Developers and casual visitors to Baltimore notice the eyesores that once-attractive houses—now empty and damaged—have become. The mismatch between discarded homes and the shortage of houses in the city, particularly for low-income households, frustrates housing advocates, city officials, and builders, as well as residents. Baltimore isn’t the only place facing such a challenge, though.
“Baltimore has been plagued for 40 years by vacant houses and has struggled to figure out how to revitalize the neighborhoods . . . blighted by these abandoned houses,” says Owen McEvoy, of counsel with Nelson Mullins law firm in the city and former deputy secretary of the Maryland Department of Housing and Community Development. “Scattered site redevelopment, which is required because vacant houses are intermittently located among occupied homes, is the hardest of all redevelopments.”
The city of Baltimore has approximately 13,000 abandoned houses and 20,000 vacant lots that create health, safety, and financial hazards for nearby properties. Although it might seem simple to fix and flip these homes, the math doesn’t easily compute.
“The problem is that if you can fix or replace these homes for about $300,000, you can’t sell them for more than $250,000,” says Joe Meyerhoff, an affordable housing finance specialist based in Baltimore. “The issue is how to close that appraisal gap at scale, which is an enormous financial problem.”
Municipal bond funding is difficult to accomplish for a handful of houses, says Christopher Sheehan, Annapolis-based managing director, public finance for Mesirow, a private financial services company headquartered in Chicago. Although funding is available through a TIF (tax increment financing) devoted to large-scale projects for a street or a parcel of land, fixing individual abandoned homes falls outside the traditional uses of a TIF, he says.
“It’s difficult to get a bank to lend on blighted homes individually because of that appraisal gap between the cost to fix them and the projected sales price,” Sheehan says.
Building or remodeling 10,000 homes at $300,000 per property would be a $3 billion endeavor. Multifamily units typically cost $350,000 per door to build, Meyerhoff says, a cost of $3.5 billion to produce 10,000 units.
“It’s easy to see [that this expense] would outstrip the resources of any jurisdiction, so I looked for a solution that’s scalable without depending solely on city or state financing,” Meyerhoff says.
Even if a state or local government can provide $500,000 to redevelop abandoned homes, doing so would fix only 10 or 20 homes, not 10,000, McEvoy says.
Meyerhoff’s solution: noncontiguous TIF bonds (NCTBs).
A TIF creates a special tax district that uses taxes generated by increased value after development to pay off the bonds used to subsidize that development. Typically, TIFs cover a geographic area, but NCTBs can be used for individual properties rather than a whole community. A proposal in Baltimore, the Vacancy Reduction and Affordable Housing TIF (an affordable housing TIF) is based on the NCTB structure.
“The proposed affordable housing TIF is anticipated to generate up to $150 million that will be used to replace vacant properties with affordable homeownership and rental housing for households earning up to 115 percent of the area median income,” says Alice Kennedy, housing commissioner of the Baltimore City Department of Housing and Community Development.
How NCTBs work
An important element of NCTBs is the “noncontiguous” piece, which means that they can be applied to individual homes.
“Typically, you see one or two vacant homes [that are] on the same block as homes that are occupied,” Meyerhoff says. “That’s why you can’t use a traditional TIF—some of these homes have taxpaying owners.”
NCTBs can be used only for properties where taxes are not being paid, which Meyerhoff says is about 70 percent of vacant properties. “As the neighborhood improves because of the elimination of blighted homes, all property values will go up, and therefore tax revenues from the neighborhood will increase,” he says.
In Baltimore, proceeds from the proposed affordable housing TIF could support more than 4,000 vacant properties located in longtime historically disinvested and minority communities, Kennedy says. “Rather than establishing a special tax district [as traditional TIFs do], the proposed affordable housing TIF uses prior-year assessment for properties that were issued a vacant building notice or a vacant lot that was redeveloped, [that] are located in the same neighborhoods as the TIF properties, and that received a use and occupancy permit.”
