Economic Impact of Project SCOPE

 

 

 

prepared for:

 

Baltimore Efficiency and Economy Foundation, Inc.

 

 

prepared by:

 

Urban Information Associates, Inc.

Baltimore, Maryland

 

 

 

 

June, 2006

 

revised August, 2006

 

 

Economic Impact of Baltimore City’s Project SCOPE

 

 

 

Table of Contents                                                             Page

 

 

Executive Summary  ………………………………………………….   2

 

Introduction ……………………………………………………………………………….  4

 

Origins of Project SCOPE  ………………………………………………………..  6

 

Project SCOPE in Operation  ……………………………………………………  7

 

Demographics of SCOPE Buyers  ……………………………………………  8

 

Project Scope Achievements …………………………………………………  10

 

Realized Impacts through December 2005 ……………………….. 11

 

Economic Impacts  …………………………………………………………………… 13

 

Potential Impacts, 2006 and Beyond ………………………………….. 15

 

Issues and Concerns regarding Project SCOPE …………………. 21

 

Opportunities to Institutionalize Project SCOPE……………….  23

 

Recommendations  …………………………………………………………………… 24

 

Summary    .………………………….……………………………………………………. 25

 

Appendices 

 

 

 

 

 

 

 

 

 

 

Executive Summary 

 

Project SCOPE, Baltimore City’s initiative to enlist the local real estate community to move vacant city-owned, residential properties into the hands of private homeowners, will be reaching its third anniversary in fall 2006.

 

By the end of 2005, 174 residential units had been placed in the Project SCOPE inventory; 98 of those units were sold, with one additional unit under contract.

 

At its current pace, a total of some 240 units will have been a part of the program, with a projected 133 housing units sold in its first three years.

 

Project SCOPE is helping to spur some important reinvestments in a small portion of the city’s housing stock. These investments are leading to significant improvements in individual blocks and raise the potential for transforming some larger neighborhoods.

 

The effects of Project SCOPE are by no means uniformly positive.  Some buyers have not met their obligations to complete the necessary renovations within the program’s required 18-month timeframe.  Baltimore Housing officials have begun to refer lagging owners to the department’s code enforcement unit.   In extreme cases, matters will be taken court.

 

In those cases where improvements have gone forward, there are indications, from property reassessments and listing prices of renovated units now on the market, some notable increases in property values have been realized.  While the evidence is limited to a small number of cases, it suggests that real benefits to the city and to the area economy can begin to be identified.

 

In measuring economic benefits, we have looked at three components: 1) benefits to the city government, 2) benefits to the private real estate community, and 3) benefits to the area economy.

 

Benefits to Baltimore City are both near-term and long-term.  In the early years of Project SCOPE, the city is realizing a net gain from the sales of the properties after expenses on the order of $1.2-million per year.  Over the longer term, the city will realize increased gains from higher assessed property values and other tax revenues.

 

The local real estate community benefits in both tangible and intangible ways.  At the current level of operations, Project SCOPE is generating brokers’ sales commissions of slightly more than $200,000 per year.  In the process of selling SCOPE homes, the brokers also have the opportunity to expose their clients to a broader range of properties and city neighborhoods.

 

Beyond these direct benefits, the process of renovating approximately 50 to 60  properties annually, with rehab costs typically in the range of $100,000 to $300,000 per unit, has a broader impact on the area economy.  Including both direct and indirect effects, Project SCOPE has the potential to account for as much as $11.2-million in annual economic activity.

 

Neighborhood ripple effects in the form of improving property values for properties not in Project SCOPE might also be occurring.  However, these effects were not explicitly accounted for in the current study. The wider neighborhood effects might be an appropriate subject for future research, when Project SCOPE is more mature and the available evidence more abundant.

