Renewing Public Assets - F Alexander 2000

Renewing Public Assets for

Community Development Professor Frank S. Alexander Emory University School of Law

Renewing Public Assets for Community Development

Written by

Frank S. Alexander Published by

Local Initiatives Support Corporation

October 1, 2000

The work that provided the basis for this publication was supported by funding from the U.S. Department of Housing and Urban Development and the National Community Development Initiative. The substance and finding of the work are dedicated to the public. The author and publisher are solely responsible for the accuracy of the statements and interpretations contained in this publication. Such interpretations do not necessarily reflect the views of the Government or the NCDI funders.

Renewing Public Assets for Community Development

The Local Initiatives Support Corporation (LISC) is very pleased to present “Renewing Public Assets for Community Development,” as part of the LISC Online Resource Library. In response to a growing national interest in the topic of property disposition, this publication is intended to serve as a tool for community development practitioners and local government officials seeking to examine and improve their systems of returning lien encumbered and publicly owned properties to productive use. LISC is fortunate to have retained Frank Alexander, Professor of Law at Emory University, to share his extensive knowledge of a complicated topic in this straightforward, exceptionally useful article. Professor Alexander was a pivotal player in reforming key Georgia statutes that govern tax foreclosure and property disposition, and he has become a leading national expert on the legal, political and practical obstacles communities face in dealing with publicly owned and encumbered properties. The article provides a concise description of the nature of tax liens, the ways in which most municipalities deal with tax delinquent and publicly owned properties, and specific reforms which can help convert these properties into productive and performing community assets. (See Professor Alexander’s Biography for more information.) About LISC The Local Initiatives Support Corporation (LISC) is a national community development intermediary, dedicated to supporting the neighborhood revitalization efforts of Community Development Corporations (CDCs). These nonprofit local organizations develop housing and businesses, perform essential neighborhood services, and assemble communities out of the individual energies of residents, entrepreneurs, volunteers, and government agencies. LISC channels grants, investments, and loans to thousands of CDCs in 40 states and metropolitan areas, plus 59 rural communities, to help them create safe, attractive environments where markets can function effectively and families find the goods and services they need, close to the housing they can afford. In LISC’s twenty years of existence, we have placed significant emphasis on the physical development activities of CDCs as a foundation for effective comprehensive community revitalization. For years, in fact, many CDCs almost exclusively did housing, in an effort to rescue the physical environment of their neighborhoods from the chaos caused by abandoned, run-down blocks and dangerous streets. LISC and CDCs have seen how eliminating physical blight in neighborhoods offers a spark of life to communities - streets, stores, safety, schools and healthy families. LISC’s work in neighborhoods around the country has revealed that CDCs in most cities and towns continue to confront obstacles posed by the existence of blighted and abandoned properties in their neighborhoods, many of which are encumbered by liens or are publicly owned. We have seen that the costs imposed by vacant and lien-encumbered properties on neighborhoods often far exceed the dollar amount of the delinquent taxes. A demoralizing eyesore to neighbors and passers-by, blighted houses and storefronts cause local property values to decline, damage the reputation of the neighborhood and discourage investment by both current and potential residents and business owners. In contrast, the benefits of rehabilitating these properties and returning them to the tax rolls are tremendous. The city and other taxing bodies gain more tax revenue, utilities recapture customers, public officials receive tangible credit, and surrounding residents often respond by improving their properties and addressing neighborhood security and quality of life issues. Thus, the redevelopment of formerly tax delinquent properties significantly increases the market appeal of entire neighborhoods.

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Renewing Public Assets for Community Development In response to an evident national need to address the issue of tax delinquent and publicly owned properties as a development resource for CDCs, LISC initiated a coordinated effort in 1999 to assist localities in assessing the effectiveness of their systems of dealing with tax delinquent and publicly owned properties. Our attention to this issue has involved several initiatives beginning in early 1999, including organizing the Restoring Community Assets Conference in September 1999 to examine national “best practice” models from five cities and to begin a national dialogue on this topic. We also created a Public Assets Renewal Team of national experts and LISC staff to provide technical assistance to localities, and to identify and create tools that can be used to examine and reform local property disposition systems. LISC Online Resource Library The LISC Online Resource Library was created in 1999 to promote ongoing innovation and success in the comprehensive revitalization of neighborhoods by disseminating LISC’s and others’ lessons learned in the field, and enhancing exchange among community development experts and practitioners nationwide. Funded with grants from the Department of Housing and Urban Development and the National Community Development Initiative, this resource will continue to grow over time to provide useful industry tools, best practices, web links and online chat sessions with community development experts. The LISC Online Resource Library presents “Renewing Public Assets for Community Development,” as part of a series of papers that will be available online. Additional topics we are planning include homeownership, organizational development, smart growth / regionalism, and economic development. All papers in the series will be available online at www.liscnet.org/resources. LISC Contacts To find out more about LISC, visit our web site at www.liscnet.org or call Tolu Sekoni at (202) 785-2908. For additional community development resources and best practices, visit the LISC Online Resource Library at www.liscnet.org/resources. For information about current LISC property disposition initiatives or to obtain Restoring Community Assets Conference materials, please contact Orlando Artze, LISC Program Vice President for the Southeast Region at [email protected] or (202) 785-2908.

Michael Rubinger President & CEO, LISC

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Renewing Public Assets for Community Development

