Tool 4: Recovering Demolition Costs
Many of the buildings that a city demolishes are privately-owned. In most other cases, the city has acquired them involuntarily as a result of tax foreclosure, rather than through deliberate acquisition. In other words, in the great majority of cases, cities are required to demolish properties as a result of the inaction of a private owner, not because the city deliberately chose to acquire and tear down the property for redevelopment or some other public purpose. In all of those cases, the owner or former owner may bear some legal responsibility for the cost of demolition. Where the owner has abandoned the property as a result of a pending mortgage foreclosure proceeding, a strong case can be made that the entity initiating the foreclosure, whether or not title has yet been conveyed, can and should be made to take legal responsibility for the cost.
Imposing abstract legal responsibility and actually collecting the cost from the responsible party are two very different matters. The ability to recover costs directly from owners is not unlimited. Many owners lack money or may be too difficult to find, but others have the resources to pay. Poor collection outcomes arise from two other issues: in some cases, state statutes fail to provide cities with the legal tools they need, and in others, cities’ fail to fully use the legal tools they already have.
Placing liens on properties
Most states allow a municipality to bill the owner for the cost of demolition. If the bill goes unpaid, they can place a lien on the property for the cost. The terms governing those liens, however, vary widely, and in practice they result in little actual recovery of municipal costs. State law should provide that such liens be super-priority liens, so that they can be either added to any taxes owed, or foreclosed directly, independent of tax foreclosure. The amount of the lien or any subsequent judgment should also include the substantial indirect costs of inspections, legal fees and notice among other costs, in addition to the cost of the demolition itself.
City officials should review the provisions of their state laws governing nuisance or demolition liens, and work to change the law where necessary to give them greater ability to recover their costs.
A demolition lien, however, is a lien on a vacant lot, often in an area with little or no market demand; as a result, most are effectively uncollectable. There are enough exceptions to justify the practice, but they will be relatively rare. Having the ability to foreclose on those liens, however, is useful as it enables the city to take control of properties and determine their use, rather than have them remain in limbo. Still, demolition liens are usually not a powerful tool for cost recovery.
Getting judgments against owners
In addition to placing a lien on the properties, many states allow cities to obtain a judgment against the owner for the cost of the demolition. With a judgment in hand, the city can then find other assets of the owner on which it can place a lien. This is rendered more difficult by the widespread practice of owners of urban properties to create LLCs or other vehicles to hold title to properties.
A New Jersey law gives municipalities the power to pierce corporate veils to collect for nuisance abatement costs:
New Jersey Statutes Annotated, Chapter 55:19-100:
With respect to any lien placed against any real property [as a result of nuisance abatement or receivership] the municipality shall have recourse with respect to the lien against any asset of the owner of the property if an individual, against any asset of any partner if a partnership, and against any asset of any owner of a 10% interest or greater if the owner is any other business organization or entity recognized pursuant to law.
This language also applies to lenders carrying out foreclosures under New Jersey’s creditor responsibility law.
The New Jersey creditor responsibility statute, which remains unique in the United States, requires entities initiating foreclosure actions to maintain the property if it is abandoned by its owner at any time subsequent to the initial foreclosure filing. This law allows cities to recover demolition costs from lenders. In some states, cities can enact similar ordinances without the need for a specific state law.
►The City of Cleveland has retained an outside law firm for collections, and sent the first roughly 50 files to that firm in February 2012. Read more.
Other approaches to cost recovery
There may be other ways to increase cost recovery.
A number of financial institutions, along with donating vacant REO properties to nonprofit or public entities, have given them money to cover all or part of the cost of demolishing the properties. In the spring of 2011, Wells Fargo Bank donated 26 properties to the Cuyahoga County Land Reutilization Corporation along with $127,000 toward the cost of demolition, while Bank of America agreed to donate up to 100 properties with a similar cost donation. Cities may want to investigate whether lenders may want to donate more properties, or provide demolition funds, under the recently approved $25 billion mortgage foreclosure abuse settlement.