Monthly Archives: November 2013

Introduction to Strategy

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Having presented the social ecosystem and discussed key findings, I now propose a series of recommendations linked to a set of strategic outcomes and objectives. These recommendations address the social ecosystem of two- to four-unit buildings in Woodlawn, barriers to their acquisition and renovation, and the need to improve property management and expand access to capital. The strategy also builds upon the strengths and opportunities that I have identified and speaks to the interests of local stakeholders.

Acquisition
Despite the substantial number of vacant two- to four-unit buildings in Woodlawn, many languish and continue to physically deteriorate because of direct barriers to acquisition and indirect factors that discourage investment. Currently, properties whose owners have fallen behind on property taxes, municipal services and building code violations cannot be purchased and renovated without paying these debts. As a result, additional strategies for easier acquisition are needed.

Renovation
Renovation strategies must be flexible in order to accommodate the unknown and varied building conditions. Controlling labor costs and providing reliable technical assistance are necessary to enable middle-income homeowners and smaller, entrepreneurial developers to take an active role in renovating two- to four-unit buildings. To ensure that properties are renovated sufficiently, a holistic approach must be taken to prevent landlords from milking properties and weakening the strength of the housing stock. Lastly, the economic activity generated by this labor-intensive process is a potential source of wealth for neighborhood residents.

Leasing, Sale and Property Management
Many of the “soft” issues in real estate development remain important to consider in the development of the strategy. Homeownership is down nationally, and increased rental demand presents an opportunity that should only be ignored at the peril of housing planners. Property management, a task that concerns homeowners and investors alike with two- to four-unit properties, has specific challenges given the nature of smaller buildings in weak market neighborhoods with a concentration of voucher recipients. Care must be taken to avoid blaming the most vulnerable participants in the real estate process, i.e. low-income tenants, for environmental conditions over which they have no control. More support for the landlords pursuing “high-road” property management would upgrade the residential options for all residents and reduce the viability of short-term cash flow driven investors. Attracting homeowners as well as tenants requires being more resolute and strategic about improving quality of life and public safety challenges in the neighborhood. A second approach for increasing homeownership is to rely more on tenants with an existing connection to the neighborhood.

Capital Availability
Several general and more specific challenges in capital availability have significant ramifications for two- to four-unit properties in Woodlawn. Beyond the macroeconomic challenges that have reduced many families’ earning capacity to purchase a home, homeownership is difficult because households cannot obtain financing in the same way they did prior to the recession. Because of the obstacles that would discourage many investors from renovating these properties, an important step is bolstering the ability of homeowners to obtain acquisition and rehabilitation financing. Much of the shortage in financing can be attributed to low property appraisals in the neighborhood, appraisals that are artificially low as a result of continued foreclosure, short sales and cash purchases. The community development institution in Woodlawn that historically filled this niche (ShoreBank) doesn’t exist anymore, while the institutions that do target Woodlawn fill a different niche in their lending. Developers can follow a series of best practices for obtaining financing: they need track records and carefully cultivated relationships with lenders, they need scale in putting together portfolios, and they need either personal funds for down payment or investment capital. Ideally, this last condition would ensure that asset appreciation takes precedence over cash flow. As a consequence of the difficulty of obtaining traditional sources of capital, other business strategies that are less community-minded become less viable.

Lower rents to HCV landlords through demonstrating non-compliance with "rent reasonableness"

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The first approach to reform responds to the documented observation that market rents in Woodlawn are, on average, lower than the rent received by Housing Choice Voucher landlords. The over-payment of subsidy creates an advantage for accepting vouchers in low-rent neighborhoods like Woodlawn over other neighborhoods. By reducing the rent that a landlord would receive, it would also reduce the profits of landlords providing lower-quality management in Woodlawn and assist more households. As discussed in Chapter 5, HUD has a requirement of Òrent reasonablenessÓ that is intended to prevent a landlord from charging a Housing Choice Voucher recipient more than they charge for un-assisted units in the same building (assuming they have unassisted units) and what identical unassisted units would receive on average in the market place.