Introduction Community development must always begin with the individuals, families and businesses which constitute the community. Development, however, requires that the community quickly turn its attention to the real property lying within the community. No single tract of land occupies a “neutral” position with respect to the life and health of a community. Either a parcel of land is utilized in a way which is consistent with and supportive of the vitality of the community, or it stands as a barrier to growth and a harm to the community’s well-being. Key to community development is the realization that each parcel of land is a potential resource to the revitalization of a community. Land which is presently used in a manner consistent with the strategic growth plan of a community, whether as residences, retail facilities, or open public parks, serves as an anchor for stability and further development. Land which is neglected or abandoned detracts from surrounding property values, invites dangerous or criminal behaviors, and serves as a major barrier to any community development a ctivity. Neglected and abandoned land invites further decay and flight from the community. Part of the community development process is to inventory and assess the current utilization of property within the community. This assessment, which is integral to preparation of a strategic plan, involves identification of existing land utilization, with a particular focus on those parcels of land which are presently causing the greatest harms to the life of the community. A second focus is to identify those parcels of land which, if available, could be converted into a new productive use consistent with the strategic plan. In most urban areas, and in many rural areas, an examination of the parcels of land causing the greatest harm to a community will reveal that they have great potential for conversion to a productive use supporting the life of the community. Often these parcels contain one of two characteristics: they have delinquent property taxes, or they are publicly owned. Parcels of land in either category can be viewed as public assets that can become vital tools for community development. An owner of private property who has allowed the property to decline through years of neglect commonly has made the conscious choice not to pay the annual property taxes. Years of taxes mount up, and when penalties and interest are included, it is possible that the total amount of delinquent taxes exceeds the fair market value of the property. At this point the owner has no incentive to support the life of the community by investing further in the property. For a wide variety of reasons, government enforcement of delinquent tax liens thus far has not been effective in changing this situation. Tax delinquent property is both a source of harm to the community, and a potential asset for future community development. A second,and commonly overlooked, key to development is that some of the land lying at the heart of a community’s difficulties may be land actually owned by a government entity. In neighborhoods that have gone through a cycle of decline and deterioration, it is likely that some of the parcels of land have been acquired by the city, county, or state through tax foreclosure procedures, enforcement of other liens such as demolition liens and water and sewer liens, or through foreclosure of government mortgages. One of the primary tasks for a community development corporation, or local government seeking to enhance community revitalization efforts, is to focus on those parcels of land which have been creating the greatest amount of harm to a community, and to realize that these same parcels likely

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Renewing Public Assets for Community Development contain keys which can become tools in the development process. Delinquent tax liens, and government owned land, are public assets waiting to be renewed in the process of community development. This article is designed to provide a basic overview of the form and substance of these two public assets which are central to community development. The first three parts describe the typical structure of property tax liens, property tax foreclosure procedures, and categories of publicly owned land. The second three parts offer suggestions to improve the effectiveness of existing laws, or to create new governmental entities that will facilitate the process of renewing these public assets. As there is tremendous divergence throughout the United States in the laws o f each specific city or county, this article is not intended to be a description of the laws of any particular community. Instead, this article is designed to permit community development organizations and local government officials to understand the relevant basic concepts and to enable them to analyze and reform the applicable laws of their cities and counties.

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Identifying Public Assets I. Property Tax Liens Virtually all of the privately owned real property in the United States is subject to an annual property tax. Property that is owned by governmental entities, and properties of certain nonprofit entities,are usually exempt from such taxation. Though the amount of revenue generated by the property tax has declined over the years as a percentage of the total budgets of state and local governments, the property tax remains the single largest source of tax revenue which is wholly within the control of local governments. As local governments face greater responsibilities for programs in the future, increased pressure will be placed on the property tax as the method of financing government expenditures.

The Mechanics of the Property Tax The annual property tax is derived from two factors: the value of the property (which is why they are commonly referred to as “ad valorem taxes”) and the rate of taxation. In theory, the full fair market value of property is potentially subject to taxation. While some jurisdictions do impose the tax upon the full value of the property, many jurisdictions elect to tax only a percentage of its fair market value (an “assessed value”). At the same time, most jurisdictions recognize various limited forms of exemptions and deductions from the value which is taxed, such as “homestead” exemptions for property which is owner-occupied, or special exemptions for elderly or disabled. Determining the fair market value of a piece of property is notoriously difficult, and much of the frustration and anger with property taxation lies in the calculation of this value. A small number of states and local governments have placed artificial limits on values,in effect freezing the value at a particular point in time for purposes of taxation. The second factor in the property tax, the rate of taxation, is established annually by the governmental entity based upon its budget needs and forecasts. If property values rise, the amount of property taxes owed increases even without an increase in the tax rate. In neighborhoods and central city areas that have experienced a general economic decline, absentee property owners who choose to ignore or abandon their properties frequently don’t bother to contest the valuation placed on the property by the tax collector. As a result, taxes may be imposed on property far in excess of the actual value, which simply encourages further a spiral of deterioration and abandonment. In low income neighborhoods that continue to have residential properties,if these properties are owner-occupied,it is common that these owners do not understand the nature of property tax exemptions to which they are entitled, and are struggling to pay annual tax bills higher than they should be paying.

Super Priority Status of the Property Tax Lien Because of the importance of property tax revenues to government operations, collection of the property tax carries with it one important feature, or power, which is not available to any other form of tax or debt.Liability for payment of the annual property tax gives rise to a lien on the property. This lien, or claim against the property, arises automatically when the tax bills are issued. Most importantly, this lien in favor of the government takes priority over all other liens or claims against the property. Most liens (such as mortgages) or claims (such as judgments) take priority as of the date they are created. For this reason, a mortgage placed on property which is not subject to any other mortgages or claims is commonly referred to as a first mortgage, and a mortgage which is later placed on the same property is referred to as a second or subordinate mortgage. In normal circumstances, priority in time establishes the relative rights of the different claimants to the property.

