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POLICY DISCUSSION PAPER NUMBER 25 DECEMBER 2008

By Thomas J. Fitzpatrick IV

Understanding Ohio’s Land Bank

Legislation

Special Series from the Program on Consumer Finance

By Thomas J. Fitzpatrick IV

Understanding Ohio’s Land Bank

Legislation

FEDERAL RESERVE BANK OF CLEVELAND

POLICY DISCUSSION PAPERS

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ISSN 1528-4344

Thomas J. Fitzpatrick IV

is a visiting scholar in the

Ofﬁ ce of Policy Analysis at

the Federal Reserve Bank of

Cleveland. The author wishes

to thank those that took time

out of their busy schedules

to offer questions, comments

and guidance on this paper.

You are too numerous to

name individually, but this

paper has greatly beneﬁ ted

from your input. Of course,

all mistakes remain the

author’s alone.

The effects of sustained high rates of foreclosure on numerous areas of Cuyahoga County

have thrust land banking to the forefront of recent public policy discussions in Ohio. This

Policy Discussion Paper seeks to inform those discussions by explaining the state’s current

land banking system and by illustrating how the proposed system under Senate Bill 353/

House Bill 602 (the Land Bank Bill) would work.

To contact the author or obtain further information about this research,

please e-mail Anne O’Shaughnessy at anne.o’shaughnessy@clev.frb.org or

call her at 216.579.2233.

Special Series from the Program on Consumer Finance

FEDERAL RESERVE BANK OF CLEVELAND

The effects of sustained high rates of foreclosure on numerous areas of Cuyahoga County

have thrust land banking to the forefront of recent public policy discussions in Ohio. This Pol-

icy Discussion Paper seeks to inform those discussions by explaining the state’s current land

banking system and by illustrating how the proposed system under Senate Bill 353/House Bill

602 (the Land Bank Bill) would work. It is not my intention to take a position on whether the

legislation should be enacted and signed into law.

This paper comprises four parts: Section I deﬁ nes land banks and explains their function;

Section II describes the land bank model currently authorized by the Ohio Revised Code

and the events leading to its creation; Section III spells out how the Land Bank Bill, if passed,

would likely alter the current model; and Section IV concludes.

I. What Is a Land Bank

(and Why Would We Need One)?

Unlike federal land banks, which extend credit to farmers and ranchers, the land banks dis-

cussed in this article are typically established as a vehicle for community development and

revitalization. A good working deﬁ nition of a land bank is offered by Frank Alexander, direc-

tor of the Project on Affordable Housing and Community Development at Emory University

School of Law, who describes land banks as “governmental [entities] that [focus] on the con-

version of vacant, abandoned, and tax-delinquent properties into productive use.”

The duties

of a land bank generally include assuming the title to tax-delinquent properties, then secur-

ing, rehabilitating or demolishing, and transferring those properties to responsible developers

or homeowners to ensure the properties are put to use instead of remaining vacant or aban-

doned.

Policymakers are increasingly considering the land bank model to address the prob-

lem of vacant and abandoned properties in cities like Cleveland, which has an abundance of

vacant housing.

One factor behind the growing vacancies is the high foreclosure rate in Cuyahoga County,

which has been described as the epicenter of the foreclosure crisis.

The problem touches

most of Ohio, which a recent study estimated as having more than 15,000 vacant and aban-

doned buildings and nearly 10,000 vacant and abandoned lots across a handful of cities.

fact, the foreclosure crisis has exacerbated a longer-term trend of increased housing vacancy

driven in part by Cleveland’s population decline.

Vacant and abandoned properties are not readily absorbed by housing demand in cities

that are losing population. In the greater Cleveland metropolitan area, for example, permits

for new construction outpaced population growth by nearly 50 percent from 1990 to 2000.

Because most of this new growth occurred outside of the city and inner-ring suburbs, those

core areas were left with higher concentrations of vacant and abandoned housing.

Looking

ahead, even after foreclosures return to lower levels, cities like Cleveland will continue to

face the challenges of concentrated areas of vacant and abandoned housing.

Why is this issue such a challenge for municipalities? Studies have shown that vacant

and abandoned buildings are magnets for criminal activity

and that reducing vacancy sup-

presses criminal activity.

Thousands of ﬁ res are also reported in vacant structures each year,

causing tens of millions of dollars in damage.

Vacant and abandoned properties also remain

off tax rolls and lower the value of surrounding properties, further eroding the real property

POLICY DISCUSSION PAPERS NUMBER 25, DECEMBER 2008

tax base.

Perhaps most signiﬁ cantly, vacant properties signal that a neighborhood is on the

decline.

They undermine a neighborhood’s sense of community and discourage further

investment.

Moreover, such disinvestment often spreads across neighborhoods and wors-

ens the overall health of a city.

For these reasons, neighborhoods, schools, and city govern-

ments bear the greatest costs induced by vacant and abandoned property.

The process of land banking is not intended to replace the operation of private markets,

but rather to assist where there is a failure of market conditions.

Private markets are not

likely to provide an adequate remedy for this problem and in some cases may aggravate it.

Private parties have little or no incentive to purchase land when the property taxes owed on

the land exceed its fair market value.

Similarly, private parties are very unlikely to purchase

land with defects on its title, because it is rarely cost-effective to cure title defects.