Because of anecdotal evidence that tenant and CHA payments are more for units located in the same building, statistical evidence that assistance payments are higher than the market rate and the presence of clear regulations that forbid this, the natural solution would be better enforcement. This could include conducting a detailed study/inventory of current apartments rented by HCV residents along with non-assisted apartments that would provide clear evidence of unreasonable rents. It could be argued that this approach reduces the rent that ÒgoodÓ landlords receive in Woodlawn, which would have a depressing effect on housing options. However, these landlords provide a better service and have a credible case for charging more to Housing Choice Voucher recipients. Indeed, helping the market to better distinguish landlords on the basis of management quality would certainly be a positive side effect.

Create alternative to short sales through Land Bank

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Stabilization efforts in the neighborhood, including NSP but also other DHED programs, lack the necessary tools to deal with the market disruptors that depress local property values. The newly established Cook County Land Bank is a promising opportunity to obtain properties through donations, tax delinquency, intergovernmental transfer and purchase. One important step is to actively seek the elimination of short sales that push down appraised values and make renovation harder. The Land Bank can accept these properties through donations or alternative arrangements to the short sale process.

Invest in commercial retail at 63rd and cottage including grocery store, coffee shop, dry cleaners, bakery and restaurants

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Though beyond the scope of housing, retail amenities are an important determinant of quality of life for residents of all income levels. Investing in commercial retail at 63rd and Cottage Grove, including a grocery store, coffee shop, dry cleaners, bakery and restaurants, would appeal to current and prospective residents alike. These investments should be considered priorities in order to ensure that the ÒbrandÓ of the revitalization efforts in Woodlawn represents the whole set of planned initiatives.

Exchange sale of property to land trust for stable property taxes

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A final approach follows the approach associated with many land trusts. Homeowners could permanently sell the land associated with their property to a county-controlled land trust (perhaps the County Land Bank) in exchange for a long-term land lease and deed restrictions on the sale of their house. No longer owners of the land, they could continue to pay their property tax with a nominal annual increase. Their house would be subjected to permanent affordability even under resale.

Support public safety efforts, including landlords of two- to four-unit buildings

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One recommendation, not specific to two- to four-unit buildings, involves continuing broad-based neighborhood efforts around improving public safety. These include the use of Interrupters to prevent escalation of interpersonal conflict into violence, prayer vigils to encourage neighborhood healing and discourage retaliatory violence, and training landlords about their role in preventing crime with the support of law enforcement. Improvements in public safety are critically important for improving the neighborhoodÕs perception issues.

S.A.L.A.D. and the Small Building Initiative

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Potentially the most important topic that has been largely unaddressed is who will be responsible for managing the temporary initiative that has been described, in this publication as well in official Choice Neighborhoods grant applications, as the Small Building Initiative. While the proposed strategic plan will rely on several partners to pursue initiatives that will positively impact the 2 to 4-unit market in Woodlawn, several initiatives must and will be undertaken by dedicated staff with programmatic resources. While the question of who should compose this entity is no less important, this thesis has instead focused on creating the road map that the organization, when chosen, may adopt. Taken as a whole, the recommendations illustrate what may be asked of potential partners and the content of a request for proposals to competitively select the Small Building Initiative administrator that is most capable and willing of fulfilling the role. In the typical framework of planning, this thesis could address the initial existing conditions and strategic planning in order to provide the foundation for actual implementation.

Develop monthly series of pre-purchase and credit counseling workshops to make marginal gains and introduce service-providers to residents

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Because foreclosure and other financial obstacles have damaged consumer credit, pre-purchase counseling may not be sufficient. Many post-foreclosure households are renting in Woodlawn with the intention of purchasing in the future. Others have been unable to purchase homes in Woodlawn, similarly because of impairments to their credit. Both groups require long-term credit repair in order to (re)join the ranks of homeownership. The people-based approach of credit repair, combined with place-based efforts such as rent-to-own strategies discussed later in this chapter, will also be valuable local wealth-building efforts.

Establish relationships with Section 3 business concerns and promote hiring of Woodlawn residents

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The Chicago Housing Authority also maintains a regularly updated list of businesses with contact information that claim to be Section 3 business concerns that are potential partners as well (CHA, 2013e). A Request for Qualifications and/or Request for Proposal could identify businesses and organizations that actively hire in Woodlawn and would be interested in the potential partnership.