Neighborhood Stabilization & Banking

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by Frank S. Alexander The Housing and Economic Recovery Act of Emory University 2008, with its much-needed Neighborhood School of Law Stabilization Program, is the first federal recognition of the severe costs borne by neighborhoods and local governments when are vacant or abandoned.1 For the first time, Congress has appropriated funds for the acquisition, management, and dispo- sition of such properties—at the same time recognizing the important role of a tool called land banking. Today, as more communities deal with , they are increasingly likely to make use of land banking.

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Communities & Banking 3 Community Goals Land Banks and the Housing and Communities that employ land banking do not do so with the idea of holding a large Economic Recovery Act of 2008 public inventory of land. Their most com- mon goal is to convey properties to not- The statutory provision authorizing the creation of what is known today as the for-profit entities for the development of Neighborhood Stabilization Program is found in section 2301 of the Housing and affordable housing, including both rental Economic Recovery Act of 2008, Pub. L. 110-298. That statute says in section 2301(c) and homeownership programs. The second most common goal is to foster econom- (3) that “amounts made available under this section may be used to … (c) establish ic redevelopment by conveying proper- land banks for homes that have been foreclosed upon.” In February 2009, Congress ties to for-profit and not-for-profit entities enacted the American Recovery and Reinvestment Act (ARRA), which allocated an that will create mixed-use developments or additional $2 billion for NSP purposes. See American Recovery and Reinvestment mixed-income housing. Act, 111 Pub. L. 5 (2009).* Land bank proponents are well aware The Neighborhood Stabilization Program regulations issued by HUD on Sep- that simply holding vacant properties achieves little and that getting them reoc- tember 29, 2008, provide the following description of a land bank: “A land bank cupied and returned to the tax rolls expe- is a governmental or nongovernmental entity established, at least in part, to as- ditiously is critical. There are only two semble, temporarily manage, and dispose of vacant land for the purpose of stabiliz- exceptions. The first occurs when there is ing neighborhoods and encouraging re-use or redevelopment of urban . no market at all for development or reuse For purposes of the NSP program, a land bank will operate in a specific, defined and the property must be removed from the geographic area. It will purchase properties that have been abandoned or foreclosed market indefinitely (often demolition and environmental clean-up are needed). The upon and maintain, assemble, facilitate redevelopment of, market, and dispose of the second kicks in when there are longer-term land-banked properties. If the land bank is a governmental entity, it may also maintain strategic purposes, such as future parks and abandoned or foreclosed property that it does not own, provided it charges the green spaces or affordable housing in a mar- owner of the property the full cost of the service or places a lien on the property ket where is causing concern. for the full cost of the service.” With respect to the 10-year provision, the HUD regulations state the following: Strengthening Neighborhoods “An NSP-assisted property may not be held in a land bank for more than 10 years During the last quarter of the 20th century, without obligating the property for a specific, eligible redevelopment of that prop- the cities of St. Louis, Cleveland, Louisville, erty in accordance with NSP requirements.” Atlanta, and Flint, , moved to cre- ate public authorities focusing exclusive- * Further, the ARRA amended section 2301(c)(3)(C) of HERA to read, “establish and operate land banks for homes ly on land-banking activities. Those cities’ and residential properties that have been foreclosed upon.” This expanded statutory language will allow land banks to use NSP funds for operating costs associated with the land bank as well as allowing land banks to use NSP funds land banks emphasize acquiring abandoned to purchase and maintain residential properties. tax-delinquent properties and converting them into new, productive uses. For exam- ple, the Genesee County Land Bank in Flint Land-Banking Basics abandoned properties from the market and acquires an average of 1,000 abandoned A land bank is not the same as a land trust, either convert them into new, productive properties each year and has been the cata- in which property may be held in perpetuity uses or hold them in reserve for long-term lyst for increasing property values by more for a community purpose such as conserva- strategic planning. The idea is not to replace than $100 million. It has developed hun- tion or affordable housing. It is more like or supplant either the open market or land- dreds of units of affordable housing, has a bank into which one deposits valuables use planning but to step in when there is a renovated major commercial buildings, and until they are needed. failure of market demand, acquiring aban- has remediated more than 1,000 brownfield Land banking is useful because markets doned inventory and making it available for properties. for land rarely, if ever, operate with market other land-use planning. Other local governments, whether efficiency. By definition, a parcel of land is a First proposed as a form of urban plan- large industrial cities or small, rural com- commodity fixed in location and hence not ning in the 1960s, the concept has taken munities, also face property abandon- interchangeable with similar products. As a root in several metropolitan communities ment. Some areas were once paradigms of result, when supply