizations (Hartford Courant, October 25, 1989).

The Mutual Housing Association of Greater Hartford recently received $11 million in federal, state, and local funds to renovate a three-story brick building at the corner of Hillside Avenue and Park Terrace. The association plans to start working on the structure, which is currently occupied, by July 2001. The association has been developing mutual housing since the mid-1980s.

REHABILITATION PROGRAMS' LIMITATIONS

Housing rehabilitation programs vary depending on structural conditions, which are different in each neighborhood. Table 1 shows how neighborhoods can be classified based on the structural conditions of the units and the market demand for them.

Table 1: Neighborhoods Classified According to Structural Conditions and Market Demand

Structural Conditions	Market Demand
	Strong	Weak
Good	· Structures in good to excellent upkeep · Low vacancy rate · Few undeveloped parcels · Aggressive bidding for homes and apartments · Low turnover · High demand	· Structures in good condition · Vacancy rate increasing · Occasional vandalism to unoccupied properties · Scattered vacant parcels · Market demand declining · Insurance costs increasing
Bad	· Structural deterioration visible · Growing share of unoccupied properties · Many abandoned and vandalized properties · More vacant sites due to demolition · Real estate speculation increasing · Conventional mortgages and loans more common	· Most structures significantly disrepair · Many vacant and abandoned structures · Arson and vandalism common · Many vacant, contiguous parcels due to past demolition · Little or no private development · Area targeted for redevelopment

Source: Rutgers University Center for Urban Policy Research, Winter 1980, used in Housing Rehabilitation, Listokin (1983).

Some rehabilitation programs try to reduce high vacancy and turnover rates in distressed neighborhoods by helping people improve their homes. But the desire to leave a neighborhood may have little or nothing to do with the condition of the home. Residents may defer basic improvements because they believe the neighborhood is changing and feel powerless to stop it, or they may simply desire better homes somewhere else (i.e., psychological abandonment).

For a rehabilitation program to succeed, the city may have to address other factors besides structural conditions, such as the fear of crime, poorly paved streets, and run down parks. If families are leaving the neighborhood simply because they want better housing, the city must adapt the program to attract new residents, including lower income people who want to move out of neighborhoods where conditions are worse. These may include first time homebuyers needing financial and technical assistance.

While new residents may help stabilize the neighborhood they move to, they may also simultaneously destabilize the neighborhood they leave. Those that remain may react to the condition of their homes and the neighborhood by not paying their mortgages, rents, utility bills, and property taxes. As properties deteriorate and tax liens accumulate, the properties' values plummet, leading owners and occupants to abandon rather than rehabilitate them.

A rehabilitation program geared for these neighborhoods must do more than encourage developers to rehabilitate abandoned structures or build new ones on vacant lots. Cities usually rely on public agencies or nonprofit developers to redevelop these properties, since there is little economic incentive for private developers to take up the task. Many nonprofit developers need training and technical assistance in implementing rehabilitation projects in addition to financial assistance. The people buying or renting the rehabilitated property may also need technical and financial assistance.

JR:ts