The un-building of un-growing cities: Part 1, condemning the unsalvageable

November 9, 2011 | Cities, Cleveland, Demolition, Foreclosure, Homeownership, Housing, Innovations, Litigation, Rehab, US News

By: David A. Smith

 

Counterintuitive as it may seem, property can have negative value – yet when it does, by itself it does not vanish. 

 

[Cleveland photographs from the Washington Post article – Ed.]

Photo credits – Michael S. Williamson / The Washington Post

A house on Pontiac Street in the Cleveland area, about an hour before it was demolished. The task of plowing under the homes rests with the Cuyahoga County Land Revitalization Corp., which sprang from a 2009 state law aimed at creating so-called land banks to acquire unwanted properties and attempt to put them to better use.

 

Someone must make it go away, and though this is among the saddest of jobs, it is also one of the more costly, as revealed in a detailed, sympathetic, and melancholic Washington Postarticle:

 


If only I hadn’t invested so much in that house

 

Cleveland – The sight of excavators tearing down vacant buildings has become common in this foreclosure-ravaged city, where the housing crisis hit early and hard. But the story behind the recent wave of demolitions is novel — and cities around the country are taking notice.

 

As I’ve previously posted, properties have negative value when their cost to place them back in habitable condition is greater than the value when renovated:

 

Cost to develop (or redevelop) is often invariant of value when developed

 

Because our laws trace liability back through the title to all previous owners, whoever acquires a negative-value property cannot simply renounce it, nor abandon it among the bulrushes, nor even leave it on the doorstep of an unsuspecting charity.

 

This foreclosed housing I here abjure?

 

Instead, like other toxic assets, the unwilling owner must pay someone to haul away the goods:

 

A handful of the nation’s largest banks have begun giving away scores of properties that are abandoned or otherwise at risk of languishing indefinitely and further dragging down already depressed neighborhoods.

 

In effect, the lenders – especially the largest ones – face a liability not unlike a Superfund environmental cleanup.  They are at risk, whether there’s a landlord or no landlord at all.

 

The banks have even been footing the bill for the demolitions — as much as $7,500 a pop.

 

Fannie Mae and Freddie mac have kept themselves to themselves on these steps, which in their way are the contrapositive of their no-principal-writedowns position.  If it becomes widely known that they have assets which negative value when emptied of their occupants and left to wind, weather, and vandalism, will borrowers, advocates, or members of Congress use this to demand that they unilaterally cut principal on thousands of homes nationwide?

 

Four years into the housing crisis, the ongoing expense of upkeep and taxes, along with costly code violations and the price of marketing the properties, has saddled banks with a heavy burden.

 

The house on Pontiac Street is demolished. Water is sprayed on the dwelling to keep the dust down. The banks that own the properties often pay for the razing, as much as $7,500 per property.

 

The carrying costs are ongoing, as are the contingent legal liabilities.  Compare that against the absence of a ready market, and liquidation/ demolition looks like an economically superior alternative.

 

It often has become cheaper to knock down decaying homes no one wants.

 

Removing a negative-value structure from a site converts it into urban fallow that can be developed into a positive asset with another use.

 

The demolitions in some cases have paved the way for community gardens, church additions and parking lots.

 

Some land uses – paying parking lots, community gardens, mini-storage facilities – represent low-investment means of land banking: keeping the land in modestly productive use, while holding onto it for later high-density development.

 

Mini-storage: cheap to build, cheap to operate, cheap to demolish

 

Even when the result is an empty lot, it can be one less pockmark.

 

In some parts of Cleveland, the lots where derelict homes were torn down are being reused as community garden plots.

 

One less clandestine house of crime, one less eyesore, one less disease magnet.  Once the property has been un-built, its value becomes a cluster of potentialities with

 

While some widespread demolitions could risk hollowing out the urban core of struggling cities such as Cleveland, advocates say [Again with the bad journalistic habit of anonymous indirect quotes – Ed.] that the homes being targeted are already unsalvageable and that the bulldozers are merely “burying the dead.”

 

The rubble of the house on Pontiac Street taken just after it was demolished. With as many as 15,000 vacant and abandoned structures remaining in the city and more on the way, the job at the current pace could take longer than a decade and cost $250 million.

 

As we saw three years ago in the case of Youngstown, and more recently with shrinking Detroit, when a city is un-growing, it has to be un-built, and that happens one home at a time, one street at a time, one neighborhood at a time.

 

Smaller, smaller … ever smaller?

 

The task of plowing under the homes rests with the Cuyahoga County Land Reutilization Corp., which grew out of a 2009 state law aimed at creating “land banks” with the power and money to acquire unwanted properties and put them to better use — or at least put them out of their misery.

 

Land banking and asset management – two complementary activities

 

Cleveland has found progress in the sliver of common ground between the land bank’s mission and the interest of financial firms.

 

It’s all in the carrying cost versus the expected return.

 

This collaboration was uncomfortable at first, said Gus Frangos, the Cuyahoga land bank’s president and one of the people behind the state law.

 

Gus Frangos, president of the Cuyahoga County land bank, points to a map of Cleveland that shows the more than 15,000 properties, represented by red dots, that suffered foreclosure and have to be dealt with. Many will be demolished under a special program to get rid of blight.

 

“Two years ago, when we started … it was difficult,” he said. “Everybody was guarded.”

 

When you’re getting vilified, as the banks have been, that happens.

 

After countless meetings, however, land bank officials and banking representatives shed their initial wariness of one another. Frangos made a simple pitch: We’re not here to point fingers.

 

You can condemn your counterparty, or you can seek common ground with your counterparty.  Choose one or the other and see which gets you to a deal quicker.

 

We’ll take your worst properties, the ones not worth keeping. Pony up for the demolition, and you’ll still come out ahead. Just don’t walk away from them.

 

A foreclosed Cleveland apartment building that was deemed beyond repair is demolished. The Cuyahoga land bank officials expect to complete about 700 demolitions by the end of the year.

 

A very sound proposal.

 

Bank of America and Wells Fargo announced plans this summer to donate more than 100 properties to the land bank. J.P. Morgan Chase also has made regular donations, and several other banks have given sporadically. Fannie Mae, the massive mortgage finance company seized by the federal government three years ago, began donating properties early on and now hands over about 30 properties a month, Frangos said.

 

Once the banks have reached the internal conclusion that the properties have negative value, donating them to a responsible demolisher is enormously better than having no landlord at all.

 

Maggie Leighty, left, and Frances Fuchs watch as a home across the street is demolished in Cleveland. They both agreed that they were glad to see the home torn down as it was hurting property values in the neighborhood.

 

For those companies, the arrangement equals good public relations. But it also makes economic sense.

 

“It feels great that we’re able to help nonprofits, help neighborhoods, help families,” said Tyler Smith, an assistant vice president [And REO manager – Ed.] at Wells Fargo, which donated 300 properties nationwide last year and is on track for about 1,000 this year. “But we certainly have to have the piece that shows it makes business sense.”

 

Systems built around self-interest sustain and strengthen themselves over time – another in the many reasons capitalism works.

 

The bank, which often services mortgages on behalf of other investors, knows what it costs daily to hold each foreclosure — the upkeep, the taxes, the broker’s commission, the potential for costly code violations.

 

 

A landlord offers a warrant of habitability. 

 

[The land bank worked] with other nonprofits and benefits from Cleveland’s assertive housing court, which has a reputation for smacking huge fines on banks and servicers responsible for crumbling properties.

 

Your fault or not, you’re collectible!

 

[Continued tomorrow in Part 2.]