and demand fluctuate, in the last 25 years. As with other new thriving economic investment and hot real land prices and consumption do not adapt approaches to and planning, some estate markets that now suddenly have large as they would for other products. efforts have been more successful than oth- inventories of vacant and foreclosed prop- In the current economic climate, with ers. But all land-banking initiatives share the erties—with the accompanying economic demand for housing and new develop- ability to address inefficiencies in and social costs. Local governments worry ment receding, some previously strong and markets and the potential to bring togeth- that they lack the power to address the new, vibrant neighborhoods are being severely er federal, state, and local policies to build multijurisdictional challenges or to access stressed. Land banking can allow regions, stronger communities. the capital necessary for acquiring, man- states, and to remove aging, and controlling a large number of 4 Summer 2009 Forty years ago, advocates urged land banking’s long-term use of the surplus properties they acquire, ensuring that they become assets adoption as part of federal housing and urban for communities and not liabilities. development policy. The need is greater than Land banking’s ultimate objective is to provide a multijurisdictional response to ever, and the opportunity is here. inefficient land markets and to reallocate land for inclusionary, sustainable purposes. properties. An added concern is the possi- Secondary Markets Forty years ago, advocates urged its adop- bility that vacant real estate will attract van- Land banking engages in the equivalent tion as part of federal housing and urban dalism and will lower property values and of property-market stabilization by creat- development policy. The need is greater create neighborhood instability. ing the functional equivalent of a publicly than ever, and the opportunity is here. Fortunately, the new Neighborhood controlled secondary market. Its ability to Stabilization Program provides funding acquire inventory when land has no read- Frank S. Alexander is a professor of law at that can be used to establish land banks for ily available private market lets it address Emory University School of Law in Atlanta homes that have been foreclosed upon— the contraction and expansion of property and director of the Project on Affordable Hous- and the resources to acquire the homes and “liquidity” relative to demand. Regulation ing and Community Development. rehabilitate or demolish them. Moreover, of private development is not affected, nor although the NSP contains an unusually are traditional initiatives and land- Endnote tight time frame (18 months) for spending use planning. 1 This article is drawn from Frank S. Alexander, Land most of the funding, land banks are exempt- Banking as Metropolitan Policy (Washington, DC: ed and may hold properties for up to 10 Capital Reserves Brookings Institution, 2008): http://www.brookings. years. (See “Land Banks and the Housing Land banking also can serve the functional edu/papers/2008/1028_mortgage_crisis_alexander. and Economic Recovery Act of 2008.”) equivalent of maintaining “capital reserves.” aspx. Land-banking programs maintain real Similarity to Banks property reserves to respond to a communi- Land banks serve four functions that are ty’s future strategic needs, such as affordable directly analogous to more familiar forms of housing, green space, and the like. banking: storing assets; stabilizing secondary markets; holding capital reserves; and oper- Regulatory Aspects ating within a regulatory framework. The As part of a public agency, or as a sepa- biggest difference might be that whereas tra- rate public authority, a land-banking pro- ditional banking often focuses on national gram is, and should be, required to exercise and international markets, land banking its authority consistent with the common specializes in neighborhood and communi- good. All transactions must ty stability and land-use planning. fall within clearly stated purposes and prior- ities on land use. These purposes and priori- Asset Banking ties are established by state legislatures, by Land banking engages in asset banking by intergovernmental contracts, or by the local acquiring inventories of real property, pri- governments that create the programs. marily from five sources: (1) tax delin- quencies and tax foreclosures; (2) excess Looking Ahead residential real estate foreclosures; (3) fore- Land banking has come of age. The time closure of government liens arising from for scaling it up is now, as communi- housing and building code violations; (4) ties nationwide struggle with the impact direct market purchases; and (5) third par- of record numbers of foreclosures and as ties’ “deposits” of properties to be held funding is made available for the first time pending redevelopment. A sixth source is from Washington. property that has been identified as holding Consider all that land banks can do. potential for development (over a two- to They can become a kind of depository insti- five-year time horizon) but for which there tution for surplus lands. They can engage is no current market demand. in asset banking and eliminate the dan- A deposit-based program can permit ger of abandoned land becoming a liabili- a governmental or not-for-profit entity to ty. By temporarily reducing the supply and transfer ownership of property to the land returning it to the market only when pri- bank, reserving the right to “withdraw” the vate demand returns, they can engage in property at any time after paying the land real estate market stabilization when sup- bank for holding costs. ply suddenly exceeds demand. They can create capital reserves of property pending future development capacity or public need.

Finally, they can regulate the short- and iStockphoto Communities & Banking 5