Preservation of Affordable Multifamily Housing
Chicago's Troubled Building Initiative: Revitalizing Affordable Housing
Rehabilitated building in the Chicago area.
by Kristopher Rengert, Community Development Expert, OCC
Across the United States, most moderately priced rental housing is market-rate housing. In many communities, substantial numbers of these units are in older buildings. In some markets, many of these affordable units are at risk of loss from the housing stock because their owners are not providing the necessary physical maintenance. Many cities have thousands of units in this downward spiral, where intervention is needed to stem the decline. This article looks at Chicago’s response to disinvestment in the city’s multifamily inventory and roles that banks have played in preserving these units in the housing stock as safe and affordable rental units.
Chicago’s Troubled Building Initiative
Chicago has more than its share of troubled multifamily properties. Unlike many cities, Chicago has expedited the process of taking control of properties whose owners are unwilling to make basic repairs and, when necessary, of conveying the properties to new owners that will. In 2003, Chicago created a unique program called the Troubled Building Initiative (TBI), bringing together the expertise of senior staff from nine city departments – Housing, Buildings, Law, Administrative Hearings, Water, Planning, Human Services, Police, and Streets and Sanitation – and a not-for-profit housing organization, Community Investment Corporation (CIC).
TBI’s goal is to circumvent the downward cycle that can occur when a housing court orders a landlord to make improvements. In most cities, if the landlord does not comply with a repair order, the housing court will generally order the landlord to vacate the property. That leaves an abandoned property and the possibility that the property will have to be demolished. No one wins in this situation. Instead, TBI allows housing court judges to order necessary repairs, maintenance or property management in neglected buildings and to appoint receivers to undertake this work.
Chicago authorized CIC to administer TBI and to act as a receiver to troubled buildings. The city provides CIC with $2 million in grant funding each year from its Community Development Block Grant allocations and from local government revenue to administer TBI. Under this program, when a property is referred to TBI, the city and CIC work through the housing court to pressure the owner to bring the property into compliance. If these efforts are unsuccessful, the Cook County Housing Court appoints a receiver, with specific responsibilities. These might include management of the building, completing emergency repairs, evicting bad tenants, and evaluating the long-term viability of the property based on occupancy rates, physical condition, rent levels, and rehabilitation potential.
Since 2003, CIC has overseen more than 300 buildings with 5,900 units through TBI. The 29 or so buildings a year taken over through receivership by CIC usually have been beset by health and safety violations, and often, severe gang and drug problems. About 190 TBI buildings have been either rehabilitated and returned to productive use or are in the process of renovation. Only nine have been demolished. The remaining buildings continue in the court process or under receivership.
When TBI was established, CIC was the only receiver used by the program. Now, multiple organizations serve as receivers, depending on the responsibilities included in specific receiverships and the capabilities of each organization. CIC continues to be the receiver used most often as well as the administrator of the TBI program on behalf of the city of Chicago.
How TBI Works
When a building is referred to TBI, the building receives an initial examination to determine whether it meets TBI’s criteria. If it does, a process begins. CIC identifies ownership and history and if possible begins working with the owner to discuss what needs to be done to bring the building into compliance. At the same time the Department of Buildings inspects the property and works to file a case in housing court. Once in court, the city and CIC continue to put pressure on the owner. If the owner cannot show that he/she is taking steps toward compliance, a receivership petition is filed by the city and heard by the judge. If the petition is granted, the judge appoints the receiver.
Charges for work performed by the receiver are either paid by the owner or are rolled into a lien against the property in the form of a receivership certificate. This lien has priority over anything other than real estate taxes, including any existing mortgages against the property. If the receivership continues for an extended period, the receiver may ask the judge for an “interim certificate” for accumulated charges. This certificate can then be filed against the property title at the Cook County Recorder of Deeds Office, where it accumulates interest at 9 percent per annum. If the certificate is not paid within 90 days, the receiver can initiate foreclosure proceedings.
Technically, this process could result in a foreclosure auction, but this rarely occurs. Typically, once foreclosure proceedings begin, the existing owner is motivated to sell the property to a new owner, who pays off the certificate. The new owner must appear before the housing court to demonstrate that it is a suitable owner for the property. If the judge concurs, the new owner pays any remaining costs due the receiver. The receivership is removed, and the property moves back into the productive housing stock. CIC may play a facilitating role in identifying suitable new owners and bringing them to the settlement table.
CIC can also acquire troubled buildings by purchasing existing liens for back taxes and then foreclosing on the property. The city can expedite the process by assigning liens to CIC to help it to take ownership. After acquiring the property, CIC will usually resell it to a responsible new owner, typically to one committing to maintain the property as affordable housing.
