The housing crash hit owners of 1-4 unit buildings particularly hard, and it’s going to take some concentrated effort to rebuild this crucial part of the rental market.
By Helene Berlin
Two-to four-unit buildings represent more than 38 percent of all rental housing in Chicago, and owners who lived in these buildings and rented units to family and others they knew well have traditionally been a strong and stabilizing factor in Chicago’s diverse housing mix.
But the real estate collapse and the recession resulted in a sea change. Many owners lost their homes and their investment to foreclosure, and renters in those units lost their leases. In Cook County, nearly a third of the units in two-four-unit buildings in low-income communities were affected by a foreclosure filing in the period from 2005 to 2011. housing in Chicago, and owners who lived in these buildings and rented units to family and others they knew well have traditionally been a strong and stabilizing factor in Chicago’s diverse housing mix.
What has largely been an “invisible” category of housing—very small rental properties delivered through conventional mortgage institutions—has now become highly visible, as a flood of foreclosed and abandoned small apartment buildings, many abandoned and blighted, are saturating largely poor and working class neighborhoods. As Chicago’s housing market moves out of crisis mode and finds the archetypical Chicago owner-occupant of these buildings gone from many neighborhoods, large stocks of small, affordable rental buildings are being “left behind.”
“How do we get responsible landlords back in these buildings so that they can own and operate them as good, affordable rentals?” asked Nick Brunick, an attorney with Applegate & Thorne-Thomsen who represents lenders and developers of affordable housing.
Brunick, who facilitated the “Recovering Lost Rentals in 1-4 Unit Properties” breakout session, noted that more than two-thirds of building sales in areas heavily impacted by the foreclosure crisis were distressed transactions. The group discussed what it might take to start turning these buildings back into productive assets for the community—and what measures are already in place.
Beyond the Traditional Live-in Owner
Attracting responsible owners is crucial to bringing back the stock of small rental buildings and to re-knitting entire neighborhoods back together. And, as Brunick put it, “we have to accomplish that in a way that is not overly reliant on government subsidies.”
Lenders at the session expressed a preference for experienced owners—whether owner-occupants or investors—who work in concentrated areas and who understand the communities they invest in. As they discussed the complications of financing small affordable rental buildings, more than one session attendee echoed the mantra: “It’s better for all neighborhoods to have quality investor ownership than empty buildings, even if owners do not live in the buildings.”
Two factors were recognized as paramount in successfully healing neighborhoods as well as individual buildings:
New Lending Tools
Several newCK loan products are designed to help get vacant, abandoned and foreclosed rental units back into the market. The most recent is through the Community Investment Corporation (CIC), one of a number of community organizations and lending institutions to receive grants from a $70 million settlement awarded to the State of Illinois from large national lenders. CIC will be lending more than $22 million to bring more than 200 one- to four-unit rental buildings back into the CookCounty affordable housing market.
Using an investment model different from typical pre-recession practice in which investors who financed purchase and rehab of small rental buildings as they might single-family homes, the CIC vehicle is designed for investors with the financial capacity to acquire and rehab multiple buildings, but then need to get their cash in order to go on a new set of buildings.
“The new loan product is geared to investors with track records of owning and operating rental buildings and who can bring to the table a concentration of buildings in a specific neighborhood where some activity is already occurring,” Brunick explained.
Another new loan program will complement the new CIC product. The Neighborhood Investment Mortgage Program (NIMP), is geared to a nonprofit or the small “mom-and-pop” investor. The NIMP, administered by the Chicago Community Loan Fund, finances acquisition and rehab and then converts the loan to permanent financing.
“Although it will take a lot of programs similar to this prototype,” observed Tony Smith, community development bank market manager of PNC Bank, “putting it out into the current market will get some concentrated, measurable, observable results.”
Government programs to address the issue
The Cook County Land Bank, another new tool created to address the vacant property issue, is designed to untangle complicated title issues on vacant buildings and otherwise expedite the transfer process to new owners. Allison Milld Clements, director of housing initiatives of the Metropolitan Mayors Caucus, said she believes it will help some of the low-capacity suburbs where many vacant rental buildings are located.
“The Land Bank will be an important partner in helping to acquire and get these properties in the hands of developers,” she said. “The key will be helping communities understand what the Land Bank is.”
A session participant said she’s seen a single family house for sale on a Chicago block that sits across the street from three empty multi-family buildings. “Pity the owner who is trying to sell across the street from three vacant buildings,” she noted, adding that even a concentrated effort would still mean at least two years of work to acquire and rehab the properties. “The Land Bank might help a developer acquire the properties much quicker.”
Ed Jacob, executive director of Neighborhood Housing Services of Chicago (NHS), said that Chicago’s Troubled Building Initiative, in which CIC and NHS both participate, can also help rescue vacant buildings to get them back into renting shape. “If a property sits vacant three years, all of a sudden the rehab cost isn’t $50,000 anymore. We should not automatically assume that because there’s a vacant building that it’s easily acquired,” he noted.
Both the City of Chicago and CookCounty’s suburban municipalities are challenged by new responsibilities with regard to foreclosed, REO and empty housing units. Municipal budgets—already stretched by the housing crash and economic recession—are now burdened with locating owners of abandoned properties, explained Milld Clements.
To respond, some suburban municipalities are working to build relationships with new rental property owner/investors by implementing landlord training programs and creating incentives to conscientious owner/investors who take good care of their properties. Communities are also looking at the possibilities of pooling their code enforcement staffs.