Back to Basics: Land Banks

The FWD #B14 • 1,442 Words

More and more localities in Virginia are wondering if land banking is the right solution to their housing and land use woes.

Way back in April 2020, we hosted a webinar called Land Banking in the Commonwealth, in which we explained a relatively new tool (for Virginia) that local governments could use to repurpose vacant and distressed properties for the public good. Since then, many localities we’ve worked with to develop new policy recommendations regularly raised land banks as a desired solution.

But, three years later, only a handful of communities have successfully established one. We’ve followed the progress of these land bank trailblazers, and want to share some insight on the potentially surprising results. As you’ll read, it turns out land banks in Virginia today are only useful in some very specific—and increasingly rare—circumstances.  

What is a land bank?

In short, a land bank is a legal entity—either a government authority or a nonprofit organization—that has a designated special status in a locality, allowing it to receive and hold properties directly from the local government. As originally intended, these properties would be vacant and formerly tax delinquent.

Usually, when a property is tax delinquent, a locality can go through tax foreclosure and take ownership of the property, then auction it off to the highest bidder to recover the lost tax revenue. The problem with tax auctions is that in places with very little market activity, the buyer is just as likely as the previous owner to sit on the vacant property and eventually stop paying property taxes. 

This creates a cycle of vacancy that land banks are designed to interrupt. Instead of putting the foreclosed property through tax auction, a locality can put it in a land bank to preserve it for future use.

In other states, land bank entities even have special powers, like tax lien authority and the ability to clear title of previous liens, as well as being able to initiate tax foreclosure themselves. These come in handy with properties that have been vacant and tax-delinquent for a very long time.

For these reasons, land banks are extremely common in the Rust Belt and are taking hold in the Deep South as well. Almost every county in Ohio has a land bank. Michigan has a statewide land bank, as well as Maine, Massachusetts, and Alabama. They’ve become popular in Georgia as well.

After a land bank has taken ownership of a property, it usually sets about finding a new use for that property, often with help from community members and interested developers. Once that decision is made, the land bank will “dispose” or transfer the property to a new private owner who agrees to execute the land bank’s vision.

How do land banks work in Virginia?

In Virginia, the establishment and operation of land banks are given relatively loose guidelines by state law, but their powers are limited. It is left largely up to the local government to decide how they want their land bank to operate, and where they want the land to come from.

A land bank can be established as either an authority (like a housing or economic development authority) or as a nonprofit corporation. A pre-existing authority, Planning District Commission, or nonprofit corporation can also be designated as a land bank entity. A land bank entity can serve a single locality or multiple localities, as long as the governing bodies all pass ordinances establishing or designating the same land bank.

Land banks can receive property by donation, buy it on the open market, or have it transferred directly from a local government.

Virginia land bank entities’ land is exempt from property taxes, which helps lower their operating costs. As well, localities can choose to fund their land bank directly from the municipal budget and/or by giving them 50% of the property tax revenue for the first 10 years after a property is disposed (this is often called “tax recapture”).

Where do land banks work in Virginia?

Land banks originated in the Rust Belt, where major disinvestment and population declines left cities with lots of abandoned properties and very little market activity. These conditions are where land banks work best. In places like Southside and Southwest Virginia, land banks can be a great tool to prevent land speculation and improve distressed properties. 

Cities such as Danville, Roanoke, Martinsville, and Chesapeake have designated or created land bank entities and are attempting to get them off the ground. Other localities in Southside, Southwest, and other regions are expressing interest as well.

Having a supply of publicly-controlled land that can later be used for affordable housing, public spaces, and other social goods will be a good thing as Virginia’s prosperity spreads to those regions. However, for Virginia land banks to find success in places already experiencing rapid economic growth, we might need to reevaluate their limited powers under state law.

Traditionally, a locality gives its land bank vacant, tax-foreclosed properties. That can include both vacant land and distressed abandoned buildings. However, the state law does not grant localities the ability to give their land bank tax lien and foreclosure authority (unless they are using a pre-existing authority with tax lien capability) or to clear title, and specifically prevents land banks from having eminent domain authority.

As well, tax foreclosure itself has become a much less appealing proposition. In 2022 the General Assembly passed a law that essentially guarantees property owners the full assessed value of their foreclosed property, minus the taxes and liens. 

That means that most of the time, foreclosing on a tax delinquent property becomes much less valuable for localities, and in some cases can actually lose them money if they cannot sell it for a high enough price at auction. This law was reinforced by the influential Tyler v. Hennepin County decision by the U.S. Supreme Court.

This was countered in 2023, when another change to state law allowed localities to petition the circuit court to appoint a special commissioner who would be able to execute deeds to transfer tax-delinquent distressed properties directly to a land bank entity. However, this method imposes strict limitations on the value of the properties, which can be no greater than $75,000, and sets a minimum for the amount of taxes and liens owed.

A simple way to find out if you have properties that might be eligible for land bank transfer is to take your list of tax-delinquent properties, filter out all those with values above $75,000, then from those, filter out all those for which the taxes owed are less than 25% of the assessed value. You should be left with a list of properties that could be eligible for special transfer to a land bank entity.

Chances are, if you’re in or near high-activity areas like Northern Virginia, Charlottesville, Richmond, or Hampton Roads, that list is pretty short, or maybe even non-existent. That means that as it stands right now, your locality probably cannot use a land bank in the traditional sense.

If you’re a local government who owns a ton of surplus property, some of that might be useful for a land bank—as long as you make sure it’s actually developable first. Or if you want to fund market acquisitions for your land bank, that could work too—but that can get expensive in those high-value markets.

What can you do instead?

If your locality has a lot of distressed, vacant properties that aren’t necessarily tax-delinquent or aren’t otherwise eligible for land banking, strategic code enforcement could be a good pathway for exploration.

Maintaining the health and safety of buildings doesn’t have to mean big fines and legal battles. Code enforcement should strive to be equitable, providing support and resources to help owners bring their properties into compliance, efficient with time and public funds, and effective at creating safer and healthier buildings and neighborhoods.

A building rehabilitation and repair assistance program is a powerful tool for strategic code enforcement. These can often be administered by existing non-profit entities or government authorities.

If your locality has a lot of tax delinquency but high assessed values preventing land bank eligibility, revising your tax delinquency and foreclosure processes could help make them more equitable, efficient, and effective at increasing redemptions. This is especially important for owner-occupied homes that are tax delinquent, whose residents are often low-income, elderly, or disabled.

Land is a community’s most valuable resource, and in order for it to serve the public good, land needs good stewards. Land banking is one way for localities to steward land directly, but good code enforcement and tax policies can help make private owners better stewards, too.

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