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THE PURPOSE OF VACANT PROPERTY RECEIVERSHIP

VACANT PROPERTY RECEIVERSHIP STEP-BY-STEP

USING VACANT PROPERTY RECEIVERSHIP

The use of receivership as a tool for addressing the problems of troubled rental buildings became widely used in the United States during the 1960s and 1970s, and appears today in the statutes of many states. Today, many New Jersey municipalities are turning to receivership as a less controversial alternative to spot blight. A court process, vacant property receivership is perceived as a fairer and more democratic process than spot blight. Despite this perception, it has one main drawback. Because it is conducted through the courts, it is a far slower way to address individual problem properties than spot blight (which is essentially an administrative process conducted by the designated department within the executive branch of local government). Nonetheless, it is a powerful tool, and should be pursued with the same degree of vigor as the VPRO, spot blight, or any other problem property tool. Below are detailed instructions on the use of vacant property receivership under New Jersey law.

THE PURPOSE OF VACANT PROPERTY RECEIVERSHIP
The legal provisions for vacant property receivership appear in N.J.S.A.55:19-84 through 97. The purpose of this legal tool is to preserve and restore vacant buildings that are at risk of being lost through neglect or disinvestment. It goes beyond New Jersey's nuisance abatement law by incorporating the positive goal of preservation, rather than solely the elimination of a negative feature of the property. While a nuisance may be abated through demolition of a building, the object of possession is the rehabilitation and reuse of the building. For that reason, in addition to a finding that the building is abandoned, the law imposes a further requirement for vacant property receivership:

A statement by a qualified professional that there are sound reasons that the building should be rehabilitated rather than demolished based on the physical, aesthetic or historical character of the building, or the relationship of the building to other buildings and lands within its immediate vicinity (N.J.S.A.55:19-85[b]).

The law recognizes an important city planning principle; namely, that a building does not have to be architecturally or historically distinguished in itself to be worthy of preservation.  Buildings that contribute to the fabric of a streetscape, a block or a neighborhood can be equally deserving of preservation. Professionals who may be qualified to make this judgment could include architects, urban designers, city planners, architectural historians, and professionally qualified historic preservation specialists.

In summary, the law allows municipalities, or entities that they may designate as their agents, to go to court to obtain an order of possession, giving them control of abandoned buildings for the purpose of rehabilitating them and placing them back in productive use. Once the court issues an order of possession the entity has full control over the property, including the ability to borrow funds for rehabilitation, obtain construction permits, and the like. Once the entity has rehabilitated the building, if the owner fails to takes steps to regain rights to the property, the court can order the property sold and the proceeds distributed. The process is described in detail below.

Since the goal of vacant property receivership is the preservation of the property, which can be expensive, and which may lead in the end to the owner’s rights being superseded, the law provides substantial procedural protection of the rights of both owners and lienholders, including:

• The party planning to seek vacant property receivership must provide the owner and lienholders with advance notification of their intent to bring the complaint
• The owner or lienholder must be given the opportunity to submit a plan for rehabilitation and reuse of the property
• The owner must be given the right to regain the property after the entity in possession has commenced rehabilitation

While the owner's rights are well protected, the obligations placed upon the owner to exercise its rights are also substantial.  The law prescribes specific actions that an owner must take in order to prevent an order of vacant property receivership or to regain the property afterward, reflecting the Legislature's desire to hold the owner accountable for the fact that the property has been abandoned and is at risk of being lost.

Both the nature of the process and the obligations of an entity in possession demand that the process not be approached lightly. Issues that should be addressed by any local official or CDC considering using vacant property receivership as a tool to preserve abandoned buildings are discussed in detail below.

The right to exercise vacant property receivership belongs to local government under the law, and stems from the police powers of the municipality. The law recognizes, however, that within a community there may be nonprofit or for-profit private entities that may be better equipped than the municipality to actually undertake the rehabilitation of abandoned properties. To this end, a municipality may delegate or assign any of its rights to a qualified rehabilitation entity, defined in the law as:

Qualified entities include CDCs as well as experienced for-profit developers active in the community. The municipality must determine who may be a qualified rehabilitation entity, subject to ultimate court approval. The municipality should review the qualifications of any potential rehabilitation entity with care, since that entity will be acting as the municipality’s agent.

