Disposing and holding of properties involves vendor prequalification, field servicing, vendor inspections, safety issues, sales agreements to rehabbers, rehabber specifications, demolition and environmental assessments, etc. From the acquisition process, to the property management/disposition process of the LRC operation, this section addresses many of the forms and practices associated with holding and disposing of properties.
B. Vendor Prequalification Statements
When a LRC becomes operational, there will be numerous vendors desiring to provide a multitude of services. This includes rehab work, demolition, inspections, appraisal, professional services such as lawyers, environmental consultants, financial and title services. It is undeniable that in most (although not all) situations, the best practices would be to place the LRCs services out for bid.
A vendor prequalification form (“PQF”) serves the twofold function of requiring vendors to provide qualifying information about themselves, and as a source from which vendors can be solicited to bid on needed services. The PQF allows a company desiring to work for the LRC to set forth its “bona fides,” its ability to secure insurance, its history, its references, etc. CDCs, staff, city officials, and other non-profits should invite known qualified rehabbers to fill out prequalification forms.
C. Field Servicing
The LRC must avoid a reputation of being a bad property owner or a “flipper.” From the moment a property is acquired, it must receive some level of “field servicing” i.e., the basic “mothballing,” care and maintenance of a property while held for demolition or future disposition. Field servicing consists of initial lock changing, board up of entrances and windows, removal of trash and debris, termination of utility services, weatherization (if water and heat need to be kept on).
Field servicing must be reliable both in quality and frequency. CDCs, neighborhood groups or volunteers should be cautiously utilized because of reliability concerns, liability for injuries to volunteers, union and other related concerns. If a LRC is engaged in any significant property holdings, a professional field servicer similar to those used by banks is needed. This publication suggests that the LRC have a few sources for these services for back-up. Field services can be procured through a request for proposal (RFP). The RFP carefully defines the services required, the insurance requirements, the program needs and billing accountability features associated with the activity.
On a property-by-property basis, a professional field servicing company must be able to accurately document and correlate billing, actual services and work orders in real time using multiple photographs of before-and-after service to a property. This information must be instantly transmitted electronically in property-specific files. Because some of the services will be a la carte, (grass cutting, board up, debris removal, lock changing, etc), a very detailed a la carte billing menu should be incorporated into the ongoing accounting system of the LRC. The LRC needs this detail so that it can be accountable itself for the expenditures it makes for field services.
Once the field services requirement is professionally secured by the LRC, it can then engage other community collaborations. For example, the Cuyahoga County LRC has agreements with smaller contractors and other non-profits such as the Court Community Service Program whereby community offenders perform lot cleaning in lieu of jail sentences. This type of service is acceptable because the service amount is calibrated to the capacity level and program supervision. Also, Court Community Service Programs are often fully insured, volunteers and “workers” are covered for the equivalent of workers compensation coverage for injuries and general liability, and are willing to indemnify the LRC.
D. Rehabbers: Vetting; Sale Agreements to Third Parties and Rehabbers
Sales agreements to the LRC were discussed in the previous section dealing with acquisitions. This section concentrates on the agreement between the LRC and a proposed buyer/rehabber of LRC properties. Once a LRC concludes that a property should be rehabilitated, certain decisions must be made as to: 1.) who the rehabber is; 2.) the reasonableness of the rehabber’s specifications; 3.) the standard of rehab; and 4.) and how work quality/completion will be enforced.
a. Vetting Rehabbers
Regarding the quality of the rehabber, there will be rehabbers with high and well-known reputations. There will also be rehabbers who do not specifically have a bad history but rather have no verifiable history. The LRC can vet rehabbers without being overly burdensome or sacrificing standards. Having a sound vetting process will prevent the LRC from being accused of property “flipping.”
One vetting model is based on financial capability of the rehabber. This model administratively staff intensive and can disqualify rehabbers who may not have “letters of credit” or bank financing, yet have a known track record and can get the job done. How are sufficient financial resources verified? Who underwrites the rehabber’s financial capability? If informal financial underwriting is the standard to be used to qualify rehabbers, who will administer draw requests? Certainly, independent organizations can perform underwriting services and construction draw management for a fee, but trying to incentivize private rehabbers (big and small) with unwieldy underwriting criteria may discourage most small, but otherwise industrious and resourceful rehabbers. Below is a Cuyahoga County LRC case study on this issue:
b. Sales to Qualified Rehabbers: A Case Study
Cuyahoga County Case Study
- Step One
- The Cuyahoga County LRC has an electronic property “showing” system whereby properties are shown to interested rehabbers. All Cuyahoga County LRC properties are posted on its website with property profile information, i.e., parcel number, address, neighborhood, square feet and availability. Rehabbers are invited to fill out the PQF, and submit their best offer along with basic specifications.
- Step two
- The LRC’s professional property manager evaluates the rehabber’s specifications based on the LRC’s pre-inspections made during the LRC’s acquisition process (Recall the inspection forms during pre-acquisition).
