Nonprofits Struggle With Revitalization Challenges

Low-income community revitalization has always been one of the most challenging jobs in housing finance. Both investors and individual buyers are hard to come by these days when cost is an issue for sellers as much as it is for buyers.

Property rehabilitations are more expensive than ever, especially in some of the country’s hardest-hit neighborhoods, says Ascala Sisk, senior manager of the NeighborWorks America Community Stabilization initiative launched in 2008.

The slow recovery has contributed to new cuts in government financing, pushing nonprofits like NeighborWorks to look for untraditional investors and new ways to attract buyers.

The NeighborWorks network provides field management services in low-income communities with large bank-owned foreclosures that need rehabilitation before they are listed for sale or for rent.

Its target markets are the hardest-hit low-income neighborhoods in all 50 states. “That is why one of our largest operations is in Miami,” she said. “We also have organizations in Kansas City, Mo., which did not have the highest number of foreclosures and REO properties but features a significantly higher number of foreclosures in the low- to moderate-income neighborhoods.”

Micro-market management is key, she says. “As we start to see some level of recovery in the housing market it is obvious that it is not uniform.”

NeighborWorks predominantly serves communities with high concentrations of foreclosures that already were struggling before the crisis and as a result “will take a lot longer to recover.” But data about the markets that were disproportionately hit by the crisis, such as neighborhoods of color and low income, still are insufficient.

Due to new demand driven by the crisis member organizations have been expanding their acquisition rehab capacity in the past few years. The program now offers rehab training since staff specialized in property rehabilitation reduced in size during the booming years of the housing market, she said.

Funding, however, is limited.

During 2008-2009, the Neighborhood Stabilization Program provided most of the funding for REO acquisitions and rehabilitation. Since 2008 roughly $7 billion in federal funds were earmarked for rehabs nationwide through the program.

“It is a drop in the bucket when you think of the number of properties out there and the cost of REO acquisition plus rehab,” she said. “It hardly treats the size of the issue, but it does help a lot.”

Rehab costs in low-income areas are higher because as a rule they consist of neighborhoods with old, outdated and often severely damaged housing stock, she said.

“It makes it harder to repair compared to, say, a suburban subdivision that ran into some financial trouble in the past couple of years. When you think of the type of the property at hand and the condition of the neighborhood.”

Rehab requirements also have changed due to state and local code requirements that may vary drastically form one jurisdiction to the next.

Expenses are determined predominantly by municipal code requirements, she said, even within states there can be multiple standards for code. “However, code is as good as the ability of that local government to enforce it and the financial condition of the local government, that makes it really difficult to keep up.”

They face a self-defeating situation, she argues, as neighborhoods with the highest number of foreclosures also have suffered the biggest hit to their tax base and budget size making the regulatory oversight process more difficult.

The current effort to turn real estate owned properties into rentals has created a new funding challenge. Rehab efforts in these areas make sense from the supply-demand perspective, she argues, on the other hand it is key to ensure rented units “are affordable, quality housing, not properties in substandard condition.”

Market demand and insufficient funding is leading to new public-private partnerships that include potential relationships not only with local organizations interested in improving their communities, but also untraditional investors such as hedge funds.

“We’re seeing some interest there,” she said, even though as of now it has been limited to initial conversations, what needs to happen is “the coming together of that money and the work that already is happening in these communities.”

Funding aside, uncertainty about the housing market is another challenge. High rehab costs and the unstable market are not attractive to private investors.

For example, it is not clear whether prices really have hit bottom, she added, or how housing values are fluctuating.

“The scale of the problem, which is much larger than the resources available, has made it even more difficult for us to be very strategic and build up momentum in our response.”

Rehab projects need a significant amount of subsidies that may include tax breaks and other regulatory incentives for buyers and individual investors.

The City of Chicago, for example, has implemented tax incentives for individual buyers and provides rehab funding for owner-occupants who are interested in purchasing properties in designated neighborhoods.

“They get a forgivable loan for $25,000 to $30,000 of their rehab costs, that is forgiven over time,” she said. “Until we bring homebuyers to the market it is going to be too large of an issue for any efforts to have a real impact on the situation.”