Residential Tax Foreclosure Survey


Introduction

New York's poor neighborhoods have been plagued by tax delinquency and abandonment since the 1960's. As economic conditions have changed over the past thirty years, hundreds of thousands of dwellings have been removed from New York's housing stock.

The City has tried to counteract these trends by first amending its In Rem Foreclosure Law in 1977 to allow foreclosure on tax delinquent properties after one year, and subsequently vesting, rehabilitating, and reselling thousands of tax delinquent buildings over the past fifteen years. Through such aggressive action, the City hoped to break the cycle of abandonment by taking possession of marginal buildings with tax arrears before they became uninhabitable.

As New York pursued this strategy during the late 1970's and 1980's, the City accumulated thousands of dilapidated vacant and occupied buildings. City stewardship, originally meant to be a temporary palliative, eventually became a long term legal and fiscal responsibility.

Rehabilitation programs implemented during the mid-1980's halved New York's in rem stock to just over 5,000 buildings by 1994. Unfortunately, these expensive programs have become increasingly burdensome given the City's fragile finances, which have been battered by rising unemployment and falling revenues over the past five years. In the face of an estimated three billion dollar deficit, the City is evaluating less costly ways of dealing with tax delinquent residential properties.

Recently, the Rent Guidelines Board has expressed concern about the plight of buildings in tax arrears, and the possibility that the current in rem program cannot accommodate an influx of new buildings. This survey analyzes the residential tax foreclosure policies of 25 large- and medium-sized cities across the nation, outlining various methods used by municipalities to retrieve back taxes from tax delinquent properties.

Summary

Methodology

Municipalities throughout the United States were surveyed for this study. Since high levels of abandonment have occurred in cities with and without rent regulation, such controls were not considered in the choice of forty cities from across the nation. These cities were culled from a 1984 report by the Department of Housing and Urban Development (HUD), which examined homelessness in small (less than 250,000 population), medium (population between 250,000 and 500,000) and large (population greater than 500,000) central cities.[1] To provide some basis of comparison with communities in the New York metro area and with communities with rent controls, twenty cities in the sample were chosen from municipalities outside of the City that have some form of rent regulation, yielding a total sample size of 60 cities.

After initial contact was made with cities in the study sample, three page questionnaires were faxed to tax collectors and housing administrators in city or county agencies that deal with tax delinquent buildings. Questions in the survey focused on actions taken against properties in tax arrears, the processes through which such actions were implemented, and the ultimate fate of buildings with arrears. Respondents were also asked about municipal programs for preventing tax delinquencies and the characteristics of buildings held by municipalities because of tax arrears. Basic queries about residential tax rates and assessment practices were also included in the survey. Follow-up questions were addressed to respondents by phone after completed surveys were faxed to RGB offices.

In Rem Housing in New York

Unlike most cities responding to the Residential Tax Foreclosure Survey, which sell tax liens or auction tax foreclosed residential properties, New York City's main strategy is to retain title and manage the buildings in the in rem program. New York once auctioned these buildings, but it found that many reverted to city ownership, because the buildings frequently did not have sufficient rent rolls to support rehabilitation and operating costs. Thus, to preserve these buildings, which house predominantly low-income people, the City found itself managing the costly properties itself.

The in rem process begins when New York City issues a notice of foreclosure to a building when it is 12 months behind in its property taxes. The City can take title to (vest) the property at this point. Thereafter, owners have up to two years (redemption period) to halt the procedure by paying the taxes owed or by establishing an installment agreement with the Department of Finance.[2]

Though New York City demolishes about 300 units each year, almost all buildings for which the City takes title remain a part of the in rem program. According to the Mayor's Management Report issued in March, 1995, the City now manages 3,062 occupied buildings containing more than 30,000 units.[3] This represents more than 1% of the entire New York City housing stock.[4] Non-profit, for-profit, and tenant organizations manage the 437 buildings that are in the Alternative Management program which account for approximately 7,000 occupied apartments. Roughly three-quarters of the properties that the City manages are concentrated in 10 Community Boards located in Central Brooklyn, the South Bronx, and Harlem.

New York City has undertaken the responsibility of managing and rehabilitating these foreclosed properties in an effort to preserve the housing stock in poor neighborhoods. However, as the costs of City management are mounting (an estimated $220 million this year excluding lost taxes and the cost of rehabilitating each unit which averages $50,000), the City, once again, is focusing on returning foreclosed properties to other entities to reduce its management, if not rehabilitation costs.