 

Beyond these economic benefits, there is an interest in taking the lessons of Project SCOPE and institutionalizing them for all aspects of the city’s disposition of its publicly-owned property. There is a general sense that the various key players involved in implementing Project SCOPE   -- the Baltimore City officials, the real estate professionals, and the developer/homebuyers  -- are highly motivated to make the program a success.  There are also concerns, certainly evident in one host neighborhood that the hoped-for sales and housing renovations are not taking place at a fast enough pace.

 

In concluding this study, we examine some of the issues that have been raised by those directly involved in the Project SCOPE process.  Some observations are made to take the program to the next level. These are presented with an aim toward changing the effort from being seen as an experimental or pilot program and fashion it as the model for the disposition of city-owned property of all types.

 

 

 

 

 

 

 

Introduction

 

On a bright spring day, the colorful balloons bobbed from tables placed in front of the Reservoir Hill rowhouses, beckoning visitors to take a closer look at the neighborhood real estate.  The two rowhouses immediately behind the tables represented a stark contrast.  To the left was a 3-story brick-front property that had recently undergone a complete interior renovation; it was now on the market with a listing price of $375,000.  Adjoining it to the right was a shell, missing its second and third floors and, without a roof, open to the blue sky.

 

The occasion was an open house organized by one of the brokers participating in Project SCOPE, Baltimore City’s program to transform vacant residential properties into occupied, tax-generated homes.  The key to the program involves the active engagement of the private real estate community to help bring about that transformation. 

 

The Reservoir Hill open house provided an excellent opportunity to view both the promise and the challenges that are a part of Project SCOPE.  The house that was gutted will require an enterprising buyer with access to a substantial mortgage loan. Some buyers, in Reservoir Hill and other neighborhoods of the city, have not been able to overcome those challenges within the time parameters of the program.

 

The transformation of completed homes at market rates, typically in the range of $350,000 to $375,000, typically represents a success story for the city, the real estate broker and the satisfied homebuyer.  Exactly what the extent of that success might be, in economic terms, was the assignment given to the consultant. Those findings are one part of what is presented in this report.

 

Beyond the economic impact, there are additional questions.  Is Project SCOPE working as its proponents have hoped?  Are there ways to fine-tune the program to better meet its objectives?  Could Project SCOPE serve as a prototype for the city’s property disposition activities, in general?  Through interviews with those participating in the program, we attempt to address these questions as well.

 

The study depended upon the cooperation of many individuals and organizations who provided information in the form of in-person interviews, data resources and the sharing of their personal experiences. We are grateful to them for making their time available and for their cooperation. The names of those who participated in these interviews are listed in Appendix A.

 

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Origins of Project SCOPE

 

Baltimore City, in cooperation with the private real estate community, foundations and other interested parties, is using a market-based approach to reduce its inventory of vacant properties.  This relatively new program, initiated by the Baltimore Efficiency and Economy Foundation (BEEF) and the Greater Baltimore Board of Realtors (GBBR), is known as Project SCOPE (Selling City-Owned Properties Efficiently).  Project SCOPE is distinct from Project 5000, Mayor Martin O’Malley’s initiative, designed to obtain clear title to some 5,000 vacant or abandoned properties throughout the city.  While the two programs have related goals, Project SCOPE is targeted to those properties and city neighborhoods where the private real estate market is still functioning reasonably well.

 

Project SCOPE harnesses the expertise and business interests of the local real estate brokerage community. The program is intended to provide an expeditious means of selling vacant properties, rehabilitating them and having them converted into productive additions to the city’s tax rolls. While the program is still in the relatively early stages of its implementation, initial indications have met with enthusiasm on the part of city officials, real estate brokers and the home purchasers.  Some efforts to rehabilitate properties purchased through Project SCOPE have been lagging, however, and concerns have been expressed by neighboring property owners and impacted neighborhoods.