VACANT PROPERTY RECEIVERSHIP STEP-BY-STEP
These are the steps in vacant property receivership, from the point where the municipality or another entity identifies a sustainable property, to the point where the property has been rehabilitated and placed back into productive use.  While the process is not simple, many of the steps are straightforward and are “either/or” propositions.  SEE DECISION TREE FOR USE OF POSSESSION HERE

Step 1: The municipality or other entity identifies a building that is appropriate for vacant property receivership. The municipality can identify a suitable building on its own, or may invite recommendations from CDCs or neighborhood organizations, including entities that may be interested in acting as a qualified rehabilitation entity and bringing a complaint with respect to the property.

Step 2: The municipality designates a qualified rehabilitation entity as its designee to bring an action for vacant property receivership. Once the building has been selected, the municipality can either bring the action in its own name, or designate a qualified rehabilitation entity to bring the action as its designee.  The law specifies that the designation is made by resolution of the governing body, except in “strong mayor” cities where the designation is made by the mayor.  Either the governing body or the mayor, as the case may be, may delegate the power to qualify and designate qualified rehabilitation entities to the public officer.

• A financial feasibility analysis of the rehabilitation and reuse;
• A budget that includes sources and uses of funds for rehabilitation, terms and conditions of realistically available grants and/or loans;
• A timetable for the completion of rehabilitation, with specific milestones for major steps; and
• Documentation of the qualifications of the individuals and firms that will be involved in all of the different elements of the project, including planning, design, financial packaging, construction and marketing (N.J.S.A.55:19-97[b]).

the entity is then given the opportunity to submit a plan. The entity’s plan must meet the same standard as that required of the owner, but the entity is not required to post a bond.

 Step 9: The court awards possession to the entity. Once the entity submits the plan, the court will award it possession of the property if it finds that:

• The proposed rehabilitation and reuse of the property is “appropriate and beneficial”;
• The entity is qualified to undertake the rehabilitation and reuse of the property; and
• The plan is “realistic and timely.”
• If the property is in an area for which a redevelopment plan or neighborhood revitalization plan have been approved, that the rehabilitation and reuse are not inconsistent with either plan

• An ownership interest for the purpose of filing plans with public agencies and boards, seeking and obtaining construction permits and other approvals, and submitting applications for financing or other assistance to any public or private entity; and
• Legal control of the property for purposes of any program of State grants or loans, including but not limited to programs of the Department of Community Affairs and the New Jersey Housing and Mortgage Finance Agency.

The entity must provide quarterly reports to the municipality on the progress of rehabilitation, which may be submitted as well to the court, at the court's discretion.

Step 11: The entity files a Notice of Completion with the court. The timing of when an owner should be permitted to move to regain control of his property is a delicate issue in vacant property receivership. If the owner must wait until rehabilitation is complete before initiating the process, the completed property could remain in limbo for months while the issue of control is addressed in the courts. If the owner can initiate the process at any time, it may unduly limit the receiver’s ability to rehabilitate the property. The New Jersey statute seeks to prevent either situation. Except as provided below, the owner may not petition to regain control for one year after possession is granted. While the owner may petition to regain control at any time after that, the Notice of Completion, issued shortly before completion of rehabilitation, triggers a “put up or shut up” situation. At that point the owner must move to regain control in timely fashion, or lose her right to do so.

The entity files the Notice of Completion with the court “at such time as [it] has determined that no more than six months remain to the anticipated date on which rehabilitation will be complete” (N.J.S.A.55:19-91[e]).46 The Notice sets forth the anticipated date of completion, along with a statement setting forth “such [remaining] actions as [the entity] plans to undertake to ensure that reuse of the property takes place consistent with the plan.” This statement is particularly important since, if the owner does regain control at this point, that statement is likely to become the basis for defining the owner's subsequent obligations. The Notice must be accompanied by an affidavit from the public officer confirming that the projected completion date for the rehabilitation is a realistic one. The entity must serve the Notice on the owner and lienholders.

