Preservation through Vacant Property Receiverships

By Special Contributor posted 09-08-2015 16:13

  
By Melanie Lacey

 A home in Mt. Airy that was protected by a recievership. |Credit: Mt. Airy USA
A home in Mt. Airy that was protected by a conservatorship. |Credit: Mt. Airy USA
Despite the duration of their existence, “vacant property receivership” laws remain mysterious territory. These laws, by way of statute or ordinance, allow third parties to seek a temporary court appointment to rehabilitate blighted properties that are unoccupied. A property does not need to be designated as historic in order to qualify for receivership; however, receivership is a useful tool for the preservationist.

To qualify as a receiver, the third party files a lawsuit detailing how the property creates a public nuisance, and if the owner does not make repairs by a designated deadline, then the court may permit the third party to act in place of the owner. An appointed receiver must finance the rehabilitation project upfront by using company or personal funds, a line of credit, or grant funds, if available. All project expenses become a lien against the property. After completion, the receiver can recover those expenses by getting permission from the court to sell the property to itself or to a new party. At sale, the lien enjoys a priority status above pre-existing mortgages, and it is paid out of the sale proceeds. Any profit would come from a capped project management fee that is included as an expense.

A Receivership Project in Philadelphia’s Mount Airy Neighborhood

The Mount Airy neighborhood in northwest Philadelphia spans two centuries of architectural styles. Unfortunately, property abandonment appears in pockets, particularly on the neighborhood’s east side. In 2013 a local Community Development Corporation (“CDC”) endeavored to address this problem by using a state law called the Pennsylvania Blighted and Abandoned Property Conservatorship Act to rehabilitate a vacant single-family house.1 From inception to completion, the project lasted 19 months. Although this project did not involve a historic property, the logistics are very much transferable.

The two-story single-family house had sat derelict for nearly three years, and its crumbling stucco was marred by graffiti. The City had sealed its ground-level windows; however, broken second-floor windows provided easy access for vagrants and squatters. Trash filled an overgrown yard. And all of this was to the detriment of neighbors who diligently cared for their homes.

The first step for the CDC to rehabilitate the property was to prepare a petition for the court. Public records searches, government websites2, and a title report provided necessary information to draw up the petition. The owner was a defunct corporation and three lienholders were identified. The property did not have any disqualifying factors,3 and the petition provided a written description of how the property constituted a nuisance. These descriptions were supplemented by exhibits, such as affidavits from neighbors, photographs of the house in comparison to its surroundings, and five notices for outstanding code violations. In addition, the CDC drafted a preliminary rehabilitation plan that laid out anticipated improvements based on the decrepit exterior.4 The CDC sought to act as both petitioner and conservator.5 To meet qualifications, it enumerated its prior rehabilitation projects within the legal requirement of a one-mile radius.6 It also disclosed its operating budget and means of financing this project, which was a construction line of credit through a local bank.

Though the owner was notified about the lawsuit, it did not file a response, and creditors ignored inquiries about seeking conservatorship or financing the project.7 No defendants attended the hearing, so the proceedings went uncontested.8 After the CDC presented its case, the judge entered an order appointing it as conservator. With a legal right to enter the premises, the CDC’s developer and architect assessed the damage throughout the house to create a final abatement plan for court approval, which described all necessary improvements. Ultimately, improvements involved removing interior and exterior debris, demolishing and relocating walls, replacing windows, repairing the stucco, and replacing building systems and finishes.

Upon completion, the CDC successfully petitioned the court for permission to terminate conservatorship and to sell the property with free and clear title.9 The property was listed for sale and a buyer was quickly secured. The CDC submitted the agreement of sale for court approval along with the mandatory distribution list, which is a statement showing every party that should be paid by the sale proceeds, and the order of their priority. Following approval, the closing took place. Court costs were paid first, outstanding taxes were covered, and the conservator/receiver was compensated with the remaining funds. Any remaining liens were extinguished because the sale proceeds could not cover them. Today, a young family occupies the single-family house.

Mid-Atlantic State Laws

Not every state has receivership laws. They are typically found in areas that were historically industrial or rural based-economies. In the Mid-Atlantic region, there are receivership laws in New Jersey,10 Pennsylvania,11 Virginia,12 and Maryland (Baltimore).13 This section will highlight ways in which these laws differ.

Receivership laws may be divided into two categories: “government-driven” and “non-government-driven,” “Government-driven” laws require municipalities to act as petitioners, which is the case in Virginia, New Jersey, and Baltimore, Maryland. In these states, municipalities use a bidding process to contract with third parties or to designate a receiver. Conversely, Pennsylvania permits petitioning by the government, or non-governmental parties that reside in close proximity to the property. In Pennsylvania, bids are not required, but petitioners must recommend qualified conservators/receivers.

Other distinctions lie in eligible property types, timeline requirements, and the sale process. For example, receivership is limited to residential properties in Virginia, whereas New Jersey and Baltimore do not specify the zoning. Pennsylvania allows “residential, commercial, or industrial” properties. Furthermore, Maryland and Virginia permit the receiver to rent out a rehabilitated property for a maximum time of two years, which allows for collection on the receiver’s lien. Following that time, receivers in those states must sell the rehabilitated property by public auction. Pennsylvania and New Jersey, on the other hand, do not have this provision because the lien may be satisfied through private sale at fair market value. Therefore, both arrangements seek to ensure that the receiver can recover its expenses. In Pennsylvania, a receiver may retain ownership by selling the property to itself.

In conclusion, the receivership programs in Pennsylvania and Baltimore specifically require compliance with historic preservation codes whenever a historic property is involved.14 As existing laws around the country evolve and take note of best practices, it is likely that other states and localities will adopt these provisions as well. Nevertheless, preservationists can reach out to CDCs that are known to engage in receivership projects, to see how they can ensure that maintaining historical features is kept a priority. Additionally, preservationists may act as receivers or petitioners under non-government driven receivership laws. These laws are not always easy to locate due to the varying sources. You can find out whether you have access to a receivership program by searching local municipal codes and state legislation.

For more on receivership also read this recent post by Lane Pearson.

Melanie Lacey is a J.D. Candidate, 2016 at the Rutgers University School of Law-Camden.

Notes:

1. PA. STAT. ANN. tit. 68, § 1101 et seq. (2008). Pennsylvania calls vacant property receivership “conservatorship”

2. Examples include: the Department of License and Inspection, Department of State, and Office of Property Assessment.

3. Disqualifying factors include pending foreclosure or sale, or an owner who is actively serving in the military.

4. The plan is based on the exterior since petitioners cannot enter the house until the court issues an order granting permission.

5. A petitioner can recommend another party to act as conservator/receiver

6. The statute requires that the conservator/receiver has done rehabilitation work near to the property. The distance was increased from one-mile to five-miles when the Act was amended in 2014.

7. PA. STAT. ANN. tit. 68, § 1108(b)-(c).

8. This “shoe-in” experience is not a reflection of every Conservatorship case.

9. If an owner cannot repair the conservator’s expenses, the expenses become a lien that the conservator can foreclose on by selling the house.

10.  N.J. STAT. ANN. § 55:19-78 (2014).

11. PA. STAT. ANN. tit. 68, § 1101 et seq. (2008).

12. Va. Code Ann. § 15.2-907.2 (2012).

13. Baltimore, Md., Code § 121.1 et seq.

14. Blake et al., “Conservatorship Handbook: How to Use Conservatorship to Address Blighted and Abandoned Property,: 27.

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