 

City officials have been carefully monitoring the progress of the individual properties as they move from initial listing with individual brokers and the statewide Multiple Listing Service (MRIS), to awarded contracts, settlement and, ultimately, occupancy. While some early measures of economic impact have been compiled, no overall economic impact assessment has been made.  The current study provides a review of Project SCOPE transactions, based primarily on 98 completed sales through calendar 2005.  With about two and a half years of experience in the program to consider, the study attempts to quantify the economic impacts already realized. Using a series of assumptions, the study also projects what those impacts might be for the remaining years of this decade.

 

 

 

 

 

 

Project SCOPE in Operation

 

While Project SCOPE is designed to sell city-owned properties efficiently, it should be clear that an important network of collaboration is necessary to maintain the program.

 

Within city government, key staff members from the Department of Housing and Community Development, the Comptroller’s Real Estate office and the city Law department are in regular communication.  The housing department (now referred to as “Baltimore Housing”) is responsible for identifying that portion of the city’s inventory of vacant houses that will be included in Project SCOPE.  Vacant houses identified for the project must be inspected, cleaned and provided with secure doors before the properties can be assigned to participating brokers. The housing department is also responsible for preparing estimates for the rehabilitation costs and assists the prospective buyer through Board of Estimates approval and settlement.

 

The real estate office is a key player, being involved in securing an appraisal for the property and establishing a listing price. 

 

The law department reviews the contract of sale for legal sufficiency and determines whether the contract is in good order and ready to be forwarded to the Board of Estimates for final approval.

 

Beyond these city agencies, outside parties are an integral part of the Project SCOPE operation.  Early in the process, the city engages the services of an independent nonprofit organization, the Community Law Center (CLC), to vet proposed contract offers.  The CLC’s role evolved from its earlier experience in dealing with unscrupulous real estate operatives, who were involved with Baltimore City’s “flipping” scandal of a few years earlier.  CLC conducts due diligence with respect to the prospective buyer/developer to assure that the buyer’s intentions and capabilities are in line with the goals of Project SCOPE.

 

Another outside player is a local real estate professional who serves as an ombudsman to the process and tries to avoid complications for both brokers and buyers.

 

The real estate brokers themselves meet on a  quarterly basis with city representatives and discuss current issues or concerns with the operation of the program.

 

Rounding out the picture of the program’s infrastructure is the Project SCOPE Task Force that meets monthly. A combination of city representatives, local real estate professionals, and other stakeholders, the Task Force tries to focus on the big picture and set a strategic vision for the program.  The Task Force is convened by David Rudow of the Baltimore Efficiency and Economy Foundation.  The foundation, along with Jody Landers of the Greater Baltimore Board of Realtors, conceptualized the program and worked with various city partners to bring it into operation.

 

While the city agencies may see the program as meeting the city’s expectations, some of those on the Task Force regard Project SCOPE as a pilot program that might serve as a prototype, serving to indicate how a variety of city-owned real estate dispositions could be handled in the future.

 

 

Demographics of SCOPE Buyers

 

Among various issues to consider in this study, we were asked to identify the characteristics of SCOPE buyers.  Are they families?  Are they first-time homebuyers?  Are they relocating from other neighborhoods in the city?

 

As it turns out, Project SCOPE does not maintain systematic records of the characteristics of the purchasers.  Presumably, this information could be developed if the primary documents were made available. The SCOPE database that was made available did explicitly identify the purchasers as “Investor” or “Homeowner”. In addition to this information we did research based upon what was available in the public records.  We relied upon the State Department of Assessments and Taxation’s real property assessment records to determine whether we were looking at a principal residence or a developer/ investor.

 

In the research we examined the assessment records of the 98 properties that were listed as sold by the end of 2005.  Very few properties were identified as principal residences, although it is possible that the status of a property could change as the renovation process made progress.  In many cases a corporate name would indicate that a private developer had purchased the property.  Some of those corporations were church-related or other recognizable nonprofit developers and are represented as such in Figure 1.  A small number of properties, though listed as sold in the SCOPE data, were still listed as owned by the Mayor and City Council in the assessment records, which is mostly likely due to backlog of deeds waiting to be recorded in the City – a situation that is beyond the control of the project.

