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The Urban Lawyer

Fix It or Lose It: The Allure and Untapped Potential of Pennsylvania’s Abandoned and Blighted Property Conservatorship Act

by Melanie B. Lacey

Melanie Lacey ([email protected]) received her J.D. from Rutgers Law School in May 2016 and her B.A. from the University of North Carolina at Chapel Hill in 2010. Melanie worked on “conservatorship” projects during law school as a legal intern at Mt. Airy, USA, a community development corporation in Northwest Philadelphia. She would like to thank the former executive director of Mt. Airy USA, Anuj Gupta, Esq., and the current executive director, Brad Copeland, for introducing her to the complexities of community development, and for their generous professional guidance. Special thanks to Richard L. Vanderslice, Esq. for his insight during the research phase of this project, to Adjunct Professor William A. Slover (Rutgers School of Law) and Professor Rick Swedloff (Rutgers School of Law) for their feedback on earlier drafts, and to the editorial board at The Urban Lawyer for their great attention to detail. The author is responsible for any errors.


I. Introduction

IMAGINE BEING ABLE TO SUE SOMEONE OVER THE POOR CONDITION OF A DERELICT HOUSE in your neighborhood. The Pennsylvania Abandoned and Blighted Property Conservatorship Act1 (the “Act”) affords such opportunity. While housing code regulations threaten violators with fines, and urban renewal laws incentivize investors with benefits, conservatorship is uniquely situated both in theory and in mechanics. The focal point shifts from the wrongdoer and fixer, to the interests of the injured third parties. Conservatorship allows those injured parties to seek a custodial role over the nuisance property that could potentially lead to ownership. Like Pennsylvania’s tax sale law,2 it creates a market for distressed assets; however, the laws are distinct.

The economic analysis of law offers improvements “by pointing out respects in which laws have unintended or undesirable consequences,”3 and that is the goal of this article. This article proceeds as follows: Part II provides a brief overview of how Conservatorship generally functions.

Part III discusses the negative externalities4 that Conservatorship seeks to address. Part IV qualitatively looks at the opportunity cost5 of conservatorship in relation to some of the other investment alternatives that seek to alleviate blight and abandonment. Part V evaluates the practical shortcomings of Conservatorship through private costs and benefits.6 This discussion of costs and benefits is supplemented with statistics from court filings between January of 2008 and July of 2014, which are also represented in the graphical figures. Part VI examines the shortcomings of existing tax reduction options before evaluating a proposed amendment that provides standardized debt forgiveness. Part VII discusses how such an amendment could affect the City of Philadelphia. Part VIII concludes with main points.

II. What is Conservatorship?

A. Overview of Mechanics

Conservatorship creates standing for community members to petition a court for the right to rehabilitate an abandoned property when its blighting conditions adversely affect them. However, claims must be local — based on the petitioner’s proximity to the abandoned property7 — and specific — based on a showing that the condition of the property harms the petitioner’s health, safety, and property value.8

If the petitioner meets the prima facie elements of abandonment,9 blight,10 and proximity,11 then a court will hold a plenary hearing. However, the Act presumes in favor of the owner retaining legal possession and title since courts generally award injunctive relief when an owner establishes its ability to bring the property into code compliance.12 In those scenarios, the parties must agree upon a rehabilitation plan for the owner, which the court monitors through progress reports and status conferences.13 Thereafter, conservatorship only becomes possible if the owner waives its opportunity to meet the terms of the injunctive court order.14 The appointment of a conservator initially transfers legal possession to a designated third party.15 If the property is conserved, then the rehabilitation expenses become a lien against the property upon which the conservator may foreclose.16 However, conservatorship confers a benefit to communities regardless of the actor.

B. Using the Judiciary as a Vehicle for Blight Reduction

Conservatorship does not conflict with the court systems’ aversion to addressing attenuated social issues that do not transpire from discriminatory laws.17 This aversion is apparent in the Supreme Court’s jurisprudence addressing school segregation. For example, the Supreme Court ruled in 1995 that a District Court could not regulate school segregation in Kansas City, Missouri since there was no legal source of harm.18 Similarly, housing abandonment, as a whole, has several contributing factors.19 However, conservatorship can be distinguished from overbroad social remedies because it provides judicial regulation for a limited number of parties under particular circumstances.

C. Rights and Remedies

Conservatorship purports to create restorative measures for individuals, communities, and cities, alike. Specifically, the Act enables individuals on both sides of the action to recover their “rightful positions” since the petitioner enjoys the abatement of the nuisance and the owner is able to maintain ownership. Similarly, communities benefit from “productive reuse” because conservatorship encourages the parties to sell or rent the property, which promotes future upkeep.20 Lastly, conservatorship benefits cities through the repayment of arrears, the reinstatement of taxable property, and the removed burden of demolition expenses from taxpayer dollars.21 The Act accomplishes each of these measures through a comprehensive array of rights and remedies.

1. Procedural Rights: Intervention, Termination, Redemption

Conservatorship can also be distinguished from the ulterior motives that initially tarnished the reputation of urban renewal programs and eminent domain proceedings.22 The history of distrust associated with the latter results from reasons including, but not limited to, (1) the homeowner’s inability to take steps that will halt or terminate the action, (2) nonnegotiable compensation that seems unfair, and (3) questionable claims concerning the habitability of properties where homeowners have lesser bargaining power. Conversely, conservatorship is unlikely to facilitate the “theft” of properties since absentee owners have substantial rights at every phase of the action.

Owners have the right to defend against an action before the appointment of a conservator,23 during the pendency of the appointment,24 and after the appointment concludes.25 From the outset, an owner has the ability to preemptively defend against an action before a court holds a plenary hearing since a petitioner must issue a “Rule to Show Cause.” Accordingly, the owners, lenders, and lien holders (collectively, “respondents”) have an opportunity to file an answer and other responsive pleadings. At that point, the burden of proof shifts to the respondents. However, when an answer on its face disproves the need for conservatorship, the court will rule on the papers that the case is dismissed without prejudice. Conversely, when the parties’ submissions leave doubt or weigh in favor of the petitioner, the Court of Common Pleas will order the parties to appear at a scheduled time.

Respondents may “intervene” during the plenary hearing by representing their own intention and ability to rehabilitate the property.26 Therefore, their posture of defense shifts from refuting evidence to arguing against the necessity of third-party involvement. After the plenary hearing, respondents still have conditional relief since they maintain the right to represent their ability to improve the property.27 Furthermore, the Act allows a respondent to remove an appointed conservator while rehabilitation is underway based on a showing of incompliance with milestones or other requirements.28 Alternatively, an owner may terminate conservatorship by repaying all expenses and committing to the monitored completion of remaining tasks.29 After rehabilitation is complete, an owner has a priority right to purchase the property over third parties, and the conservator, if it is able to do so.30 This priority is akin to a “right of redemption” before the sale. However, the statute does not allow for “redemption” after a sale takes place.31

2. Statutory Remedies: Restitution, Ancillary Damages, Commission, and Profits

While revitalization is the true remedy, the Act provides several monetary damages. However, conservators never enjoy a windfall since their award is limited in scope. For example, conservators are entitled to restitution through the repayment of expenses,32 and commission through the payment of a capped “developer’s fee.”33 The developer’s fee is calculated as the greater amount resulting from either a 20% mark-up on construction costs, or 20% of the sale price.34 Moreover, a conservator cannot inflate costs to generate higher commission since the court must approve the budget, and respondents may oppose line items therein.35

Any portion of the sale price remaining after creditors are paid will constitute profits that return to respondents. However, profits are rare due to the nature of the statutory sale distribution.36 Priority is given to governmental liens, such as liens to the Commonwealth, unpaid property taxes, and properly recorded municipal liens.37 In fact, the conservator’s lien is the fifth disbursement in the scheme.38

In 2014, the Pennsylvania Legislature amended the Act39 to better safeguard the conservator’s investment by requiring intervening respondents to post bond and repay legal fees.40 Imposing stricter procedural requirements contributes to judicial economy in that the threat of financial penalties deters respondents from engaging in delay tactics and other unserious efforts. However, while the 2014 amendments seek to punish wrongdoers, the amendments do not alleviate circumstances flowing out of the practical realities of the Pennsylvania housing markets.

III. What Problems Does Conservatorship Seek to Address?

A. Externalities of Property Abandonment

Externalities generally describe how the private choices of an actor benefit or cost the surrounding physical environment and people.41 In this context, owners often make a conscious decision to abandon property due to obsolescence42 or competing financial obligations. That decision affects, or creates externalities of compromised safety, squandered tax revenue, and reduced property values.