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Renewing Public Assets for Community Development In the case of property taxes,however, the situation changes entirely. The property tax lien becomes a first priority claim upon the property if the taxes are not paid when due.This “super priority status” of property tax liens means that a tax lien has a higher claim,a first right to be paid, than mortgages which existed on the property years before the taxes went unpaid. Because of this super priority status of property tax liens, mortgage companies are deeply concerned about property taxes and commonly require that debtors “escrow”funds each month to pay the annual property tax bill. The super priority status of property tax liens is a feature not found in most other liens or claims against property. Bills for governmental services such as water and sewer, or for improvements such as sidewalks,can result in a lien against the property if the bills are not paid, but these kinds of liens very rarely are given super priority status. If a local government at its expense demolishes a vacant and abandoned building which had become a public nuisance, the government may be able to place a demolition lien on the property for the cost of its work, but this lien will usually be behind all other liens and claims to the property. It is thus a frequent source of frustration to development organizations and government officials to discover that many such governmental liens will never be paid because existing mortgages have a higher priority claim to the property. Because of this inconsistency, mortgage companies want to make sure that property taxes that are senior in priority to their mortgages are paid on time. Mortgage companies have far less concern with other government liens which are subordinate, or junior, to their mortgages. Every jurisdiction imposes substantial penalties and interest when property tax bills remain unpaid. Added together, the annual amount of penalties and interest on delinquent property taxes can easily exceed 25 to 40 percent of the initial tax bill. When property tax bills remain unpaid for several years, the total amount of the delinquency can approach or exceed the total fair market value of the property. In distressed neighborhoods which have declined in economic strength, it is even more likely to discover abandoned properties in which the amount of the delinquent taxes exceeds the value of the property. The super priority status of property tax liens facilitates the collection of property tax revenues by local governments. It also causes private investors to look at the property tax lien as a potentially lucrative investment. In approximately one-half of the cities and counties across the country, it is possible for a private investor to purchase from the local government the lien for the unpaid taxes. The advantage to the government is that it receives payment of the delinquent tax bill from the investor. The advantage to the investor is that it is able to receive high rates of return on its investment reflected by the substantial penalties and interest if the owner redeems the property. A potential disadvantage to the property owner is that he or she may have difficulty knowing of the sale of the tax lien, locating the tax lien purchaser in order to pay the bill, or in negotiating with government officials about the fairness of the original amount of the bill. In recent years several metropolitan areas that have significant volumes of delinquent tax liens have negotiated with investment banking companies for the sale in bulk of these liens. An investment banking firm may purchase as much as $25 million, or $100 million, of delinquent property tax liens from a city or county. The property tax lien is a key public asset both for the governmental entities seeking to collect tax revenues and for community developers. Liens for delinquent taxes usually indicate that property owners are choosing to neglect the property, or that they are struggling with ways to pay the taxes. In either situation, prolonged delinquency results in deterioration and decline of the property and the neighborhood. Because of its powerful status, the property tax lien is a key to reversing the process of neighborhood decline. Enforcement of a tax lien by a local government can be a vital method of transferring ownership of the property to p ersons or organizations willing to reinvest in the community.

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II. Property Tax Foreclosures Because of its super priority status, the property tax lien should be the easiest of all liens to enforce. As the senior lien on the property, the enforcement proceeding, known as foreclosure,should be able to result in the sale of the property to a purchaser, free of all other liens and claims. The purchaser, whether a governmental entity, a nonprofit organization, or a private person should then be able to redevelop the property in a manner consistent with public and private development strategies. In many jurisdictions, however, precisely the opposite is true. The tax lien foreclosure process is often so lengthy, cumbersome and filled with doubts and objections that local governments have largely ignored growing tax delinquencies, particularly in low income neighborhoods.

Obstacles to Enforcement There are two primary reasons for the lack of enforcement of property tax liens in many jurisdictions. The first reason is simply due to the harshness of the remedy. When a property tax lien is enforced through foreclosure, the owner loses the property and all claims to the property. In addition, all other persons or companies with an interest in the property, whether tenants or mortgage companies,also lose their interests in the property. Fear of this result has led most jurisdictions to create additional periods of time before a tax sale is finally complete. Some of these provide that foreclosure proceedings cannot be commenced until the taxes are delinquent for at least a year, or several years, or that owners and other interested parties have a right to get the property back after a foreclosure sale has been completed. All property owners have a right to stop foreclosure proceedings before they are completed by paying the amount of the taxes, penalties and interest which are due (the “right of redemption”). Some jurisdictions have extended this right of redemption for a period of several years after the sale. Virtually every jurisdiction in the United States follows a slightly different set of enforcement procedures, often with cities and counties having the choice among a range of different procedures. When property owners know that an enforcement proceeding may take several years at a minimum to complete, there is a tendency to ignore the liability for the taxes. When property owners choose not to pay their property taxes for whatever reason, neighborhood deterioration tends to accelerate. The second reason for the lack of enforcement of property tax liens is that the procedures for foreclosure of tax liens have not kept up with changing constitutional requirements over the years. Typical of many procedures is that notice of the pending tax foreclosure sale is given by publication of an advertisement in the local newspaper. Notice by certified mail, or by other legal process, is rarely given to all of the persons or entities with an interest in the property. In recent years, however, the United States Supreme Court has gradually tightened the requirements for tax foreclosures, ruling that notice by publication is not adequate, and that notice must be given to all parties with an interest in the property. Local governments are then faced with statutory procedures that do not provide for adequate notice to all parties, or local government officials are uncertain about how to provide notice to all parties. 5

Renewing Public Assets for Community Development

Forms of Foreclosure Proceedings Across the United States there are three different kinds of property tax enforcement proceedings. The first form is known as “strict foreclosure” and does not involve a sale of the property. In this type of proceeding the government gives notice of the tax foreclosure and if the taxes aren’t paid by a specific date ownership of the property is conveyed directly to the government. Most states do not permit this form of tax foreclosure, or permit it only in special cases, because of the problem which may arise when property is functionally forfeited to the government for nonpayment of taxes that are only a small fraction of the value of the property. In these cases an owner may lose entirely a valuable piece of property for taxes which are very small in relation to the value of the land. Most states follow one of the other two forms of property tax enforcement proceedings, both of which require at some point a public sale of the property. Roughly half of the states have tax foreclosure procedures, resulting ultimately in a tax sale, which do not require any involvement of the court system. This procedure,known as the “nonjudicial tax foreclosure” procedure, relies solely on administrative actions of the tax collector to give notice to all interested parties and to conduct the tax sale. Significantly, in this approach there is no court supervision of the tax foreclosure, and no final court order approving the process. In approximately one-half of the states the tax foreclosure proceeding does involve the courts (“judicial tax foreclosure” proceedings), either through the entire process or as a review of the process at its conclusion to ensure its accuracy and fairness. In judicial tax foreclosures there is a final court order approving the adequacy of notice to all interested parties. In the typical property tax foreclosure proceeding, once a sufficient period of time has gone by after the taxes become delinquent, notice is given that a tax sale will be conducted, and that the property will be sold. If the taxes are not paid prior to the date of the sale, the property is sold in a public proceeding. It is important to distinguish between the sale of a tax lien, and the sale of property at a tax sale. Despite the similarity in the words,there is a large difference. When a tax lien is sold by a local government, what is being sold is the right to foreclose that tax lien in the future. In contrast, at a tax foreclosure sale, normally it is the property which is being t ransferred to the purchaser and not just a lien. Some jurisdictions use the term “tax certificates”, in which case it is virtually impossible to know precisely what is taking place at a tax sale without a thorough examination of the state statutes. Some states follow a relatively simple procedure of conducting a single tax sale of the property. State law may permit owners an additional period of time after the sale (a post-sale right of redemption) to pay the taxes and redeem the property, but upon failure to do so within a specified period of time, the sale is considered complete. In other states the procedures are complicated by conducting two different sales. There is first a sale of the property (or perhaps sale of a lien), but it is not considered final until a second sale occurs several months or years later, at which time the property is finally transferred to a purchaser. Given the complexity of these proceedings,and the wide differences in the proceedings and terminology between states, the only way to be confident about the precise consequences of any given step in a foreclosure procedure is to analyze very carefully the entire statutory procedure. At a public tax foreclosure sale, the most common approach is to offer the sale to the highest bidder. Any person or entity (including a community development corporation) is permitted to bid for the property. The bid price must be in cash, and the minimum bid is usually the full amount of the delinquent taxes, penalties, interest, and costs. Roughly eight states attempt to reduce the

