REV 3/7/2007

Policy and Procedures for Property Flipping

City of PittsburghProperty Reserve

Background

The City of Pittsburgh Property Reserveis a tool for non-profit Community Development Corporations (CDC) toacquire and assemble land affordably for community development projects. These development projects create new housing opportunities, increase property values, build the tax base and revitalize communities.

The function of the Reserve is to assist CDCs in overcoming barriers to land acquisition. These barriers are overcome by providing access to the municipal tax foreclosure system, establishing affordable fixed prices on lots and structures, and allowing CDCs to acquire and assemble development deals without paying holding costs on land. TheProperty Reserve system is a public investment that makes development projects financially feasible.

While the Reserve is for non-profit CDC use only, VPWG partners recognize that there is an appropriate role for private developers in the Land Reserve process. In a time of limited resources, partnerships become increasingly important. Not all CDCs have the capacity to undertake development projects themselves, and partnerships with private developers are common. Creating partnerships with private developers can also lead to additional development that does not require public subsidy. In order to ensure that public investment in the Land Reserve is yielding public return, the VPWG seeks to establish a formal policy regarding the flipping of property.

The current agreement in place allows a CDC, in appropriate circumstances, to identify property for the Land Reserve, buy the property from the City, then resell it to a developer or third party purchaser without significant improvements. In these cases, the CDC is to split evenly with the City of Pittsburgh all net profits made from the sale of the property. This transaction returns property to tax generating uses and provides a return on public investment to the City.

Definitions

CDC: A chartered, tax exempt, non-profit Community Development Corporation (CDC) or other eligible community based organization approved by the Finance Department to purchase City owned property

Property: Any property, vacant land or structure, identified for the Land Reserve. All eligible properties must be unoccupied and at least 2 years delinquent on City real estate taxes

Project Feasibility Application: The approved application required for all Treasurer’s Sale and Land Reserve requests. Approval of applications is contingent upon City Finance and Urban Redevelopment Authority of Pittsburgh (URA) approval

Flipping: The purchase and resale of property, for a profit, without significant physical improvements. The Department of Housing & Urban Development defines flipping as “a practice whereby a property that was acquired is quickly resold for a considerable profit with an artificially inflated value.”[1] Though prices may not be inflated in the case of the Land Reserve, the City Sale price is artificially low, resulting in the same outcome.

Significant Improvements: Rehabilitation or physical improvements to a structure or the construction of a new structure or use on a vacant lot

Net Profit: Amount of profit earned by a CDC through the sale of a property after recovering eligible costs incurred through the acquisition of the property

Eligible Costs: Direct costs incurred by a CDC through the acquisition of a property including title reports, maintenance (if not done by the City), legal fees, documents and staff time investment

Staff Time Investment: Staff time expended on property identification, due diligence, site visits, application, correspondence, property stabilization, improvements and other actions necessary to advance development

Policy

The intent of the Land Reserve is to provide public investment for the acquisition and assembly of land, making community development projects financially feasible. The Reserve is not intended to provide revenue for CDC overhead. The VPWG acknowledges the following policy regarding the flipping of property from the Land Reserve:

Acquiring property through the Treasurer’s Sale and Land Reserve with the sole intent of quickly reselling the property for a profit without making significant physical improvements is prohibited.

If a CDC is unable to complete the plan originally approved in a Project Feasibility Application, the CDC must give the URA and City Real Estate Departments first right of refusal before selling the property to another party to complete the project. If neither the City nor URA is interested, then the CDC may sell the property to a competent buyer to complete the approved plan. In this case, the CDC must remit to the City exactly half of the net profit made from the sale of the property.

If a CDC is acquiring property on behalf of another developer/purchaser through a partnership, then the Project Feasibility Application must specify the CDC’s role and responsibilities in the partnership, the developer’s name and contact information, a detailed project description and proof of the partnership/agreement in place.

Procedure

1)When requesting property for the Treasurer’s Sale, a CDC must clearly state in the Project Feasibility Application their role as a developer, co-developer or other. If the CDC is to be a co-developer or ‘other’, the roles and responsibilities of the CDC in the project must bedefined.

2)The project description must clearly outline a plan and timeline for acquiring the property and reselling to the developer.

3)To be approved, the Project Feasibility Application must include the developer’s name and contact information along with proof of partnership (eg. letter of intent, memorandum of understanding, etc.)

4)When submitting aProposal to Purchase, the CDC must sign aStatement of Acknowledgement, stating the CDC has read and understands the policy, provisions and penalties of the Land Reserve and agrees to remit to the City fifty (50) percent of net profit made from the resale (flipping) of the property.

Penalties

Council Bill Number 402 of 1998, establishing the City of Pittsburgh Land Reserve, defines penalties for violating Land Reserve provisions. A CDC found in violation of Reserve provisions will be prohibited from utilizing the Reserve for a period of one (1) year from the time it is determined by the Department of Finance that default has occurred. At the expiration of one year, the CDC mustcompensate the City for funds not paid and demonstrate to the URA the CDC’s ability to undertake additional development activities in order to utilize the Reserve process.

PCRG, URA and City Finance will work collaboratively to ensure this policy is being implemented and enforced.

I have read and understand theabove policy, provisions and penalties associated with flipping property held in the City of Pittsburgh Land Reserve.

Signatures

Organization: ______

Signature: ______

Name: ______Title:______

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[1]FR-4615 “Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs.” May 1, 2003