Urban Institute
Research Associate II

Can pay for success be a tool to fight blighted properties?

December 5, 2018 - 1:09pm

Cities of all sizes and geographies across the United States are struggling with vacant and abandoned homes. Whether driven by the more recent 2008 housing market crash or longer term economic restructuring in older, industrial “legacy cities,” cities across the United States are struggling to address the economic and social costs associated with vacant and abandoned homes. Living near vacant and abandoned properties is associated with higher rates of crime, chronic illness, stunted mental and physical child development, and unhealthy eating, among having other detrimental effects on neighborhoods and their residents. Further, vacant and abandoned properties can cost cities millions of dollars because of associated maintenance and other fees. They also represent missed opportunities for cities to collect property tax revenue and appreciate property values.

Pay for success (PFS) has the potential to finance physical social infrastructure projects, and it may be a tool to tackle the issue of blight as well.

Why PFS?

The strategies for eliminating blight in older legacy cities are well established. In recent years, Baltimore, Cleveland, Detroit, Flint, and other cities have launched initiatives to inventory blighted properties, assess property conditions to determine the concentrations and scale of the problem, and develop specific programs to address these problems. The primary program response typically falls into one of two categories: cities and/or counties help facilitate the transfer of the property to nonprofit or for-profit developers who can then rehabilitate the home or demolish the property and turn it into a pocket park, community garden, or other community space.

However, many cities do not have resources available to address the magnitude of the problem. Detroit, for example, has about 85,000 blighted structures within the city. The cost of rehabilitating them (excluding commercial and industrial space) is about $850 million dollars. Meanwhile, Flint, Michigan, can only cover about a tenth of the estimated $100 million it needs to address nearly 20,000 blighted properties. PFS could address this resource gap because it brings in private capital to scale programs to address social issues. 

Blight reduction is also a good fit for PFS because the potential to generate revenue makes it an appealing investment opportunity. Successful PFS projects need to justify to government stakeholders the added costs associated with repaying investors, which many PFS projects do through potential cost savings to local and state governments. Demolishing or remediating blighted properties, however, both saves government money and potentially generates revenue for governments.  A study found that vacant properties in Toledo, Ohio, accounted for $3.8 million in direct costs and $2.7 million in lost tax revenue. Moreover, cities would benefit from the property value increases of surrounding properties, not just the rehabilitated property. That same study found that nearby properties depreciated by about $98.7 million in value because of their proximity to the blighted property, which cost Toledo an additional $2.68 million in lost tax revenue.

How might a PFS project to fight blight and vacancy work?

A potentially straightforward, but still valuable, program would be strategic demolition. As noted above, demolition can save money and generate additional tax revenue. Moreover, tearing down vacant homes can reduce crime. In Saginaw, Michigan, nine fewer crimes per year were committed per blighted structure that was torn down. Legacy cities such as Detroit, Flint, and Cleveland would likely benefit from removing blighted properties. The populations in these cities have declined significantly and they typically have older housing stock that is falling apart. Private investment could scale up existing demolition programs and target homes based on already-existing plans. Once the properties are torn down, they could be turned into parks or other urban greenspace. Adding greenspace can reduce residents’ stress and increase cohesion and improve stormwater management. Outcome payments could be tied to number of blighted properties removed, number of parks added, and changes in surrounding property values.

This is just one way a PFS project could work—in practice, a project could take many different forms and support rehabilitation, demolition, or both. While there may be some reluctance to demolish properties, creative officials and engaged local residents can leverage PFS to support solutions appropriate for their communities. 

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