When

land speculators do purchase and hold tax-foreclosed property, cohesive redevelopment

plans can be held up or completely prevented. This speculation problem is exacerbated

when speculators reside out of state, beyond the reach of local jurisdictions.

An efﬁ cient land bank, on the other hand, could help municipalities address the costs

borne by neighborhoods, schools, and city governments by working to reduce vacancy and

abandonment. For instance, land bank systems can deter harmful land speculation by en-

abling land banks to obtain title to distressed properties before they are offered to the pub-

lic. Land bank systems can also deter harmful tax-lien speculation by enabling land banks

to purchase tax liens against distressed properties instead of these liens being offered for

sale to the public. Land banks can ﬁ ll an important gap in private markets by purchasing

undesirable land and removing defects on the title. This latter step is a critical function, as

property without clear title is undesirable to private buyers since they cannot obtain title

insurance. Land banks undertake their tasks with the goal of returning distressed properties

to private entities that will put the land to productive use. If there is no private interest in

land acquired by a land bank, the land can be converted into public green space and donated

to municipalities.

II. Current Ohio Land Banks

The Ohio Revised Code currently allows local authorities to establish a type of land bank

called a land-reutilization program. These land banks typically do not pursue tax foreclo-

sures or otherwise take an active role in addressing the problem of vacant and abandoned

properties. Instead, they are commonly used to hold properties, usually vacant lots, in in-

ventory. These passive land banks were established in an earlier era to address a different

problem, and may not be adequately equipped to address the problem facing Ohio today.

This section will explore the history of Ohio’s current land banking system and illustrate

why it is not suited to address the modern vacancy and abandonment problems facing

communities across the state.

A. History of Current Land Banks

Passive land banks, or those that simply hold properties for future use, were designed in 1976

to address widespread tax delinquency. In the mid 1970s, Cleveland’s population declined sig-

niﬁ cantly, which contributed to more than 11,000 parcels of land becoming tax-delinquent.

FEDERAL RESERVE BANK OF CLEVELAND

At the time, tax-foreclosure procedures required suits to be brought against property owners

rather than the property itself. Because many of these owners had left the jurisdiction, numer-

ous tax foreclosures could not be brought against them. To address the effects of widespread

tax delinquency, legislators enacted a bill in 1976 that enabled local authorities, most com-

monly cities, to create passive land banks.

The 1976 legislation modiﬁ ed tax-foreclosure procedures so that real property tax fore-

closures were actions against property, rather than against property owners, thus allowing

actions against tax-delinquent properties even after owners left the jurisdiction.

When a

county foreclosed on a property, the property would then be advertised and offered for sale

at public auction. If a parcel was not purchased after being offered at two auctions, the leg-

islation enabled passive land banks to receive, manage, and convey the property to private

third parties.

In 1988, the Ohio legislature modiﬁ ed the land bank law to permit the abatement of prop-

erty taxes on land held by passive land banks.

The 1988 legislation also created a dedicated

fund for the prosecution of delinquent real property taxes.

A small percentage of delin-

quent real property taxes and assessments is placed in the fund to ﬁ nance tax-foreclosure

suits by county prosecutors and to cover passive land bank costs. Finally, the 1988 legisla-

tion altered notice requirements to expedite judicial tax foreclosure proceedings.

recently, House Bill 294 was passed in 2006 to expedite the tax foreclosure process.

Under

the changes made by HB 294, the foreclosure of distressed properties may be adjudicated

with an administrative hearing rather than through a judicial proceeding.

B. Challenges Faced by Passive Land Banks

Passive land banks may have worked effectively to address the tax-delinquency problems

faced by Cuyahoga County in 1976, but they are not fully equipped to address the problems

Ohio faces today. The fact that passive land banks are municipal programs rather than sepa-

rate legal entities has four important implications. First, passive land banks have no operating

budgets or staffs of their own, and most local governments lack the tools necessary to address

the vacant and abandoned housing problem.

The limited funding these passive land banks

receive comes from participating local governments and the housing trust funds available to

support activities related to the transformation of land bank properties.

Because passive

land banks lack dedicated staff, time spent on passive land bank issues reduces the time and

resources that localities can direct to other important issues.

Second, passive land banks operate only within local governments, so they cannot address

vacancy and abandonment regionally. This limits the redevelopment planning each program

can undertake. The spread of urban decay is not bound by city limits. Redevelopment strate-

gies in one municipality will affect those of its neighbors and beyond. Consider that in Frank-

lin County, home to Columbus, a land-reutilization program has been organized at the county

level, but is unable to actively foreclose on tax-delinquent properties within municipalities

without their consent.

This restriction, which the Land Bank Bill would remove, delays

redevelopment efforts.

Third, because passive land banks are not legal entities, they do not have the power to

acquire real-estate-owned (REO) properties or contract to upkeep inventoried parcels. These

actions must be executed at the city level. This lack of leverage creates inefﬁ ciencies both

POLICY DISCUSSION PAPERS NUMBER 25, DECEMBER 2008

for the parties holding REO properties and for Ohio government, because it forces multiple

municipal negotiations for the purchase or upkeep of REO properties.

Fourth, because passive land banks are government programs as opposed to separate le-

gal entities operating independently from local governments, local governments are exposed

to legal liability. Under the current legislation, local governments bear the legal liability for all

properties in a land-reutilization program’s inventory. The most distressed properties carry

with them the most signiﬁ cant exposure to liability, which may discourage effective use of

land banks.