- Step Three
- Based on the PQF, there is an “above-the-line” as well as “below-the-line” evaluation of the rehabber. “Above-the-line,” means the rehabber’s company and its principal officer or officers are vetted for chronic tax delinquency, chronic housing court problems, violent crime and chronic lawsuits involving rehabilitation and subcontractor disputes. This information is readily available on public data sites. The point is to make sure that there are no obvious flags. “Below-the-line,” means the rehabber can point to verified, previous successful rehabs and, ideally, references from quality CDCs or city officials.
- Step Four
- Once the rehabber is successfully vetted, and an offer is accepted on a particular property, a basic improvement specification form is given to the rehabber to complete declaring his/her intended scope of the proposed work. The form contains categories for all the common trades (roof, drywall, mechanicals, etc.). It must be remembered, that this form is not completed in a vacuum. The LRC property manager already has a fairly extensive pre-acquisition and post-acquisition inspection report and photographs in order to verify the reasonableness of the rehabber’s scope of work.
- Step Five
- Once the rehabber has been vetted, and the scope and price of work agreed to (often nominal in the case of seriously distressed properties), the LRC then enters into an agreement which commits the rehabber to its rehabilitation commitment. How is a rehabber held to its commitment and how is that commitment enforced?
- CDCs and city land banks use deed restrictions or deed reverters. On paper, these legal “enforcements” make sense, but they do not provide practical enforcement. Once a property is transferred to a rehabber who fails to perform as promised, the fact that a LRC can file lawsuits to enforce a reverter or deed restriction is not a practical or costly alternative. The Cuyahoga County LRC uses either a “straight” purchase agreement for verifiably qualified rehabbers; or a “deed-in-escrow” agreement.
- Under the “straight” sale agreement, if a rehabber does not perform as promised, all purchase money is forfeited and a “default lien” is place on the property making it harder to “flip” the property.
- The “deed-in-escrow” agreement simply involves the execution of a purchase agreement, but the deed is held in escrow until the rehabber secures a Certificate of Occupancy upon completion of the work. At that time, the rehabber pays the purchase price for the property. There are several obvious benefits to the deed-in-escrow agreement.
- the LRC literally holds title to the property until the work is completed. If the rehabber fails to perform mid-stream, the rehabber forfeits all improvements and expenses made on behalf of the property (no quantum meruit rights);
- this process is based on a predictable and objective standard, i.e., Certificate of Occupancy;
- the property remains in a tax-free state while the rehab is being completed:
- the rehabber is not required to pay the purchase price until the work is completed thereby not tying up his/her money.
- Entry into a deed-in-lieu contract gives the buyer “equitable title” to the property (and thereby an insurable interest). If the rehabber’s insurance agency or lender insists on the rehabber having actual title, then a “reverse deed-in-escrow” provides yet another alternative. In this situation, the deed is transferred to the rehabber for the purpose of procuring insurance and/or financing. Simultaneously, the rehabber contingently tenders a deed directly back to the CLRC. If the rehabber fails to perform as promised, the LRC is free to file the deed back into its name.
E. Demolition and Environmental Practice
In the context of widespread urban vacancy and abandonment, demolition will likely be an important LRC activity. Whatever the LRC’s demolition strategy, demolition has become increasingly more complex. Prior to acquiring property, the LRC must: 1.) establish beforehand its procurement practices, bidding and demo specification package forms; 2.) pre-qualify a pool of demolition contractors seeking to bid; and, 3.) studying carefully the demolition permit process in those jurisdictions where most of the demolitions will be occurring.
Whether a property is demolished is typically determined early on during pre-acquisition assessment. Except with emergency demolitions, the property is held for some time in order to write and publish demolition bid specs, comply with environmental rules, solicit bids, award and execute demolition contracts, and ultimately secure permits. While the demolition permitting process varies from city to city, certain things apply to all demolitions. For quality control purposes, staff should be familiar with these processes even though the demolition contractor applies for and secures the permit.
While each jurisdiction is different, the following generic things usually apply to procuring a demolition permit. These activities typically involve a fee.
- a. Filling out the permit application
- b. Confirming parcel number and geography by planning or engineering department
- c. Securing an overweight vehicle permit
- d. Procuring a right of way/obstruction permit for dumpster
- e. Securing a water hydrant permit from the water department for dust control
- f. Securing a release from the water department for back water charges
- g. Securing a sewer closure, water cut-off and sewer closure permits
Some jurisdictions have a “one-stop shop” and perform these activities electronically. Other jurisdictions will require demolition contractors to travel to multiple city offices (some of them in different buildings) to secure this paperwork. By understanding these realities, LRC staff can hone in on permit bottlenecking problems and advocate intelligently to the appropriate city supervisory personnel to correct problems.
b. Environmental Compliance
Environmental compliance has become a costly element of the demolition process. National Emissions Standards for Hazardous Air Pollution (“NESHAP’) interpretations issued by U.S. E.P.A. in November, 2010 classify large scale or recurring demolition activity as a form of “urban renewal.” As such, EPA requires even a single run-of-the-mill residential nuisance demolition to be preceded with an environmental survey and a ten (10) day prior notice filing with the applicable EPA office containing the information required prescribed EPA notice form.