1. Safety

It has been argued that abandoned houses promote petty crimes that cause urban decay, and may open the door for more serious crime in the future.43 The link between “urban decay” and crime is attributed to a study from the 1980’s called the “Broken Windows Theory.”44 The Theory derived its name from its token example stating that, when a broken window in a building is left unrepaired, the rest of the windows will soon be broken as well, irrespective of the neighborhood.45 The Theory reasoned that fun, destructive acts that go unpunished — such as vandalism, graffiti, and dumping trash — serve as visual indicators that local residents are less invested in their communities, refrain from informal surveillance, and are less likely to call the police.46 The Theory asserts that, over time, this culture of disregard allows destruction to increase in volume and in severity.47 Ultimately, criminals would be more likely to prey on neighborhoods suffering from urban decay since they can reduce their chances of being identified or caught as “potential victims are already intimidated by prevailing conditions.”48

2. Taxes

Since maintenance is physical and financial, there is a strong correlation between tax arrears, blight, and abandonment.49 The City of Philadelphia hosts over 40,000 abandoned properties,50 most of which contribute to the annual loss of millions of dollars in uncollected tax revenue.51 The Philadelphia Inquirer estimates that, “some delinquent properties are owned by low-income homeowners who genuinely lack the means to pay.”52 However, “at least 59 percent of all tax delinquent real estate in Philadelphia belongs to landlords, speculators, and investors” who live elsewhere.53 To make matters worse, many properties decay without ever going to sheriff ’s sale.54 In fact, nearly one-quarter of all tax delinquent properties in the City have been delinquent for more than a decade.55

3. Property Value

Abandoned houses reduce the value of neighboring properties that are occupied, by thousands of dollars.56 While the Broken Windows Theory asserts a direct relationship between urban decay and the proliferation of crime, it also asserts an inverse relationship between those factors and property values.57 This is due to a neighborhood with a reputation of supporting crime and poverty as being unappealing to renters and buyers.58 For example, a Philadelphia study from 2001 found an average sale price reduction of $6,720 for all the other properties situated on the same block as an abandoned property.59 A citywide evaluation by the same study revealed property value reductions that ranged from 6.5% to 20% in some neighborhoods.60 A separate study indicates that these cumulative reductions represented “$3.6 billion in total lost wealth for the City.”61

Moreover, studies have concluded that, “the expectation of neighborhood abandonment that causes depressed real estate values perpetuates further abandonment.”62 An “analysis of changes in vacancy at the neighborhood- level from 1984 to 2000 show that a neighborhood with small numbers of vacant houses grouped in widely scattered clusters will end up with large clusters of vacant properties” unless some action was taken.63 The opposite also proved true since the study showed that clusters of occupied and maintained properties enjoyed an average increase in home sale prices of 32% between the years of 2008 and 2012, compared to a 2% increase at control locations around Philadelphia.64

B. Gentrification When Neighborhoods Improve

The Act emphasizes the development of affordable housing since it anticipates that eliminating problem properties can contribute to gentrification. Gentrification describes the population shift in the renters and homeowners of a neighborhood that results from an improved perception about its value.65 This shift results from the involuntary departure, or “forcing out,” of lower income, older, and minority residents. In recent times, gentrification around the country has been motivated by the desire of young professionals to live in urban centers.66 Two factors contribute to the likelihood of gentrification in Philadelphia: (1) proximity to Center City or high paying-jobs, and (2) proximity to convenient public transportation, such as a bus line or SEPTA stop.67 As rents in Center City, and the immediately surrounding areas, get increasingly expensive, the region of interest diffuses to incorporate farther-reaching neighborhoods.68 Therefore, Philadelphia illustrates “the story of the outward spread of Center City.”69

Improved housing demand in a neighborhood drives out renters, as landlords are able to increase rent amounts. Substantial rent inflation is possible in the City of Philadelphia since the City does not enforce limits on rental amounts, rent control, or stabilization policies.70 Instead, landlords need only give tenants short-term notice that their rent will increase upon renewal of their lease term.71 A landlord’s failure to comply with notice requirements may constitute an “unfair rental practice” that is subject to fines and penalties from the Fair Housing Commission.72 Nevertheless, notice, fines, and penalties do not alter the outcome, which is that “priced-out” renters must ultimately leave.

Improved housing demand also tempts landlords to engage in unscrupulous practices for the purpose of accelerating the departure of unwanted tenants. Some landlords will intentionally frustrate tenants by ignoring requests to repair damage, such as plumbing leaks and structural damage; or by creating uncomfortable conditions, such as limited heat and hot water during cold months.73 Moreover, a landlord might band-aid a problem in a manner that leaves damage unaddressed to spiral into worse condition.74 After unwanted tenants depart, a landlord is free to improve the property, demolish it and erect something more “trendy,” or sell it to a private developer.75

The blossoming appeal of a neighborhood also forces out homeowners, who must weigh financial alternatives. The prospect of a quick turnover creates a competitive environment where local and out-of-state investors nearly harass preexisting residents with purchase offers by telephone, mail, and personal visits.76 Even when they reject offers out of a desire to remain, longtime homeowners face ballooning property taxes due to the increased value of their neighborhood. This trend is problematic since Philadelphia has a large population of low-income homeowners who purchased their property at a time when it was affordable, or inherited property from a relative who did so.77

Beyond general tax increases, homeowners in transitioning neighborhoods must also contend with the Actual Value Initiative (“AVI”), which Philadelphia implemented in 2013.78 The AVI increased the percentage of the property that would be taxed in order to better reflect prevailing market rates,79 based on factors such as the size and age of the property, the location and condition, and the property’s use.80 Therefore, the increased vitality of a neighborhood compounds the effect of the AVI system. Unfortunately, new assessment values have virtually exploded, with some homeowners seeing property tax increases by tens of thousands of dollars, and occasionally, in excess of one-hundred thousand dollars.81

To mitigate this outcome, Philadelphia offers programs for elderly homeowners who survive on fixed-incomes, and for individuals experiencing property tax increases of 300% or more.82 Examples include the “Senior Tax Freeze,” the “Homestead Exemption,” and the “Longtime Owner-Occupants Program.”83 However, while these programs are helpful, they do not benefit homeowners who face mountainous tax debt that predates implementation of the AVI.

IV. How does Conservatorship Compare to Alternatives?

A. Opportunity Costs

Opportunity costs describe the benefits that an actor gave up by choosing one course of action over a different course.84 Here, the parties who have standing to engage in conservatorship may combat property abandonment by making alternative investments. For example, community members and investors may purchase abandoned properties at Tax Sales; absentee owners have an option to comply with the Window and Doors Ordinance;85 and investors may engage in traditional redevelopment. However, these alternatives serve different objectives, and they are not mutually accessible by each party.

1. More Effective than Window and Door Ordinances

While Conservatorship bears similarities to initiatives that promote external property maintenance,86 it is more effective than such initiatives because it raises the standard beyond short-term fixes. For example, the Pennsylvania “Window and Doors Ordinance” (the “Ordinance”)87 is premised upon a hypothesis that replacing plywood boards with functional doors and see-through windows can reduce the volume of crimes that proliferate when perpetrators of crime are concealed from sight.88 These low-cost improvements prohibit easy entry and increase the visibility of squatters and drug dens.89 However, while the convenience is removed, such a hypothesis assumes that criminals will not target a “sealed” property for crime if they become aware that it is maintained remotely.

A 2014 study revealed that numerous property owners do not comply with the Ordinance, and that the corresponding fines often remain outstanding.90 Between January of 2011 and April of 2013, only 29% of cited properties made improvements to lift their violations.91 In May of 2014, the Licensing and Inspection Department assessed at least $1.5 million in fines from the remaining 71% of cited properties.92 Much like the overwhelming property tax arrears, these “assessed fines” create an additional range of liens that the City may struggle to collect. Moreover, the Ordinance is highly bureaucratic, which ultimately adds to the City’s expenses: “inspectors visit [a] property approximately every thirty-five days to assess compliance.”93

While the Ordinance offers a quicker and cheaper alternative, the statistics and potential loopholes suggest that conservatorship is more reliable. For example, a conservatorship filing must result in rehabilitation, either by a conservator or by the owner. Additionally, the sale of a conserved property directly results in homeownership, which creates a reality of concern as opposed to an artificial impression. Conservatorship also allows community members to strategically target nuisance properties, which helps to diminish the culture of disregard that generally attracts crime.94 Strategic efforts are important since the removal of one derelict building can “stabilize a block for the long term and put it back on an upward trajectory.”95

2. Overcomes the Loopholes of Tax Sales

The greatest similarity between the Conservatorship and tax sale processes is its ability to restore clouded title and wipe out encumbrances. Tax sales allow municipalities to monetize distressed assets through the auctioning of tax certificates or deeds, depending on the jurisdiction. For example, the State of New Jersey offers tax certificates, which convey a “super lien” on a subject property.96 New Jersey bidders must pay the entire tax balance to obtain a conditional interest that is subject to redemption for a period of two years, whether or not the property is occupied.97 After the redemption period expires, certificate holders must institute foreclosure to finalize the conveyance.98 In contrast, the State of Pennsylvania issues tax deeds, which are called “sheriff ’s deeds” in the City of Philadelphia.99 This system does not require payment of the entire lien balance, which can allow for inexpensive purchases. Moreover, the sheriff ’s deed gives an outright interest, and deed-holders need not foreclose.100 The City of Philadelphia provides a limited right of redemption of varying durations, depending on whether the property is occupied.101 For example, owner-occupants who inhabited the property ninety days prior to the sale are entitled to a redemption period of nine months after acknowledgment of the sheriff ’s deed.102 Recent court rulings have also established a shorter right of redemption for absentee owners during the period before acknowledgment of the sheriff ’s deed.103 However, bidders cannot avoid redeemable properties since the sheriff sale rules prohibit bidders from conducting inspections.104

Analyzing the distinctions between the tax sale system of New Jersey versus that of Pennsylvania highlights the dire circumstances of tax collection in the City of Philadelphia. For example, many properties in Philadelphia remain unsold even though the tax sale process is less expensive and significantly easier to navigate. Another contributing factor is the City’s tendency not to offer tax delinquent properties for sheriff sale at all, potentially due to the sheer volume. Therefore, conservatorship creates an alternate, volitional avenue for third parties to acquire these properties.