Incidentally, land banks are limited to taking unimproved land

unless the structures on

the land are slated for demolition or are unoccupied and acquisition is “necessary for the

implementation of an effective land reutilization program.”

The tendency has been for pas-

sive land banks, such as the one in Cleveland, to acquire only unimproved land.

A couple

of driving factors are likely at play: First, the legal liability and costs associated with holding

the land may motivate passive land banks to acquire only unimproved land. Also, passive land

banks do not have the funding to engage in wide-scale rehabilitation or demolition. These

factors demonstrate that passive land banks are designed to address a different problem en-

tirely, as many of today’s tax-delinquent properties have buildings in need of rehabilitation

or demolition located on the parcels.

Passive land banks also take a long time to acquire tax-foreclosed properties. Currently,

tax-foreclosed property must go through two public auctions, held only a few times a year,

before being transferred to passive land banks. Before being offered at a public auction, the

property must be advertised for 21 days. Even the majority of expedited HB 294 foreclosures

must go through at least one auction before they can be transferred.

Thus, properties ac-

quired by land banks under current law will sit vacant for up to nine months after foreclo-

sure and before they are transferred to the program. This lengthy time period allows such

properties to fall into disrepair due to neglect or to be stripped by looters.

Communities that established a countywide land-reutilization program under current law

must contend with the challenges imposed by the present land-acquisition process. To be-

gin with, the requirements that must be satisﬁ ed before a land-reutilization program can

take title to a property limit the types of properties the program can access. In the case of

the Franklin County Land Reutilization Program, the properties it most commonly acquires

after being offered at public auction are (1) vacant lots with delinquent taxes in excess of

property value, (2) abandoned homes or commercial structures, and (3) environmentally dis-

tressed properties.

Franklin County cannot acquire recently vacated or abandoned homes

for its land-reutilization program because these properties must ﬁ rst be offered for sale at

public auctions.

The proposed land banking system in the Land Bank Bill would address current short-

comings by establishing land banks as separate legal entities with their own staff, budgets,

and independent legal existence. Land banks organized under the proposed system would

have the resources and ability to address the regional problems of vacancy and abandon-

ment more efﬁ ciently and effectively than current law allows. Further, they would have the

legal independence necessary to shelter localities from legal liabilities associated with mini-

mizing the effects of vacant and abandoned housing.

FEDERAL RESERVE BANK OF CLEVELAND

Under Ohio’s proposed land banking system, a county land bank would be organized as

a corporation empowered to foreclose on tax-delinquent properties. Once the county land

bank had title and obtained appropriate municipal permits, it would either contract the

properties for rehabilitation or demolition or sell them to responsible developers. If proper-

ties were rehabilitated, the county land bank would resell them individually to homeowners.

Alternatively, county land banks could bundle clusters of acquired properties and sell them

to developers.

III. How the Land Bank Bill Would

Alter the Current Land Banking Model

Intended to modernize Ohio’s current land bank system, the Land Bank Bill would allow for

the creation of County Land Reutilization Corporations (CLRCs)—nonproﬁ t community im-

provement corporations authorized by and subject to the Ohio Revised Code

—to help ac-

quire, reclaim, rehabilitate, and reutilize vacant land. The land banking system proposed under

the Land Bank Bill would alter the state’s current model in four signiﬁ cant ways:

The bill gives CLRCs the powers they need to regionally address vacant and abandoned •

housing.

The bill streamlines the primary method of property acquisition: tax foreclosure.•

The bill secures a source of funding for county land banks without creating new taxes.•

Finally, the bill assures that land banks have the ability to organize as corporations legally •

distinct from local governments.

A. County Land Reutilization Corporations:

A Modern Land Banking Model

i. CLRC Powers

The proposed bill gives CLRCs both special and traditional corporate powers. Special powers

include the ability to contract with numerous government organizations and county boards.

Counties will be able to provide CLRCs with all the basics needed to run a business – data

storage, ofﬁ ce space, etc. – at or below market rates. CLRCs would be empowered to contract

with municipalities for management of property. Finally, CLRCs would be able to initiate fore-

close on tax liens.

As an Ohio Revised Code § 1724 corporation, CLRCs have most of the traditional powers

of corporations.

Among these are the abilities to develop regional strategies for address-

ing the vacant and abandoned housing problem, negotiate directly for the acquisition of

REO properties, maintain other entities’ REO properties for a fee, accept properties as gifts

or donations, purchase properties from individuals, and contract for the rehabilitation or

maintenance of inventoried properties. Negotiating with banks or servicers to acquire REO

properties at the county level makes the process more efﬁ cient for all parties involved. Ser-

vicers and municipalities within a county will not have to engage in numerous transactions,

each resulting in the transfer of a handful of distressed REO properties. Instead, CLRCs can

negotiate for every distressed REO property in the county.

As independent corporations, CLRCs also will have the freedom to decide how to dispose

of property. This could entail anything from rehabilitation and resale to demolition. Because

POLICY DISCUSSION PAPERS NUMBER 25, DECEMBER 2008

CLRCs are organized to effect land redevelopment, they could vet potential new owners to

ensure they are ready to be homeowners. Alternatively, they could sell to private developers

who bring forward approved plans to help accomplish long-term community development.

