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How Residential TIF Financing Can Save Baltimore's Neighborhoods

Wednesday, April 27

The Devil is Always in the Details. The question of why developers don’t rehab houses in transitional areas has a very simple answer – but it is not the answer that you think. Frequently tossed around, but wrong, answers include fear of crime and theft. In our experience of renovating 500 or so houses in transitional areas over the past 10 years, we have never feared for our safety. And as long as you don’t leave the doors unlocked and the window openings wide open, we haven’t had much trouble with theft either. So why don’t we do more renovations in transitional areas then? The answer is in the details. Let me walk you through a gut renovation in a transitional area…

We buy the shell for $5-10K. We plan to spend $75K to renovate the house, including an all new modern layout, mechanical systems, abatement of all lead paint, new trim, doors, kitchens and baths. The result is a lovely and healthy home, capable of attracting a rent north of $1200/mo, which is the minimum we need to keep the house up, make debt service payments and pay all of the other expenses of the home. Here’s where the train falls off of the tracks… We have $85K of cash in this house, so we go to a bank to refinance. Refinancing allows us to get our money back and go do another project. The bank will give us 70% of the appraised value. Because the house is in a transitional area, appraisals are only $100K, so the refinance proceeds are only $70K. So we have $15K “stuck” in the deal. If I were an investor with $100K, after 6 renovations I’m done. $100K is a lot of money – there aren’t hundreds of guys who want to invest in real estate with $100K sitting around. The bottom line? We aren’t to renovate thousands of vacant properties and make any kind of a dent 6 houses at a time.

The problem is that there is a $15K per house shortfall, which prevents this cycle from being 100% replicable. The investor can’t fund it without depleting their operating capital and grant money isn’t a long term fix to the problem. There is another beneficiary in this system that gains from a shell being renovated. The City Tax Collector. The renovated property will have a new assessed value of at least $85,000. Property taxes will be at least $2,000/yr. This $2,000/yr is found money to the City. It invested nothing to get this return. My suggestion is that the City should.

If the City funded the $15K shortfall in the form of a forgivable loan paid back by property tax revenues from the property, the investor would do that project. Property taxes to the City would increase by $2,000/yr. At a 6% interest rate, which is more expensive than the rate at which the City raises money, the $2,000/yr fully amortizes the City’s loan in only 10 years. At the end of 10 years, City is completely paid back and the property tax increase is gravy to the City’s coffers.

There is almost zero risk of loss to the City because property taxes are the most senior lien on a property. After signing on the line for $70K of bank, there is no way that either the Investor or the Bank are going to let themselves be completely wiped out for non-payment of the property taxes. The Investor can recycle his operating capital and renovate continuously. And the neighborhood has a way to rid itself of the dilapidated vacant on an otherwise good block.

Traditional Tax Increment Financing (TIF) won’t work, because it has been designed for large scale commercial projects. The concept is the same and the math works. We need to design a TIF structure that works for small scale residential. The stakes are too big not to.

Anatomy of a Fraud - 1314 W Lafayette Ave

Wednesday, April 27

Long story short:
Two guys bought a house from an estate for $1K in 2006 and sold it to a woman for $29K in 2007. The woman got a renovation loan from K Bank for $156K. Then she sold it to one of the original guys who she bought it from for $258K in 2008. The guy got foreclosed on and the bank took it back for $144K in 2010. Then the bank sold it to a third party for $15K in 2011. Your TARP money at work…

The juicy details:
1314 W Lafayette was purchased by Ricardo Rowe and Darius Waters in Nov 2006 from the Estate of Charles Grandy for $1,000. They may have had to pay back taxes, water, and an undisclosed outstanding mortgage balance, so when they sold the property to Evelyn Waters in Feb 2007 for $29,450, it wasn’t that notable of a transaction. Ms Waters took an acquisition & renovation loan from K Bank for $156,000. It’s a big house – still not necessarily a notable transaction. In Nov 2007, however, she sold it back to Ricardo Rowe for $258,000. Ricardo got a loan from Metrocities Mortgage for $245,100. This is a notable transaction.

13 months later, the property was officially in foreclosure. In Dec 2010, the property was transferred to FNMA since they purchased the $245K note from Metrocities Mortgage after it was originated in Nov 2007. FNMA then sold the property to Chris Campbell for $15K and recorded a $230K loss that we, the American taxpayers, paid for.

Did Chris Campbell get a good deal at $15K? Maybe. The question I want to have answered is why Ricardo Rowe agreed to purchase the property for $258,000 after he sold it to Evelyn Waters for only $29,450 only 9 months before. A cynic might get it in his head that this sale wasn’t an arms-length transaction, and that Evelyn Waters and Ricardo Rowe shared in the profits of this deal. Ricardo used some of the proceeds to make payments on the $245,100 mortgage that he got from Metrocities, and then let the property go into foreclosure. A cynic might say that Ricardo Rowe never had any intention of making payments for 30 years like he signed his name to. A cynic might suggest that Ricardo Rowe and Evelyn Waters committed fraud.

That is a question for the Department of Labor Licensing and Regulation of the great State of Maryland, though. It’s really none of my business – except the part about my tax dollars being used to bail out a probable fraud scheme and the fact that fraudsters are one of the main reasons that banks tend to redline urban areas like 21217, where this property is located. This kind of transaction is bad for the Baltimore City and bad for the American taxpayer.

The DLLR might take the position that this is a victimless crime, though. No one involved in the transaction is claiming to be hurt. In fact, since the paper was sold to FNMA, the only one who got hurt is the American Taxpayer, who doesn’t have a voice in this transaction. I found this series of transactions in 10 minutes of public record research. Why aren’t there hundreds of open cases against probable fraudsters?

Ricardo Rowe lives in Columbia, MD. Research into Ricardo shows strong business ties with Darius Waters of Randallstown, MD and Derrick Spruell. All three gentlemen are subjects of multiple foreclosures including:
-          2728 Pennsylvania Ave – Bank’s statement of debt was $113,829, sold third party in March 2011 for $12,500  
-          1340 W Lafayette – Bank’s statement of debt was $153,733, sold third party in August 2010 for $15,000

In those three addresses alone, there is nearly $500,000 of losses footed by the American taxpaying public. It’s ok, though. They were probably just victims of the downturn in the real estate market…

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Jack BeVier

Dominion Financial Services
Hard Money Lender
Baltimore, Maryland

Phone: (410) 727-0908
Fax: (410) 727-4306




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