Also by Reinvestment Fund

Financial Times – Baltimore launches housing renovation strategy

Linnell Woods had a case of property envy. She was at the Cherry Hill housing development in Baltimore with a friend who was buying a home.

“I was holding my head down, saying to myself, ‘I wish I could do this one day,’” says the 42-year-old, who works in a company mail room and is the mother of two grown sons.“I thought I was talking to myself, but Lisa heard me and said, ‘Why not?’” she recalls, referring to Lisa Hawkes, a real estate agent who works with a non-profit investor helping people like Woods own their homes.

With Hawkes’ help, and after six years spent cleaning up her own credit history and saving the $1,000 downpayment, Woods and her husband, a maintenance mechanic, bought a renovated row (terraced) house in an area of east Baltimore that politely could be called “transitional”.

The coastal Maryland city, which has been struck by the kind of urban decay that has blighted other once-great US cities such as Detroit and Cleveland, has launched an ambitious project aimed at rehabilitating neighbourhoods with the potential to be desirable again.

Baltimore has lost more than a third of its population since 1950 as traditional employers such as shipyards and steel mills have moved out, taking much of the city’s working population with them.

That has left about 16,000 vacant and uninhabitable properties in the city, the grittier side of which was shown in the television drama series The Wire.

“Over the past 15 or 20 years, people have been trying to figure out ways to deal with this intractable problem,” says Paul Graziano, Baltimore’s housing commissioner. “There were a few failed attempts over time, like spending city money acquiring properties.”

Baltimore has, with little success, tried the strategies used by cities such as Gary, Indiana, that have sold abandoned houses for $1 to people who will fix them up and live in them.

As Graziano says: “We don’t want someone to rehab a house on a block of 29 vacants unless there is a plan for those 29.”

So Baltimore is trying a more targeted strategy, one that has gathered steam since Stephanie Rawlings-Blake was elected mayor in 2010. She ordered a stepped-up approach to the city’s housing problem, one that did not require huge amounts of public money, as Baltimore basically had none and federal funds have been cut back.

Instead of trying to fix the buildings itself, the city has implemented its Vacants to Value strategy, which involves getting rid of uninhabitable houses, facilitating private investment, offering incentives to homebuyers and demolishing buildings in severely distressed areas.

The city has teamed up with investors such as Philadelphia-based TRF Development Partners, which describes itself as a non-profit housing affiliate “making real estate investments that reinforce community assets, revitalise downward markets and create suitable environments for market growth”.

The programme conducted “cluster analysis” to come up with blocks in distressed areas that it could clear and redevelop.

It has honed in on “areas of strength” in “middle-market neighbourhoods” around Penn Station, which links Baltimore to New York and Washington DC, and Johns Hopkins Hospital, one of the country’s premier medical institutions.

There, the housing authority is focusing on rehabilitating 5,000 houses, rather than all 16,000. It uses its eminent domain (compulsory purchase) powers to take over buildings that are not fixed. The houses are then sold at bargain-basement rates at public auction – sometimes going for $500 or $1,000 – to investors such as TRF, which fix them up and sell them on.

The idea is to start the ball rolling, so that the area comes to be viewed as attractive. “The goal is to build a market so that private investors can come in and it becomes self-sustaining,” Graziano says.

The remaining 10,000-plus houses in places where there is no market demand will be razed – the city has allocated $150m for demolition over the next 10 years – to make way for urban gardens.

More than 800 patches of greenery are being cared for by the community under the city-administered Adopt-A-Lot scheme.

Vacants to Value started off with about $26m in funding from the city, state and religious groups, which it hopes to leverage into $125m worth of investment. It has already attracted $72.3m of private funding.

Aside from the demolition costs, the city is spending next to nothing on the programme. It is putting about $1m this year into $10,000 grants for people who buy homes in the area. (People who work at places such as Johns Hopkins can also apply for a $17,000 “live near your work” subsidy from their employer.)

Staunching Baltimore’s bleeding is a long, slow process, but the improvements are tangible. Since Vacants to Value started three years ago, 1,302 vacant houses have been rehabilitated and 660 more have been demolished. The city plans to tear down 1,500 more vacant properties and renovate another 1,500 by 2016.

Photos taken before the project began show rows of graffiti-covered houses with boarded-up – or bare – windows, the pavements an obstacle course of rubble and weeds.

The area was a haven for drug dealers, and undesirable characters loitered on the streets, especially outside Cookies Liquors, a ramshackle shop that used to be on the corner of Bond and Preston Streets.

One of the first things TRF did when it moved in – it has an office, complete with exposed brick walls and stained glass windows, in a house across the road – was to buy the shop and its liquor licence. The licence alone could have fetched about $75,000.

Then, with local church leaders, it held a ceremony outside the shop and burnt the licence – a sign of its intent to clean up the area.

“From the ashes will rise new homes, and from the homes will rise new families,” says Calvin Keene, pastor of Memorial Baptist Church, according to local reports at the time.

Some blocks that have been rehabilitated might still have a couple of derelict houses, but many have been gutted and renovated into modern living spaces with gleaming hardwood floors. The streets are lined with saplings, while houses that have been given a new lease of life by TRF are easily identifiable by their colourful doors.

“We thought, let’s build the best quality houses we can and extend the demand curve,” says Sean Closkey, president of TRF, which sells the houses at steep discounts – $40,000 off a market value of $170,000, for example. “We don’t want to sell seven houses – we want to sell 70,” he says.

The numbers tell of the improvement. The areas targeted for rehabilitation had a vacancy rate of 49 per cent in 2008 and a median household income of $24,405; today, those figures are 32 per cent and $40,950 respectively. The developers hope to have reduced the proportion of empty houses to 8 per cent by 2016.

TRF aims to get out of the Baltimore market by 2018, hoping it will be fully functioning and will no longer need its help.

Certainly, the Woods are now set. Their house is worth $180,000 but, thanks to the subsidies they were eligible for, their mortgage is for only $114,000.

They are also spending less on housing than they were as renters: $784 a month, compared with $921 for their apartment in a public housing complex.

“It feels wonderful,” Woods says of owning her own house, although she does still express some skepticism about the brightness of the yellow paint in her front room. She also feels more invested in the community. “I own my own home, I work, I pay taxes,” she says.

There is still a lot of work to be done, but residents say the area is changing quickly. For people like Hawkes, the key will be ensuring the houses remain within financial reach as the market recovers.

“We have to make sure we don’t put people in places they can’t afford,” says Hawkes, who is in the unusual position for a real estate agent of trying to keep prices down. “Otherwise we will get into a situation like we were in before,” she says, referring to the foreclosure crisis that sparked the 2008 recession.

But for now, she can hardly believe her eyes: “I’m a very optimistic person, but even I can’t believe how it’s turning out.”

Story from  THE FINANCIAL TIMES LTD | September 11, 2013