Tuesday, August 16, 2011

What Do You Think?

 
 
Special report: How tax delinquent properties thwart development
 
August 15, 2011
By Patrick Kerkstra
For PlanPhilly

For most of its recent history, the 1700 block of Manton Street in Point Breeze was notable only as a 420-foot-long case study in Philadelphia’s ills.
Violence? Check. Abandonment? Check. Crack house? Double check.
Predictably, the block was also full of tax-delinquent properties, vacant shells, and empty lots that had not contributed so much as a penny to the public purse in decades.
Relative to the crime, poverty, and blight, the overdue debt might seem a trifling problem, an issue rightfully low on the city’s priority list for a derelict block in a troubled neighborhood.
That approach, repeated on thousands of blocks across the city, has helped make Philadelphia the most property-tax-delinquent big city in the nation. After decades of weak enforcement, there are now nearly 111,000 properties in arrears, on which is owed a combined $472 million to the city and School District.
The impact of this failure to collect goes far beyond finances. It has also had a huge and highly visible affect on neighborhoods across the city.
Tax-delinquent properties are often blighted and unsafe. In well-off communities, they can stand out as glaring eyesores. In declining neighborhoods, they add fuel to urban abandonment and decay. And in recovering areas, the city’s failure to promptly sell off vacant tax-delinquent land acts as a significant drag on redevelopment.
“Tax-delinquent properties lead to blight, they depress the property values of their neighbors, and they create an added financial burden for those who do pay their taxes on time,” said State Rep. Chris Ross (R., Chester).
This summer, Ross introduced legislation to overhaul tax-delinquency collection laws across Pennsylvania. The changes are intended to make it easier for municipalities to collect what they are owed. But the draft legislation — based on best practices from other states — is also designed to arrest the cycle of delinquency and abandonment that plagues low-income Philadelphia neighborhoods.
“It’s time we deal with this mess,” Ross said.

Problems and potential in Point Breeze

The connection between delinquency and redevelopment is crystal clear on the hard-case block of Manton Street.  
In the last two years, six market-rate houses have been built on this long-troubled block. Of those, five were built on tax-delinquent properties bought at sheriff’s auctiion — vacant lots and crack houses. This year, the drug houses were torn down and replaced with two 2,400-square-foot townhouses, each with a roof deck and an asking price around $300,000.
Ori Feibush, their developer, is itching to buy and renovate more delinquent lots.
If the city’s tax-delinquency system worked as intended, he would have no shortage of supply. There are eight more delinquent properties on the 1700 block of Manton Street alone, including three abandoned lots.
But the city — which has never auctioned off many properties — scaled tax sales back even further in 2009 and 2010, creating an artificial shortage of vacant lots for Feibush and other Point Breeze builders to develop.
“We’re begging and clamoring for tax-delinquent properties to go to sheriff sale,” Feibush said, standing beside a vacant lot opposite the Manton Street houses he built. The lot has been delinquent for 25 years.
“It’s a tremendous fight. But we absolutely have the appetite to not only purchase but to build on every single tax-delinquent sheriff-sale property in Point Breeze immediately.”

Premier address infected


About a mile away, at 18th Street and Delancey Place, near Rittenhouse Square, the city has another kind of tax-delinquency problem.
There, kitty-corner to a mansion designed by the firm of architect Frank Furness stands a boarded-up wreck that would qualify as a severe eyesore on any block in the city, much less one as exclusive as this.
Overgrown weeds cannot block the sight of plywood-covered windows and a gaping 12-foot-high hole in an exterior wall. An unfinished cinder-block addition is topped with two floors of partially exposed steel studs, moldy plywood, and torn construction fabric. A series of long beams have been jammed between the sidewalk and the side of the building in an apparent attempt to prop it up.
Neighbors said the property had been in disrepair for years; it is now caught up in litigation over its rightful owner.
In March 2008, the city Department of Licenses and Inspections cited Jack Trung Nguyen, the owner listed on the deed, for unsafe conditions and ordered him to stabilize the building.
That never happened. Last year, the city slapped the property with another citation, for leaving the building open and unsealed. The department is trying to take Nguyen to court in hopes of forcing him to bring the historic building up to code.
In many other cities, the property would already have been auctioned at a sheriff’s sale for nonpayment of taxes — it is three years and $26,900 behind — regardless of the legal dispute over who owns the land.
In other cities, the parties would be fighting over sheriff’s sale proceeds, and the building would have a new owner.
But in Philadelphia, the system moves far more slowly.
The city did not begin legal proceedings to seize the property until Aug. 4, shortly after The Inquirer and PlanPhilly.com asked officials why such action had not been taken. City officials declined to discuss the property further, citing privacy concerns.