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Renewing Public Assets for Community Development harsh consequences of a tax sale on the owner by selling at a foreclosure sale only a fractional ownership interest in the property, meaning that the tax sale purchaser and the former owner become joint owners of the property. A few states conduct tax sales by selling the property to the purchaser willing to charge the lowest rate of interest to the owner during the post-foreclosure period of redemption.

Ineffective Tax Sales One problem that occurs in cities and counties which have not enforced property tax liens regularly is that the accumulated taxes (with penalties, interest and costs) may exceed the fair market value of the property. In this situation there will be no effective tax sale of the property because no person will pay the minimum bid. When this occurs there is the danger that the tax sale will be ineffective, and the property will continue to be a source of harm to the surrounding community. The best solution to this dilemma is to provide that the local government, or a governmental entity, may acquire the property at the tax sale for the amount of the minimum bid. Such property can then become a public asset available for further community development. At a tax foreclosure sale the property is never sold for its fair market value. Instead, the sales price (if there is competitive bidding) is frequently just a small fraction of the full value of the land. There are two reasons for this disparity. One reason is that a tax sale is usually not a complete sale, and is subject to additional rights of the former owner. The second reason is that most tax sale procedures leave unresolved many legal and constitutional questions about the rights of the various owners and other parties having claims to the property. A p rospective purchaser will reduce the price it is willing to pay to reflect these uncertainties. In states that rely upon a nonjudicial property tax foreclosure procedure, there is usually a period of time after the date of the tax sale during which the prior owner can reclaim the property by paying the taxes, or the foreclosure sale price. This post-sale right of redemption typically lasts for one to three years after the sale. During this time the tax sale purchaser has no rights to use or to develop the property, and no assurance that it will ever acquire the property because of the chance the prior owner may redeem the property. The effect of this post-sale redemption period is that the property continues to deteriorate and harm the surrounding community. Additional uncertainty about the effect of the original tax sale is found in those jurisdictions that require the tax sale purchaser, in order to terminate this redemption period, to undertake additional legal actions. The second reason that property never sells for fair market value at a tax sale is that the legal procedures for enforcement of property tax liens are filled with constitutional doubts and questions. The legal procedure that was recommended and adopted in many states in the early and middle parts of the twentieth century relied not upon a court proceeding, but simply upon the publication of notice in a local newspaper that a tax foreclosure would occur. This newspaper advertisement was, and is, often the only notice given to the owner of the property, and to the mortgagees, tenants and other parties having interests in the property, that the property is to be sold for taxes and their interests terminated. Towards the end of the twentieth century the United States Supreme Court held that notice by publication is not adequate notice in most instances, creating serious doubts about whether a tax sale could result in a sale of the property even if the procedures followed the existing state law. Due process under the United States Constitution now requires that in a property tax foreclosure procedure notice must be g iven to every party holding a legally protected property interest whose name and address can reasonably be determined by diligent efforts. The notice must be of the kind

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Renewing Public Assets for Community Development designed to inform these parties of the proceedings. Notice by publication in a newspaper will not be adequate notice except in very rare circumstances. Notice by mail sent to the best available address will usually be required. Because most existing state laws require that notice be sent only to the property owner, or perhaps to a mortgagee as well, serious constitutional doubts exist about the adequacy of the tax sale proceeding. In order to meet this higher standard of constitutionally required notice, it is now basically necessary to conduct a full examination of the title to the property prior to the tax foreclosure proceeding in order to identify all of the owners and other parties having an interest in the property. Adequate notice must then be mailed to each of these owners.

Title Insurance The presence of constitutional doubts about existing tax foreclosure procedures makes it extremely difficult for a tax sale purchaser to obtain title insurance. In the development of property it is essential to be able to obtain clear title to, or ownership of, the property. The best evidence of such title is the availability of title insurance, which insures that the owner owns the property free and clear of the claims of other parties. If title insurance is not available for a particular parcel of land,it is risky to invest in its development,and banks will usually decline to make loans if lender’s title insurance is not provided. Title insurance companies throughout the country are understandably reluctant to issue title insurance policies for tax foreclosure sales unless there is some degree of clarity that constitutional procedures were followed. From their perspective, the title insurance companies will normally require a court ruling on the adequacy of the procedures which were followed. In every state this can be accomplished by a separate legal proceeding, after a tax sale,known as a “Quiet Title” action, in which a court issues a final order on the ownership of the property. Unfortunately, such lawsuits are expensive and time consuming, only adding to the costs and time periods for conveying clear title through a tax sale. An alternative approach, which is increasingly being adopted by states, is to have the basic tax foreclosure proceeding involve participation by the local courts. This is a change from the historic nonjudicial tax foreclosure process to a judicial tax foreclosure process. The key feature of a judicial tax foreclosure process is a court ruling that adequate notice was given to every party with an interest in the property. On the basis of such a final and binding court order, title insurance companies are more willing to issue title insurance polices for property conveyed at a tax sale. The failure to enforce adequately the collection of property taxes not only undercuts the financial health of a local government, it commonly contributes to neighborhood decline. The failure to have an efficient and effective system of enforcing property tax liens creates a barrier to neighborhood development. As some cities, counties and states have demonstrated in recent years, however, the existence of the property tax lien is a valuable public asset which can become a tool for community development activities. With appropriate revisions in state and local laws on tax foreclosures, future abandonment of properties can be stopped far more quickly, and existing vacant and abandoned tax delinquent properties conveyed to those who are willing to undertake reinvestment in the community.