The City has recently devised a block- or cluster-based strategy, known as Building Blocks!, to rehabilitate and sell occupied and vacant City-owned housing to private owners. The City's stated objective for implementing Building Blocks! is not substantially different from its reasoning behind managing all occupied foreclosed housing - maintaining affordable housing for low-income New Yorkers and preventing displacement of legal tenants - though the approach is more comprehensive. Through the Building Blocks! program the City additionally aims to "strengthen and diversify communities" by rehabilitating all City-owned buildings within the "cluster", offering low-cost loans to private owners, targeting code inspections, and intensifying patrols by the New York City Police Department and HPD's Narcotics Control Unit. This is obviously a hands-on, and potentially costly, approach to return city housing to private ownership.

Tax Delinquent Housing In Other Cities

Twenty-Six cities (43% of the study sample) responded to the 1995 Residential Tax Foreclosure Survey. Unfortunately, several of the largest cities, such as Chicago, Los Angeles and Philadelphia were unable to respond before the submission deadline.

In dealing with tax delinquent housing, nearly all of the twenty-six respondent cities are driven by fundamentally different motivations than those behind the creation of New York's in rem program. Whereas New York's vesting and management practices seek to prevent housing from becoming abandoned, policies in respondent cities are largely focused on recouping revenue lost through tax arrearage. In essence, New York's policy seeks to protect the City's housing, while the policies pursued by the other respondents protect tax revenues derived from housing. Officials in many respondent cities felt that such a focus actually benefitted tax delinquent housing by keeping it largely in private hands, without excessive government management.

Given these differing philosophies, it is not surprising that New York is the only city in the survey that manages, let alone renovates, thousands of tax delinquent buildings. Several respondents, mainly located in the South or West, claimed that abandonment was not a significant problem, and that residential property was rarely seized for tax arrears. Only one city, St. Louis, mentioned rising levels of abandonment and urban decay.

In contrast to New York's in rem program, which manages (and attempts to rehabilitate) 30,000 occupied dwellings, a minority of the responding cities reported some form of management program for tax delinquent residential buildings which cannot be sold to private buyers. Several cities located in the South and West claimed that residential foreclosures were very rare, while nearly all of the cities that actually managed in rem properties managed fewer than 100 dwelling units. Jersey City was exceptional in this regard, with hundreds of residential properties under rent receivership awaiting eventual sale or demolition.[5] However, officials in Jersey City estimate that the city will dispose of these buildings within two years.

Policy Responses in Other Cities

Two distinct types of policies are used by the twenty-five cities that responded to the Residential Tax Survey. Traditional programs involve municipal foreclosure of tax delinquent buildings, which are then sold, at public auction, usually for at least the value of taxes and costs owed by the former owner. This type of policy was used by New York prior to the creation of the current in rem program in 1977. As the chart [Cities Responding to the Residential Tax Foreclosure Survey] shows, four-fifths of the respondents rely on such policies to regain back taxes from buildings in arrears.

Alternative methods, used by Birmingham, Bridgeport, Denver, Grand Rapids, Hartford, Jersey City, New Orleans, and Yonkers attempt to insulate municipalities from the liabilities of foreclosure and ownership by selling or securitizing tax liens on buildings with arrears. In this way, cities quickly recover at least part of their back taxes without having to incur extra foreclosure and selling costs and without having to take legal and financial responsibility for dilapidated and potentially dangerous structures.

Several cities stood out from those which responded to the Residential Tax Foreclosure Survey due to particularly comprehensive policies for retrieving revenue from and for re-using properties in tax arrears. Jersey City, New Jersey and Yonkers, New York are the only municipalities that combine sales of tax liens for delinquent buildings with foreclosure of buildings whose liens remain unsold. Such a program results in a triage type process in which the most marketable delinquent buildings are initially transferred to private investors, forcing the city to foreclose on only the "worst" (ie. deteriorated or vacant) buildings with tax arrears.

The mechanics of Jersey City's strategy are quite simple. Liens are either sold individually at a city-sponsored auction, or "bulked" (amalgamated) by the city and sold to investment banks for 70% of their value. Properties that do not sell during the lien sale phase are vested by the city after six months and placed under rent receivership, during which time private contractors manage the properties and pass along rents, which are used to pay back taxes. Once per year, Jersey City auctions properties in receivership to the highest bidder. Owners can redeem their properties either by paying arrears in full or by negotiating to repay in installments. Properties that are auctioned cannot be recovered by their former owners. Jersey City typically holds buildings in receivership for two years, after which most are either sold or demolished for not meeting the local building codes.