How TBI Preserves Affordable Housing
Troubled buildings tend to be in neighborhoods where market rents are low enough to be affordable to low- and moderate-income households. This is because of the market realities that motivate owners of properties in higher cost neighborhoods to maintain their buildings. As such, TBI effectively functions as an affordable housing preservation program in lower cost neighborhoods, although maintaining the condition of the buildings remains its primary goal. Absent TBI, many of the troubled buildings would eventually be lost from the affordable housing inventory via abandonment or demolition.
When troubled buildings occur in higher cost neighborhoods, which is rare, or in transitioning neighborhoods where housing costs are on the rise, which is more common, buildings moving through TBI are vulnerable to loss from the affordable housing inventory via conversion to higher rent units. In this scenario, generally, if the property is ultimately transferred to a for-profit entity, it will likely become market-rate housing beyond the financial reach of low- and moderate-income households. If it is transferred to a nonprofit entity, it is likely to reenter the affordable stock in rejuvenated form. Although both the city and CIC are committed to preserving affordable housing, the end use of a building is not always within TBI’s control. The number one goal of the program is to eliminate the blight and influence of troubled buildings and preserve the existing multi-unit housing stock.
In an effort to make TBI operate more efficiently to stabilize troubled buildings and bring them back into the productive housing stock as affordable housing, CIC, Park National Bank, and the MacArthur Foundation have created a $20 million line of credit to purchase buildings. This fund is particularly important because it enhances CIC’s ability to purchase mortgages or real estate-owned property directly from banks and sell the properties once title has been obtained to new owners who will rehabilitate and maintain the properties as affordable housing. CIC will also often provide the financing for the rehabilitation. Park National Bank committed the full $20 million for the line of credit, and then sold participation to other banks, raising $11 million to date. The MacArthur Foundation has contributed $2 million as part of a $5 million guarantee provided by CIC to guarantee the line of credit. Participants in the line of credit include MidAmerica Bank, Clarendon Hills, Ill.; Charter One Bank, Chicago; Bank of America, Charlotte; Shorebank, Chicago; Cole Taylor Bank, Rosemont, Illinois; and Northern Trust, Chicago.
TBI Helps Reluctant Landlords Exit and Improves Chicago’s Neighborhoods
TBI is a public–private partnership serving Chicago’s residents and improving Chicago’s neighborhoods. The owners whose buildings are ordered into receivership are often looking for a way out because they are tired of being cited by the city in housing court and may have delinquent utility or tax bills. Note holders, too, typically cooperate in helping to rectify the property’s problems because when the court appoints a receiver, the receiver lien supercedes the first lien in Illinois.
In addition, city laws make the lien holder responsible for the condition of the property. While the city has not pursued actions against lien holders of properties with housing court violations, it could do so. So, when CIC offers to purchase the first lien from the note holder, most lenders prefer to sell.
As the receiver lien goes through a normal foreclosure process, the lender can bid on the property at the judicial sale and pay off the certificate’s value. But in general, most lenders do not want to put troubled properties into their real estate owned portfolios, so they negotiate the purchase of their lien by CIC.
Ultimately, for most parties, TBI leads to a positive outcome. Many owners are helped to rid themselves of a property that they no longer wish to own. Current and future tenants benefit from higher quality housing, usually at affordable rents. Residents and property-owners in the surrounding neighborhoods benefit from troubled buildings being renovated or removed. Chicago, its neighborhoods, and its residents all benefit from a well maintained housing stock, increased property tax receipts, decreased municipal costs, and the preservation of quality affordable housing.
For additional information, e-mail Kris Rengert or call him at (202) 874-4798.
Community Investment Corporation
Community Investment Corporation (CIC) was founded in 1974 by a group of banks that wanted to help preserve stable, affordable housing in underserved Chicago neighborhoods through a multi-lender vehicle that allowed them to share the risks associated with this sort of investment. CIC has grown over the past three decades. It now includes 50 investors, mostly banks that have pledged a revolving loan pool of more than $550 million. In 2006, they were involved in the preservation of 240 buildings, including nearly 5,000 housing units, and experienced a loan loss rate of zero.
CIC uses these funds to provide mortgage loans for the acquisition and rehabilitation of multifamily apartment buildings in the six-county area in and around Chicago. CIC makes loans that other financiers do not, because they have experienced staff and the flexible funding tools appropriate for the environment in which they work. Since 1984, CIC has made 1,352 loans resulting in the rehab of 39,000 units and a total CIC loan amount of $777 million.
In 2003, CIC joined forces with Chicago to target the worst buildings in a neighborhood. “Worst” has been defined by CIC to be either or both physical and social deterioration. Thus, these buildings may suffer from inadequate maintenance and aging, as well as crime, drugs sales, gang violence, and tenant abuse. TBI finds buildings and conveys them to new owners who will rehabilitate them using CIC financing. At the beginning of 2007, TBI had processed more than 300 building and rehabilitated (completed or in process) an additional 170 buildings with more than 8,557 units total.
For additional information, e-mail Michael Bielawa or call him at (312) 258-0070 x222.
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