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III. Government Owned Property Over the past fifty years local governments have acquired ownership of more parcels of land than at any prior point in our history. Much of this land acquisition is due simply to the expanding range of local government functions and services. It is also due in part to the widespread urban renewal programs of the 1960’s and 1970’s,and to the creation of major public works projects such as transportation and recreation facilities. Cities and counties have also added to their inventories of publicly owned properties, perhaps unintentionally, through attempts to enforce property tax liens or other government liens. Parcels of land which are owned by local governments, or local government agencies, often present a second opportunity for community development activities. It is quite common that in neighborhoods and communities that have gone through a cycle of decline and deterioration, a surprisingly large number of the properties are actually owned by the local government. In certain situations the government may not even be aware of its ownership of the property. Whenever property is held by a local government, it is exempt from property taxes and not directly contributing to the financial health of the government. Whenever publicly owned property is not being used for public functions, it is an idle asset frequently standing as a barrier to development. For local governments and community development entities the task is to determine which properties are publicly owned, how the property is currently used, and if the property can be converted to a more productive use.

Categories of Government Owned Property One category of publicly owned property includes land which has been acquired through a lien foreclosure process. The foreclosure of property tax liens falls into this category when the property is conveyed directly to the government through a strict foreclosure process (which is rarely used), or when there is no one else willing to purchase the property at a tax sale. Given the likely constitutional defects in the tax foreclosure procedures by which this property was a cquired, this category of property presents special problems for the local government. It is not likely to develop the property for public uses in fear that a prior owner may some day challenge its loss of ownership. It is also not easy for the government to sell, or transfer, this property because of the same ownership issues. Within this broad category of property are also those parcels of land which have been acquired by the local government through the enforcement of liens other than property taxes, such as liens for demolition of improvements, assessments, and water and sewer liens. In the absence of a super priority status for such liens, the legal status of government ownership of the property through a foreclosure proceeding is even more doubtful than in a property tax foreclosure proceeding. One additional group of properties which potentially exists in this category are properties acquired by a local government through foreclosure of government mortgages. Over the past thirty years a number of federal,state and local programs have extended mortgages for various development projects, and inevitably

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Renewing Public Assets for Community Development some of these projects went into default. Foreclosure of the mortgages has occasionally placed ownership of the property in the local government. A second category of publicly owned property involves property which was originally acquired for a large public project such as a transportation, recreation or sanitation project, or construction of new public buildings. Such projects usually require the acquisition of more property than is permanently required for the facility, with the excess land remaining unused by either the government or the private sector (and not producing any property taxes). In this category the local government usually has relatively clean title to the property because of the manner in which it was initially acquired either by purchase or by eminent domain. The difficulty thus far in converting such excess property to a more productive use is that usually the local government, or government agency, has not made a determination of the geographical boundaries of such excess land. In addition, the funds that were used to acquire the property initially may contain restrictions on how the property can be used, or transferred, after completion of the initial project. A third category of government owned real estate which could be a key to community development activity is property that is no longer used for its original functions. Examples of such properties include land and buildings formerly used for public schools but which have long been closed due to declining student enrollments, land once used for public housing projects but since abandoned in the face of changing public housing strategies, and government buildings once used for offices, jails, or warehouses but later replaced by newer facilities elsewhere. In each of these situations the challenge usually does not pertain to questions of ownership or title. Instead,the primary challenge is a determination by public leadership of which properties are indeed surplus properties and no longer needed for governmental functions. Even if a policy decision is made to sell or convey such surplus property, an additional policy decision needs to be made on whether to convey the property at little or no cost for community development work, or to sell the property on the open market to the highest bidder. A fourth, and often overlooked, category of publicly owned property is land which has been, or could be, donated to a local government by the existing private owner. If a private landowner has allowed property taxes to become delinquent, or has made the decision not to invest any further money in the property, the owner should be encouraged to consider donating the property to the local government instead of simply abandoning the property. This approach may provide the owner with income tax deductions for a charitable donation,may reduce the possibility of lawsuits over repair of the property, and could avoid reliance on a questionable tax foreclosure proceeding. From the perspective of community development activities, government owned property should not be viewed only in terms of the large tracts of land with buildings on them. It is often the smaller tracts of land,frequently not suited for large development due to size or location,that pose both the greatest problems to a neighborhood and the greatest potential for easy conversion to productive use. Local governments are often not effective property managers of small tracts of land that are not being directly used for government or public functions. These small tracts are the ones which are usually acquired through lien foreclosure, or are surplus from public projects,and which get “lost” in the government’s property inventory and management system. For a neighborhood association pursuing development, small tracts which accumulate debris quickly become public nuisances.

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Renewing Public Assets for Community Development

Barriers to Development Just as there are four primary categories of government owned property potentially available for community development, there are four different types of barriers to the actual renewal of these properties. The first and most basic barrier is the lack of knowledge and awareness of the public ownership of these properties. In many jurisdictions maintenance of these properties is a low priority in terms of public policies, and there often is a lack of coordination between the government agency which enforces lien foreclosures and the government division responsible for property management of publicly owned properties. The second possible barrier is that when property is acquired by a government for public purposes, the funds used for the acquisition may contain restrictions or limitations on subsequent use or transfer of the property. Tracing of the original acquisition funds, and the restrictions imposed upon the property by federal or state law, can be a difficult and time-consuming process. It is not, however, an insurmountable barrier. A parallel obstacle may exist with respect to properties that were donated to the local government for specific purposes, such as for public parks. Depending on the precise form of the words of the conveyance, it may not be possible to convert such property to other uses. The third barrier to conversion of existing government owned property to other uses consistent with community development is that every state and local government has a specific legal procedure which applies to the transfer of government properties to private entities. Created in order to prevent unethical conveyances, or conveyances inconsistent with the concept of the common good, these statutory disposition procedures generally require that surplus or excess properties be sold at public auction to the highest bidder. In some cities proper use of the existing procedures may be adequate for conveyance of government owned property to meet development goals. In other cities it may be appropriate to create new procedures authorizing conveyance of properties to nonprofit entities at little or no cost in exchange for a commitment to develop the property in a certain manner. In some states a fourth barrier is present when existing laws unnecessarily restrain the local government from conveying property to another public entity, or to a public or private nonprofit corporation for specific purposes. If a local government is unable to convey its surplus property to a development agency or nonprofit entity, what may be missing is the legal authorization for a new public entity that can act as an intermediary between the local government and community development organizations. Delinquent property tax liens and government owned property are two key potential assets for community development. Both stand as a possible cause of neighborhood deterioration, yet both stand as a potential resource to achieve neighb orhood revitalization. Renewal of these assets for community development depends on increasing access to these assets.