Land banks also would have the ﬂ exibility to adapt to new market demands quickly. For exam-

ple, they could lease properties if there was a sudden demand for leased space. The changes in

the Land Bank Bill would give land banks increased independence and ﬂ exibility.

As will be discussed more fully in the funding section, CLRCs may borrow money via

loans or lines of credit and by issuing ﬁ nancial instruments or securities. They may request

that a county’s Board of Commissioners pledge a source of revenue to secure a borrowing

and issue notes in some circumstances. If CLRCs are operating within the boundaries of a

city or other municipality, they may request that the municipality issue bonds to fund CLRC

activities within those boundaries. In this way, municipalities can collaborate with CLRCs by

providing some funding for large initiatives.

ii. CLRC Immunities

The Land Bank Bill also grants CLRCs important immunities. Because CLRCs would be in the

business of acquiring vacant, abandoned, or otherwise distressed real property, they should

be immune from some regulations. The bill would immunize CLRCs from state environmen-

tal regulations and orders, permits, licenses, variances or plans approved or issued under any

such regulations. There are, however, some immunities not on the list that may beneﬁ t CL-

RCs.

Some substantial exposure to liability comes with acquiring nuisance properties.

The

potential for nuisance lawsuits is a real possibility between the time when CLRCs acquire a

property and when the property is rehabilitated, demolished, or sold. Similarly, there is a real

possibility of successful negligence lawsuits against CLRCs between the time when CLRCs

acquire title to negligently maintained properties and when the property is rehabilitated,

demolished, or sold.

CLRCs would not beneﬁ t from sovereign immunity because they would be independent

corporations created by county governments. Thus, it might be wise to provide CLRCs with

temporary immunity from lawsuits that are based on the condition of the property when

it was acquired. Such immunity could run from the time of property acquisition by CLRCs

until the expiration of a reasonable time necessary to cure the property’s defects.

While

the Land Bank Bill is a step in the right direction by granting some immunities, it could offer

CLRCs further important protections.

iii. Checks and Balances

Granting CLRCs broad powers and immunities makes them a powerful redevelopment tool

in the right hands. Such powers and immunities, however, also raise the question of who will

operate as a check on CLRCs to balance out their powers. In this case, the answer is twofold.

First, the board of directors of every CLRC will comprise elected ofﬁ cials or their designees.

Thus, voters could change the leadership of a CLRC by electing different ofﬁ cials.

Second, municipalities can effectively prevent CLRCs from operating within their bor-

ders. Although it is not spelled out in the initial version of the Land Bank Bill, as a pragmatic

matter, CLRCs will have to work in cooperation with municipalities. The CLRCs will not be

FEDERAL RESERVE BANK OF CLEVELAND

able to obtain permits for actions such as demolition, for example, unless municipalities is-

sue the permits. The Land Bank Bill also grants municipalities the right of ﬁ rst refusal on all

tax-delinquent properties within their borders. That is, if both a municipality and a CLRC are

interested in receiving the same parcel of tax-foreclosed land, the municipality takes priority

over a land bank.

As community improvement corporations, CLRCs would be subject to further oversight

by the state auditor. Each year, every CLRC will be required to ﬁ le an annual report with the

state auditor.

Failure to ﬁ le this report will result in a CLRC’s articles of incorporation being

cancelled by the Ohio secretary of state, at which point that CLRC would no longer be able

to function as a corporation or under any special powers it had been granted.

In addition, CLRCs will be subject to regular audits by the state auditor.

These audits

will occur at least once every two years. Audits may also occur more frequently, which might

be desirable to ensure CLRC powers and immunities are not abused.

These reports and

audits ensure that the activities of CLRCs are in accord with their purpose of facilitating the

reclamation, rehabilitation, and reutilization of vacant, abandoned, and tax-foreclosed land.

Finally, to ensure transparency, CLRCs will be required to keep regular corporate books and

records of all transactions, including disclosure of prices paid and prices received for each

parcel of land.

These checks should ensure that CLRCs do not abuse the powers and immunities granted

by the Land Bank Bill. Because CLRCs are granted speciﬁ c powers, immunities, and exemp-

tions—they are not required, for instance, to engage in competitive bidding for either the

sale of land or properties or for contracting services related to rehabbing or demolishing

properties

—these checks accommodate public oversight and transparency of CLRCs, and

continue Ohio’s tradition of providing a strong home rule environment for municipalities.

B. Primary Method of Property Acquisition:

Tax Foreclosure

Under the proposed legislation, land banks’ primary method of property acquisition will con-

tinue to be foreclosure on tax-delinquent properties.

Land banks cannot focus their acqui-

sition strategies directly on vacant and abandoned housing for a few reasons. There is no pre-

cise, widely accepted deﬁ nition for abandoned property. Vacancy is difﬁ cult to ascertain and

track. And—in part because of these two factors—no organization currently acts as a central

information repository to document the location of vacant and abandoned properties at the

county level.

A county-level data repository would assist in a more regional evaluation of

the vacant and abandoned housing problem, and may help tailor future strategic redevelop-

ment plans.

Property-tax delinquency, however, is often a precursor to vacancy and abandonment

when it occurs in neighborhoods with high foreclosure rates.

Emory University’s Frank

Alexander calls such delinquency “the most signiﬁ cant common denominator among vacant

and abandoned properties.”