Step 12: The owner petitions for reinstatement of control and possession of the property. Once the entity has filed the Notice of Completion, the owner has 30 days to file a petition to be reinstated in control and possession of the property.  The owner can also file a petition one year after the grant of possession, if no Notice has yet been filed, but must file within two years after the grant of possession.
The owner seeking to regain control must comply with a rigorous series of requirements:

• The owner must provide a plan to complete rehabilitation and reuse of the property consistent with the plan submitted by the entity in possession and previously approved by the court.

In reviewing the owner's plan, the court is likely to be guided by the statement provided by the entity as a part of its Notice of Completion (see Step 11 above).

• The owner must provide legally binding assurances that it will either (1) comply with the conditions of grants and loans secured by the entity, or (2) repay them in full, at the discretion of the maker of the loan or grant.

Any public or private entity that made a loan or grant to the project has the right to demand repayment in full from the owner prior to the owner's reinstatement. This is likely to apply where the entity in possession has obtained a government grant that may be tied to its nonprofit status, or its community development mission.

The owner must pay the following costs in full:

• All outstanding municipal liens on the property
• All costs incurred by the municipality and/or the entity in bringing action with respect to the property
• Any costs incurred by the municipality and/or the entity not covered by any of the grants or loans to be repaid or assumed by the owner
• Any remaining costs to complete rehabilitation and reuse of the property, as determined by the public officer

The full amount must be deposited in escrow with the Clerk of the Court at the time the owner files the petition for reinstatement.

The above provisions are mandatory. The court can, however, impose additional conditions on reinstatement, including requiring the owner to post a bond or other security to ensure that she will continue to maintain the property in sound condition. The bond is available to the municipality to correct any subsequent code violation not corrected in timely fashion by the owner, and may be forfeit if the owner fails to comply with any requirement imposed by the court as a condition of reinstatement. The bond must remain in place for at least five years.

Step 13: If the owner fails to gain reinstatement, the entity takes title to the property or sells it under court supervision. If the owner fails to bring a timely petition for reinstatement, if the owner's petition is denied, or if the owner's petition is granted but subsequently revoked by the court for failure to meet one or more conditions, the entity in possession may seek the court's approval either to take title to the property or sell it to a third party. The court must approve the terms of sale, which must be at fair market value, and, if the property is sold to a third party, the court must find that the sale “will further the effective and timely rehabilitation and reuse of the property.” The buyer should be an entity that is qualified to own and operate the property consistent with the reuse plan previously approved by the court.

Step 14: The proceeds of sale are distributed under court supervision.
Municipal liens are paid at closing. The balance of the proceeds is distributed in the following order of priority:

• Costs and expenses of sale
• Other governmental liens
• Repayment of any loan granted priority status under the grant of possession (see Step 10)
• A reasonable development fee to the entity carrying out the rehabilitation consistent with the standards of the Department of Community Affairs or Housing and Mortgage Finance Agency
• Other valid liens and security interests, in order of priority
• The owner

Once the distribution of proceeds has taken place, all liens, claims and encumbrances on the property are extinguished. The purpose of the order of possession has been served, and the order is terminated by the court.

USING VACANT PROPERTY RECEIVERSHIP
Vacant property receivership is a powerful tool. It gives a municipality, or a CDC or other party acting under the authority granted by a municipality, control of an abandoned property without actually taking title, granting it all the powers it needs to raise the funds, obtain the approvals, and carry out the work needed to restore the property to productive use. Subsequently, the property owner must make the entity whole, or the property can be bought by the entity or conveyed to a suitable third party. At the same time, it demands that the municipality or entity go through a legal procedure that involves spending funds not only on legal expenses, but also for title searches, notices and the cost of preparing a rehabilitation plan to be submitted to the court.

Furthermore, while initiating the process may not represent a legal commitment in the strict sense, it does represent a strong de facto commitment to see the process through to the end. When an entity files a complaint in Superior Court seeking possession of a property for purposes of rehabilitation and reuse, the entity is making a good faith commitment that, if the owner fails to do so, it will take responsibility for rehabilitating that property. Failure to follow through on that commitment will at a minimum be embarrassing for both the municipality and the rehabilitation entity, but may also hasten the loss of the building, and, depending on the circumstances, potentially raise the possibility of a claim for damages by the owner.