Conservatorship is also distinguished from tax sales because it removes competition in two ways.105 First, conservatorship is noncompetitive since respondents cannot redeem a property after it is sold. Second, the statute restricts intervention to respondents. This feature is important in counties that offer a right of redemption since “intermeddling” companies notoriously acquire standing through the execution of an agreement of sale with property owners.106 An “intermeddler” is a company that takes advantage of the redemption period by “swooping in at the eleventh hour” to offer vulnerable homeowners the redemption price plus a small amount of consideration.107 While “intermeddling” is less common in tax deed jurisdictions, it occasionally takes place, and would be an opportunistic strategy towards properties located in transitioning areas. Conversely, conservatorship is immune to these particular antics since respondents must prove that they actively marketed the property for sixty days before the petition was filed.108 If owners cannot demonstrate such prior efforts, then sale attempts would not circumvent the conservatorship action.109

Lastly, successful conservatorship is dissimilar from tax sales because the procedures entail immediate improvements and quick re-occupancy. Tax sales do not guarantee either of these outcomes since deed holders are often motivated by real estate speculation.110 For example, sheriff deed holders generally refrain from making substantial improvements to the property until they are ready to sell it. Moreover, the relative infrequency of tax sale auctions permits sheriff deed holders to take the risk of foregoing subsequent tax payments, with the goal of allowing sale proceeds to cover the new tax balance at the time of sale. The finality of sheriff deeds allows this potential loophole, since the City will not void the transaction based on subsequent incompliance.

3. More Altruistic than Traditional Redevelopment

i. Catalytic Rather than Reactive

While the effect of conservatorship on a neighborhood would be slower, and smaller in scale than the effect of traditional redevelopment, it has the power to stimulate housing prices. For example, conservatorship offers community members a prophylactic way to curtail or diffuse the formation of scattered abandonment clusters.111 In contrast to stimulation, traditional redevelopment is more reactive in nature since it seeks out “gaps” where renters and buyers have already shown interest.112 Therefore, conservatorship can gradually bolster the profile of market factors that are used in traditional redevelopment to determine investable areas, such as demand.113 Lastly, conservatorship can help democratize access to revitalization before a neighborhood garners wider interest.

ii. Promotes Affordable Housing

A successful conservatorship project that reduces adverse visual indicators has the potential to contribute to neighborhood gentrification. However, the Act seeks to maintain diversity in transitioning neighborhoods. It encourages conservators to use existing housing stock to offer affordable housing,114 instead of using demolition to offer new or luxury construction. Studies have shown that preservation is more cost effective than new construction.115 In 2013, the Center for Housing Policy on affordable multi-family rental housing found that new construction costs between $40,000 and $71,000 more than acquiring and rehabilitating existing developments, in spite of their higher maintenance expenses.116

Due to the shortage of affordable housing, the federal government implemented the Housing Choice Voucher program, which assists very low-income families, the elderly, and disabled to afford decent, safe, and sanitary housing in the private market.117 Placing scattered low and moderate income housing, and prohibiting landlord discrimination against housing voucher holders, are essential measures to prevent neighborhoods from gentrifying.118

V. What Is Wrong with Conservatorship?

The economic approach to vacant property conservatorship assumes that self- interested parties will decide whether to rehabilitate abandoned properties by considering the costs and benefits. The self-interested parties include absentee owners, a group that consists of mortgagors and mortgagees; the government, which is a lien holder that enjoys mandatory repayment;119 the petitioners, who file all court pleadings; and the conservators, who finance the project and carry out construction. A petitioner and conservator do not have to be the same person or entity.120 Collectively, the factors that these parties consider translate into private costs and benefits.

A. Private Benefit: Unique Standing

Conservatorship allows Pennsylvanians to exercise a stake in the vitality of their neighborhoods. The Act empowers community members by affording them legal recourse where none existed otherwise. Outside the scope of conservatorship, the options are limited to lobbying for an authority figure to take action since third parties have no right to force an owner into action. Within the scope of conservatorship, nongovernmental parties may seek out an alternative to condemnation in places where it did not occur. While the statute does not use this terminology, the premise for providing relief to petitioners is the concept that they are “injured,” because they can show how the abandoned property negatively affects them in the specific ways that the statute articulates.121

B. Private Costs

Practitioners criticize conservatorship as complicated and risky for several reasons. The foremost reasons are that litigation may be long and delayed,122 conveyance is not guaranteed,123 and governmental liens render several properties as unattractive investments.124 Consequently, delinquent taxes constitute externalities as well as private costs.

1. The Length of Litigation

Over time, the length of conservatorship litigation has reasonably shortened. However, the Act sets forth a timeline that gives little guidance on what is likely to transpire: a court “shall act upon a petition within 120 days, and render a decision within thirty days of a hearing.”125 Among the fourteen properties that were conserved between 2009 and 2015, the average duration of cases was one to three years.126 However, cases have become more efficient due to the experience of repeat petitioners127 and repeat judges128 For example, the three cases resulting in conservatorship immediately following enactment had durations exceeding four years. Since that time, five cases lasted between two to three years (36%), and six cases lasted less than two years (42%). Since these timelines are decent, this prevailing criticism should be dispelled.

Figure 1 — Length of Litigation for Conserved Properties (based on 91 filings as of July 2015)

By vigorously protecting the equity and security interests of respondents, the Act operates in a way that dissuades private petitioning.129 For example, some of the longer running cases were delayed by bankruptcy filings, deadline extensions, and continuances requests by respondents, which courts have leniently granted. However, these delay tactics should be distinguished from the typical defense of mortgage foreclosures, where owner-occupants remain in their homes until they figure out where to go and how to pay for relocation. Here, the delay is unjustified since absentee owners already live elsewhere, and the property has fallen into a prolonged state of disrepair. If an owner is not financially capable or does not wish to carry out repairs, then the public has an interest in appointing a conservator. Moreover, the threshold requirements for bringing a petition proscribe the likelihood of innocent owners losing “wanted” properties.

If the Pennsylvania Legislature shortened the litigation timeline, then respondents would receive less notice, which affects the respondents’ ability to defend against the action. Conservatorship achieves fairness through due process procedures. A petitioner must provide notice of the charges, and must allege with specificity how the respondents violated articulated standards of conduct.130 In addition, respondents must have an opportunity to rebut the charges; and a court must render a decision that is supported by substantial, credible evidence.131

a. The Risk of Non-Conveyance

The mechanics of conservatorship essentially propose two conceptions of remedy. The first is to create a situation that forces respondents to rehabilitate the property before a hearing takes place132 since “someone is paying attention” and holding them accountable.133 Even after a court appoints a conservator, a respondent may intervene out of a desire to prevent the possibility of conveyance.134 Notably, this outcome is collaborative since a “team” comprised of the court, the petitioner, and respondents, must reach mutual satisfaction before the case is dismissed.

The second conception of remedy is to transfer possession to a responsible party who can step into the shoes of the owner. Although possession does not always lead to ownership, a respondent’s inability or refusal to repay the conservator’s lien creates an opportunity for conveyance of the property. Therefore, conveyance becomes a means of reorganizing resources in a way that is socially efficient. It also creates a “threat” that deters other absentee owners from engaging in adverse behavior.

Though the Act incorporates multivariate routes to remedy, absentee owners are entitled to the same extent of protections and rights as responsible property owners under conservatorship. Moreover, it does not treat absentee owners differently based on gradations of culpability. Academics have already evaluated justifications for leaving land unproductive through economic discussions of adverse possession.135 For example, farmland may be left idle for animal grazing, wooded land may be left idle for inhabitation by wild life, or any property may be left idle for development at a later time.136 While the abandonment may result from speculators intending for later development, derelict properties in Philadelphia commonly involve the story of incomplete mortgage foreclosures.137

Nevertheless, conservatorship makes no distinction between institutions and individuals, nor does it weigh whether prolonged inaction towards a property is conscious or deliberate. Instead, all respondents have the same right to abate,138 intervene,139 and redeem,140 irrespective of these factors. While this blanket treatment may seem unfair, it avoids delays and complications that could arise from an additional phase of subjective, fact-sensitive determinations.