 

Figure 1.    Homebuyers and Investors

 

 

This information suggests that SCOPE properties are seen primarily as investment opportunities, either by experienced residential developers or by individuals who want to gain that experience.

 

What is clear is that SCOPE properties have a broad geographic appeal.  Based upon the mailing addresses listed on the assessment records, SCOPE buyers are coming from many parts of the Baltimore-Washington metropolitan corridor, stretching into Washington, DC and its Northern Virginia suburbs.

 

Figure 2.    Location of SCOPE Buyers

 

It is also evident that the marketing efforts of Project SCOPE brokers and others involved in the process are casting a much wider net.  Other out-of-state buyers include individuals in Massachusetts, New York, Florida and California.

 

 

Project Scope Achievements

 

Project SCOPE was formally launched in September 2003, with the initial listing of properties and their assignment to the selected brokers.  The program was seen as operating in two models: 1) Classic SCOPE, in which buyer/developers would typically purchase the property and be responsible for the property rehabilitation, and upon completion the buyers are free to either sell or rent the property and 2) Homeownership, in which the buyer is expected to be the eventual owner-occupant, or by deed restriction the buyer agrees to sell the rehabbed property to an owner occupant.  The first batch of Homeownership units were identified from the city’s inventory of vacant houses in Reservoir Hill.

 

By the end of 2005, 174 residential units had been placed in the Project SCOPE inventory; 98 of those units were sold and one additional unit was under contract. Early in January 2006, the milestone of 100 units sold was reached.

 

By late May, a total of 118 units had been sold, another 30 properties were under contract and 13 contracts were approved by the city’s Board of Estimates, awaiting settlement. These real estate transactions, including units under contract and awarded, represented $4.142-million in gross sales revenue to Baltimore City. In addition, an estimated $20.872-million in rehabilitation costs would be invested in the residential properties.  The total new investment would be just over $25.0-million, or an average of $155,366 per unit.

 

At its current pace of about one new sale per week, a total of 133 units will have been sold in the program’s first three years.  We will assume that Project SCOPE, at its current level of staffing, can maintain a rate of 50 sales per year.

 

In Table 1, we present a summary of all Project SCOPE sales that had reached settlement by the end of 2005.  As is shown, the houses were located in a total of 26 city neighborhoods.  In 17 of the neighborhoods, only 1, 2 or 3 SCOPE units were sold.  In five of the neighborhoods, as many a six units had been sold, led by Reservoir Hill with a total 28 SCOPE properties in new private ownership.

 

 

Table 1.  SCOPE Sales, by City Neighborhood, 2004-2005

 

 

Number

Aggregate

Aggreg. Est.

Aggregate

City Neighborhood

Sold

Listing Prices

Rehab Costs

Sales Prices

 

 

 

 

 

Ashburton

1

$45,000

$63,432

$55,000

Booth-Boyd

8

$31,500

$800,000

$128,101

Canton

1

$450,000

$293,336

$550,000

Carrollton Ridge

3

$25,000

$233,970

$25,000

Cedonia

1

$78,900

$100,000

$50,000

Central Park Heights

1

$5,000

$94,861

$5,000

Coldstream/Homestead/Montebello

6

$47,000

$504,688

$47,000

Coppin Heights /Ashburton/Coppin East

4

$15,500

$643,754

$26,700

Druid Heights

6

$39,300

$629,836

$27,000

East Baltimore Midway

1

$3,900

$100,000

$3,000

Fallstaff

1

$45,000

$100,000

$45,000

Franklin Square

3

$13,500

$300,000

$13,500

Greenmount West

3

$12,000

$300,000

$12,000

Harlem Park

1

$3,000

$100,000

$3,000

Hollins Market

2

$71,000

$145,019

$75,000

Irvington

1

$15,000

$115,593

$15,000

McElderry Park

2

$6,000

$200,000

$6,000

Middle East

5

$19,400

$500,000

$27,600

Milton-Montford

4

$10,000

$270,382

$14,500

Parkview/Woodbrook

2

$14,000

$279,868

$14,200

Penn North

7

$35,750

$757,689

$36,750

Reservoir Hill

28

$840,700

$5,431,659

$1,250,500

Upper Fells Point

1

$40,000

$67,320

$60,000

Upton

4

$60,000

$929,742

$80,000

Washington Village

1

$24,000

$100,000

$30,000

Waverly

1

$25,000

$86,230

$20,000

 