The process does not lend itself to many economies of scale. Possession, including both the notice and the period during which the owner is given an opportunity to submit a plan, is building, owner and lienholder specific. It is unlikely that buildings with different owners, or even the same owner but different lienholders, could be meaningfully bundled together for court proceedings in any way that would make the process more efficient, and significantly save time and money. At the same time there are some clear advantages from doing more rather than fewer actions, in terms of reducing the learning curve on the part of the municipality, any designated entities, as well as the courts themselves.

Just the same, in most communities vacant property receivership is not likely to be a wholesale process, but a more focused strategy to target buildings that are both valuable—in themselves or because of their effect on their surroundings—and significantly at risk. An example might be a 1920s apartment building on a major street being held by a speculator who is more interested in the ultimate value of the land than in preserving the building.  Another might be a solid one or two family house in the middle of an otherwise sound block, where its loss—or serious delay in its rehabilitation—could do serious harm to the social and physical fabric of the block. In such situations, vacant property receivership is likely to be effective, not least because it might well motivate owners to rehabilitate their buildings rather than risk losing their properties entirely.

Responsible municipal officials and potential receivers should subject properties under consideration to two tests:

• Is vacant property receivership the most appropriate remedy for the particular building?

Vacant property receivership is one tool in the abandoned property toolkit, and is not appropriate for every building, or even every building that meets the criteria of being both valuable and at risk.  If a municipality wants to preserve an abandoned apartment building, for example, that has a very low “as is” fair market value, particularly under the appraisal guidelines of N.J.S.A.55:19-102, it may be better off pursuing spot blight eminent domain, in order to take the property and then reconvey it to a CDC or other qualified entity for rehabilitation.  The municipality is likely to gain control of the property as or more quickly than under an action for possession, and will have title from the beginning of the process.

Conversely, if the “as is” value is more substantial, vacant property receivership may be a preferable alternative, particularly in places where market values are rising and owners may be sitting on abandoned properties in the expectation of future speculative returns.

The use of spot blight eminent domain, however, is only available if the municipality has an abandoned property list, and the property is on that list. Since listing is not a requirement for vacant property receivership, it may also be a good tool in communities which, for whatever reason, have not created an abandoned property list, particularly smaller communities which do not have large numbers of abandoned properties, but are vexed by a small number of particularly troublesome buildings.

Properties that are coming up for tax sale, or are eligible for tax foreclosure, should also be evaluated with respect to their suitability for possession. If the municipality has an abandoned property list, it could place the property on a special tax sale to get it into the hands of the entity that might otherwise be the entity in possession. Tax foreclosure, however, is not a speedy procedure. The length of time involved in the tax sale and foreclosure process may add to the risk that the property would be lost. In that case, the municipality might want to pursue possession as a speedier remedy. Nothing in the statutory provisions regarding possession affects the ability of local government to simultaneously pursue tax foreclosure of the property if the owner fails to make timely payment. Indeed, the tax arrears could become another point of leverage over the owner.

• Is the rehabilitation of the property realistically achievable?

• The entity has the capacity, based on its track record, internal financial strength, and in-house and consultant expertise, to undertake a project of the scale and character proposed.

• The entity, based on the best available information, can present a realistic plan for assembling the funds it will need to rehabilitate the building, and covering those funds through subsequent resale or cash flow.

• Funds, either in the amount needed or on the terms needed to make the project feasible, may not be available, or their timing may be too uncertain; or
• Although funds may be available, the selling price or cash flow after rehabilitation may appear inadequate to repay or carry the cost of rehabilitation, given the terms on which funds are likely to be available.

The latter could be a particularly serious problem with respect to buildings planned for office or retail use, where grant funds are in extremely short supply. In the case of an office or retail building in an inner-city location, even though the demand may exist for the space, the rents that the building can command may not be adequate to cover the debt service on the funds that would have to be borrowed to pay for the rehabilitation.

Fortunately, this will often not be the case. Many potential projects will turn out to be feasible, and can move forward with a high level of confidence, if not certainty. In many cases, however, success will depend on help from the municipality, either through direct financial assistance such as HOME or CDBG funds, or indirect financial assistance such as tax abatement.