Redevelopment opportunity squandered by mass delinquency

Farther north, at Ninth and Norris Streets, the community-development corporation Asociación Puertorriqueños en Marcha plans to break ground this year on a mixed-use, mixed-income, $40 million-plus transit-oriented development at the foot of the Temple University SEPTA Regional Rail station in North Philadelphia.

It has all the makings of a transformative project that could boost investment in the area and lure market-rate buyers to a community that could use some middle-class incomes, particularly in the blocks around the big development.
But those blocks are choked with dozens of abandoned, tax-delinquent properties, the owners of many of which have not paid a dime in taxes in 10, 20, even 30 years.
Most of the owners, if they are even alive, have long since given up on the parcels. Would-be developers often have a hard time finding owners of long-delinquent property, making redevelopment challenging.
In other cities, those properties would be made available to developers through sheriff’s sales. In Philadelphia, though, the city’s long history of offering only a tiny number of tax-delinquent properties for sheriff’s sale each year makes it likely the land around this dynamic development will stay locked in delinquency limbo for years to come.

Why it’s this way


There are many reasons for Philadelphia’s failure to effectively deal with its nearly 111,000 tax-delinquent properties, including political interference, a lack of resources, bureaucratic inertia, and, critically, a deep-seated reluctance to evict homeowners for nonpayment of taxes.

But there is also a seeming lack of understanding going back decades about the street-level impact that tax-delinquent properties have on neighborhoods and responsible homeowners.
“Protecting homeownership in tax collection is important. But it’s not just the people who haven’t paid that need protecting. What about the people who do pay their taxes and have their equity, their entire lifetime investment, stolen from them because we allow a low standard of nonpayment to be acceptable?” asked Daniel Kildee, president of the Center for Community Progress, a national nonprofit that advises governments how to manage vacant land.

“What happens to them when we allow blighted and abandoned tax-delinquent properties to spread, infecting block after block?”
Kildee contends that when cities go easy on tax enforcement, the greatest damage is to low-income neighborhoods, where delinquencies are most common.
“What disparate tax enforcement does is create a self-fulfilling prophecy that those neighborhoods that are bad will get worse, and those that are stable will be preserved,” Kildee said. “And there’s some serious inequities in a system that allows for that.”
Despite the close link between tax delinquency and community welfare, the city’s redevelopment branches — such as the Redevelopment Authority and the Office of Housing and Community Development — have played no significant role in shaping the city’s tax-delinquency enforcement program.
Nor does the city use tax sales to target nuisance properties, such as tax-delinquent code violators like the crumbling manse at 18th and Delancey.
And tax sales have played no role in the city’s formal blight-fighting programs, such as former Mayor John F. Street’s $296 million Neighborhood Transformation Initiative, which relied on the far more expensive process of eminent domain (which requires the city to pay property owners fair market value) to acquire thousands of properties, many of which were tax-delinquent.

A potential fix


Read or not, City Hall's property-tax delinquency system could be in for a major shake-up.
Between Ross’ bill and one sponsored by Rep. John Taylor (R., Phila.), Pennsylvania’s bewildering and archaic tax-delinquency law may soon be repealed. As drafted, the new legislation would:
  • Require cities to begin foreclosure proceedings on tax-delinquent properties 12 months after they fall into arrears.
  • Give municipalities authority to create public land banks, with the power to acquire tax-delinquent properties ahead of private investors.
  • Make it easier and less costly for cities and counties to take properties to sheriff’s sale.
  • Tighten notification requirements so owners of tax-delinquent properties are given many opportunities to pay up before their land is auctioned.
  • Require hardship agreements and payment plans to be made available for low-income owner-occupants.
  • Provide for a clean title at the end of the process, which makes the properties easier to insure and more appealing to less sophisticated buyers.