 

 

 

 

City-Wide Totals

98

$1,975,450

$13,147,379

$2,619,851

 

 

 

 

 

Reservoir Hill

28

$840,700

$5,431,659

$1,250,500

 

 

 

 

 

Canton

1

$450,000

$293,336

$550,000

 

 

 

 

 

Other Neighborhoods -Totals

69

$684,750

$7,422,384

$819,351

 

 

 

 

 

Source: Baltimore Housing, Asset Management and Property Disposition, December 2005.

 

In Table 1. above, we see that purchasers are paying a premium, on average, of 32.6 percent above the listing prices established by the city.  It should also be noted that the data is somewhat skewed by a single transaction, the $550,000 paid for a former police station located in the city’s Canton neighborhood. Table 2 presents this sales data, including one unit pending settlement, by calendar quarter.

 

Table 2.   Project SCOPE sales through December 2005,

                By Calendar Quarter

 

 

 

 

 

 

 

 

 

 

 

Quarter Ending

No. of Sales

Listing Price

Rehab. Cost

Sales Price

Ave. Sales

 

 

Totals

Estimates

Totals

Price

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2004

13

163,000

1,700,000

174,400

13,415

 

 

 

 

 

 

Sept. 30, 2004

18

102,750

1,880,000

115,000

6,389

 

 

 

 

 

 

Dec. 31, 2004

18

298,800

2,360,000

333,101

18,506

 

 

 

 

 

 

March 31, 2005

8

115,000

918,233

171,900

21,488

 

 

 

 

 

 

June 30, 2005

23

485,000

3,516,561

735,450

31,976

 

 

 

 

 

 

Sept. 30, 2005

7

588,000

989,325

661,000

94,429

 

 

 

 

 

 

Dec. 31, 2005

12

287,500

1,946,610

382,500

31,875

 

 

 

 

 

 

 

 

 

 

 

 

Total Sales

99[1]

$2,040,050

$13,310,729

$2,573,351

$25,993

 

 

 

 

 

 

 

Source: Baltimore Housing, Asset Management and Property Disposition, December 2005.

 

 

 

 

 

 

 

 

Economic Impacts

 

In considering the Economic Impacts of Project SCOPE, we should recognize various possible beneficiaries.  The most obvious candidates are:

 

·        Baltimore City government, the owner of the vacant properties;

·        The private real estate brokerage community; and

·        The regional economy as a whole.

 

This analysis will look at each of these components.  Other beneficiaries include the purchasers of the properties and the impacted neighborhoods. We will regard the purchasers, whether developers or homebuyers, as the beneficiaries of acquiring what is expected to be, in most cases, appreciating assets.  (Our economic impact assessment assumes that future property values will exceed the combined purchase price and estimated rehabilitation costs of SCOPE homes; only time will tell if this basic assumption is valid.)  The impact on the neighborhoods is beyond the scope of the current study.  It may be an appropriate subject for future study, when the number of properties in neighborhoods other than Reservoir Hill has reached a critical mass.

 

Direct Impact to City Government:

 

The initial benefits to Baltimore City are in the form of the net proceeds from the sales of properties in the city’s SCOPE inventory. 

 

Table 3. Net Benefits to Baltimore City

 

 

 

 

 

 

            ACTUAL                                   

  POTENTIAL                                                            

 

 

 

 

 

 

2004

2005

2006

2007