Ultimately, the policy of conservatorship presuming in favor of respondents supports an inference that there is a high risk of nonconveyance. A review of conservatorship filings showed that this criticism is legitimate. Between the law’s enactment and the summer of 2015, forty-six of the ninety-one cases resulted in settlements, which means that the owner rehabilitated the property based on a contractual partnership with the conservator. Out of the remaining forty-five cases, only fourteen of the properties were actually conserved, which is equivalent to roughly 15% of total filings. However, some cases suffered from sabotage by petitioners due to filing deficiencies, or sabotage by conservators due to their failure to comply with court orders or procedures.

Figure 2 — Case Outcomes (based on 91 filings as of July 2015)

b. The Burden of Liens

A successful conservatorship presupposes a sale, which should satisfy all debts. As discussed, the construction costs and the “developer’s fee” are the fifth disbursement under the statute’s sale distribution.141 Therefore, compensation to the conservator is contingent upon the size of the government’s take. This distribution is problematic, given that abandoned houses are more likely to have substantial tax debt.142 In fact, conservatorship actions filed in Philadelphia between effectuation143 of the Act and July of 2015 (“control period”) had tax and utility lien amounts as follows: 25% owing between $5,000 to $10,000, and 31.5% owing over $10,000.144

Figure 3 – Total Tax and Utility Arrears (based on 91 filings as of July 2015)

The following hypothetical, Table 1, illustrates how project finances might look on a property that is sold for $100,000, highlighting the need for a debt forgiveness formula.

The Table 1 hypothetical shows that the distributions totally consume the sale price, and it would even fall short if the arrears were greater. Furthermore, the budget leaves no room to cover contingencies, such as demolition, substantial rehabilitation,145 or increased legal fees associated with a contested matter. The conservator’s commission would suffer the shortfall, and the first mortgage would remain unpaid. Therefore, conservatorship is not exceptionally lucrative unless a conservator has low construction costs and a high sale price. In sum, the ratio of effort to profit discredits the likelihood that conservatorship is susceptible to corruption.

Table 1 — Sale Proceeds Distribution

c. Lack of Volume

Alongside community members, governmental entities also have standing to bring conservatorship actions.146 However, private-petitioners play a pivotal role, as they accounted for 99% of total filings during the first five years after enactment.147 During that period, the Philadelphia Court of Common Pleas only processed ninety-one conservatorship filings,148 and the most petitions filed in any given year was thirty.149

Figure 4 — Petitions Filed per Year (based on filings between January 2009 and July 2015

The City of Philadelphia actually conserved its first property in the summer of 2015.150 Time will tell whether funds and competing interests will permit the City to file more petitions in the future. As matters stand, making the law more attractive to private petitioners would increase the total number of filings and produce stronger outcomes.151

Figure 5 — Petitioners (based on 91 filings as of July 2015)

VI. How Do We Fix Conservatorship?

A. Standardized Debt Forgiveness is Advantageous

Increasing the volume of private petitions would allow the Act to better combat negative externalities.152 It is probable that the substantial debt on many properties deters participation of private petitioners due to the subordinate position of the conservator’s lien.153 Making the Act more aggressive by way of a debt forgiveness formula would incentivize greater participation.

1. Lien Reduction Appeals Are Unpredictable

While property owners in Pennsylvania already have access to tax forgiveness, conservators do not have access to those options until very late in the appointment, and the extent of reductions are unpredictable. For example, Tax Review Boards at the state- and local-government levels currently permit constituents to appeal certain governmental arrears. In Philadelphia, property owners have two methods for reducing liens relating to water, school district, and real estate taxes. First, they may submit a Petition for the Waiver of Interest or Penalties, by which the “Revenue Commissioner or … designeemay abate such balance, up to fifteen thousand dollars ($15,000) in interest or $35,000 in penalty, or both.”154 The Department may grant partial or whole reductions when it makes a finding of “good faith without negligence and no intent to defraud.”155 Second, Philadelphia property owners may submit a Petition for Compromise, which brings principal balances under review by the Department of Revenue.156 However, neither petition process articulates valid grounds for relief157 or a timeline for the decisions.158

A conservator is unable to petition for Waivers or Compromise until rehabilitation is complete and the Court of Common Pleas issues an order granting permission to sell the property. Prior to this phase of the action, the conservator has a limited legal interest, as a possessor rather than an owner. Conservators may negotiate reductions only after sale proceeds are pending in escrow, and reductions would be determined on a case-by-case basis.159

Since municipalities in Pennsylvania have the authority to reduce lien balances, the Act should expressly authorize the reduction of these debts in a standardized fashion. Having a reliable standard would allow conservators to better anticipate their cost exposure and to budget more efficiently. It would also expand the number of investment-worthy properties, which could increase the number of filings by private petitioners. Lastly, the debt forgiveness formula would allow municipalities to collect taxes on properties where collection was no longer expected to happen.

2. Tax Abatements and Credits Do Not Reduce Liens

In addition to the appeals process, the City of Philadelphia has programs that reduce the tax obligations of struggling homeowners and risk-taking developers. For example, Philadelphia offers installment and deferment arrangements for low-income households.160 Similarly, developers have access to local and federal real estate tax abatements. The City of Philadelphia offers abatements for “improvements to deteriorated industrial, commercial or other business properties;”161 “new construction of residential properties;”162 and “improvements to convert deteriorated industrial, commercial or other business property to commercial residential use.”163 These categories of construction are untaxed for a period of ten years.164 Applicable federal tax credits include the Low Income Housing Tax Credit165 and the New Markets Tax Credit,166 which would provide “dollar-for-dollar” reductions if a developer holds and rents a conserved property. However, these options do not address the unforeseen interplay of arrears on revitalization in the City of Philadelphia.

Implementing a debt forgiveness formula under the Act is necessary because conservators are not eligible for installment or deferment payments, and tax credits and abatements do not reduce preexisting arrears. Instead, at the time of closing, abatements and credits eliminate the current taxes due on the sale transaction. One might ask why a conservator should enjoy the reduction of past, current, and future property taxes. However, tax credits and abatements serve to reward developers for engaging in riskier investments, and the reward is lost when the arrears are high. Therefore, the debt forgiveness formula would restore the intended benefits.

3. Preferential Treatment is Necessary

The debt forgiveness formula would protect the interests of third-party investors but provide no relief to intervening respondents. This outcome raises two issues. First, it presents a question of fairness, since current programs for homeowners are far less aggressive. For example, most owners will only have access to deferred payments, installment plans, or the unpredictable lien reduction appeals. Second, ensuring the profitability of conservatorship could promote an influx of homeownership by business entities. While this scenario is not intrinsically bad, such homeowners are more likely to be detached from the needs of the community. Even so, these downsides are ultimately outweighed by the current state of externalities, and the status quo of fifteen to thirty petition-filings per year.

B. The Proposed Amendment

Conservators should have access to reliable and predictable reductions in total governmental arrears.167 Reductions can be achieved with a flat rate cap that assures payment of construction costs and the developer’s fee on small-scale projects. The Pennsylvania Senate actually recognized and addressed the burden of preexisting debt in a previous bill iteration. In fact, a total of six conservatorship bills were proposed during a twenty-year period before its enactment.168 The 1999 Bill gave priority to the first mortgage over the conservator’s lien, but it reduced the first mortgage by way of appraisal if tax arrears exceeded the property value.169 Unfortunately, this feature did not survive, and the concern was later abandoned. Even though the enacted law does prioritize the conservator’s lien over the first mortgage, recovery of the developer’s fee remains problematic due to the frequency by which taxes continue to reduce equity. A provision that makes full compensation will more likely attract organizations that have been reluctant to utilize this law. It will also expand the number of investment-worthy properties, which would render the Act more effective in achieving its objectives.

Table 2 — Debt Forgiveness Formula

The debt forgiveness formula prioritizes the payment of construction costs. Therefore, construction costs become a super lien under the premise that the construction creates the increased equity that creditors enjoy. Prioritizing construction costs is a reasonable course of action since the court’s approval of a conservator’s budget at the outset of a case confirms the necessity of those expenses. Accordingly, conservators should not have to absorb costs.

Rather than focusing on the relationship between the property value and arrears, this formula shifts the comparison to that of “flexible money” and arrears. Flexible money is the difference between the postrehabilitation sale price and the construction cost. Thereafter, the formula does not allow governmental liens to exceed 10% of the flexible money. Doing so ensures that the sales proceeds will not be consumed before a conservator receives commission for a smaller project.

Applying the debt forgiveness formula to the hypothetical presented in Table 1, which generated $50,000 in “flexible money,” would reduce the burden of arrears from $15,000 to $5,000. This reduction enables the conservators to recover its developer’s fee in full, and it generates surplus funds of $3000, which could go towards contingencies or profit for the respondents.170

When applied to different scenarios, this 10% cap only affects projects that generate low “flexible money.” For example, when there is high flexible money, arrears will probably amount to less than 10% of that amount, and will not be substantially reduced. However, the amount of tax arrears on a property does not correlate with the property value, and high flexible money does not necessarily correspond with a high sale price when construction costs are low.

