Action Now Institute s. Rebuild Chicago. Campaign. The Neighborhood Revitalization Committee. Action Now Institute

Transcription

1 1 Action Now Institute s Rebuild Chicago Campaign The Neighborhood Revitalization Committee Action Now Institute Like the Great Chicago Fire nearly 150 years ago, today s Foreclosure crisis has claimed tens of thousands of properties throughout the city; but just like after the fire, we will rebuild.

2 2 PART 1 Introduction The Federal Reserve s Monetary Policy Report to Congress of February 29, 2012 states that the large number of vacant properties continue to depress the housing market. The significant pipeline of vacant properties only strengthens a policy consideration that the Federal Reserve already raised in a white paper drafted for the United States Senate on January 4, These properties, vacant due to the foreclosure crisis, often sit for years and have a deleterious effect on neighborhoods. Dan Immergluck of the Georgia Institute of Technology and Geoff Smith of the Woodstock Institute write of this negative spiral. They conclude that each foreclosure within an eighth of a mile around a given single family home cause that home s value to decline by nearly a full percent. For example, 3,750 foreclosed homes across Chicago cost $159,000 each in devaluation over a single year, totaling $598 million in depreciated property values. These vacant properties often sit as Real Estate Owned (REO) and are difficult to sell. The Federal Reserve estimates that twenty-five percent of homes sitting vacant are REO properties. Yet while the housing market has weakened, demand for rental properties has strengthened. The red line in the following graph shows the increase in average rent coupled with a decrease of vacant rentals. This proves that while the housing market continues to stagnate the rental market is only growing.

3 3 The Federal Reserve considers that foreclosed homes, in some instances, could be redeployed as rental properties. The Fed estimates that forty-percent of Fannie Mae s REO inventory would have a higher economic benefit from renting the property than from selling it. The lending agency s list of REO properties is expected to grow as cities continue to process their foreclosure pipeline. Converting REO vacancies in Chicago into rental properties will improve the values of nearby homes and have a higher yield to economic growth than would selling the properties.

4 4 PART 2 Process The program turns vacant buildings into rental properties as a means for economic development and neighborhood revitalization. Properties pass through four development stages: the property begins as a vacant, bank Real Estate Owned (REO) unit and transitions into a rehabilitated, rented property. Finally, the property is returned as bank held property sold on the market. Rehab Properties 1: REO Properties Deeded in Escrow Vacant properties currently held by bank mortgagors as Real Estate Owned properties are deeded into an Escrow account held by a city entity. Consider a property in the Auburn Gresham neighborhood: a two flat containing two, two-bedroom units. The following summary shows how this property will continue through the process of this program. 2: Rehab Properties In a 2008 issue of Chicago Magazine, which relied on the financing estimates of three independent, private contractors, determined that a total gut-rehab costs 50 percent of the total property value. An assessment of properties will first be performed to determine properties requiring only a partial rehab. Our property in Auburn Gresham, valued at $131,818 costs 25 percent to rehab, or $32, to rehabilitate from a vacant property into a suitable rental property. This cost to rehab the property is subsidized by the Chicago Infrastructure Trust at a 50 percent ratio, matched by a private developer. The Chicago Trust and the private developer finance $16, for this rehabilitation. Receiving 60 percent of rental revenue, the Infrastructure Trust and the private development earn $2, per year each, or $26, over the rental period. The Chicago Infrastructure Trust and private developer earn a $10, net profit from this one property, as explained below. 3: Rental Period The two, 2-bedroom units property in Auburn Gresham is then rented as an affordable rental property. To meet this definition, the property cannot be rented for more than 15 percent of the median income of the neighborhood per bedroom. For example, if the property of the two, 2-bedroom units building in Auburn Gresham was rented where the neighborhood median income is $23,779, the property could be rented for as much as $ per month, per unit.

5 5 As a fully rehabilitated unit, the cost of maintenance would be reduced to the sum of property taxes and reasonable property upkeep costs. The upkeep costs can be estimated at one-percent of the property value, per year. A property valued at $131,818, such as a two-unit building in Auburn Gresham, would require $1, in upkeep and $4,004 in taxes. The property collects up to $14, in rent annually. Net rent is $8, The management company licensed to rent the units and maintain this Auburn Gresham property retains 40 percent, or $3, in profit per year rented. Over the course of the rental-licensed period, the company will profit $35, from this one property. 4: Deeded Back to Banks A two-unit property in Auburn Gresham similar to the one in our example, 7719 S. Ada St., sold in 2010 for $25,000. After being rehabilitated through investments by the Neighborhood Stabilization Program, it resold two years later for $125,000, or an appreciation of 133 percent. This appreciation is realized when the rental period expires, and the deed of the property is returned to the original mortgagor and placed on the market for sale. The bank that originally provided the property as a deed-in-escrow now has a 133 percent return on its investment.

6 6 Summary of the Rebuild Chicago Plan The timeline of a vacant 2 bedroom, 2-unit property in Auburn Gresham enrolled in the program: 1. REO Properties Deeded in Escrow The vacant property currently held by bank mortgagors as Real Estate Owned properties is deeded into an Escrow account held by a city entity. 2. Rehab Properties Through a 50 percent share private and public partnership between the Chicago Infrastructure Trust and a private developer, the property is rehabilitated from vacant property into rental property. Through the course of a 10-year rental period, the Chicago Infrastructure Trust and the private developer will earn $10, net profit each from this one property. 3. Affordable Rental Period A private property management company is licensed to rent the properties units for a period of 10 years at an affordable rate. The affordable rental rate is determined as 15 percent of the neighborhood s median income. Through the course of a 10-year rental period, the management company will profit $35, from this one property. 4. Deeded back to REO The property, now rehabilitated and no longer vacant, is deeded back from the Escrow account to the original bank mortgagor to be sold on the market, perhaps to the private property management to be further rented, or perhaps to the renters to now be owners. After the 10-year rental period, the bank mortgagor will earn a 133 percent return on their investment through this sale.

7 7 Appendix 1: Return on Investment This graph shows the return on investment for an example Auburn Gresham two-bedroom two flat rehabbed from an REO property into two rental units and then resold on the market after a ten-year rental period expires. 2: Rate of Rehabilitation Based on case studies from the Cuyahoga County Land Bank and data from the Cleveland metropolitan area, an estimated 30% of vacant properties can be rehabbed for an appropriate cost of 25% of their property value, or $25,000 - $30,000.