Grand Rapids, Michigan and Pittsburgh, Pennsylvania are the only respondents to devote part of the receipts from tax lien sales for the acquisition and management of municipal property, including housing. Grand Rapids is unique in that it offers delinquent properties that have not been sold at the county tax lien sale to "homesteaders" for one dollar, in return for an agreement to occupy and adequately maintain the structures. Low interest loans as well as counseling are also provided to homesteaders who attempt to renovate their new homes. Local brokers are enlisted by the city to find investors willing to purchase larger buildings at substantial discounts. This type of policy protects both the city's revenue stream and its housing stock through rapid recovery of arrears and incentives for investors to occupy, and if necessary rehabilitate, tax delinquent buildings.

Adoption of lien-sale based policies seems to mark a trend towards more aggressive collection of tax arrears by the nation's municipalities. Nearly one-third of the cities reported significant changes in their local tax collection statutes over the last five years, all of which served to boost the speed and effectiveness of programs for collecting back taxes. Two cities, Hartford and Bridgeport, Connecticut made legal changes to permit the transition to alternative collection approaches.

Little substantial difference was noted between cities with traditional and alternative approaches with respect to the length of time between tax delinquency and initiation of legal action. As detailed in the chart on the previous page, most cities in the survey wait between one and three years before taking title or initiating lien sales against buildings with tax arrears. All of the responding cities have provisions for owners to pay back taxes and related fines and costs before their property, or liens on it, were put up for sale. Some cities allowed installment plans to be negotiated prior to sale, whereas Hartford, Louisville and Raleigh require payment in-full.

Unfortunately, while most cities responding to this year's survey permitted owners of delinquent buildings some flexibility in paying off arrears, only two have programs in place to warn of, let alone forestall, a building's descent into tax arrears. Hartford has an early warning system based upon tenant complaints and building code violations, while Cleveland provides counseling for owners suffering tax delinquency for the first time.

Respondent cities also fell into two groups regarding the distribution of proceeds of foreclosure auctions or lien sales. More than one-third of the cities keep all surplus monies above the amount of taxes, costs and fines owed, while four others (Buffalo, Raleigh, St. Louis and Seattle) remit surplus receipts back to delinquent owners or their creditors. Six other respondents did not indicate how they disbursed funds gained from sales of buildings or liens. All of the cities that remit surplus receipts to property owners pursue traditional foreclosure and auction-based policies.

Different strategies were also observed for disposing of delinquent properties whose title, or liens, could not be sold. As the chart indicates, three-fifths of the respondents claimed to demolish buildings with arrears which could not be transferred to other public agencies or to the private sector, in most cases because such buildings were vacant and/or uninhabitable. Cleveland made the distinction of destroying only structures that were deemed hazardous. Buffalo, Grand Rapids, Pittsburgh and St. Louis on the other hand specifically mentioned policies whereby unsold properties were recycled for new uses. Buffalo, Grand Rapids and Pittsburgh demolish vacant or uninhabitable buildings on unsold delinquent parcels and attempt to sell the vacant lots. St. Louis transfers unsold properties to a public entity, the Land Realization Authority, for similar treatment.

Conclusion

The 1995 Tax Foreclosure Survey clearly shows that few local governments manage tax delinquent properties they foreclose upon. Nearly all respondents attempt to retrieve as much revenue as possible from buildings in arrears through auctions, lien sales or, if necessary, demolition and subsequent sale of vacant lots. While these policies do not specifically aim to protect housing from abandonment, officials who administer them believe such policies, by quickly resolving tax arrears and minimizing government involvement, may actually benefit local housing markets.


Notes

  1. U.S. Department of Housing and Urban Development. A Report to the Secretary on the Homeless and Emergency Shelters. U.S. Government Printing Office, 1984.

  2. After a foreclosure action is initiated by the City, a landlord may recover the property for up to 24 months by filing an Application for the Release of the City's Interest in the Property and by paying the taxes owed and related penalties. The first four months of the redemption period are a mandatory waiting period when the owner can recover the property; the following 20 months constitute a discretionary period during which the City decides on a case-by-case basis whether the landlord may recover the property.

  3. This represents the number of occupied buildings/units in HPD's Central Management program. There are an additional 1,687 vacant buildings with 12,341 units in Central Management and 437 buildings with 8,537 vacant and occupied units in Alternative Management programs.

  4. There are almost 2.8 million occupied dwelling units in New York City according to the 1993 Housing and Vacancy Survey.

  5. Jersey City currently has 800 properties under rent receivership, which were not sold at the city's most recent tax lien sale. Municipal officials could not provide an exact figure for the number of residential buildings in this portfolio.