VII. How Fixing Conservatorship Could Make an Impact

One way to project the increased volume offered by the proposed amendment is to factor in full participation by Philadelphia community development corporations (“CDC’s”). The Act characterizes conservatorship as a grassroots movement, and it lists CDC’s within the small group of “parties in interest” with standing to petition and to conserve.171 Currently, the Philadelphia Association of Community Development Corporations has 111 members.172 Undoubtedly, some CDC’s are not members, and some of those members do not engage in rehabilitation work. Still, relying on this figure, the City could see exponential growth in conservatorship actions if each member filed a minimum of five petitions per year.

Current statistics show that not every filing results in conservatorship, and many will conclude in a settlement where the owner performs rehabilitation. Putting the variables aside, 555 filings per year could spur numerous rehabilitations, improving the condition of several neighborhoods, regardless of the actor. Challengers could argue that Philadelphia does not have sufficient demand to meet such an increased supply of housing in distressed areas. However, conservators may also turn to demolition and use vacant land creatively. For example, they can endeavor temporary projects, such as community gardens and other green spaces, special events such as festivals or concert series, or pop-up stores and restaurants.173 Ultimately, any replacement will reap greater benefits for a neighborhood than the conditions of a derelict building.

VIII. Conclusion

Evaluating the opportunity costs and unique features of the Act demonstrates its potential to incrementally improve safety, reinstate taxable property, increase property values, and promote affordable housing. However, the greatest impediment to its success is the presence of exorbitant arrears, which stymie the frequency of filings. Existing tax reduction options, such as credits, abatements, and appeals, do not allow investors to circumvent the priority status of preexisting liens that are currently causing investors to absorb their costs. Implementing a debt forgiveness formula under conservatorship would incentivize greater participation by investors in Pennsylvania’s market for distressed assets.