The legislation — which is likely to change and which faces serious political hurdles — is modeled on reformed tax-delinquency systems in use in cities as diverse as New York; Flint, Mich.; and Atlanta. The goal, Ross said, is to create an easy-to-understand system capable of quickly processing large numbers of delinquent properties and getting them back on the tax rolls.
Although the law would apply to all Pennsylvania municipalities, its impact would be most profound in Philadelphia, as it would not tolerate the city’s system that has allowed many delinquent property owners to escape foreclosure indefinitely.
Even owner-occupants — who have been vigorously, if informally, protected from tax foreclosure by politicians — would not be exempt. They, too, would have to pay up, enter into a formal hardship agreement, or lose their homes to sheriff’s sale.
In cases where there is no private-sector demand for the property, or in instances where the city had a strategic interest in the property, the tax-delinquent land could be scooped up at sheriff’s sale by a government land bank before public bidding began.
If these proposed changes were already law, the eyesore at 18th and Delancey (where the real estate market is obviously strong) likely would have been auctioned off more than a year ago. Given the location, odds are the new owner would have renovations well under way.
Ori Feibush might well have already snapped up every vacant, tax-delinquent lot on the 1700 block of Manton and put townhouses with granite kitchen countertops on each.
And Asociación Puertorriqueños en Marcha — or a city land bank — would likely already have title to the abandoned properties surrounding the Temple transit-oriented development, priming the area to take full advantage of market demand spurred by the big project.

A tool for managing tax delinquent land

Land banks are likely to play a central role in any eventual change.

Typically, land banks are quasi-public authorities that acquire, hold, maintain, and sell tax-delinquent parcels and other nuisance properties that have been seized by the government. At their best, land banks exist for one reason: to make the most out of land that owners could not or would not maintain.
That can mean a range of options, including converting tax-delinquent property into a public park, selling it at a market-rate price to private developers, giving it to community-development corporations to build low-income housing, or selling it at a deep discount to a neighbor to use as a side yard.
Philadelphia officials said they are intrigued by the prospect of a centralized city land bank and open to reforming the tax-delinquency enforcement laws. But they are worried about the prospect of mass foreclosures, particularly on owner-occupied homes. In addition to the human toll of evicting a family, there’s the specter of increased social-services costs and the potential destabilization of neighborhoods.
“I can’t imagine a scenario under which the city would engage in large-scale tax foreclosure of owner-occupants in low-income neighborhoods. Why would we want to do that?” asked John Carpenter, deputy executive director of the Philadelphia Redevelopment Authority.
The city has other concerns as well. For those properties sold at sheriff’s auctions, what assurances does the city have that the new owner will be any more responsible than the previous? And is it really a good idea for the city — which is short on money and which has a dismal record of managing land — to create a land bank and fill it with a bunch of formerly tax-delinquent properties?
“There’s a great deal of concern that we not take on responsibility for more property before we demonstrate the ability to manage the property we have in a more effective way,” Carpenter said.
Last year, the Nutter administration created a task force based in Managing Director Richard Negrin’s office to improve the city’s management of its property holdings, particularly its vacant land, Carpenter said.
The city’s inventory already includes more than 11,500 properties, split among at least five departments and quasi-independent agencies, each of which has a different culture, priorities, procedure for selling property, and political pressures.
The costs of holding additional land — both in actual maintenance and potential liabilities — are extra worries. If someone slips and breaks a leg on a tax-delinquent vacant lot, the city is not legally responsible. If the property is in a city land bank, however, taxpayers could be on the hook.
“We have to make a decision about what level of responsibility we’re going to voluntarily assume for the sake of looking like we’re doing something when in reality, in substance, we’re not doing anything that changes the material result,” City Solicitor Shelley Smith said when asked why the city does not simply sell off what it can of its massive inventory of tax-delinquent properties and take ownership of the rest.
Kildee has heard all of these objections before. Some of the problems can be overcome, he contends, by combining most of the city’s publicly owned land into a single land bank with one clear goal: productive reuse.
“A land bank needs to be a single-purpose entity. When the people who work there wake up in the morning, their whole day needs to be about maximizing the reuse of these properties,” Kildee said. “It can’t be an agency’s second or third priority.”
But he acknowledged that land banking is difficult. Cities are rarely great landlords, and complaints about maintenance of land-banked properties are common, Kildee said. He maintains that cities should embrace land banks regardless because “the chances of doing something positive with the property are far greater if it’s held by a public entity than if it’s allowed to stay out there in a delinquent never-never land.”
“City halls are created to deal with community problems. These properties are community problems,” said Kildee, who formed a trailblazing land bank in 2002 as treasurer of Genesee County, Michigan.
“So if you own that problem, you may as well own the property, because then you have a fighting chance to do something about it.”

