How do we get ahead of the future of blight?

How do we get ahead?

Even the swiftest and most aggressive fight against today’s blight will accomplish very little if we don’t address the conditions that led to it. Detroit’s collapsing structures and vacant lots didn’t just “happen.” They are the physical result of dire economic and social forces that pulled apart the city over many decades. Issues such as uneven economic opportunity, crime, education and spotty public lighting contribute to blight and must be addressed.

Although these issues clearly fall outside the scope of our report, the Task Force feels it is critical to address two specific areas that can help the city “stay ahead” in its fight against blight: property tax reform and legislative policy.

Property tax reform

Properties in Detroit are over-assessed, under served, and subject to usurious, state-imposed, excessive interest rates when owners fall behind on taxes. Compounding these property taxation issues is the city’s poor track record in collecting taxes owed. Only 53 percent of city property owners paid their 2011 property taxes. Approximately $246.5 million in taxes and fees went uncollected for 2011, of which $131 million was due to the city.

The city has already begun to take steps to address its property assessment issues. Detroit is about to embark on its first citywide property reassessment in 30 years. It is expected to take two years and cost $10 million to complete this task. The city is also pursuing several initiatives designed to improve property tax collection rates. We applaud the city’s current efforts. We also believe more is needed. The city must use the data gathered during Motor City Mapping to sort through the properties that are now vulnerable to tax foreclosure, and to do its utmost to save homeowners’ ability to stay in their homes, while acting to protect foreclosed properties from speculation and continuing neglect.

Problems with tax foreclosure now

Tax foreclosure in Detroit is a critical issue. Since the financial crisis of 2008, more than 60,000 Detroit properties have been foreclosed due to non-payment of property taxes. These properties are funneled into the annual Wayne County Tax Foreclosure Auction—a last attempt to recover the taxes owed. Each year, thousands of distressed properties fail to sell at auction, millions of dollars in tax revenue are lost, and the City of Detroit inherits thousands of unsold properties. This grinding annual event affects the entire city, forcing people from their homes and leaving their former neighbors behind to face the next storm.

The confluence of the 2008 financial crisis, some of the highest property taxes in the country, and Detroit’s descent into bankruptcy have further eroded payment of taxes. At this moment, more than 76,000 properties across Detroit are subject to tax foreclosure because the property owners have not paid taxes in more than three years. More than 42,000 are tax distressed and on the way to foreclosure, with unpaid taxes for at least one year (but not yet three years delinquent). Combined, these 118,000 properties owe more than $500 million in unpaid property taxes. These properties are in addition to the more than 84,000 Detroit properties to which various public entities already hold title as a result of tax foreclosure.

Without intervention, county tax foreclosure will continue to sweep across the city until the inventory of foreclosable properties is exhausted. Speculators will buy cheap property and allow it to deteriorate. Despairing and frustrated residents will continue to walk away from their tax-foreclosed homes and from Detroit. Unscrupulous landlords will evict tenants and scrap their own properties. The county and city will continue to lose incredible amounts of tax revenue. The city will continue to inherit liabilities by the thousands.

Following is a brief explanation of the tax foreclosure process, its effects on the physical and financial state of Detroit, and some recommended changes that can stem the tide and keep Detroiters in their homes.

How it works. In Michigan, every county is required to hold an annual tax foreclosure auction in which properties with three years’ worth of unpaid taxes are offered up in two rounds. As practiced in Wayne County, properties are offered in the first round of the auction for the total amount of back taxes owed, plus any interest and penalties. In the second round, all penalties and interest are wiped clear, and bidding for each property starts at $500.

Interest on unpaid taxes accumulates at a rate of 18 percent per year in order to finance bonds the Wayne County Treasurer floats to front Detroit’s, and other cities, uncollected property taxes, plugging gaps in their general funds. The auction is the County Treasurer’s final recourse to recoup unpaid property taxes. Thousands of properties in a distressed market are auctioned for the total amount of taxes owed, plus three years of interest accrual at 18 percent.

Each year, the auction fails to collect the total amount of back taxes owed. In 2013, 18,732 Detroit properties went to auction in an attempt to collect $214 million in taxes and penalties, according to Loveland Technologies. The County sold 9,143 properties for a combined $32 million, leaving a gap of $182 million in uncollected taxes. When the dust on last year’s auction settled, 6,703 unsold properties became wards of The City of Detroit, adding to about 84,000 Detroit properties already owned by public entities, nearly half from the last ten years of tax foreclosure.