A property owner’s decision to stop paying taxes, combined

with foreclosures in the neighborhood, is often a sign that the owner plans no further invest-

ment in his residential property.

While the primary means of property acquisition would remain the same, the Land Bank

Bill would signiﬁ cantly reduce the time it takes to procure vacant or abandoned property.

POLICY DISCUSSION PAPERS NUMBER 25, DECEMBER 2008

The proposed bill changes the deﬁ nition of “abandoned land” so that occupied land against

which a CLRC holds a tax certiﬁ cate will still qualify as “abandoned,” allowing a CLRC to

execute an expedited foreclosure on land that is renter-occupied but has an absent landlord.

Shortening property-acquisition time for land banks helps reduce the likelihood that such

properties would fall into disrepair due to landlord neglect.

The bill also creates an alternative redemption period

that runs for 45 days from ad-

judication of foreclosure, after which the right of equitable redemption expires. Once the

45 days have passed, the bill allows the parcel to be transferred directly to a CLRC without

appraisal or sale. This direct-transfer provision prevents speculators from purchasing and

holding land without reinvesting in it.

These changes address several shortcomings of pas-

sive land banks under current law. The shortened acquisition timeline helps ensures that the

property does not fall into disrepair while going through the two public auctions now re-

quired by law. It also reduces the chances that the property will be stripped of copper pipe,

aluminum siding, storm windows, or other easily sold materials.

Another important feature of the bill is that it would provide a “title cleaning” mechanism

for all properties that CLRCs acquire. This will make CLRC properties more attractive to

responsible developers by ensuring the land has a marketable title. The mechanism works

by automatically extinguishing any other interests in the land transferred to CLRCs. This is a

critical function of successful land banks, because without marketable title to a property, po-

tential owners will not be able to obtain title insurance. If title to property cannot be insured,

it is unlikely that the property will be purchased by either homeowners or developers.

C. Funding Mechanisms

Funding is one of the most critical aspects of any active land bank. Wide-scale rehabilitation

and demolition, both of which may be necessary to address Ohio’s vacant and abandoned

housing problem, can be very expensive. Without a source of funding, passive land banks have

limited ability to address the vacancy and abandonment problem facing Ohio. For example,

a guiding consideration of the Franklin County Land Reutilization Program is minimizing its

ﬁ nancial and stafﬁ ng impact.

The primary source of funding for CLRCs would be penalties

and interest on delinquent real property taxes.

Because the primary source of CLRC funding would be the captured interest and penal-

ties on unpaid or delinquent real property taxes and assessments, no new taxes would be

instituted. Currently, county treasurers sell tax certiﬁ cates to private parties for the amount

of the delinquent taxes.

Under the changes in the Land Bank Bill, CLRCs essentially would

purchase tax certiﬁ cates instead of county treasurers offering them for sale to private par-

ties. In this way, the Land Bank Bill allows for the public use of an existing tax and prevents

tax liens from being sold to speculators. Under the proposed funding mechanism, no new

real property taxes or assessments are imposed on punctual tax payers.

It is important to note that tax lien speculators do not capture all interest and penalties

from delinquent property taxes. Currently, some of these revenues ﬂ ow to and are used

by municipalities. Under the Land Bank Bill, municipalities will still receive the principal

value of delinquent real property taxes and assessments. The penalties and interest, however,

would be redirected to CLRCs.

FEDERAL RESERVE BANK OF CLEVELAND

The Land Bank Bill makes the numerous statutory changes required to create a mecha-

nism through which CLRCs can capture interest and penalties, including a revised tax distri-

bution schedule. The proposed mechanism would function by way of the County Treasurer,

upon approval of the County’s Investment Advisory Committee, borrowing money from the

County Treasury. Borrowed money is paid directly to taxing districts in amounts equal to

their unpaid or delinquent real property taxes and assessments. As those unpaid and delin-

quent taxes are recovered, the principal amount of the tax goes to pay off the line of credit.

The penalties and interest are put into an account used to fund CLRCs.

This system should

operate effectively at the county level because the County Treasurer has access to lists of all

tax-delinquent properties in the county as well as the amount owed on each property.

The proposed changes would allow the line of credit to be funded initially via several

methods. First, the CLRC could borrow from the County Treasury. Second, if the County

Treasury cash ﬂ ow is insufﬁ cient to fund the bill’s revised tax distribution schedule, a line of

credit with a ﬁ nancial institution can be used to satisfy the deﬁ ciency. Finally, the bill creates

an optional mechanism for the creation and sale of delinquent-tax anticipation securities.

These would not be general obligations of the County. Instead, they would be supported

with only a pledge of revenue from the collection of speciﬁ cally identiﬁ ed delinquent real

property taxes and assessments.

The bill does increase the rate at which interest is calculated on unpaid and delinquent

taxes and assessments.

Each month the taxes are delinquent, 1 percent interest is charged

against the amount owed. Late payment penalties (5% and 10%) remain the same. The cur-

rent Cuyahoga County Treasurer projects that this interest rate increase will generate roughly

seven million dollars in annual revenue in Cuyahoga County alone.

It should be noted that this funding system could also work at the municipal level. Under

current law, municipalities could purchase tax certiﬁ cates from the county and pursue the

lower interest and penalties for either general or speciﬁ c use.