A matter of trust


The prospect of City Hall’s owning anything more than it already does terrifies Feibush, the Point Breeze developer.

“It sounds like Armageddon. It would absolutely stop development in its tracks,” said Feibush, an energetic 27-year-old whose company, OCF Realty, operates a coffee shop and the real estate blog Naked Philly in addition to managing properties across the city and developing more than 100 housing units in Point Breeze.
Acquiring tax-delinquent properties has been crucial to his Point Breeze business. He estimates that he has bought more than 150 abandoned and tax-delinquent Point Breeze properties at sheriff’s sale over the years, some for his company, others on behalf of developers less familiar with the complicated process. Of those 150 lots, virtually all have been redeveloped, Feibush said, at an average construction cost of $200,000.
“Do the math. That’s a $30 million investment,” he said. “You’d think the city would want more of that.”
The only reason Feibush was able to acquire those 150 properties was that he asked City Council President Anna C. Verna’s office to have the city list them for sale. Verna’s requests worked for a while. Many of the properties Feibush had his eye on made it to the auction block.
Point Breeze, which has been rapidly redeveloping, is something of a sheriff’s sale hot spot, with many more properties making it to the auction block than in most neighborhoods. That seems due at least in part to Feibush’s lobbying.
But in recent years, the city has slowed auctions of tax-delinquent properties to a trickle. In 2010, only 128 tax-delinquent properties were auctioned off citywide, according to Sheriff’s Office records, a 90 percent decline from 2004.
It’s not for lack of inventory. There are at least 4,000 tax-delinquent properties in Point Breeze alone, and an estimated 17,000 tax-delinquent empty shells and vacant lots across the city. The Nutter administration attributes the slowdown to the 2010 tax-amnesty program and mismanagement in the Sheriff’s Office that led to a temporary freeze on foreclosure sales.
Whatever the cause, the shortage of tax-delinquent parcels has slowed redevelopment, and not just in Point Breeze.
“If they were to throw 50 properties up for sheriff sale in West Philadelphia, we’d be looking to buy all of them, and we wouldn’t be the only ones bidding,” said Jim Levin, president of Neighborhood Restorations, a private West Philadelphia company that specializes in converting shells and empty lots into low-income rental housing.
Given the shortage of tax-delinquent lots, Levin and Feibush have tried buying vacant lots and shells the city already owns. Both said the process was excruciating. Feibush called it “almost impossible.”
Theoretically, a unified Philadelphia land bank would make it much easier for private and nonprofit developers alike to acquire public property.
For instance, there are five city-owned lots on the 1700 block of Manton, split among four agencies. If Philadelphia had a land bank and its existing inventory were combined with abandoned, tax-delinquent property, there would be at least eight lots on Manton assembled and ready for development.
That presumes, of course, that the city is capable of running an effective land bank.
“If they released these properties to private developers like myself, I would break ground tomorrow. We don’t even care what the purchase price is. We’ll buy it and we’ll build it tomorrow,” Feibush said. “If the City of Philadelphia would just get out of its own way, we could make this whole neighborhood better.”

Contact Patrick Kerkstra at pkerkstra@planphilly.com or @pkerkstra on Twitter.

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