Why it matters. Detroit’s current tax foreclosure process leads to profound loss, not recovery. Comparing the same collection of 50,000 tax-foreclosed properties as documented in the 2009 Detroit Residential Parcel Survey, and then again by Motor City Mapping this year, the Task Force found a significant decrease in rates of occupied properties, and evidence of widespread demolition amongst tax-foreclosed properties. Far from filling a hole in city and county coffers, tax foreclosure actually increases the loss by several orders of magnitude: lost taxes, lost residents, and lost properties.

Since the 2008 financial crisis, 70,552 properties in Detroit (18.5 percent of all properties) have been tax foreclosed. These properties owed a combined $852 million in property taxes, of which only $107 million was collected through foreclosure auctions. That’s $744 million in lost property taxes and penalties.

What it leads to. The fate of tax-foreclosed properties when inherited by an overextended and resource-depleted city is grim. Motor City Mapping found structures in “Poor” or “Suggest Demolition” condition at rates seven times higher among these properties than among privately owned properties.

In addition, Motor City Mapping put a number to what was anecdotally already known: Many tax foreclosed properties that go unsold at auction still have people living in them. Of the more than 84,000 Detroit properties owned by public entities, Motor City Mapping surveyed 5,374 of them as “Occupied.” The city of Detroit is a very large and inadvertent landlord.

How to fix it

Recommendation7-1: Promote a property tax policy that encourages participation. Fewer than half of Detroit property owners are paying property taxes today. The Task Force believes it is more valuable right now to collect something in property taxes from everyone, and encourage participation, than to collect more from a smaller number of owners and allow 18 percent interest to accrue on the rest, swelling a collection gap that will never close.

The Task Force urges the city to act boldly to level the playing field for property assessments over the next two years. The city’s tax reform must provide clearly stated expectations for property owners, and must improve payment systems to make them far easier to use than the clunky on-line interfaces and antiquated in-person payment processes that exist now. Alongside this effort, to prevent history repeating itself, state legislation should be passed that reduces the 18 percent interest rate on unpaid property taxes to six percent in distressed Michigan communities like Detroit.

Recommendation7-2. Address the properties at risk of foreclosure. Even if property taxes are reduced moving forward, there are still 118,000 properties citywide that are on track for tax foreclosure. Detroit cannot afford to put more than a quarter of the city on the auction block. Collectively, these properties carry more than $500 million in unpaid taxes. There has to be a better way.

The Task Force urges the city to take the following steps to stem the tide of future foreclosures:

“Bundle” vacant lots and vacant structures (the properties most vulnerable to speculation and zero maintenance by predatory, private owners if auctioned off). This tool is available to the County Treasurer to make properties unattractive for sale. If one property in a bundle is purchased, all of them must be purchased.

Once protected from speculators at auction, bundled properties can be transferred to the Detroit Land Bank Authority (DLBA), where better disposition strategies can lead to removal or sale with “reverter clauses” that demand improvement and tax payment, or call for a return to public ownership if this requirement is not met. The DLBA should be funded to monitor the upkeep of these properties and act on “reverter clauses” if the buyer is out of compliance.

Properties should be differentiated between owner-occupied properties to which resources can be directed (such as Step Forward Michigan, which offers up to $30,000 in forgivable grants for tax delinquent properties); and rental properties, or those on land contract, which warrant a different approach that discovers who precisely the land owner is, and then tailors an appropriate response.

Property owners who try to skirt delinquent taxes by selling burdened properties to unsuspecting buyers must be dealt with. Reverter clauses applied to auction properties should require the original purchaser to assume liability for any unpaid taxes at the time of transfer.

Legislative reform

Local reform must be supported by a robust legislative framework at the State level. Michigan’s leadership is needed in a number of key areas to strike out blight at its earliest signs. The city, in alliance with other urban centers in Michigan, should lead an active and sustained effort to strengthen State legislation related to blight.

Michigan has recently enacted legislation that can strengthen the city’s hand in fighting blight, including stiffer state penalties and a law that cracks down on the illegal market in scrap metal. This section examines those current legislative initiatives and suggests additional directions for focus.

Fines and penalties for blight

Recommendation7-3: Use and strengthen existing fines and penalties for blight. Until recently, Michigan’s treatment of blight offenders was among the softest in the country. That changed in March 2014 with a series of laws that empowered local blight courts with additional powers to impose penalties and punitive action.

The new legislation enables blight courts in Michigan to act against property owners that have incurred civil fines and costs of $1,000 or more, and have not paid within 30 days. The courts can now impose additional penalties, including misdemeanors punishable by jail time. The legislation also allows cities to render blight violators ineligible for zoning changes, building permits, or certificates of occupancy. The courts are permitted to garnish these property owners for unpaid fines. Last but not least, the new law makes it easier for cities to impose liens against properties involved in blight violation.