Prior to the November 2010 NESHAP interpretations, demolition of a 1-4 family dwelling consisted of hiring an environmental consultant to determine the existence of asbestos or other hazardous materials in a home. If the amount of material was less than the stated EPA threshold, the consultant would remove the materials, document the same and the property could immediately be demolished. If the material exceeded the thresholds, this material would be removed, taken to a lab, and properly disposed of after which the property could be demolished. Ironically, this is still the basic demolition procedure for a single, private owner of property. No survey or remediation is required for a residential home under USEPA rules. For cities and entities doing bulk demolitions, the NESHAP interpretations apparently classify these same residential demolitions to be “urban renewal” or “development projects” thereby necessitating the surveys and 10-day notice requirement.
It may seem that bidding out larger bundles would result in lower costs due to volume. This is not always the case. When bundling ten (10) or twenty (20) demolitions at a time in one bid package, smaller demolition contractors cannot handle this volume. These are more suitable for larger demolition contractors which have embedded capital costs and overhead. Additionally, with large bid packages, a performance bond in the bid specifications is advisable. These two factors combined often actually increase the per demolition cost. Conversely, bidding packages of 3 to 5 demolition allows smaller, more competitive contractors to bid. Larger contractors are impelled to “sharpen their pencils” in order to stay competitive. These factors may vary depending on the particular geography and jurisdiction. The best way to sort these questions out is by simple trial and error.
d. General Internal Demolition Process
- Step One
- Once Property is acquired knowing it will be demolished, the LRC will order an asbestos survey form the list of LRC asbestos consultants. If the survey shows abatement needed, then an abatement contractor is selected and a work order prepared; this step can be done a bit later somewhere between acquisition and the contractor award (the sooner the better).
- Step two
- Prepare a bid solicitation and Bid Package to qualified demolition contractors containing general conditions and detailed specifications based on site review of staff or hired staff inspectors; the specifications will also instruct the bidders to visit the site and check Auditor’s data to determine square foot information, etc.
- Step Three
- Send out Bids Package. Upon receipt and review of responses, lowest and best demo contractor is selected, contractors notified of award of bid;
- Step Four
- Contracts package is prepared and executed, insurance verified and results of asbestos survey given to Contractor;
- Step Five
- Contractor begins the permit process by pulling all necessary permits in the applicable jurisdiction (vehicle weight permit, demo permit, hydrant permit, water/sewer/utility disconnections).
- Step Six
- Prior to demolition or any activity at the site, Contractor submits US EPA 10-day notice (Form: “Ohio Environmental Protection Agency Notification of Demolition and Renovation”) and notifies EPA office having jurisdiction. Contractor supplies EPA office with complete asbestos survey supplied by environmental consultant;
- Step Seven
- Upon expiration of 10-day period, LRC issues an “Abatement Proceed Order” to either the demolition contractor (if authorized to do asbestos abatement) or to the licensed asbestos remediator.
- Step Eight
- Upon asbestos/hazardous materials removal, LRC verifies proper disposal (lab reports, dump tickets, confirm location receipts for disposal, etc) whereupon LRC issues a “Proceed Order” to the demolition contractor.
- Step Nine
- Site inspections are made by staff/field inspectors to assure proper fill, seeding and debris removal.
- Step Ten
- Contractor submits invoices with Lien Waivers, dump tickets and photos of the site, and receives payment in a few weeks, less a 10% retainage to assure no problems with the fill, seeding or damage to sidewalks or neighbors has occurred.
Like other development contracts, the LRC should require a “retainage” so that if a lot was not properly seeded, a sidewalk was cracked and unrepaired, a neighbor’s fence was damaged, etc., the contractor will make the corrections. The retainage should be held for 6-8 weeks. Payment of the price (less retainage) should not be made earlier than three weeks after work completion to assure that no immediate non-conforming work is disclosed. It is important that prompt and predictable payment be made to contractors. The more timely a contractor can be paid, the more willing he/she will be to go the extra mile for unpredictable issues occurring in the field.
Section XIII Sample Forms
- Form XIII-1 – RFP for Field Services Long Form
- Form XIII-2 – Field Service Contract Long Form
- Form XIII-3 – RFP for Field Services Short Form
- Form XIII-4 – Field Services Contract Short Form
- Form XIII-5 – Court Community Service Field Service Contract
- Form XIII-6 – Pre-Qualification Form
- Form XIII-7 – Straight Sale Agreement Short Form
- Form XIII-8 – “Deed in Escrow” Sale Agreement
- Form XIII-9 – In-House Rehab/Development Agreement
- Form XIII-10 – Demolition Specifications
- Form XIII-11 – Demolition Bidding Package
- Form XIII-12 – Demolition Contract
- Form XIII-13 – Demolition Notice to Proceed
- Form XIII-14 – Short Form RFPs for Asbestos Consultant: Surveys
- Form XIII-15 – Environmental Survey Contract
- Form XIII-16 – NESHAP Letter
- Form XIII-17 – Asbestos Abatement Contract
- Form XIII-18 – EPA 10-day Notice