Homelessness is fundamentally a housing production issue, and the most affordable home is often an existing one. Tools like NCTBF streamline the acquisition and rehabilitation of vacant properties, providing a cost-effective way to deliver more deeply affordable units and at the stabilize communities. These homes are ideal for individuals and families who are housing insecure, at risk of homelessness, and have limited needs for supportive services.
Developers can use a closed home escrow fund (CHEF) as a bridge to an NCTB, Sheehan says. “The CHEF works as a warehouse of capital that can be allocated to each house as a line of credit until you get to critical mass of $10 million for the NCTB,” he says. “Then you can issue the bond and repay the CHEF. Typically, the CHEF funding comes from a public/private partnership that includes large financial institutions based locally as investors.”
An NCTB overlay can be applied to an entire city, so that any property in the city can be eligible as long as it’s empty and the owners are not paying taxes, Meyerhoff says.
Challenges and solutions
NCTBs solve the issue of providing a TIF for properties that are not adjacent to one another. The next step is to accumulate enough vacant properties to issue a bond. Sheehan estimates that a $10 million bond is the minimum because of set-up costs.
“You need economies of scale to make this work, so it makes sense to bundle 40 or 50 houses or more into one bond, depending on the price point,” McEvoy says.
Risk reduction is key to affordable housing financing.
“Since NCTBs are not issued until projects are completed and sold to the end users, this [instrument] eliminates construction risk, noncompletion risk, or the risk of being unable to sell the property,” Meyerhoff says. “The funds are kept in a CHEF, so it’s easier to get a commercial line of credit for the development. They’re virtually risk-free.”
Although Baltimore’s vacant properties are primarily single-family homes, NCTBs can be used for low-income rental housing, too, as long as the rentals meet the threshold of affordability for households with 60 percent area median income required for LIHTC funding, Meyerhoff says.
Residents in some Baltimore neighborhoods want redevelopment, McEvoy says, so NCTBs could be a possible solution for them. “The program needs to be introduced to stakeholders so they understand how it could benefit the whole community,” he says. “You also need investors interested in buying the bonds. LIHTC bonds weren’t popular in the 1980s, but now they’re everywhere.”
McEvoy envisions investors—particularly social benefit investors—embracing the NCTB as they learn about this type of bond.
NCTBs elsewhere
Municipalities apart from Baltimore also face blight, so NCTBs could be a viable solution nationwide.
“I can see NCTBs working [anyplace] that has vacant homes, developers interested in fixing them, and people who want to live there,” McEvoy says. “This [approach] could be the next big thing to solve some major housing problems.”
The goal is to attract a wide audience of developers with a local commitment and to find the capital commitment to match, Sheehan says. NCTBs can work in small towns as well as they can in cities, if the smaller communities have enough projects in aggregate, he says.
“The beauty is that every municipality can decide what [source] to pair NCTBs with, such as federal money, grants, or philanthropic organizations,” Sheehan says. “The hope is that this [flexibility] will open up a lot of opportunities for a variety of configurations that will benefit households with low to moderate incomes.”
Baltimore already has a charter for tax increment financing, which doesn’t exist everywhere, Meyerhoff says. To use NCTBs in other locations, jurisdictions would need legislation in place that allows a TIF to be placed over “areas” so that the instrument can include more than one property, he says.
“The most important thing about NCTBs is that they are scalable and repeatable,” Meyerhoff says. “If you’re a developer, and you’re trying to line up 20 homes on one block to renovate, that takes time and can sometimes be impossible. This [approach] changes the . . . economics of affordable housing redevelopment. It gives developers the ability to plan and to build affordable housing without all the hoops or waiting for funding. Lenders will be on board to provide funds, because they know that, when the certificate of occupancy is issued and the property is sold, they’ll get the bond issue.”
Editor’s note: This article is part of an ongoing series supported by ULI’s Homeless to Housed initiative, exploring innovative finance strategies for providing more deeply affordable housing.
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