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  1. Abandoned and Blighted Property Conservatorship Act 68 PA. CONS. STAT. §§ 1101-1111 (2017).
  2. Real Estate Tax Sale Law 72 PA. CONS. STAT. §§ 5860.101-5860.803 (2017).
  3. Richard A. Posner, Values and Consequences: An Introduction to Economic Analysis of Law 1-2 (Coase-Sandor Inst. for Law & Econs., Working Paper 53, 1998).
  4. See N. GREGORY MANKIW, PRINCIPLES OF ECONOMICS 196 (South-Western Coll. ed., 6th ed. 2012) (defining externalities as arising “when a person engages in an activity that influences the well-being of a bystander but neither pays nor receives any compensation for that effect. If the impact on the bystander is adverse, it is called a negative externality.”). Throughout this article, the term “externalities” refers to negative externalities.
  5. Id. at 6 (defining opportunity cost as “. . . what you give up to get that item. When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action.”)
  6. “A producer’s or supplier’s cost of providing goods or services. It includes internal costs incurred for inputs, labor, rent, and depreciation but excludes external costs incurred as environmental damage (unless the producer or supplier is liable to pay for them).” Private Cost, BUSINESSDICTIONARY, http://www.businessdictionary.com/definition/private-cost.html (last visited Feb. 28, 2017).
  7. 68 PA. CONS. STAT. § 1103 (2017) (requiring that petitioning neighbors live within 2,000 feet of the abandoned property, and petitioning nonprofit organizations be located within the same city. A proposed conservator must also have completed a previous rehabilitation project within a five-mile radius of the abandoned property).
  8. See id. § 1105(d); see also id. § 1102(3) (“Substandard, deteriorating and abandoned residential, commercial, and industrial structures are a public safety threat and nuisance . . .”); see also Note, A Nuisance Law Approach to the Problem of Housing Abandonment, 85 YALE L.J., 1130, 1132-33 (1976).
  9. See 68 PA. CONS. STAT. § 1105(d)(1)-(4).
  10. See id. § 1105(d)(5).
  11. See id. § 1105(b)-(d).
  12. Id. § 1105(f )(1) (“If the court finds after a hearing that the conditions for conservatorship set forth in subsection (d) 29 have been established, but the owner represents that the 30 violations or nuisance or emergency condition will be abated in a reasonable period, the court may allow the owner to proceed to remedy the conditions.”).
  13. See id. § 1106(b)(5).
  14. See id. § 1105(f )(1).
  15. See id. at § 1104(a).
  16. See id. § 1109(b).
  17. See, e.g., DOUGLAS LAYCOCK, MODERN AMERICAN REMEDIES, CASES AND MATERIALS 310 (4th ed. 2010) (citing Missouri v. Jenkins, 515 U.S. 70 (1995)) (discussing how the Supreme Court distinguished between de jure, or legal, versus de facto, or factual, sources of harm while addressing school segregation).
  18. See Missouri v. Jenkins, 515 U.S. 70 (1995). In 1995, the Supreme Court overturned a case that awarded a structural injunction by the District Court of the Western District of Missouri that provided extensive and prolonged regulation of a school district for the purpose of combating segregation and equalizing student learning experiences. Id. at 102-03. The majority opined that the segregated schools resulted from de facto circumstances of neighborhood population trends that flowed out of personal choices. Id. at 101-02. As a result, the legislative branch would be better suited for such a regulatory role. Id. at 111-12.
  19. See 68 PA. CONS. STAT. § 1102.
  20. See generally id. § 1102(5).
  21. See id. § 1102(4) (“[I]f these buildings are not rehabilitated, they are likely to remain abandoned and further deteriorate, resulting in increased costs to the Commonwealth, municipality and taxpayers to secure and ultimately demolish them.”).
  22. Cf. Richard Rothstein, Presentation to the Atlantic Live Conference, Reinventing the War on Poverty: Modern Segregation (Mar. 6, 2014), http://www.epi.org/publication/modern-segregation (“Urban renewal programs of the mid-twentieth century often had similarly undisguised purposes: to force low-income black residents away from universities, hospital complexes, or business districts and into new ghettos. Relocation to stable and integrated neighborhoods was not provided; in most cases, housing quality for those whose homes were razed was diminished by making public housing high-rises or overcrowded ghettos the only relocation option.”).
  23. See 68 PA. CONS. STAT. § 1104(d)(6).
  24. See id. § 1105(i) (providing for the removal of a conservator upon the request of an owner or a showing that the conservator is not carrying out court orders. The owner would have to pay expenses up to that point); see also id. § 1110(2) (“Allowing the owner, mortgagee, or lien holder to request termination of the conservatorship by providing “adequate assurances to the court that the conditions . . . will be promptly abated,” and that all fees and expenses of the conservator fully “paid or provided for . . .”).
  25. See id. § 1110(2) (providing that after a project is complete, an owner may indicate to the court its ability to purchase the property, and would enjoy a priority right to purchase over third parties and the conservator).
  26. The statute uses the term “intervene” after the petitioner has established that conservatorship is necessary; therefore, the burden shifts to the respondent. See id. § 1105(b), (“A party in interest may intervene in the proceeding and be heard with respect to the petition, the requested relief, or any other matter which may come before the court in connection with the proceeding.”).
  27. See id. § 1105(f )(1), (“If the court finds after a hearing that the conditions for conservatorship set forth in subsection (d) have been established, but the owner represents that the conditions, violations or nuisance or emergency condition will be abated in a reasonable period, the court may allow the owner to proceed to remedy the conditions.”).
  28. Id. § 1005(i) (“A conservator may be removed by the court at any time upon the request of the conservator or upon a showing by a party to the action that the conservator is not carrying out its responsibilities under this act.”).
  29. Id. § 1110(2) (“[T]he owner, mortgage or lien holder has requested that conservatorship be terminated and has provided adequate assurances to the court that the conditions that constituted grounds for the petition will be promptly abated, all obligations, expenses and improvements of the conservatorship, including all fees and expenses of the conservator, have been fully paid or provided for and the purposes of the conservatorship have been fulfilled.”).
  30. Id.
  31. The statute articulates four specific grounds for terminating conservatorship: (1) the owner pays off conservatorship expenses after the conservator completes rehabilitation; (2) the owner pays off conservatorship expenses before the conservator completes rehabilitation, and the owner commits to finishing the rehabilitation; (3) the conservator sells the property free and clear of liens; or (4) the conservator failed to get court approval for a plan or failed to implement a court-approved plan. Id. § 1110(1)-(4). Therefore, the statute allows the owner to “redeem” during or after rehabilitation, but not after the free and clear sale by the conservator. Id.
  32. Id. § 1105(g) (“The conservator may file a lien against the property in an amount based on the costs incurred during the conservatorship, including, but not limited to, costs of rehabilitation, attorney fees and court costs. The lien amount may be adjusted from time to time.”).
  33. Id. § 1103 (providing that the construction costs and the developer’s fee collectively comprise the “conservator’s lien”).
  34. Id.
  35. Id. § 1106(c)(5) (“At the time of the hearing, all parties shall be allowed to comment on the plan, and the court shall take all comments into consideration when assessing the feasibility of the plan and the proposed financing. In making its assessment, the court shall give reasonable regard to the conservator’s . . . in approving the final plan and in approving the costs of conservatorship and sale of the property.”).
  36. Id. § 1109(c)(2) (“In the event that the proceeds of the sale are insufficient to pay all existing liens, claims and encumbrances, the proceeds shall be distributed according to the priorities set forth in subsection (d) and all unpaid liens, claims or encumbrances which have not been assumed under section 8(d) shall be extinguished.”).
  37. See id. § 1109(c) (providing that governmental liens and tax arrears are “priority liens” that must be paid before the conservator’s lien. The conservator’s lien is comprised of construction costs and the developer’s fee, which is 20% of the sale price or 20% of the construction costs. See id. § 1109(c).
  38. The conservator’s lien is paid after the costs and expenses of sale (such as legal fees, closing and insurance costs) and after indebtedness related to project financing. Id. § 1109(d).
  39. H.B. 1363, 2013 Gen. Assemb., Reg. Sess. (Pa. 2014).
  40. 68 PA. CONS. STAT. § 1105(f )(4).
  41. MANKIW, supra note 4, at 196.
  42. Matthew J. Samsa, Reclaiming Abandoned Properties: Using Public Nuisance Suits and Land Banks to Pursue Economic Redevelopment, 56 CLEV. ST. L. REV. 189, 195 (2008) (“Where costs of rehabilitation outweigh potential return on investment.”); see also ALLAN MALLACH, BRINGING BUILDINGS BACK: FROM ABANDONED PROPERTIES TO COMMUNITY ASSETS 5 (2d ed. 2006) (“If a property owner views a property as a drain on resources that cannot produce income, even in the long-term, abandonment of the property becomes an attractive alternative.”).
  43. George L. Kelling & James Q. Wilson, Broken Windows: The Police and Neighborhood Safety, ATLANTIC Mar. 1982, http://www.theatlantic.com/magazine/archive/1982/03/broken-windows/304465/. The Broken Windows Theory has received criticism relating to a lack of empirical evidence showing that disorder, when left unchallenged, causes serious crime. But see Adam J. Mckee, The Broken Windows Theory, ENCYCLOPEDIA BRITANNICA ( Jun. 13, 2013), https://www.britannica.com/topic/broken-windows-theory (“The validity of the broken windows theory is not known. It is safe to conclude that the theory does not explain everything and that, even if the theory is valid, companion theories are necessary to fully explain crime. Alternatively, a more complex model is needed to consider many more cogent factors. Almost every study of the topic has, however, validated the link between disorder and fear. There is also strong support for the belief that fear increases a person’s desire to abandon disorderly communities and move to environments that are more hospitable. . . .”) The Theory has also been criticized “for fostering ‘zero-tolerance’ policies that are prejudicial against the disadvantaged segments of society.” Id.
  44. Kelling & Wilson, supra note 43.
  45. Id. (“This is as true in nice neighborhoods as in rundown ones.”).
  46. Id.
  47. Id.
  48. Id.
  49. The majority of tax delinquent properties in Philadelphia are abandoned. See Patrick Kerkstra, Property-Tax Debt is Ravishing Philadelphia, PHILA. INQUIRER (Mar. 11, 2013), http://articles.philly.com/2010-07-28/news/24969809_1_abandoned-property-tax-delinquent-properties-numerous-city-agencies (finding that between 2011 and 2012, 18% of all properties in Philadelphia were tax delinquent, and 59% of delinquent properties were abandoned.).