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Renewing Public Assets for Community Development

Increasing Access to Public Assets IV. Drafting an Efficient and Effective Tax Foreclosure Process When a neighborhood, or area targeted for community development, confronts large numbers of parcels of land that are heavily tax delinquent, or even a few key tracts of land that are tax delinquent, the first task is to work with the appropriate local government officials to determine the feasibility of using existing property tax enforcement procedures on these properties. It may well be that existing procedures are adequate to force existing owners to become responsible for the condition (and taxes!) of their property, and that all is required is a little public encouragement to elevate property tax enforcement on the priority list of the public officials. Unfortunately, however, the response of the tax collectors, or local government attorneys, is often simply that the existing patchwork of foreclosure procedures takes too long, is too cumbersome, is subject to constitutional inadequacies, or will not produce insurable title. Faced with this response,the appropriate course of action is to prepare a revision of the applicable laws to create an enforcement mechanism which will work.

Building Collaboration Revising state and local government laws on property tax foreclosure is not an easy task, but it can be done. In the last four years alone, several states have enacted significant revisions to their property tax foreclosure laws, and, where permitted, a number of local governments have revised their own ordinances and procedures. Reform of the tax foreclosure process requires collaboration among four different constituencies that do not necessarily have a history of working together, so coalition building is essential. The first partner in these efforts must be the tax collector. It is the tax collector who is likely to be the most frustrated by the inadequacy of existing remedies, and who has the most to gain by having an efficient and effective enforcement mechanism at his or her disposal. The second partner must be the local government attorneys, for they are the ones who specialize in the statutory authority of the public officials and without whom no new statute is likely to be passed. Participation by the tax collectors,and the city attorneys, will be backed by the support of the local government elected officials who see the possibility of both increasing general tax revenues and encouraging community development simultaneously. The third partner in the coalition must be the nonprofit community development organizations. These groups will be able to emphasize the harmful effects on the community of the lack of property tax enforcement,and will be in a position to ensure that new legislative approaches do not end up harming the very people they are trying to serve, such as the low-income elderly who happen to own their own homes but who have never understood the significance of applying for homestead exemptions. The fourth par tner in this coalition, who is in many ways the most significant, is the title insurance company. Whatever new statutory procedure is designed must be acceptable to title insurance companies. When a property tax foreclosure procedure is ultimately completed, if the title to the property is not insurable,no future development will occur on that property until yet more legal proceedings are completed.

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Renewing Public Assets for Community Development

Elements of an Efficient System There are four elements to an efficient and effective tax foreclosure procedure. The first involves the length of time it takes to begin, and complete, the entire process, and the second element pertains to the number of different steps, or stages in the process. The provision of constitutionally adequate notice is a third key element, and the availability of insurable title is the fourth. In any given jurisdiction, the existing statutory framework has one, or two, or even three of these critical elements present, yet fails to be either efficient or effective because of the missing fourth element. Most jurisdictions, however, lack two or more of these elements. Everyone agrees that property owners must be given a reasonable period of time to pay property taxes, even once the taxes are delinquent. A reasonable period of time is justified by the harshness of the enforcement remedy - the complete loss of the property. What is reasonable will vary according to the jurisdiction, with the minimum period of time for the entire process being roughly one year after the taxes become delinquent. There is little justification for having a process which takes two years, or four years, or longer in order to be completed. If a property owner fails to pay delinquent taxes by the end of an additional year after actual date of delinquency, and after receiving notice of the enforcement proceedings, it is most likely that the owner will never pay the taxes and the property will continue to decline. Advocates of a very extended period of time for payment of delinquent taxes are usually simply expressing their opposition to property taxes generally, or their fears about never receiving adequate notice of the foreclosure proceeding. From the perspective of efficiency, whatever period of time is determined to be reasonable should be a period of time prior to the commencement of legal proceedings. If an owner is going to be given an additional period of time to pay the property taxes, it should be before a court orders a sale of the property (or a transfer of title to the government). In other words, there is no need for a post-sale right of redemption from a property tax foreclosure if an adequate period of time exists before the sale occurs. The second key element in an efficient and effective tax foreclosure process is reliance on a single stage, or single event. There is no sound policy justification for a process which involves first a “conditional” public auction of the property, and then later a second proceeding to terminate, finally, the rights of the property owner. Statutes which provide for multiple events, or stages,not only prolong the length of time required to complete the process, and the costs, but also present significant constitutional questions of providing adequate notice at each step in the process. If there is a reasonable period of time prior to the single, and final, event, and the owner and all other interested parties received notice of the commencement of the process, a single foreclosure event which is final and binding should be fair to all parties. Providing adequate notice of the property tax foreclosure proceeding, the third key element, is essential simply because it is constitutionally required. This is the primary legal defect in most existing tax foreclosure laws. Existing laws tend to rely upon notice by publication, and mailed notice to the owner and perhaps to mortgagees. The Supreme Court has made clear, however, that actual notice must be given to every party having an interest in the property whose identity and address can reasonably be ascertained. Functionally, the only way to identify all of the interested parties is to conduct a title examination, and mail notice of the proceeding to every party identified. Notice should also be given to every occupant of the property. The costs of the title examination can be added to the minimum foreclosure sales price.

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Renewing Public Assets for Community Development Having insurable title in the hands of a tax foreclosure sale purchaser, or the local government, at the completion of the process is a fourth,and crucial, element for future development of the property. Making sure that title insurance companies are comfortable with the title examination requirements and the provisions for notice is essential.

