RICHMOND -- With its plan to use eminent domain to seize underwater mortgages still in limbo, the city is mulling the possibility of green lighting another program aimed at its troubled housing market.
The City Council voted 6-1 Tuesday to develop plans for a "Richmond Distressed Housing Rehabilitation Program," which will partner a local nonprofit, a San Francisco law firm and the city in a strategy to float bonds to fund the purchase of blighted houses, rehabilitate them and resell them.
The plan is the brainchild of John Knox, a Point Richmond resident and partner in the international law firm Orrick, Herrington & Sutcliffe LLP. Knox said he hatched the idea last fall while reading news stories about the city's eminent domain plan, which has stalled in the face of lawsuits by banks on behalf of mortgage holders and declining support on the council.
"The pictures I saw in the media were of blighted, vacant houses not affected by the eminent domain program," Knox said. "I thought about a plan to directly address the issue of these boarded-up properties, which are a significant cost for the city."
The plan would work as follows: The city would issue bonds and loan the money it gets from investors to the Richmond Community Foundation, a nonprofit partner. The RCF would use the money to buy and rehabilitate blighted houses, then sell them and use the proceeds to pay back the city and the bond investors. Surplus funds would be plunged back into buying and fixing more houses.
The idea is to target "social impact investors," Knox said, who are willing to accept slightly lower returns and greater risks to help fund a worthwhile program.
"This is at a conceptual level right now," Knox said, "but we think it will work."
Knox said the city has up to 1,000 properties that are potential targets for cheap buys, rehabilitation and resale but said he plans to start "small," probably with $2 million to $5 million. The city's role is as a partner in facilitating work permits and helping craft the plans and goals as well as floating the bonds, which will enjoy state tax exemptions.
The technique is called "conduit financing," said Knox, adding the city will not be on the hook for guaranteeing anything to the bond investors. Knox said he is confident the plan will draw investors.
"The city faces no risk," Knox said.
RCF would manage the construction aspects of the program.
City Council members agreed to move ahead with formulating the plan and hope to have detailed proposals to review and possibly approve within 60 days.
But questions remain about what properties would be targeted and to whom they would be sold.
"The concern I have is that these homes could get bought and rehabbed and sold but not to our low-income families and first-time homeowners," Mayor Gayle McLaughlin said. "I want to see that it's outlined how low-income residents' needs will be met."
Questions also loom about how the city's eminent domain proposals could affect Knox's plan. Investor group Mortgage Resolution Partners (MRP) crafted the plan for the city, in which it would seize underwater mortgages using eminent domain and resell them at current market rates to stem impending foreclosures. Knox called the eminent domain plan a "litigation-based strategy" and said it was too early to know whether it would hinder his plan.
"In order for our plan to work, we need for a strong cooperative relationship with the financial community," Knox said. "Without that, it will be hard to succeed."
McLaughlin, a proponent of the eminent domain plan, said the two programs could "side by side address two different stages of the housing crisis."
Councilman Corky Boozé disagreed. He was the lone vote against Knox's plan but said his opposition was rooted in eminent domain.
"I voted against it because my colleagues refused to eliminate our contract with MRP," Boozé said. "There's no way we are going to get any investors for what Knox wants to do if we have this eminent domain thing hanging over our heads."
City Manager Bill Lindsay said the program is well-conceived and involves strong partners in Knox's firm and the RCF.
"City staff recommends this and would be anxious to work on it," Lindsay said.