  50. See Vacant Lot Program, CITY OF PHILA., http://www.phila.gov/clip/vacantlotprogram/Pages/default.aspx (“There are approximately 40,000 vacant lots in the City of Philadelphia”); see also Michelle C. Kondo et al., A Difference-In-Differences Study of the Effects of a New Abandoned Building Remediation Strategy on Safety, PLOS ONE Jul. 8, 2015, at 1, 2-3, http://journals.plos.org/plosone/ article/file?id=10.1371/journal.pone.0129582&type=printable (citing a study relating to the intersection of blight and safety indicating that in 2010, there were 25,000 “vacant buildings,” and over 3,000 “abandoned buildings or other structures”).
  51. Hearing on H.B. 2188 Before the H. Urb. Affairs Comm., 2008 Gen. Assemb., Reg. Sess. 5-6 (Pa. 2008) (statement of Thomas C. Petrone, Chairman, H. Urb. Affairs Comm.).
  52. Kerkstra, supra note 49.
  53. Id.
  54. Catherine Lucey, 40,000 City Properties. Abandoned. Now What?, PHILA. INQUIRER, July 28, 2010, http://articles.philly.com/2010-07-28/news/24969809_1_abandoned-property-tax-delinquent-properties-numerous-city-agencies (“Sometimes they go to sheriff’s sale, but often they just decay.”).
  55. See Kerkstra, supra note 49.
  56. See PA. CONS. STAT. § 1102(3) (“[B]lighting effect [of abandoned houses] diminishes property values in the communities in which these properties are located.”); see also Hearing on H.B. 2188, supra note 50, at 5-6.
  57. But see Mckee, supra note 43. The Broken Windows Theory has been subject to criticism, however, criticism largely relates to the relationship between disorder and crime. The relationship between disorder and property value is generally accepted. Id.
  58. Samsa, supra note 41, at 196 (citing GEORGE L. KELLING&CATHERINE M. COLES, FIXING BROKEN WINDOWS (1996) (discussing the “Broken Windows” Theory)).
  59. See Gordon Whitman, Blight Free Philadelphia: A Public-Private Strategy to Create and Enhance Neighborhood Value iv (Research for Democracy, Working Paper 2001), https://www.researchgate.net/publication/296514187_Blight_Free_Philadelphia_A_ Public-Private_Strategy_to_Create_and_Enhance_Neighborhood_Value (“[A]ccording to multivariate analysis of the effects of abandonment on sales prices . . .”).
  60. Id.
  61. See Kondo et al., supra note 50, at 2 (citing ECONSULT CORP. & PENN. INST. FOR URB. RESEARCH, VACANT LAND MANAGEMENT IN PHILADELPHIA: THE COSTS OF THE CURRENT SYSTEM AND THE BENEFITS OF REFORM i, ii (2010) (prepared for the Redevelopment Authority of the City of Philadelphia, Philadelphia Association of Community Development Corporations), http://planphilly.com/uploads/media_items/http-planphilly-com-sites-planphilly-com-files-econsult_vacant_land_full_report-pdf.original.pdf.
  62. Id.
  63. Whitman, supra note 59, at iv.
  64. Michelle C. Kondo et al., supra note 50, at 4 (citing THE REINVESTMENT FUND, EXECUTIVE SUMMARY: EVALUATION OF PHILADELPHIA’S LICENSE AND INSPECTION’S ACT 90 ENFORCEMENT ACTIVITIES (2014), https://www.reinvestment.com/research-publications/2014-analysis-of-limited-supermarket-access/9/.
  65. Earni Young, The Issues that Can Divide a Changing Neighborhood, in The Problems and the Promise: Gentrification in Philadelphia, PHILA. INQUIRER (Feb. 25, 2016), http://www.philly.com/philly/news/Gentrification_in_Philadelphia.html.
  66. Wendy Ruderman, Renters Are the First to Know, in The Problems and the Promise: Gentrification in Philadelphia, PHILA. INQUIRER (Feb. 25, 2016), http://www.philly.com/philly/news/Gentrification_in_Philadelphia.html.
  67. Id.
  68. Id.
  69. Id.
  70. “Some cities have remained strangely immune to the rent control temptation. Chicago, with one of the largest proportions of renters of any American city, has never seriously entertained proposals for rent control. Philadelphia, Baltimore, Cleveland, and other eastern cities outside the Boston-New York-Washington axis have never experimented with this policy.” See WILLIAM TUCKER, CATO INST. CATO POLICY ANALYSIS NO. 274: HOW RENT CONTROL DRIVES OUT AFFORDABLE HOUSING 2 (1997), https://object.cato.org/sites/cato.org/files/pubs/pdf/pa274.pdf.
  71. Matthew N. McClure & Ryan Trifelitti, Landlords in Philadelphia Face New Legal Requirements Concerning Residential Rental Increases, BALLARD SPAHR, http://www.ballardspahr.com/alertspublications/legalalerts/2015-12-07-landlords-inphila-face-new-legal-requirements-concerning-residential-rental-increases.asp. (last visited Mar. 1, 2017) (discussing how chapter 9-800 of the Philadelphia Code was recently amended to require landlords to give notice of thirty days for leases covering a duration of less than one year; and sixty days for leases covering one year or more. A tenant with a lease of one year or more who receives timely notice of the increase and decides not to renew must notify the landlord of such nonrenewal no later than 30 days before the current term ends.)
  72. Id.
  73. Simon van Zuylen-Wood, Out with the Poor, In with the Rich: The Landlord’s Guide to Gentrifying NYC, BLOOMBERGBUSINESSWEEK (Oct. 12, 2016, 10:00 AM), http://www.bloomberg.com/news/articles/2016-10-12/get-out.
  74. Id.
  75. Id.
  76. Home sale prices in neighborhoods that circle Center City have skyrocketed since the year of 2000. See Young, supra note 64.
  77. See Valerie Russ, One Block in Brewery Town, in The Problems and the Promise: Gentrification in Philadelphia, PHILA. INQUIRER (Feb. 25, 2016), http://www.philly.com/philly/news/Gentrification_in_Philadelphia.html (“But Freeman, a retired airport custodian who lives in the house he and his brother inherited from their mother, said he’s not worried about being bought out or priced out by higher taxes as new residents move in.”).
  78. How OPA Assesses Property, CITY OF PHILA., http://www.phila.gov/OPA/Assessments/Pages/HowOPAAssessessProperty.aspx. (last visited Mar. 1, 2017).
  79. See Young, supra note 64 (“AVI is the city’s attempt to catch up to increases in property values that were foregone during the real estate boom. Prior to AVI, properties were assessed at a percentage of their market value. Now property owners are facing tax bills based on market values that are double or even triple their 2013 assessments.”).
  80. How OPA Assesses Property, supra note 78.
  81. See Young, supra note 65 (“The sticker shock is especially dire in gentrifying neighborhoods that have experienced the biggest spike in home sale prices. For example, Alda Ballard’s brownstone was recently assessed at $420,000, vs. $27,100 in 2012.”).
  82. See Dan Geringer, The Problem of Tangled Titles, in The Problems and the Promise: Gentrification in Philadelphia, PHILA. INQUIRER, (Feb. 25, 2016), http://www.philly.com/philly/news/Gentrification_in_Philadelphia.html#ifrndnloc (“One of the programs is the Longtime Owner-Occupants Program, which provides a tax break for homeowners whose property assessments increase by 300 percent or more in the course of one tax year.”).
  83. Id.
  84. MANKIW, supra note 4, at 6 (defining opportunity cost as “. . . what you give up to get that item. When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action.”)
  85. Neighborhood Blight Reclamation and Revitalization Act, 53 PA. CONS. STAT. §§ 6101-6145 (2017); see also Vacant Property Strategy, CITY OF PHILA., http://www.phila.gov/li/aboutus/Pages/VacantPropertyStrategy.aspx. (last visited Mar. 1, 2017) (“The Department now enforces the ‘doors and windows’ ordinance, which was passed by Philadelphia City Council, allowing the Department to ask the court to fine owners $300 per day per each opening that is not covered with a functional door or window. In addition, State Act 90 allows the department to ask the court to attach these potentially high dollar fines to owner’s personal property.”)
  86. Such as the trimming of lawns and the repairing of facades. See Home Repair, HABITAT FOR HUMANITY PHILA.,http://www.habitatphiladelphia.org/home-repair-weatherization-programs. (last visited Mar. 1, 2017).
  87. Neighborhood Blight Reclamation and Revitalization Act §§ 6101-6145.
  88. Kondo et al., supra note 50, at 3; see also Stephen Dare, New Penn Study Finds that Building Remediation Works, METRO JACKSONVILLE ( July 19, 2015, 01:00 PM), http://www.metrojacksonville.com/printpage/2015-jul-new-penn-study-finds-that-building-remediation-works (quoting Michelle C. Kondo, lead author of the study, “. . . This could be the ‘broken windows theory’ in action, with new doors and windows and a newly cleaned building facade signaling to potential offenders that a property is occupied and crime is not tolerated.”).
  89. See Kondo et al., supra note 50, at 3; see also News Release, Penn Medicine News, Remediating Abandoned, Inner City Buildings Reduces Crime and Violence in Surrounding Areas, Penn Study Finds ( July 8, 2015), http://www.uphs.upenn.edu/news/News_Releases/2015/07/branas/ (“[The study] found a significant decrease in serious and nuisance crimes in areas around remediated buildings after Philadelphia began enforcing an ordinance requiring owners of abandoned buildings to improve their facades and install working doors and windows in 2011.”).
  90. Id.
  91. Kondo et al., supra note 50, at 8 (finding 676 out of 2,356 cited buildings complied with the Doors and Window ordinance).
  92. Id.
  93. Id.
  94. Hearing on H.B. 2188 Before the H. Urb. Affairs Comm., 2008 Gen. Assemb., Reg. Sess. 14 (Pa. 2008) (statement of Elizabeth Hersh, Exec. Dir., Hous. All. of Pa.) (“This is a surgical tool that is used in cases of last resort when the owner has disappeared or failed to maintain a property over a long period of time.”)
  95. Neema Roshania Patel, Blighted Property in Mt. Airy to be Rehabilitated by Community Conservator, NEWSWORKS (Oct. 10, 2013), http://www.newsworks.org/index.php/local/nw-philadelphia/60640-blighted- property-in-mt-airy-to-be-rehabilitated-by-community-conservator (quoting Anuj Gupta, Esq., former Executive Director of Mt. Airy, USA, discussing the success of a conservatorship project in the Mount Airy neighborhood of Philadelphia, PA).
  96. Competitive auctions involving tax certificates may require investors to pay a premium on the tax balance and then “bid down” on the interest rate that they are entitled to receive upon redemption. Certificate holders must also pay new taxes during the two-year redemption period. See Elements of Tax Sales in New Jersey, DIV. LOCAL GOV’T SERVS., N.J. DEP’T CMTY AFFAIRS, http://www.nj.gov/dca/divisions/dlgs/programs/tax_collector_docs/elements_of_tax_sales_nj.pdf. (last visited Mar. 1, 2017).
  97. Id.
  98. Id.
  99. Id.; see also, e.g., Government Finance: Tax Claim Bureau, BUCKS COUNTY, http://www.buckscounty.org/government/Finance/TaxClaimBureau (last visited Mar. 13, 2017). Some counties have Tax Claim Bureau auctions, which operate slightly differently from tax sheriff sales. However, this note does not discuss them, for the sake of brevity.
  100. Auctions start at $600, and then each successive bid must be made in $100 increments. See Overview of the Sheriff Sale Process, PHILA. SHERIFF’S OFFICE, http://www.officeofphiladelphiasheriff.com/en/real-estate/how-sheriffs-sales-work/overview-of-the-sheriff-sale-process. (last visited Mar. 1, 2017).
  101. Special sales and redemption rules apply in Philadelphia, Pittsburgh, and Scranton and in Allegheny County. See Tax Lien Certificates & Tax Deed Sales in Pennsylvania, PROFESSOR PROFITS, http://www.professorprofits.com/states/state.php?name=Pennsylvania (last visited Mar. 13, 2017).