Judicial Foreclosure Though it is possible to create a new nonjudicial property tax foreclosure process, it is likely that such a process will leave open serious questions about the adequacy of the procedure, or whether each of the elements were met in a particular case. For this reason, creating a foreclosure procedure which r elies upon court sup ervision and approval is far preferable. A court will be in a position to issue a final order on the constitutional and statutory adequacy of the procedures, and title insurance companies will be able to rely upon the express words of the court authorized deed. Some jurisdictions have elected to create a separate, modified, procedure for certain types of property. These modified procedures provide for an even more expedited tax foreclosure process. Properties that are subject to these procedures are those which are found to be abandoned, or which are a serious nuisance to the surrounding properties. These expedited procedures may set forth a very short period of time, such as sixty days, for completion of a tax sale in a single step. The element which can not be modified, however, is the requirement of adequate notice to all interested parties, which applies regardless of the condition of the property. Reform of existing tax foreclosure laws should always anticipate the situations in which title to the property is conveyed to the local government. A few jurisdictions provide that at the conclusion of the proceeding all tax delinquent properties are forfeited to the local or state government. This has the advantage of allowing the government to use, or convey, the property as it deems appropriate. Most jurisdictions, however, prefer to sell the property at public sales, as local governments are not necessarily in the business of managing large numbers of scattered parcels of land. Whenever a tax foreclosure law relies upon public sales, the law should anticipate the situation where the minimum bid (the total amount of taxes, penalties, interests, and costs) exceeds the fair market value of the land. When this occurs, no third party will bid for the property, and no sale will take place, unless special provision is made for “sale” of the property to the government, or a governmental agency. One additional policy issue will likely need to be addressed in the reform of existing tax foreclosure laws. A significant number of states have, for decades, permitted private third parties (either individuals or institutional investors) to purchase the liens for delinquent taxes from the local governments. To the extent that the purpose of this policy was to permit governments to raise cash by selling tax liens which were difficult to enforce, reform of the tax foreclosure laws should eliminate this need by creating efficient and effective tax foreclosure laws.

V. Using Government Properties for Community Development The second key to community development is to make maximum utilization of the tracts of land that are currently owned by the state or local government within the targeted development area. In order for this to occur, each of the four barriers to renewal must be addressed. The four barriers are (i) identification of publicly owned property, (ii) legal restrictions on use of the properties, which arise from the original sources of funding to acquire the property, (iii) legal requirements that all property be sold for the highest possible price, and (iv) laws restricting conveyance of public property to nonprofit entities.

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Renewing Public Assets for Community Development Depending upon the local government,indices and other lists of publicly owned properties may be accurate and easily accessible. This should not be assumed, however, and individual tracts of land which are central to neighborhood revitalization should be checked carefully for evidence of public ownership. A survey of land ownership also should not be limited to the name of the city, or county, as frequently title to the property may be listed in the name of an agency of the local government, or an independent government authority. When a particular tract of land is identified as being owned by the local or state government, it is advisable to determine how the government acquired ownership. For example, if federal funds were used to help acquire the land for a public project, there may be restrictions on subsequent use and development. Such restrictions are not insurmountable, but do need to be addressed carefully. The third and fourth barriers to the transfer of government property are the most common. Virtually all states have general statutes requiring that public property that is no longer needed for public purposes be sold at a public auction for the highest possible price,and prohibit negotiated transfers for little or no consideration to nonprofit entities. There are several options to address this barrier, each of which may be used independently or concurrently. One option is to create a statutory amendment to the state statute on disposition of public property, authorizing local governments to convey property upon terms and conditions determined by the local government. This approach grants maximum authority and flexibility to the local government. A second option is to authorize local governments to convey public property, at little or no cost, for use in certain designated programs. For example, state law may permit local governments to convey residential properties at no cost to first-time homebuyers as part of an “urban homesteading” program. Alternatively, state law may authorize local governments to convey public properties in targeted development areas to nonprofit entities for future development. A third option builds upon the first two and adds one essential component - the creation of a new public agency, or authority specializing in the acquisition and transfer of properties for community development. In some jurisdictions these entities take the form of public development authorities, while other jurisdictions have created separate land bank authorities.

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Renewing Public Assets for Community Development The effectiveness of an independent, or quasi-independent,authority depends in large measure on the nature of the properties over which the authority has control. If there is a large volume of tax delinquent properties, then a land bank authority needs to have the power to acquire the properties at the tax foreclosure for little or no consideration other than responsibility for the taxes. If the authority has been given power to waive the taxes, it is then able to acquire clean title to the property and reconvey it to a qualified nonprofit entity for development purposes. If, instead, the publicly owned properties consist primarily of parcels of land owned for years by the local government and acquired through various lien foreclosure procedures, the authority must have the power to initiate legal proceedings to resolve title questions.

VI. Evaluating the Challenges Community development is a challenging task,and the complexity of laws on delinquent taxes and publicly owned property doesn’t make it any easier. Instead of attempting to master all of the various possibilities, problems,and options,it is frequently easier to assess the challenges,and the possible solutions, one question at a time. The following set of questions presents a form of “decisiontree” analysis. It begins by asking a basic question and then, depending on the answer, indicates a follow-up series of questions leading ultimately to a concrete set of potential solutions for property in a particular neighborhood or community. Before beginning with the following questions, identify (as least in preliminary form) a specific neighborhood or community in which there are one or more specific parcels of land which are key to development activities,and which cannot be acquired through direct negotiations with the current owner. With respect to these properties, answer the following questions and then proceed as indicated to subsequent questions or recommendations.

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Renewing Public Assets for Community Development Question 1 Are properties in the target area characterized by significant delinquent taxes?

Yes Has the local government attempted to enforce tax foreclosure proceedings in recent years?

No Does the tax collector or tax commissioner feel that the existing tax foreclosure laws are unworkable, or inefficient, or ineffective?

No

Go to Question #2 Yes

Yes Potential solution: Begin working with tax collector to ensure commencement of enforcement proceedings.

Yes Are existing procedures ineffective because they do not provide for constitutionally adequate notice with judicial review and order?

Yes No Is the failure to enforce delinquent taxes due primarily to administrative resources, or to political concerns?

Potential solution: Begin building a coalition around key issues of the losses to the public treasury of nonpayment of property taxes; the implicit shifting of the tax burden to property owners willing to pay taxes, and the negative economic impact on neighborhoods from abandoned and neglected properties.

Yes No Has the jurisdiction followed a practice of selling tax liens, either individually or in bulk, to private third party purchasers?

No Potential solution: Meet with the tax collector, and the local government attorneys, to deter mine why existing tax foreclosure proceedings are not being utilized.

Potential solution: Begin building a coalition of local Government attorneys, title insurance companies, and tax collectors to draft appropriate revisions to state laws, and if necessary, to local government ordi nances, making sure that title to the property at the completion of the procedure is insurable title.

Potential solution: Examine why the sale of tax liens is not address ing the “problem” parcels in the targeted development areas.

No Are the existing procedures inefficient and ineffective because of the multiple steps required, or the length of time (the redemption periods) before the proce dures is complete?

