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TAFT: Indianapolis vacant housing at critical crossroads

March 15, 2014

Taft
Neighborhood and local government leaders in Indianapolis increasingly face a dilemma: Let tax-foreclosed houses sit vacant or enable their acquisition by large, scattered-site rental investors.

With close to 10,000 such houses in Indy, the impending disposal of these properties will dramatically shape the older city.

Indy has been plagued with a growing number of abandoned homes for over a decade. They’re typically old homes in neighborhoods with high poverty and unemployment, typically hit hard by losses of construction jobs since the 1990s and further destabilized by the housing crisis and recession.

Most of the houses end up controlled by the county or city due to unpaid property taxes. The county tries to sell the homes at tax sales to recoup unpaid taxes and get the title into the hands of new taxpayers.

Recently, a growing number of these vacant homes have been purchased by private-equity investors assembling national portfolios of single-family rental homes.

Last fall, one investor based in California announced it had acquired over 100 homes and was seeking to acquire over 1,000 more in Indianapolis.

When a single investor controls so many homes in a tight cluster of neighborhoods, its management performance will dramatically affect the core city.

The local history of scattered-site rentals should caution government about selling large numbers of homes to any single investor.

In the 1990s, local not-for-profits bought and renovated hundreds of houses scattered through neighborhoods as affordable rental housing. They formed complex partnerships that financed these renovations through federal tax credits leveraging bank debt.

Sadly, after renovating many blighted homes into high-quality rentals, this redevelopment model came crashing down.

The basic lesson is that their cost of operation rose faster than rents. Low-income tenants usually have flat incomes that are stretched to pay a higher percentage of their pay for housing than middle-income people do. This makes it difficult for landlords to raise rents and still attract tenants.

If rents go up too much, units sit vacant or must be rented to people with terrible rental histories, resulting in even greater operating costs when houses are damaged.

In the end, these rentals ended up in foreclosure or were refinanced through heavy subsidy to reduce operating costs.

This pattern of flat rents and rising costs will likely continue in low-income neighborhoods. When I pose this challenge to some of these new large-scale investors, they deflect the question, state their optimism that the rising economy will drive higher rents, or talk about selling tenants their homes after a few years.

Unfortunately, the assumption that poor Indy families will see rising incomes is counter to all economic evidence, so I don’t see how they will pay higher rents or be able to obtain mortgages. There clearly will be a time when these partially renovated homes just can’t be occupied without expenditures that rents will not cover.

What will happen then? It seems like this new scattered-site rental model will fail just as the old one did, leaving us with another burst housing bubble.

While these investors may be the most eager buyers at this time, let’s make sure they don’t end up concentrating their rentals in single neighborhoods or creating local portfolios so large that their failure would result in another round of destabilization.

It is worth taking our time in liquidating tax-foreclosed homes through solid redevelopment strategies instead of taking quick cash and creating larger problems down the road.•

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Taft is executive director of Local Initiatives Support Corp., a not-for-profit that invests in neighborhood redevelopment projects. Send comments to ibjedit@ibj.com.

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