  102. See 53 PA. CONS. STAT. § 7293(a) (2017) (providing that a property owner has the right to redeem a property after it is sold at Sheriff’s Sale “at any time within nine months from the date of the acknowledgment of the sheriff’s deed therefor, upon payment of the amount bid at such sale” along with other costs associated with the Sheriff’s Sale, including interest).
  103. See City of Phila. v. F.A. Realty Inv’rs Corp., 146 A.3d 287, 298-99 (Pa. Commw. Ct. 2016) (“If the redemption process is initiated, subsequent acknowledgment does not unilaterally terminate an owner’s statutory right to redeem.”); see also 53 PA. CONS. STAT. § 7293(c) (“Notwithstanding any other provision of law to the contrary, in any city, township, borough or incorporated town, there shall be no redemption of vacant property by any person after the date of the acknowledgment of the sheriff’s deed therefor.”).
  104. Overview of the Sheriff Sale Process, supra note 100.
  105. Conservatorship can wipe out mortgages but it cannot clear governmental liens. However, tax sales pay off some or all outstanding taxes and wipe out all other governmental liens.
  106. See Simon v. Cronecker, 915 A.2d 489, 492 (N.J. 2007).
  107. Id. at 489, 496 (discussing plaintiff ’s argument that the intervenor was not a “competitor” but “a parasitic speculator that searches complaint files for the names of owners facing foreclosure of their properties. With few options available, the vulnerable owners are primed to surrender their property interests to the intermeddler for a trifling consideration. The intermeddler then arranges for the redemption of the tax certificate . . .”).
  108. See 68 PA. CONS. STAT. § 1105(d)(2); see also id. at § 1105(f )(3)-(4).
  109. Id. § 1105(d)(2).
  110. See Vacant Lot Program, supra note 50.
  111. Conservatorship can address multiple blighted properties if they are located on appurtenant land and belong to the same owner. See 68 PA. CONS. STAT. § 1104(e) (“[T]he petition may include one or more adjacent properties in a single action if: (1) the property that is the primary subject of the action is owned by the same owner as the adjacent property; and (2) the properties are or were used for a single or interrelated function”).
  112. Developers target areas where they expect future demand to exceed the current supply. See BRIAN W. BLAESSER & THOMAS P. CODY, REDEVELOPMENT: PLANNING, LAW AND PROJECT IMPLEMENTATION: A GUIDE FOR PRACTITIONERS 22 (2008).
  113. Id. at 22-29 (discussing regional growth patterns, basic employment, and demographic trends).
  114. See 68 PA. CONS. STAT. § 1103 (indicating under the “definitions section” that nonprofit corporations that qualify as potential petitioners and conservators must have “as one of its purposes, community development activities, including economic development, historic preservation or the promotion or enhancement of affordable housing opportunities.”).
  115. Maya Brennan et al., Comparing the Costs of New Construction and Acquisition-Rehab In Affordable Multifamily Rental Housing: Applying a New Methodology for Estimating Lifecycle Costs 11 (Ctr. Hous. Policy, Working Paper Feb., 2013), http://inclusivepolicy.org/wp-content/uploads/2015/09/Cost-Comparison-Rehab.pdf.
  116. Id.
  117. Housing Choice Voucher Fact Sheet, U.S. DEP’T HOUS. URB. DEV., https://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/programs/hcv/about/fact_sheet (last visited Dec. 24, 2016).
  118. Rothstein, supra note 21.
  119. 68 PA. CONS. STAT. § 1109(d) (providing that, whereas governmental liens have priority over the conservator’s lien, the conservator’s lien has priority over mortgages. A mortgagee’s interest may be extinguished, but a governmental lien must always be paid).
  120. See id. § 1103 (providing that the petitioner acts as a legal agent who prepares pleadings and compiles evidence for the court action, whereas the conservator finances the project and manages construction).
  121. See, for example, 68 PA. CONS. STAT. § 1105(d), citing vermin, crime, squatters, trash, etc.
  122. See infra Figure 1 (showing that the average duration of cases was one to three years between January 2009 and July 2014). An adversarial respondent may use the same “delay tactics” that are commonly applied to foreclosure, such as bankruptcy.
  123. 68 PA. CONS. STAT. § 1110(3). Conveyance only becomes possible if an owner does not repay the lien after rehabilitation is complete. See id. § 1109(d).
  124. Conservatorship filings during the control period showed that properties had lien amounts as follows: 25% between $5,000 to $10,000, and 31.5% owing over $10,000. I obtained this information from my own evaluation of filings.
  125. 68 PA. CONS. STAT. § 1105(a).
  126. See infra Figure 1.
  127. 32% of all petitions filed in Philadelphia during the control period, and several organizations have filed two to three petitions.
  128. In Philadelphia, these bench trials are assigned to a particular judge in the Civil Trial Division of the Court of Common Pleas.
  129. 68 PA. CONS. STAT. § 1104(d)(1).
  130. Id. § 1104(b), (d); § 1005(d).
  131. Id. § 1105(a)-(c).
  132. Id. § 1105(f )(1) (“If . . . owner represents that the violations or nuisance or emergency condition will be abated in a reasonable time, the court may allow the owner to proceed to remedy the conditions.”).
  133. Patel, supra note 95 (quoting Brad Copeland, Executive Director, Mt. Airy, USA).
  134. 68 PA. CONS. STAT. § 1110(2).
  135. STEVEN SHAVELL, Chapter 9: Acquisition and Transfer of Property, in FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 1, 28-29 (forthcoming 2003), http://www.law.harvard.edu/programs/olin_center/papers/pdf/399.pdf.
  136. Id.
  137. See Andrea Boyack, Bankruptcy Weapons to Terminate a Zombie Mortgage, 54 WASHBURN L.J. 451, 455 (2015) (“Today’s market realities have resulted in numerous cases of debtors who abandon possession of their homes even though their mortgage lenders have failed to foreclose. These mortgage loans exist in a sort of un-dead state, with unresolved liens haunting collateral realty long after borrowers have attempted to divest their equity, bury their debt, and move forward. The phenomenon has achieved the colorful moniker of ‘zombie mortgage.’ ”).
  138. 68 PA. CONS. STAT. § 1104(d)(6).
  139. Id. § 1005(b). A party-in-interest, usually a lienholder, may intervene in the action, see id.; or, a respondent may interrupt the conservatorship appointment by showing an ability to repay expenses and complete the project, id. § 1110(2), or by showing that the appointed conservator is incompetent and not complying with court orders, id. § 1110(3).
  140. Id. § 1110(2).
  141. See id. § 1109(d)(5) (providing that distribution starts with court fees, followed by tax arrears and governmental liens, and, thereafter, closing costs, and legal fees before the conservator’s lien.). But see OHIO REV. CODE ANN. § 3767.41 (LexisNexis 2017); VA. CODE ANN. §15.2-907.2 (2017) (making conservator’s lien superior to taxes in the distribution chain).
  142. See Kerkstra, supra note 49, at 2 (stating during the last seven years, “the city’s average annual collection rate has been 85.6 percent, [which is] 10 percentage points below the average rate of the 20 largest cities over the same period.”).
  143. January 30, 2009.
  144. This data reflects filings at the Civil Division of the Philadelphia Court of Common Pleas, First Judicial District of Pennsylvania. These figures do not account for liens from the License and Inspections Department, other municipal liens, or state and federal judgments.
  145. See 68 PA. CONS. STAT. § 1103 (describing substantial rehabilitation as “[r]epairs to the building where: (1) the cost of repairs, replacements and improvements exceeds 15% of the property’s value after completion of all repairs, replacements and improvements; or (2) more than one major building component is being replaced. Major building components include: (i) roof structures; (ii) ceilings; (iii) wall or floor structures; (iv) foundations; (v) plumbing systems; (vi) heating and air conditioning systems; and (vii) electrical systems.”).
  146. See id. (listing five parties that qualify as a “[p]arty in interest” with standing to bring petitions, including “[a] lien holder and other secured creditor of the owner” and “[a] municipality or school district in which the building is located.”).
  147. This information reflects my evaluation of conservatorship actions filed in the Philadelphia Court of Common Pleas between January of 2009 and July of 2015.
  148. Id.
  149. Id.
  150. See William Kenny, The Battle on Blight, NORTHEAST TIMES ( July 29, 2015), http://www.northeasttimes.com/2015/jul/29/battle-blight/#.VkkZonarQgv (“Philadelphia Redevelopment Authority [PRA] completed its first-ever conservatorship—the rehabilitation of an abandoned townhouse in Morrell Park. . . . PRA is not a true branch of city government. It’s considered a quasi- city agency and was created by the state legislature in 1945. The mayor appoints the agency’s five-member board of directors, but the agency gets most of its funding from federal grants along with its own revenue-generating activities.”).
  151. See 68 PA. CONS. STAT. § 1102(5).
  152. See id. § 1102(2)-(4).
  153. See id. § 1110(1).
  154. PHILA., PA., CODE § 19-1705(1) (2017), http://www.amlegal.com/codes/client/philadelphia_pa/.
  155. Id.
  156. Id. § 19-1704(1)-(2).
  157. See id. § 19-1705(1) (stating a petition must “specify the reason(s) for seeking relief,” and that the Revenue Commissioner shall consider it within a reasonable time before notifying the petitioner in writing); Id. § 19- 1704(1), (stating that owners should “state the facts which the petitioner believes warrant a finding that such compromise would be in the best interest of the City or the School District of Philadelphia”).
  158. See Id. § 19-1704(1)-(3).
  159. 68 PA. CONS. STAT. § 1109(c) (2017).
  160. PHILA., PA., CODE § 19-1305, -1307. Deferment arrangements are available when property tax assessments increase by more than 15% due to the AVI. It is separate from the “Longtime Owner-Occupants Program,” which offers real estate tax discounts to qualifying homeowners experiencing substantial increases, by 300% or more. See Geringer, supra note 81.
  161. § 19-1303(3).
  162. Id. § 19-1303(4).
  163. Id. § 19-1303(5).
  164. Id. § 19-1303(1)-(5).
  165. 26 U.S.C § 42 (2017).
  166. 26 U.S.C. § 45D (2017).
  167. Principal, plus interest, plus penalty.
  168. S.B. 888, 1987 Gen. Assemb., Reg. Sess. (Pa. 1987); H.B. 2523, 1998 Gen. Assemb., Reg. Sess. (Pa. 1998); H.B. 1996, 1999 Gen. Assemb., Reg. Sess. (Pa. 1999); H.B. 14, 2003 Gen. Assemb., Reg. Sess. (Pa. 2003); H.B. 691, 2005 Gen. Assemb., Reg. Sess. (Pa. 2005); H.B. 843, 2007 Gen. Assemb., Reg. Sess. (Pa. 2007); H.B. 2188, 2008 Gen. Assemb., Reg. Sess. (Pa. 2008); H.B. 1363, 2013 Gen. Assemb., Reg. Sess. (Pa. 2014).
  169. H.B. 1996, 1999 Gen. Assemb., Reg. Sess. (Pa. 1999).
  170. 68 PA. CONS. STAT. § 1109(d) (2017).
  171. See id. § 1103, for the definition of “party in interest.”
  172. See Membership, PHILA. ASSOC. COMM. DEV. CORPS., http://www.pacdc.org/membership. (last visited Mar. 1, 2017).
  173. Keith Fudge et al., Temporary Urbanism: Alternative Approaches to Vacant Land, EVIDENCE MATTERS, , Winter 2014, at 28, 28, https://www.huduser.gov/portal/periodicals/em/EM_Newsletter_winter_2014.pdf.