The fact that cities are not

currently doing this may be due to economies of scale. That is, the amount of interest and

penalties collected by any one municipality, when compared to collection costs, may make

pursuing the interest and penalties cost prohibitive. Aggregated at the county level, however,

pursuing the collection of interest and penalties may be cost effective.

The Land Bank Bill also allows for numerous possible secondary sources of funding for

CLRCs. First, CLRCs will capture the proceeds from the sale of any of their urban and subur-

ban properties. This is made possible because CLRCs obtain clear title to land after the alter-

nate redemption period, and because all delinquent taxes and assessments will be advanced

to taxing districts. Thus, there would be no liens on the land that would entitle any person or

taxing district to a portion of sale proceeds.

Second, the bill allows up to 5 percent of the delinquent taxes and assessments collec-

tion fund to be earmarked for use by a CLRC. This fund is currently used for the collection

of delinquent real property, personal property, and mobile/manufactured home taxes and for

passive land bank expenses.

Third, a Board of County Commissioners may provide additional funding. Boards are

authorized to make contributions to corporations organized under Ohio Revised Code §

1724.

Boards are also authorized to levy additional property taxes to help fund CLRCs.

Boards may also support CLRCs from their general operating tax levies.

POLICY DISCUSSION PAPERS NUMBER 25, DECEMBER 2008

Fourth, CLRCs are non-proﬁ t corporations that can raise money in their own right. They

can do this by borrowing money, issuing bonds, accepting gifts, and applying in their own

names for grants.

CLRCs may grant mortgages on the land they hold to secure borrowed

money.

Finally, CLRCs may contract with lenders or servicers and GSEs to provide upkeep

and manage temporarily vacant properties for a fee. This is a signiﬁ cant change from passive

land banks, which cannot independently pursue funding because of their status as govern-

ment programs rather than independent corporations.

IV. Conclusion

The reforms contained in the Land Bank Bill would modernize Ohio’s land banking model in

several ways. Current Ohio land banks are not equipped to address the widespread vacant

and abandoned housing problems plaguing many regions of Ohio. The Land Bank Bill would

enable land banks to organize at the county level as corporations directed by elected ofﬁ cials

or their designees. These corporations would act as a county-level repository for data, allow-

ing for regional evaluation of the vacant and abandoned housing problem.

The Land Bank Bill would give land banks operating budgets that are independent from

municipal budgets without raising taxes. The bill would also encourage cooperation between

CLRCs and municipalities. The Land Bank Bill would also signiﬁ cantly reduce the amount of

time it takes for land banks to acquire vacant properties, expediting the properties’ return to

the real property tax rolls.

There are aspects of the bill that should be carefully considered by policy makers. For ex-

ample, the lack of temporary immunity from lawsuits based on the condition of the premises

when it is acquired by a land bank exposes land banks to legal liability. Also, funding CLRCs

will redirect some penalties and interest on delinquent real property taxes and assessments

from municipalities to CLRCs. This will have short-term implications for municipal budgets.

Representatives from municipal and county governments should work closely to determine

the total ﬁ nancial impact of CLRCs. The total ﬁ nancial impact analysis should consider the

municipal costs of funding CLRCs and the ﬁ nancial beneﬁ ts municipalities will reap from

CLRC operations in both the short and long term.

Ultimately, the successful economic development of a region involves numerous factors,

including workforce training, transit systems, taxes, and the business climate. The Land Bank

Bill does not guarantee community stabilization or development. Rather, it establishes land

banks as effective tools for stabilizing and developing communities. It would allow one

county-wide entity to take clear title to distressed properties, expediting rehabilitation and

development of these properties. It would encourage the acquisition of distressed proper-

ties by granting land banks speciﬁ c immunities and allowing municipalities to avoid liability

associated with distressed properties.

In sum, the Land Bank Bill addresses many of the challenges faced by the state’s current

land bank model. The bill offers a well-rounded approach to the problem that may beneﬁ t

those regions of Ohio most affected by vacant and abandoned properties and land. And, not

insigniﬁ cantly, the approach spelled out in the Land Bank Bill comes at a low cost because it

requires no new property taxes or assessmentsto punctual taxpayers.

FEDERAL RESERVE BANK OF CLEVELAND

Endnotes

1. Frank S. Alexander, Land Bank Authorities, A Guide for the Creation and Operation of Local Land Banks 2 (Local Initiatives

Support Corporation, 2005).

2 Matthew J. Samsa, Reclaiming Abandoned Properties: Using Public Nuisance Suits and Land Banks to Pursue Economic

Redevelopment, 56 Clev. St. L. Rev. 189, 213 (2008).

3 See, for example, Les Christie, Where Cleveland Went Wrong, CNNMoney.com, November 14, 2007 available at

http://money.

cnn.com/2007/11/12/real_estate/Cleveland_foreclosure_factors/ (last visited November 2008); Associated Press, Cleveland

Sues Banks Over Foreclosures, msnbc.com, Jan 11, 2008 available at http://www.msnbc.msn.com/id/22613244/ (last visited

November 2008); Lisa Nelson, Foreclosure Filings in Cuyahoga County, Federal Reserve Bank of Cleveland, August 29, 2008

available at http://www.clevelandfed.org/Our_Region/Community_Development/Publications/Behind_the_Numbers/2008/0908/

BTN_20080929.cfm (last visited November 2008).