Yes Potential solution: Begin building a coalition of tax collectors, local gov ernment attorneys, ttle insurance companies, and community development corporations to revise tax foreclosure laws to simplify procedures and reduce time period, with careful attention not to create hardships on low-income owner occupied properties.

No Are existing procedures inefficient and ineffective because of the statutory provisions for minimum bids?

Yes No Potential solution: Either revise the existing statutory minimum bid requirements, or create a new special purpose government entity which has authority to acquire the property at less than the minimum bid, such as a land bank authority.

Next step: Work with the tax collector to determine if he or she believes that existing laws are inefficient or ineffective.

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Renewing Public Assets for Community Development Question 2 Are properties in the target area characterized by abandoned buildings, or “junk” improvements which are a danger to neighborhood?

Yes Has the local government attempted to bring legal proceedings against the property to require the owner to rehabilitate the property or cause the improvements to be demolished?

No

Go to Question #3

Yes Potential solution: Work with local government officials to develop a priority list for “problem” parcels, focusing both on those parcels which are causing the greatest harm and on those parcels which can be converted into productive use for the community.

No No Are there existing government ordinances pertaining to elimination of public nuisances caused by vacant and abandoned properties that could be enforced?

Yes Is the failure to enforce existing ordinances due to actual or perceived defects in the existing legislation?

No Is the failure to enforce existing ordinances due to lack of public resources or political will?

No Next Step: Encourage community groups to meet with elected political representatives to seek enforcement of existing ordinances against specific “problem” parcels.

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Potential solution: Build a coalition of local government officials to draft appropriate legislation for local, or state, enactment granting authority to local governments to proceed expeditiously in judicial proceedings against properties which constitute a public nuisance.

Yes Potential solution: Build a coalition of local government attorneys, real estate attorneys and title insurance companies to review, and prepare revisions of, existing code enforcement ordinances and statutes.

Yes Potential solution: Build constituency that can demonstrate the economic and cultural harm to the community from inaction with respect to public nuisances.

Renewing Public Assets for Community Development No

Question 3

Potential solution: with no property which is tax delinquent, abandoned, constituting a nuisance, or even owned by governmental entities, the only (!) challenge is to find a way to attract new private investment into the community.

Are properties in the neighborhood owned by a governmental entity, a public agency or public authority?

Yes Have the publicly owned properties been inventoried, and divided into categories according to the method, or source, or acquisition of the properties?

No Next Step: Work with the appropriate department of the local government to inventory publicly owned properties, and divide them into categories according to source of acquisition (lien foreclosure, excess properties from public works projects, surplus properties no longer needed by local government), and according to geographic location.

Yes No Within each categor y, has a determination been made of restriction, if any, imposed on the property by virtue of the source of funds used to acquire the property initially?

Yes Do existing state laws and local ordinances, permit the transfer of public properties to community development corporations, other nonprofit entities, or possibly private developers for title or no cash consideration so long as the property is developed and used in accordance with stated purposes?

Next Step: Begin tracing the source of acquisition of the property to determine if any federal, sate, or local grant contracts impose conditions on the use of the property, or upon proceeds derived from the sale or transfer of the property.

No Next Step: Build a coalition of local government attorneys and community development corporations to prepare necessary legislation for authorization of special purpose conveyances. Include within this legislation consideration of the possibility of creating a land bank authority.

Yes

Yes

Is the failure to utilize existing procedures for the transfer of publicly owned properties due to the lack of capacity of community development corporations or other entities to acquire and develop such properties?

Potential solution: Focus on capacity building in the local nonprofit community, whether on nonprofits serving special needs, or on community associations seeking to prepare a strategic plan for a neighborhood, and consider utilization of nonprofit intermediar y (either local or national) to facilitate the capacity building.

No Is the failure to utilize existing procedures attributable to title questions involving the properties?

No Next Step: Identify one or more specific parcels as “models” to use to initiate the transfer of the property to entities for community development purposes.

Yes Potential solution: Evaluate the feasibility of using existing statutory procedures (such as Quiet Title Actions) to resolve title defects or creating a new procedure for bulk “reforeclosure” of the tax liens or other liens by which the local government acquired the properties.

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Biography

Frank S. Alexander Frank S. Alexander is a Professor of Law at Emory University School of Law, where he joined the faculty on a full-time basis in 1982 following four years in the private practice of law. At Emory his courses include Property, Real Estate Sales and Finance, State and Local Government Law, Law and Theology, and a seminar in Federal Housing Policies and Homelessness. Honored with the Emory Williams Award for Distinguished Teaching in Professional Education in 1991, and the Ben F. Johnson Faculty Excellence Award in 1998, Professor Alexander has been selected eight times as the Professor Who Best Exemplifies the Ideals of the Legal Profession by the Emory Student Bar Association. He is the author of Georgia Real Estate Finance & Foreclosure Law (2rd edition, 1999), co-editor of The Weightier Matters of the Law: Essays on Law and Religion (1988), and has published eighteen articles in real estate finance, law and theology, and legal philosophy. Founder of Emory University’s Law and Religion Program in 1982, Professor Alexander’s work in recent years has focused on homelessness and affordable housing. From 1993 to 1996, he served as a Fellow of the Carter Center of Emory University, specializing in neighborhood redevelopment activities and low-income housing in conjunction with The Atlanta Project. Appointed by Governor Miller in 1994, he served as a Commissioner of the State Housing Trust Fund for the Homeless from 1994 to 1998, and has served as an advisor to the residents of East Lake Meadows in the redevelopment of the public housing project. Professor Alexander is Chairman of the Board of Directors of the Consumer Credit Counseling Service, a non-profit community service agency providing consumer credit counseling, and Treasurer of Community Friendship, Inc., a non-profit psycho-social rehabilitation program for the seriously mentally ill. He is the recipient of the 1996 Outstanding Service Award from the Atlanta Legal Aid Society, the 1995 Georgia Affordable Housing Award for Individual Initiatives, and the 1995 Citizen’s Award for Outstanding Service from the Fulton County/City of Atlanta Land Bank Authority. Professor Alexander received both a J.D. from Harvard Law School and a Masters in Theological Studies from Harvard Divinity School in 1978, and holds a B.A. from the University of North Carolina. He was admitted to the State Bar of Georgia in 1978, and has served as Counsel with the Atlanta law firms of Kutak Rock and Powell, Goldstein, Frazer & Murphy. He is an active member of the American Arbitration Association, the American Law Institute, the American Bar Association, and the Georgia Bar Association.

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