This legislation is an important step, but does not go far enough. The extra misdemeanors cited above, and the zoning and permitting provisions, do not apply to buildings taken by banks in foreclosure. The number of such buildings is significant. A blighted property taken by a bank in foreclosure is no less of a nuisance to the community than any other property. The city should push to remove this “carve out” for banks.

Scrap metal legislation

Recommendation 7-4. Strengthen the new scrap metal legislation. Stripping and theft of valuable metals and items from buildings is one of Detroit’s most corrosive contributors to the deterioration of properties. Earlier this year, Michigan approved a much-debated reform to its law on scrap metal purchases, taking the teeth out of this illegal practice. The centerpiece of the law is the requirement that scrap metal businesses mail payments to the sellers of certain frequently stolen types of scrap items to a verifiable address if the purchases are more than $25. This will help create a paper trail between scrap sellers and purchasers.

Although the legislation is an important step, the city should remain vigilant and continue to push forward for two additional reforms:

Eliminate the $25 threshold entirely. The legislation still allows for on-the-spot payments via electronic payment cards on items under $25. This is an easy loophole for thieves to exploit, because they can go from scrap dealer to scrap dealer getting multiple payouts of $25 via electronic payment card, which are easily convertible to cash. In a sense, the legislation encourages them to do so. Sellers are still going to want instant cash, and because of the $25 limit, they may actually steal more items to get the same amount of cash they are currently allowed. The city should consider at some point renewing its push to eliminate the $25 threshold entirely.

Enforcement. A law is ineffective without concerted enforcement that sends a “zero-tolerance” message. The city should be diligent in policing to enforce the new law.

Repurchase of tax-foreclosed properties at auctions

Recommendation 7-5. Crack down on real estate “buy-backs” by speculators. Michigan is currently considering SB 0295 to discourage real estate speculation and predatory purchases of tax-foreclosed property. Under current law, a land speculator may buy a house at auction for $500 and never pay taxes on it. Then, when the municipality forecloses on the property, the speculator can simply buy it back for another $500, and not have to pay the taxes owed. Allowing speculators such free rein keeps property vacant and contributes to blight in urban areas.

The proposed law would prevent a bidder from bidding on foreclosed property if the bidder had unpaid fines for violating local blight or nuisance ordinances. This legislation should be supported, with appropriate provisions to close loopholes made possible by the fact that most property owners own their properties in distinct single-purpose entities over which they retain complete control. At the same time, the legislation should not inadvertently ensnare legitimate homeowners who have lost their primary residences due to unpaid property taxes, and are now trying to buy another home as their primary residence.

Fire insurance escrow fund

Recommendation 7-6. Broaden and strengthen the applicability of fire insurance escrow fund. Michigan’s current Fire Insurance Withholding Program (also known as the Fire Insurance Escrow Fund, or simply the Fire Escrow Fund) has required insurance companies to give municipalities 25 percent of the insurance proceeds for each burned-out house within their boundaries, but only up to $6,000. If an owner razes a fire-damaged house, the owner can access that money. But if the owner fails to raze the house, the city can access the money to do so. The $6,000 cap, however, is rarely enough for demolition, so the money remains in the account and fire-damaged structures remain blighted. About $20M was sitting in the Fire Escrow Fund unused until April 2014, when the city began to use those funds to supplement the demolition of their designated structures.

The Task Force recommends that the State of Michigan take two actions to remedy this bottleneck:

  1. Reallocate funds. Michigan should amend its Fire Escrow laws to provide that when an eligible structure has been demolished but funds deposited for it remain in the Fire Escrow Fund, the escrow funds should be reallocated to a general fire demolition fund, to be used to demolish other fire-damaged structures.
  2. Increase the amount to be withheld. Michigan should amend the current program to increase the amount withheld from the insured to $15,000, or an amount sufficient to actually cover the cost of demolishing a residential structure, including the costs of environmental abatement. If the actual cost is below $15,000, then any remaining funds should be released to the insured only after renovation or proper demolition of the structure, as well as grading and seeding of the lot.

Additional recommendations for state legislation

Recommendation 7-7.Although the city can and should take actions to streamline utility disconnects to abandoned properties, as described in Chapter 6, the State has a potentially supportive role. The Task Force recommends that the State, through the Michigan Public Service Commission, allow DTE Energy and other regulated utilities to amend their tariffs to include free utility disconnects for blight removal.

Recommendation 7-8. In addition, Detroit needs stronger anti-dumping laws. The dumping of trash and large objects such as cars and boats is a major source of blight throughout Detroit. Clearing of such dumped materials becomes an exercise in futility if people are allowed to dump without repercussion. The laws against dumping need to be reviewed and strengthened, and enforcement of such laws must become a priority.