4. Community Research Partners and ReBuild Ohio, $60 Million and Counting: the Cost of Vacant and Abandoned Properties to

Eight Ohio Cities iii (ReBuild Ohio 2008).

5. Cleveland has lost population every decade since 1950. Edward L. Glaeser & Joseph Gyourko, Urban Decline and Durable

Housing, 113 Journal of Political Economy 345, 346 (2005).

6. Thomas Bier & Charlie Post, Vacating the City: An Analysis of New Homes vs. Household Growth 5 (The Brookings Institution

2003).

7. Bier & Post supra note 6, at 2. The paper goes on to state that East Cleveland has approximately 3,500 abandoned units, or 13%

of the abandoned units in the greater Cleveland area. Id. at 3. See also Frank S. Alexander, Land Banking as Metropolitan Policy

5 (Brookings Institute, 2008) (“[Excess supplies of real estate] can happen gradually over a period of years as populations shift

from urban centers to suburban and exurban rings…”). The fact that real property is not fungible in nature, the supply and demand

for land is often not ﬂ exible enough for prices and consumption to adjust to relative demand and available supply. Id. at 7.

8. Mark Setterﬁ eld, Abandoned Buildings: Models for Legislative and Enforcement Reform, Research Project 23, Trinity College

(1997); William Speilman, Abandoned Buildings: Magnets for Crime, 21 JOURNAL OF CRIMINAL JUSTICE 481 (1993).

9. Douglass Goodman & Bruce D. Mann, An Empirical Investigation of More Police Time: Crime in Midwest Cities, 1990 v. 2000

16 (Working Paper Series University of Puget Sound July 2005), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_

id=770385.

10. Setterﬁ eld supra note 8.

11. A 1998 study of the Cleveland area showed that for every property in tax delinquency, house values within 1-2 blocks

decreased by $778. Robert A Simons, Roberto G. Quercia & Ivan Maric, The Value Impact of New Residential Construction and

Neighborhood Disinvestment on Residential Sales Price, 15 JOURNAL OF REAL ESTATE RESEARCH 147, 158 (1998). A more recent

study found that an additional abandoned structure within 500 feet reduces the sale price of a residence by 2.27%, within 501-

1000 feet by 1.92%, and within 1001-1500 feet by 1.5%. NIGEL G. GRISWOLD & PATRICIA E. NORRIS, ECONOMIC IMPACTS OF RESIDENTIAL

PROPERTY ABANDONMENT AND THE GENESEE COUNTY LAND BANK IN FLINT, MICHIGAN 4 (MSU Land Policy Institute, 2007).

12. ALEXANDER, supra note 1, at 4 (citation omitted). See James Goldstein et al., Urban Vacant Land Redevelopment: Challenges

and progress, (Lincoln Institute of Land Policy, Working Paper, 2001); EDWARD G. GOTEZ ET AL., PAY NOW OR PAY MORE LATER:

ST. PAUL’S EXPERIENCE IN REHABILITATING VACANT HOUSING (1998); Kathleen C. Engel, Do Cities Have Standing? Redressing the

Externalities of Predatory Lending, 38 CONN. L. REV. 355, 357-59 (2006).

13. ALEXANDER, supra note 1, at 4; Engel supra note 12, at 357-59.

14. ALEXANDER, supra note 1, at 4.

15. FRANK S. ALEXANDER, LAND BANKING AS METROPOLITAN POLICY 5 (Brookings Institute 2008).

16. ALEXANDER, supra note 7, at 6.

17. ALEXANDER, supra note 1, at 8. See also Ana Baptista, Redeveloping City-Owned Vacant Lots: Strategies for the Equitable

Redevelopment of City-Owned Vacant Land in Providence, RI, Brown University for Environmental Studies (2000) available at

http://envstudies.brown.edu/oldsite/Thesis/2000/masters/abaptista/.

18. ALEXANDER, supra note 1, at 8.

19. Frank S. Alexander, Land Bank Strategies for Renewing Urban Land, 14 JOURNAL OF AFFORDABLE HOUSING 147 (2005).

20. Id. at 148.

21. Id. at 148.

22. Id. at 148.

23. ALEXANDER, supra note 1, at 6; Alexander supra note 19, at 148; Ohio H.B. 603 Approved June 24, 1988.

24. ALEXANDER, supra note 1, at 6; Frank S. Alexander supra note 19, at 148; Ohio H.B. 603 Approved June 24, 1988.

25. ALEXANDER, supra note 1, at 6; Alexander supra note 19, at 148; Ohio H.B. 603 Approved June 24, 1988.

26. Part of the deﬁ nition of “abandoned land” is that the land must be unoccupied. See Ohio Rev. Code § 323.65(A) (2008).

27. ALEXANDER, supra note 7, at 5.

28. ALEXANDER, supra note 1, at 26.

29. For more information about Franklin County’s land reutilization program, see the Franklin County Treasurer’s Website at http://

www.co.franklin.oh.us/treasurer/landbank/index.html (last visited November 2008).

30. Generally, unimproved land is land without any constructed improvements such as residential or commercial buildings or other

structures.

31. Ohio Revised Code § 5722.01(E) (2008).

32. ALEXANDER, supra note 1, at 9.

33. The only time properties can be transferred directly to a land bank under current law is when the taxes owed on the property

POLICY DISCUSSION PAPERS NUMBER 25, DECEMBER 2008

exceed the property’s fair market value and the property is foreclosed upon via a HB 294 expedited foreclosure. Ohio Revised

Code § 323.73(G) (2008).

34. See http://www.co.franklin.oh.us/treasurer/landbank/index.html (last visited November 2008).

35. The County Treasurer would act as the incorporator with approval of the Board of Commissioners. As with any corporation, a

CLRC’s articles of incorporation must be approved by the Secretary of State and are subject to review by the Attorney General

for compliance with applicable law. Once incorporated, the board of directors is created. The County Treasurer (or his designee)

and at least two County Commissioners (or their designees) must sit on the board. An amendment has been proposed that

would allow large municipalities to appoint a director. The Board adopts a code of regulations for governance which provides for

corporate government and appointment of ofﬁ cers to conduct business and management of property, and establishes policies

and procedures (including agreements with municipalities and other agencies). The code of regulations for governance must

conform to Ohio Revised Code §§ 1702.11 & 1724 (2008).

36. For a list of powers, see Ohio Revised Code § 1724.02 (2008).

37. This increased independence and ﬂ exibility is accompanied by signiﬁ cant accountability, discussed infra, in section III.A.iii.

38. Samsa supra note 2, at 228.

39. Although such a time limit could be a speciﬁ c number of days, by granting immunity for a “reasonable period” would allow courts

to consider surrounding circumstances and account for changes in the amount of time rehabilitating or demolishing buildings

takes. It also allows land banks to avoid nuisance or negligence liability by strategically acquiring properties so that no one

property sits too long without being addressed.

40. Proposed Ohio Revised Code § 1724.03(B) in the Land Bank Bill requires that the Board of Directors be composed of at

least two County Commissioners and the County Treasurer. An amendment that would grant some municipalities the power

to appoint a Director has been proposed. This would give local voters more control over the CLRC and further encourage

cooperation between county and local governments.

41. Ohio Revised Code § 1724.05 (2008).

42. Ohio Revised Code § 1724.06 (2008).

43. These audits are required by Ohio Revised Code § 1724.05 (2008) and subject to Ohio Revised Code § 117.11 (2008).

44. Ohio Revised Code § 117.11(A) (2008).

45. Ohio Revised Code § 1724.05 (2008); Land Bank Bill Proposed Ohio Revised Code § 1724.01(B)(2).

46. Ohio Revised Code § 1702.25 (2008).

47. The Land Bank Bill’s Proposed Ohio Revised Code 1724.02(O) (2008) explicitly exempts CLRCs from public bidding require-

ments.

48. As discussed in section III.A.i., infra, a CLRC will be empowered to purchase REO property from servicers and lenders (as well

as other property owners, if necessary) and accept gifts and donations as well.

49. Municipal Departments of Community Development may act indirectly as repositories of the location of vacant and abandoned

properties because of the information they receive from Community Development Corporations. CLRCs could aggregate and

supplement this information to further one of their primary goals: acting as county-level repositories of this information to further

regional evaluation of the vacant and abandoned housing problem.

50. A

LEXANDER, supra note 1, at 4.

51. ALEXANDER, supra note 1, at 4.

52. ALEXANDER, supra note 1, at 14.

53. The redemption period is the time after foreclosure that former owners may pay the amount of the lien against the property and

regain title. Under current law this period lasts until sale to a third party.

54. This direct transfer provision may also have the effect of preventing investors from assembling land on their own for new

investment projects. Such investors, however, should be able to purchase land from land banks if their projects are viable as

assembling distressed parcels of land for sale to developers is a primary duty of a land bank.

55. See http://www.co.franklin.oh.us/treasurer/landbank/index.html (last visited November 2008).

56. These sales are subject to Ohio Revised Code §§ 5721.30, et seq. (2008).

57. This is not a completely new system. Currently tax certiﬁ cates can be purchased by private individuals to for the principal

amount of unpaid and delinquent taxes. Revenue from sale of such certiﬁ cates goes to the appropriate taxing districts (those

selling their interest in unpaid or delinquent real property taxes and assessments. After holding the certiﬁ cates for one year,

the purchaser may attempt to collect the taxes, along with penalties and interest. Essentially the bill would result in these

certiﬁ cates being sold to a County Land Reutilization Corporation instead of private “tax lien” speculators.

58. Interest is currently charged on delinquent property taxes on August 1 (for the prior 8 months) and December 1 (for the prior 4

moths). The tax rate is calculated according to Ohio Revised Code §5703.47, which requires following this formula:

[The rate of average market yield on outstanding marketable obligations of the U.S. with remaining periods of three moths or

less] + 3%.

59. There is nothing in ORC §§ 5721.30 et seq. prevent cities from purchasing tax certiﬁ cates.

60. The success of the Genesee County Land Bank operating under a similar system suggests the collection of interest and

penalties is cost-effective at the county level.

61. County Land Reutilization Corporations would be organized under Ohio Revised Code § 1724 (2008).

62. The Genesee County, Michigan county land bank has been using EPA Brownﬁ eld grants to fund portions if its activities.

63. This is not nulliﬁ ed by the title-clearing mechanism set in place for CLRCs. Title is only cleared upon acquisition. Thus,

subsequent encumbrances on title will not be washed away.

papers

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